TABLE OF CONTENTS




|                              |                                                                                               |                                                        |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Consolidated Balance Sheets                           
|                              |                                                                                               | Consolidated Statements of Operations (Unaudited)     
|                              |                                                                                               | Consolidated Statements of Cash Flows (Unaudited)     
|                              |                                                                                               | Notes to Consolidated Financial Statements (Unaudited)
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitive and qualitative disclosures about market risk                             
|Part II. Other Information   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|Exhibit 27                   



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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 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 June 30, 2000

[ ] 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                                                                |  | 34-1462198                          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|(State or Other Jurisdiction of Incorporation or Organization)      |  | (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 Issuers Involved in Bankruptcy
Proceedings during the Preceding Five Years

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

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 August 8, 2000,
10,189,684 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
Six and Three Months Ended June 30, 2000

INDEX

|                              |                                                                                               |                                                                                                 |    |    |          |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -- | -- | -------- | - | 
|                              |                                                                                               |                                                                                                 |    |    | Page No.
|Part I. Financial Information
|                             
|                             
|                             
|                             
|                              | Item 1. Financial Statements                                                                 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Balance Sheets as of December 31, 1999                                            
|                             
|                             
|                             
|                             
|                              |                                                                                               | And June 30, 2000                                                                               |    |    |          | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statements of Operations for the Six and Three
Months Ended June 30, 1999 and 2000 |    |    | 4        |  
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 2000           |    |    | 5        |  
|                             
|                             
|                             
|                             
|                              |                                                                                               | Notes to Consolidated Financial Statements                                                      |    |    | 6        |  
|                             
|                             
|                             
|                             
|                              | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                                                 |    | 11 |         
|                             
|                             
|                             
|                             
|                              | Item 3. Quantitative and Qualitative Disclosures about
Market Risk                            |                                                                                                 |    | 17 |         
|                             
|                             
|                             
|                             
|Part II. Other Information   
|                             
|                             
|                             
|                             
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                 |    | 18 |         
|                             
|                             
|                             
|                             
|Signatures                    |                                                                                               |                                                                                                 | 19 |   

2



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##### Table of Contents






Part I. Financial Information





Item 1. Financial Statements







PhoneTel Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
(In thousands except share and per share amounts)


|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |             |        | 
|------------------------------------ | ----------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | -------------------------- | ------ | ----------------- | ------- | ------- | ------- | ----------- | ------ | 
|                                     |                               |                                                                                                                                                                            |                                 |                            |        | Successor Company
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                  
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         | (Unaudited)
|                                     |                               |                                                                                                                                                                            |                                 |                            |        | December 31       |         | June 30
|                                     |                               |                                                                                                                                                                            |                                 |                            |        | 1999              |         | 2000   
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |        
|Assets                              
|                                    
|                                    
|                                    
|                                    
|                                     | Current assets:              
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Cash                                                                                                                                                                       |                                 | $                          | 5,700  |                   |         | $       | 5,176   |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Accounts receivable, net of allowance for doubtful accounts
of $1,339 and $1,696, respectively                                                                             |                                 |                            | 11,246 |                   |         |         | 11,256  |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Other current assets                                                                                                                                                       |                                 |                            | 1,144  |                   |         |         | 1,245   |            
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            
|                                     |                               |                                                                                                                                                                            |                                 | Total current assets       |        |                   | 18,090  |         |         |             | 17,677 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Property and equipment, net   |                                                                                                                                                                            |                                 | 22,741                     |        |                   |         | 20,718  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Intangible assets, net        |                                                                                                                                                                            |                                 | 83,057                     |        |                   |         | 76,617  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                  |                                                                                                                                                                            |                                 | 511                        |        |                   |         | 550     |        
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            
|                                     |                               | $                                                                                                                                                                          | 124,399                         |                            |        | $                 | 115,562 |        
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            
|Liabilities and Shareholders Equity
|                                    
|                                    
|                                    
|                                    
|                                     | Current liabilities:         
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Current portion of long-term debt                                                                                                                                          |                                 | $                          | 1,172  |                   |         | $       | 1,241   |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Accounts payable                                                                                                                                                           |                                 |                            | 5,272  |                   |         |         | 5,341   |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Accrued expenses:                                                                                                                                                         
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            | Location commissions            |                            |        | 2,841             |         |         |         | 2,569       |       
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            | Line and transmission charges   |                            |        | 1,902             |         |         |         | 1,607       |       
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            | Personal property and sales tax |                            |        | 2,672             |         |         |         | 2,695       |       
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            | Interest                        |                            |        | 461               |         |         |         | 490         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            | Salaries, wages and benefits    |                            |        | 502               |         |         |         | 438         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            | Other                           |                            |        | 137               |         |         |         | 551         |       
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            
|                                     |                               |                                                                                                                                                                            |                                 | Total current liabilities  |        |                   | 14,959  |         |         |             | 14,932 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Long-term debt                |                                                                                                                                                                            |                                 | 48,642                     |        |                   |         | 50,199  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Commitments and contingencies |                                                                                                                                                                            |                                 |                           |        |                   |         |        |        
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Shareholders Equity :       
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Common Stock  $0.01 par value; 15,000,000 shares
authorized, 10,188,630 and 10,189,684 shares issued and
outstanding at December 31, 1999 and June 30, 2000, respectively |                                 |                            | 102    |                   |         |         | 102     |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Additional Paid-in Capital                                                                                                                                                 |                                 |                            | 63,390 |                   |         |         | 63,429  |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Accumulated Deficit                                                                                                                                                        |                                 |                            | (2,694 | )                 |         |         | (13,100 | )          
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            
|                                    
|                                    
|                                    
|                                    
|                                     |                               |                                                                                                                                                                            |                                 | Total Shareholders Equity |        |                   | 60,798  |         |         |             | 50,431 | 
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            
|                                     |                               | $                                                                                                                                                                          | 124,399                         |                            |        | $                 | 115,562 |        
|                                     |                               |                                                                                                                                                                            |                                 |                            |        |                   |         |         |         |            

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 (Unaudited)
(In thousands except for share and per share amounts)


|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|---------------------------------------------------- | -------------------------------------------------- |  | ------------------------ | ------- | -------------------------- |  | ----------- | ------ | --------- |  | ---------- | ------ | - |  | ---------- | ------ | -
|                                                     |                                                    |  | Six Months Ended June 30 |         | Three Months Ended June 30
|                                                     |                                                    |  |                          |         |                           
|                                                     |                                                    |  | 1999                     |         | 2000                       |  | 1999        |        | 2000     
|                                                     |                                                    |  | Predecessor              |         | Successor                  |  | Predecessor |        | Successor
|                                                     |                                                    |  | Company                  |         | Company                    |  | Company     |        | Company  
|                                                     |                                                    |  |                          |         |                            |  |             |        |          
|Revenues:                                           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Coin calls                                         |  | $                        | 20,863  |                            |  | $           | 16,925 |           |  | $          | 10,452 |   |  | $          | 8,583  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Non-coin telecommunication services                |  |                          | 18,832  |                            |  |             | 15,886 |           |  |            | 9,470  |   |  |            | 8,307  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other                                              |  |                          | 69      |                            |  |             | 224    |           |  |            | 59     |   |  |            | 118    |  
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|                                                     |                                                    |  | 39,764                   |         |                            |  | 33,035      |        |           |  | 19,981     |        |   |  | 17,008     |       
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Operating expenses:                                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Line and transmission charges                      |  |                          | 10,891  |                            |  |             | 7,826  |           |  |            | 4,763  |   |  |            | 4,171  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Telecommunication and validation fees              |  |                          | 4,653   |                            |  |             | 3,482  |           |  |            | 2,305  |   |  |            | 1,783  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Location commissions                               |  |                          | 6,402   |                            |  |             | 4,349  |           |  |            | 3,316  |   |  |            | 2,180  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Field operations                                   |  |                          | 10,539  |                            |  |             | 8,977  |           |  |            | 5,377  |   |  |            | 4,455  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Selling, general and administrative                |  |                          | 5,105   |                            |  |             | 4,705  |           |  |            | 2,586  |   |  |            | 2,233  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization                      |  |                          | 11,935  |                            |  |             | 8,753  |           |  |            | 5,973  |   |  |            | 4,371  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other unusual charges and contractual settlements  |  |                          | 73      |                            |  |             | 110    |           |  |            | 27     |   |  |            | 44     |  
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|                                                     |                                                    |  | 49,598                   |         |                            |  | 38,202      |        |           |  | 24,347     |        |   |  | 19,237     |       
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Loss from operations                                 |                                                    |  | (9,834                   | )       |                            |  | (5,167      | )      |           |  | (4,366     | )      |   |  | (2,229     | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Other income (expense):                             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest expense                                   |  |                          | (10,898 | )                          |  |             | (5,381 | )         |  |            | (5,613 | ) |  |            | (2,750 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest and other income                          |  |                          | 110     |                            |  |             | 142    |           |  |            | 45     |   |  |            | 65     |  
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|                                                     |                                                    |  | (10,788                  | )       |                            |  | (5,239      | )      |           |  | (5,568     | )      |   |  | (2,685     | )     
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Net loss                                             |                                                    |  | ($20,622                 | )       |                            |  | ($10,406    | )      |           |  | ($9,934    | )      |   |  | ($4,914    | )     
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Earnings per share calculation:                     
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss                                             |                                                    |  | ($20,622                 | )       |                            |  | ($10,406    | )      |           |  | ($9,934    | )      |   |  | ($4,914    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Preferred dividend payable in kind                 |  |                          | (8      | )                          |  |             |       |           |  |            | (4     | ) |  |            |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accretion of 14% Preferred to its redemption value |  |                          | (781    | )                          |  |             |       |           |  |            | (399   | ) |  |            |       |  
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Net loss applicable to common shareholders           |                                                    |  | ($21,411                 | )       |                            |  | ($10,406    | )      |           |  | ($10,337   | )      |   |  | ($4,914    | )     
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Net loss per common share, basic and diluted         |                                                    |  | ($1.14                   | )       |                            |  | ($1.02      | )      |           |  | ($0.55     | )      |   |  | ($0.48     | )     
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  
|Weighted average number of shares, basic and diluted |                                                    |  | 18,754,133               |         |                            |  | 10,188,804  |        |           |  | 18,754,133 |        |   |  | 10,188,977 |       
|                                                     |                                                    |  |                          |         |                            |  |             |        |           |  |            |        |   |  |            |        |  

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

4



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##### Table of Contents






PhoneTel Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)


|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |       |  
|------------------------------------------------------ | ----------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------ | ------------------------ | ------ | --------- | ----- | -------- | ----- | -
|                                                       |                                                                               |                                                                            |        | Six Months Ended June 30
|                                                       |                                                                               |                                                                            |        |                         
|                                                       |                                                                               |                                                                            |        | 1999                     |        | 2000     
|                                                       |                                                                               |                                                                            |        | Predecessor              |        | Successor
|                                                       |                                                                               |                                                                            |        | Company                  |        | Company  
|                                                       |                                                                               |                                                                            |        |                          |        |          
|Cash flows provided by (used in) operating activities:
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net loss                                                                      |                                                                            |        | ($20,622                 | )      |           |       | ($10,406 | )    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Adjustments to reconcile net loss to net cash flow from operating activities:
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Depreciation and amortization                                              |        |                          | 11,935 |           |       |          | 8,753 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Non-cash interest expense                                                  |        |                          | 974    |           |       |          | 2,506 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Increase in allowance for doubtful accounts                                |        |                          | 398    |           |       |          | 357   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Gain on disposal of assets                                                 |        |                          | (42    | )         |       |          | (67   | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Stock compensation expense                                                 |        |                          |       |           |       |          | 28    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Changes in current assets                                                  |        |                          | 994    |           |       |          | (468  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               | Changes in current liabilities, net of reclassifications of long-term debt |        |                          | 5,946  |           |       |          | (96   | )
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|                                                       |                                                                               |                                                                            | (417   | )                        |        |           | 607   |         
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|Cash flows used in investing activities:              
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Purchases of property and equipment                                           |                                                                            |        | (863                     | )      |           |       | (581     | )    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deferred charges  commissions and signing bonuses                            |                                                                            |        | (298                     | )      |           |       | (442     | )    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds from sale of assets                                                  |                                                                            |        | 56                       |        |           |       | 68       |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Change in other assets                                                        |                                                                            |        | (38                      | )      |           |       | (39      | )    
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|                                                       |                                                                               |                                                                            | (1,143 | )                        |        |           | (994  | )       
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|Cash flows provided by (used in) financing activities:
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds from debt issuances                                                  |                                                                            |        | 2,500                    |        |           |       |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Principal payments on borrowings                                              |                                                                            |        | (190                     | )      |           |       | (4       | )    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Debt financing and restructuring costs                                        |                                                                            |        | (1,259                   | )      |           |       | (144     | )    
|                                                       | Other                                                                         |                                                                            |        |                         |        |           |       | 11       |      
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                               |                                                                            | 1,051  |                          |        |           | (137  | )       
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|Decrease in cash                                       |                                                                               |                                                                            | (509   | )                        |        |           | (524  | )       
|                                                      
|                                                      
|                                                      
|                                                      
|Cash at beginning of period                            |                                                                               |                                                                            | 5,768  |                          |        |           | 5,700 |         
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|Cash at end of period                                  |                                                                               | $                                                                          | 5,259  |                          |        | $         | 5,176 |         
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|Supplemental disclosure:                              
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Interest paid during the period                                               |                                                                            | $      | 2,441                    |        |           | $     | 2,846    |      
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      
|Non-cash Transactions:                                
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deferred financing costs                                                      |                                                                            |        |                         |        |           | $     | 1,380    |      
|                                                       |                                                                               |                                                                            |        |                          |        |           |       |          |      

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

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PhoneTel Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
For the Six and Three Months Ended June 30, 2000(In thousands of dollars except for installed public pay telephone, 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. Operating results for the six and
three months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 1999.

Certain amounts relating to 1999 have been reclassified to conform to the
current quarter presentation. The reclassifications have had no impact on
total assets, shareholders equity or net loss as previously reported.

2. Debt Restructuring and Chapter 11 Bankruptcy Filing

On July 14, 1999, the Company commenced a case under Chapter 11 of the
United States Bankruptcy Code and filed its prepackaged plan of reorganization
in the United States Bankruptcy Court for the Southern District of New York
(the Prepackaged Plan). On October 20, 1999, the Court entered an order
confirming the Companys Prepackaged Plan, which became effective on November
17, 1999 (the Consummation Date).

Pursuant to the terms of the Prepackaged Plan, claims of employees, trade
and other creditors of the Company, other than holders of the Companys
$125,000 aggregate principal amount 12% Senior Notes, due 2006 (the Senior
Notes), were 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 received 9,500,000 shares of a new issue
of common stock (Common Stock (Successor Company)) in satisfaction of the
Senior Notes and accrued interest thereon. In addition, pursuant to the
Prepackaged Plan, an unofficial committee representing holders of a majority in
principal amount of the Senior Notes (the Unofficial Committee) appointed
four of the five members of the Board of Directors of the Company (the New
Board).

Holders of the Companys 14% Cumulative Redeemable Convertible Preferred
Stock (the 14% Preferred) received 325,000 shares of Common Stock (Successor
Company) and warrants to purchase up to 722,200 shares of Common Stock
(Successor Company) 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 (Common Stock (Predecessor Company)) received 175,000 shares of Common
Stock (Successor Company) and New Warrants to purchase up to 388,900 shares of
Common Stock (Successor Company). Options and warrants to purchase Common
Stock (Predecessor Company) were 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 the issuance
of 205,000 shares of Common Stock (Successor Company) to certain financial
advisors for services rendered in connection with the reorganization, and
issuances resulting from the exercise of certain options to purchase up to 5%
of Common Stock (Successor Company) which have or will be granted by the New
Board pursuant to the terms of a management incentive plan and other awards
included as part of the Prepackaged Plan.

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3. Fresh Start Reporting

Upon emergence from its Chapter 11 proceedings, the Company adopted fresh
start reporting pursuant to the provisions of AICPA Statement of Position 90-7
(SOP 90-7). The Company has recorded the effects of fresh start reporting as
of November 17, 1999, the Consummation Date of the Companys Prepackaged Plan.
In accordance with SOP 90-7, assets and liabilities have been restated as of
November 17, 1999 to reflect the reorganization value of the Company, which
approximates their fair value at the Consummation Date. In addition, the
accumulated deficit of the Company through the Consummation Date has been
eliminated and the debt and capital structure of the Company has been recast
pursuant to the provisions of the Prepackaged Plan. Thus, the balance sheets
as of December 31, 1999 and June 30, 2000 reflect a new reporting entity (the
Successor Company) and are not comparable to periods prior to November 17,
1999 (the Predecessor Company). Furthermore, the accompanying consolidated
statements of operations and cash flows of the Predecessor Company report
operations prior to the Consummation Date and the effect of adopting fresh
start reporting and are thus not comparable with the results of operations and
cash flows of the Successor Company.

4. 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). The Company receives revenues from such carriers and
records those revenues from dial-around compensation based upon the per-phone
or per-call rate in effect under orders issued by the Federal Communications
Commission (the FCC). Retroactive changes in the dial-around compensation
rate pursuant to orders issued by the FCC are accounted for as changes in
accounting estimates and are recorded as adjustments to revenues at the
beginning of the most recent period prior to the announcement of such changes
by the FCC. At December 31, 1999 and June 30, 2000, accounts receivable
included $10,636 and $10,516, 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 six months ended June 30, 1999 and 2000,
revenues from non-coin telecommunication services included $7,776 and $6,971,
respectively, for dial-around compensation.

Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under section 276 of the Telecommunications Act
(Section 276), the FCC issued an order to achieve fair compensation for
dial-around calls placed from pay telephones through deregulation and
competition (the 1996 Payphone Order). Among other things, the 1996 Payphone
Order prescribed compensation payable to the payphone providers by certain
interexchange carriers (IXCs) for dial-around calls placed from payphones.
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 local exchange carriers
(LECs) to make such coding available to the payphone providers as a transmit
item included in the local access line service. The 1996 Payphone Order set an
initial monthly rate of $45.85 per pay telephone for the first year after its
implementation (the First Phase), an increase from the monthly per pay
telephone rate of $6.00 in periods prior to its implementation, and thereafter,
set dial-around compensation on a per-call basis, at the assumed deregulated
coin rate of $0.35. The First Phase monthly rate was arrived at by the product
of the assumed deregulated coin rate ($0.35) and the then monthly average
compensable dial-around calls per payphone. A finding from the record
established at the time that the monthly average compensable calls was 131.

The 1996 Payphone Order was appealed by various parties, including the
IXCs, to the United States Court of Appeals for the District of Columbia
Circuit (the Appeals Court). Among other items, the Appeals Court found that
the FCC erred in using a market-based method for calculating the amount of
dial-around compensation and further determined that the method for determining
the allocation of payment among IXCs was erroneous. The Appeals Court remanded
the 1996 Payphone Order to the FCC for further consideration.

In response to the remand by the Appeals Court, in October 1997 the FCC
issued a new order implementing Section 276 (the 1997 Payphone Order). The
FCC used a market-based method to determine a per- call compensation rate,
reduced it by certain costs attributable to a coin call which it did not
believe applied to a

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dial-around call, and adjusted the per-call rate from
$0.35 to $0.284 (the Default Rate). The FCC concluded that the Default Rate
should be applied retroactively in determining compensation during the First
Phase and reiterated that payphone providers were entitled to compensation for
every call pursuant to the provisions of Section 276; however, the FCC deferred
for later decision the method of allocation of the payment among the IXCs.

The 1997 Payphone Order was subsequently appealed by various parties. In
May 1998, the Appeals Court again remanded the per-call compensation rate to
the FCC for further explanation, without vacating the Default Rate, indicating
that the FCC had failed to adequately explain its derivation of the Default
Rate.

In response to the remand of the 1997 Payphone Order, 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 to $0.238, (the Adjusted Default Rate) retroactive to October 7,
1997. In adjusting the rate, the FCC changed from the market-based method used
in the 1996 and 1997 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 Adjusted Default Rate, the FCC
incorporated its prior treatment of certain payphone costs and examined new
estimates of payphone costs submitted as part of the proceeding. Pursuant to
the 1999 Payphone Order, the $0.24 amount ($0.238 plus $0.002 for amounts
charged by LECs for providing Flex Ani) will serve as the Adjusted Default Rate
for coinless payphone calls through January 31, 2002, at which time, parties
may petition the FCC regarding the default amount, issues related to
technological advances, and the expected resultant market changes.

The 1999 Payphone Order deferred a final ruling on the First Phase
treatment of dial-around compensation to a later, as yet unreleased order;
however, it appears from the 1999 Payphone Order that the Adjusted Default Rate
will be applied for periods in the First Phase. The FCC further ruled that a
true-up will be made for all payments or credits, together with applicable
interest due and owing among the IXCs and the payphone service providers for
the payment period November 7, 1996 through the effective date of the Adjusted
Default 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
Adjusted Default Rate. 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 had been appealed by various parties. The Appeals
Court heard oral arguments on February 2, 2000 and issued its ruling on the
matter in June 2000 in which it denied all petitions for review of the per-call
compensation rate and kept in place the Adjusted Default Rate mandated by the
1999 Payphone Order. Based upon the information available, the Company
believes that the minimum amount it is entitled to receive as fair compensation
under Section 276 for prior periods is $31.18 per pay telephone per month based
on $0.238 per call and 131 calls per pay telephone per month.

5. Long-Term Debt

Long-term debt at December 31, 1999 and June 30, 2000 consisted of the
following:

|                                                                                                                                 |  |             |        |         |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ------- |  | - | ------ | -
|                                                                                                                                 |  | December 31 |        | June 30
|                                                                                                                                 |  | 1999        |        | 2000   
|                                                                                                                                 |  |             |        |        
|Exit Financing Agreement, due November 16, 2001
with interest payable monthly at 3% above
the base rate (12.5% at June 30, 2000) |  | $           | 48,799 |         |  | $ | 50,402 |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Note Payable-Warrant Put Obligation                                                                                              |  |             | 1,010  |         |  |   | 1,036  |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Other notes payable                                                                                                              |  |             | 5      |         |  |   | 2      |  
|                                                                                                                                 |  |             |        |         |  |   |        |  
|                                                                                                                                 |  |             | 49,814 |         |  |   | 51,440 |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Less current maturities                                                                                                          |  |             | (1,172 | )       |  |   | (1,241 | )
|                                                                                                                                 |  |             |        |         |  |   |        |  
|                                                                                                                                 |  | $           | 48,642 |         |  | $ | 50,199 |  
|                                                                                                                                 |  |             |        |         |  |   |        |  

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Post Reorganization Loan Agreement

The Company executed an agreement with Foothill Capital Corporation
(Foothill) for post reorganization financing (Exit Financing Agreement) on
November 17, 1999. The Exit Financing 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 Financing Agreement is
secured by substantially all of the assets of the Company and matures on
November 16, 2001.

The Exit Financing 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, together with interest thereon, 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
Financing Agreement are subject to certain reductions for early prepayment,
provided that the Company is not in default under the Exit Financing Agreement.

The Exit Financing Agreement provides for interest on the outstanding
principal balance at 3% above the base rate (as defined in the Exit Financing
Agreement), with interest on the Maximum Amount payable monthly in arrears.
The Exit Financing Agreement, as amended on December 31, 1999, 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 Financing 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 and Note Payable

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 (Predecessor Company). 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
specified that the Company was to redeem Series A Warrants that were
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.

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 in
the form of a note payable, subject to certain reductions for early payment,
together with deferred interest at 5% per annum, in five years. In addition,
the former lender agreed to forfeit its shares of Common Stock (Successor
Company) and New Warrants which were issued pursuant to the Prepackaged Plan
and immediately canceled. The adjustment to reduce the amount of the Warrant
Agreement put obligation to $1,000, to record a note payable for this
obligation and to credit additional paid-in capital was recorded by the Company
as of November 17, 1999.

6. 14% Cumulative Convertible Preferred Stock Mandatorily Redeemable
(Predecessor Company)

At June 30, 1999, the Predecessor Company had 107,918 shares of 14%
Preferred issued and outstanding and cumulative dividends issuable of 61,900
shares (valued at $1,126). The Company recorded dividends, declared and
undeclared, at their fair market value and recognized the difference between
the carrying value of the 14% Preferred and the mandatory redemption amount
($10,189 at June 30, 1999) through monthly accretions using the interest
method. For the six months ended June 30, 1999, the carrying value of the 14%
Preferred was increased by $781 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 (Predecessor

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Company) and was subject to mandatory redemption on
June 30, 2000.

As discussed in Note 2, the Successor Company issued 325,000 shares of
Common Stock and 722,200 New Warrants in exchange for the 14% Preferred on
November 17, 1999.

7. Shareholders Equity

On March 9, 2000, pursuant to the 1999 Management Incentive Plan (the
1999 Plan), the Company granted options to purchase 193,000 shares of Common
Stock (Successor Company) to certain management employees at an exercise price
of $1.56 per share. On April 1, 2000, options to purchase an additional 50,000
shares at an exercise price of $1.16 per share were granted to an officer of
the Company pursuant to the 1999 Plan. No compensation expense was recorded
because the exercise prices of these options were equal to the market value of
the Companys shares on the respective dates of grant. Such options vest
equally over a three-year period beginning one year from the date of grant and
expire after five years.

On May 23, 2000, the Company granted options to purchase 75,000 shares of
Common Stock (Successor Company) to an officer of the Company pursuant to an
employment agreement. Such options vest immediately, have an exercise price of
$0.01 per share, and expire three years after the date of grant. The Company
recorded $28 of compensation expense under the intrinsic value method of
accounting relating to these options.

Under the Amended and Restated Articles of Incorporation confirmed as part
of the Companys Prepackaged Plan, the total authorized capital stock of the
Successor Company is 15,000,000 shares of Common Stock. On July 18, 2000, the
shareholders approved an amendment to the Amended and Restated Articles of
Incorporation to increase the total authorized capital stock of the Successor
Company to 45,000,000 shares of Common Stock.

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

On June 11, 1998, PhoneTel Technologies, Inc., (PhoneTel) 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 publicly held, independent pay telephone provider (Peoples), also
entered into a merger agreement (the Peoples Merger Agreement) with Davel.

On September 29, 1998, PhoneTel received a letter from Davel purporting to
terminate the Davel Merger Agreement. Thereafter, a complaint against PhoneTel
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, PhoneTel 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, PhoneTel 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.

PhoneTel 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. PhoneTel 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 PhoneTel are without merit and is
pursuing its claims against Davel and Peoples.

9. 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,

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results of operations or cash
flows.




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 2000 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.

Overview

At the end of 1998 and during 1999, the Company implemented several profit
improvement initiatives. The Company has been able to obtain lower local
access line charges through negotiations and promotional programs with certain
of its incumbent LECs or by utilizing competitive LECs (CLECs). The Company
entered into agreements with new operator service providers (OSPs) to obtain
an improvement in rates for operator service revenues and long distance line
charges. The Company reduced the number of field operations personnel and
related costs, abandoned location contracts relating to approximately 2,000
unprofitable phones and closed three district operations facilities to reduce
costs. The Company also reduced the number of administrative and sales
personnel and eliminated or reduced non-essential expenses. In 2000, the
Company has continued its cost reduction efforts and has begun to initiate new
programs to generate revenues from calling cards and other prepaid products.
The Company believes these measures have and will continue to have a positive
impact on the results of its operations.

Debt Restructuring and Chapter 11 Bankruptcy Filing

On July 14, 1999, the Company commenced a case under Chapter 11 of the
United States Bankruptcy Code and filed its prepackaged plan of reorganization
in the United States Bankruptcy Court for the Southern District of New York.
On October 20, 1999, the Court entered an order confirming the Companys
Prepackaged Plan, which became effective on November 17, 1999.

Pursuant to the terms of the Prepackaged Plan, claims of employees, trade
and other creditors of the Company, other than holders of the Companys
$125,000 aggregate principal amount 12% Senior Notes were to be

11



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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
received 9,500,000 shares of a new issue of common stock in satisfaction of
the Companys obligations under the Senior Notes. In addition, the Unofficial
Committee representing holders of a majority in principal amount of the Senior
Notes appointed four of the five members of the Board of Directors of the
Company.

Holders of the Companys 14% Cumulative Redeemable Convertible Preferred
Stock received 325,000 shares of Common Stock (Successor Company) and New
Warrants to purchase up to 722,200 shares of Common Stock (Successor Company)
at an exercise price of $10.50 per share which expire three years from the date
of grant. Holders of existing Common Stock received 175,000 shares of Common
Stock (Successor Company) and New Warrants to purchase up to 388,900 shares of
Common Stock (Successor Company). Options and warrants to purchase Common
Stock (Predecessor Company) were 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 the issuance
of 205,000 shares of Common Stock (Successor Company) to certain financial
advisors for services rendered in connection with the reorganization, and
issuances resulting from the exercise of certain options to purchase up to 5%
of Common Stock (Successor Company) which have been or will be granted by the
New Board pursuant to the terms of a management incentive plan and other awards
included as part of the Prepackaged Plan.

Results of Operations

Upon emergence from its Chapter 11 proceedings, the Company adopted fresh
start reporting pursuant to the provisions of AICPA Statement of Position 90-7.
The Company has recorded the effects of fresh start reporting as of November
17, 1999, the Consummation Date of the Companys Prepackaged Plan. In
accordance with SOP 90-7, assets and liabilities have been restated as of
November 17, 1999 to reflect the reorganization value of the Company, which
approximates their fair values at the Consummation Date. In addition, the
accumulated deficit of the Company through the Consummation Date was eliminated
and the debt and capital structure of the Company was recast pursuant to the
provisions of the Prepackaged Plan.

The Predecessor Companys financial statements (through November 17, 1999)
are not comparable to the Successor Companys financial statements (subsequent
to November 17, 1999). (See Note 3 to the Companys Consolidated Financial
Statements.) However, for purposes of managements discussion and analysis of
results of operations, the six months ended June 30, 1999 is being compared to
the six months ended June 30, 2000 since the results of operations are
comparable except for the elimination of interest expense relating to the
Predecessor Companys Senior Notes, which resulted from the implementation of
the Prepackaged Plan, and the effect on depreciation and amortization of
adopting fresh start reporting.

Six months ended June 30, 2000 compared to six months ended June 30, 1999

Revenues

Revenues decreased by $6,729 or 16.9%, from $39,764 for the first six
months of 1999 to $33,035 for the first six months of 2000. This decrease is
primarily due to the decrease in the average number of installed pay telephones
and a decline in call volume as discussed below. The average number of
installed pay telephones decreased from 41,676 for the six months ended June
30, 1999 to 36,931 for the six months ended June 30, 2000, a decrease of 4,745
or 11.4%, due in part to the timing of expiring location contracts and the
competition for payphone locations in the marketplace. The average number of
installed pay telephones also declined due to the removal of approximately
2,000 pay telephones in the fourth quarter of 1999 as part of the Companys
continuing program of evaluating and removing phones that are no longer
profitable.

Revenues from coin calls were $20,863 and $16,925 for the first six months
of 1999 and 2000, respectively. This decrease of $3,938, or 18.9% is due in
part to the decrease in the average number of installed pay telephones in the
first six months of 2000 compared to the first six months of 1999. In
addition, long distance and

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local call volumes and coin revenues have been
adversely affected by the growth of wireless communication services, which
serves as an increasingly competitive alternative to payphone usage. To a
lesser extent, coin revenue has declined due to the use of prepaid calling
cards and other types of dial-around calls.

Revenues from non-coin telecommunication services of $15,886 were $2,946
or 15.6% less than the $18,832 of revenues reported in the first half of 1999.
Of this decrease, long distance revenues from operator service providers
declined by $2,141 or 19.4%. This decrease is a result of the reduction in the
average number of pay telephones and the reduction in operator service revenues
caused by the continuing aggressive dial-around advertising by long distance
carriers such as AT&T and MCI Worldcom. Long distance revenues from operator
service providers have also been adversely affected by the growth in wireless
communications. In addition, revenues from dial-around compensation decreased
by $805, from $7,776 in the first six months of 1999 to $6,971 in the first six
months of 2000, due to the reduction in the average number of pay telephones in
the first six months of 2000.

Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under section 276 of the Telecommunications Act, the FCC
issued an order to achieve fair compensation for dial-around calls placed from
pay telephones through deregulation and competition (the 1996 Payphone
Order). Among other things, the 1996 Payphone Order prescribed compensation
payable to the payphone providers by certain interexchange carriers for
dial-around calls placed from payphones. 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 local exchange carriers to make such coding available to the
payphone providers as a transmit item included in the local access line
service. The 1996 Payphone Order set an initial monthly rate of $45.85 per pay
telephone for the first year after its implementation (the First Phase), an
increase from the monthly per pay telephone rate of $6.00 in periods prior to
its implementation, and thereafter, set dial-around compensation on a per-call
basis, at the assumed deregulated coin rate of $0.35. The First Phase monthly
rate was arrived at by the product of the assumed deregulated coin rate ($0.35)
and the then monthly average compensable dial-around calls per payphone. A
finding from the record established at the time that the monthly average
compensable calls was 131.

The 1996 Payphone Order was appealed by various parties, including the
IXCs, to the United States Court of Appeals for the District of Columbia
Circuit. Among other items, the Appeals Court found that the FCC erred in
using a market-based method for calculating the amount of dial-around
compensation and further determined that the method for determining the
allocation of payment among IXCs was erroneous. The Appeals Court remanded the
1996 Payphone Order to the FCC for further consideration.

In response to the remand by the Appeals Court, in October 1997 the FCC
issued a new order implementing Section 276 (the 1997 Payphone Order). The
FCC used a market-based method to determine a per-call compensation rate,
reduced it by certain costs attributable to a coin call which it did not
believe applied to a dial-around call, and adjusted the per-call rate from
$0.35 to $0.284 (the Default Rate). The FCC concluded that the Default Rate
should be applied retroactively in determining compensation during the First
Phase and reiterated that payphone providers were entitled to compensation for
every call pursuant to the provisions of Section 276; however, the FCC deferred
for later decision the method of allocation of the payment among the IXCs.

The 1997 Payphone Order was subsequently appealed by various parties. In
May 1998, the Appeals Court again remanded the per-call compensation rate to
the FCC for further explanation, without vacating the Default Rate, indicating
that the FCC had failed to adequately explain its derivation of the Default
Rate.

In response to the remand of the 1997 Payphone Order, 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 to $0.238, (the Adjusted Default Rate) retroactive to October 7,
1997. In adjusting the rate, the FCC changed from the market-based method used
in the 1996 and 1997 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 Adjusted Default Rate, the FCC
incorporated its prior treatment of certain payphone costs and examined new
estimates of payphone costs submitted as part of the proceeding. Pursuant to
the 1999 Payphone Order, the $0.24 amount ($0.238 plus $0.002 for amounts
charged by LECs for providing Flex Ani) will serve as the Adjusted

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Default Rate
for coinless payphone calls through January 31, 2002, at which time, parties
may petition the FCC regarding the default amount, issues related to
technological advances, and the expected resultant market changes.

The 1999 Payphone Order deferred a final ruling on the First Phase
treatment of dial-around compensation to a later, as yet unreleased order;
however, it appears from the 1999 Payphone Order that the Adjusted Default Rate
will be applied for periods in the First Phase. The FCC further ruled that a
true-up will be made for all payments or credits, together with applicable
interest due and owing among the IXCs and the payphone service providers for
the payment period November 7, 1996 through the effective date of the Adjusted
Default 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
Adjusted Default Rate. 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 had been appealed by various parties. The Appeals
Court heard oral arguments on February 2, 2000 and issued its ruling on the
matter in June 2000 in which it denied all petitions for review of the per-call
compensation rate and kept in place the Adjusted Default Rate mandated by the
1999 Payphone Order. Based upon the information available, the Company
believes that the minimum amount it is entitled to receive as fair compensation
under Section 276 for prior periods is $31.18 per pay telephone per month based
on $0.238 per call and 131 calls per pay telephone per month.

Other revenues increased $155 from $69 for the six months ended June 30,
1999 to $224 for the six months ended June 30, 2000. This increase was
primarily the result of the amortization of a deferred operator service bonus
received in January 2000.

Operating Expenses.

Total operating expenses decreased $11,396, or 23.0%, from $49,598 for the
six months ended June 30, 1999 to $38,202 for the six months ended June 30,
2000. The decrease was due to a reduction in substantially all expense
categories, due in part to the decrease in the average number of installed pay
telephones and field operations personnel in the first six months of 2000
compared to the first six months of 1999. Operating expenses also decreased as
a result of the adoption of fresh start reporting in November 1999 which
resulted in a decrease in depreciation and amortization expense.

Line and transmission charges of $10,891 in the first half of 1999 and
$7,826 in the first half of 2000 declined by $3,065, or 28.1%. Line and
transmission charges represented 27.4% of total revenues for the six months
ended June 30, 1999 and 23.7% of total revenues for the six months ended June
30, 2000, a decrease of 3.7%. The dollar and percentage decreases were 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 access charges resulting from the use of competitive local
exchange carriers. In the six months ended June 30, 2000, the Company also
recovered approximately $1,363 of prior years sales and excise taxes charged
by LECs.

Telecommunication and validation fees (consisting primarily of processing
costs relating to operator services) decreased $1,171, or 25.2%, from $4,653
to $3,482 for the first six months of 1999 and 2000, respectively. The dollar
decrease was primarily the result of the decrease in operator service revenues
compared to the first six months of 1999. As a percentage of total revenue,
telecommunication and validation fees decreased from 11.7% in 1999 to 10.5% in
2000 principally due to a change in the Companys primary operator service
provider (OSP) during the first quarter of 2000. The Company entered into an
agreement with this new OSP which provides for a reduction in the processing
costs as a percentage of gross operator service revenues.

Location commissions were $4,349 in 2000 compared to $6,402 in the first
six months of 1999. Location commissions declined by $2,053, or 32.1%, and
represented 16.1% and 13.2% of total revenues for the six months ended June 30,
1999 and 2000, respectively. The dollar and percentage decreases are due to
the reduction in revenues in the first six months of 2000 compared to 1999 and
the use of higher commission accrual rates in the first six months of 1999 to
recognize the increasing commission rates resulting from location contracts
with new and existing location providers.

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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 $1,562, or 14.8%,
from $10,539 for the six months ended June 30, 1999 to $8,977 for the six
months ended June 30, 2000. Field operations represented 26.5% of total
revenues for the six months ended June 30, 1999 and 27.2% of total revenues for
the six months ended June 30, 2000. The dollar decrease in the first six
months of 2000 compared to 1999 was primarily due to lower aggregate salaries
and wages resulting from the reduction in personnel and a decrease in sales and
other taxes based on revenues during the first six months of 2000. The
increase as a percentage of total revenues was a result of the lower revenues
in the first half of 2000.

Selling, general and administrative (SG&A) expenses declined, from
$5,105 for the first six months 1999 to $4,705 for the six months ended June
30, 2000, a decrease of $400 or 7.8%. SG&A expenses represented 12.8% of total
revenues for the six months ended June 30, 1999 and 14.2% of total revenues for
the six months ended June 30, 2000. The dollar decrease was primarily due to a
decrease in telephone expenses and other cost reduction efforts. In the first
half of 2000, there was an increase in the number of sales personnel offset by
a reduction in the number of administrative personnel, which resulted in a
comparable amount of personnel related expenses in the six months ended June
30, 1999 and 2000. The increase in SG&A expenses as a percentage of total
revenues was due to the decrease in revenues in the six months ended June 30,
2000.

Depreciation and amortization decreased in 2000 primarily due to the
adoption of fresh start reporting as of November 17, 1999, the Consummation
Date of the Companys Prepackaged Plan. Under fresh start reporting, the
carrying values of property and equipment and of intangible assets were
adjusted to equal the fair value of such assets at that date. The new cost
basis of these assets is being depreciated or amortized over their remaining
useful lives. Depreciation and amortization decreased $3,182, or 26.7%, from
$11,935 for the six months ended June 30, 1999 to $8,753 for the six months
ended June 30, 2000. Depreciation and amortization represented 30.0% of total
revenues for the six months ended June 30, 1999 and 26.5% of total revenues for
the six months ended June 30, 2000

Other unusual charges and contractual settlements were $110 in the six
months ended June 30, 2000 compared to $73 in the six months ended June 30,
1999 and consisted primarily of legal and professional fees relating to
non-routine litigation and the Companys Prepackaged Plan.

Other Income (Expense)

Other income (expense) is comprised principally of interest expense
incurred on debt and interest income. Total interest expense decreased $5,517,
or 50.6%, from $10,898 for the six months ended June 30, 1999 to $5,381 for the
six months ended June 30, 2000. Interest expense represented 27.4% of total
revenues for the six months ended June 30, 1999 and 16.3% of total revenues for
the six months ended June 30, 2000, a decrease of 11.1%. The dollar and
percentage decreases resulted from the conversion of the $125,000 aggregate
principal amount 12% Senior Notes to Common Stock (Successor Company) as the
result of the consummation of the Companys Prepackaged Plan. Excluding $7,896
of interest expense relating to the Senior Notes in the first six months of
1999, interest expense increased by $2,379 principally due to an increase in
the amount of the Companys secured debt and an increase in the effective rate
of interest arising from higher fees relating to the Companys Exit Financing
Agreement.

EBITDA from Recurring Operations

EBITDA from recurring operations (income before interest income, interest
expense, taxes, depreciation and amortization, and other unusual charges and
contractual settlements) increased $1,522, or 70.0%, from $2,174 for the six
months ended June 30, 1999 to $3,696 for the six months ended June 30, 2000.
EBITDA from recurring operations represented 5.5% of total revenues for the six
months ended June 30, 1999 and 11.2% of total revenues for the six months ended
June 30, 2000, an increase of 5.7%. The dollar and percentage increases are
primarily due to the decreases in coin and non-coin telecommunication revenues
(including dial-around compensation) offset by larger decreases in operating
costs. EBITDA from recurring operations is not intended to represent an
alternative to

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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 from recurring
operations 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.

Liquidity and Capital Resources

Cash Flows from Operating Activities

The Company had working
capital of $2,745 at June 30, 2000 compared to
$3,131 at December 31, 1999, a decrease of $386. This decrease was due
primarily to a decrease in cash resulting from the use of cash in investment
activities during the first half of 2000. Net cash provided by (used in)
operating activities during the six months ended June 30, 1999 and 2000 was
$(417) and $607, respectively. Net cash provided by operating activities
resulted mainly from the net loss for the six months ended June 30, 2000 offset
by non-cash charges for depreciation and amortization and non-cash interest
expense.

Cash Flows from Investing Activities

Cash used in investing activities during the six months ended June 30,
1999 and 2000 was $1,143 and $994, respectively. In the first six months of
1999 and 2000, cash used in investing activities consisted mainly of purchases
of telephones, other property and equipment and expenditures for deferred
commissions and signing bonuses relating to location contracts. Deferred
commissions and signing bonuses increased over the prior year due to improved
sales which resulted in a slight increase in the number of pay telephones
during the first half of 2000.

Cash Flows from Financing Activities

Cash flows provided by (used in) financing activities during the six
months ended June 30, 1999 and 2000 were $1,051 and $(137), respectively, which
in 1999 consisted primarily of additional borrowing under the Companys Credit
Agreement offset by expenditures for professional fees for the restructuring of
the Companys Senior Notes. Cash flows used in financing activities during the
six months ended June 30, 2000 consisted primarily of expenditures for
professional fees for the proposed refinancing of the Companys Exit Financing
Agreement.

Post Reorganization Loan Agreement

The Company executed an agreement with Foothill for post reorganization
financing on November 17, 1999. The Exit Financing 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 Financing
Agreement is secured by substantially all of the assets of the Company and
matures on November 16, 2001.

The Exit Financing 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, together with interest thereon, 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
Financing Agreement are subject to certain reductions for early prepayment,
provided that the Company is not in default on the Exit Financing Agreement.

The Exit Financing Agreement provides for interest on the outstanding
principal balance at 3% above the base rate (as defined in the Exit Financing
Agreement), with interest on the Maximum Amount payable monthly in

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arrears.
The Exit Financing Agreement, as amended on December 31, 1999, 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 Financing 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 and Note PayableIn connection with the Prepackaged
Plan, the Company reached an agreement with a former lender to settle a claim
for the purported exercise of a put right relating to warrants to purchase
shares of Series A Special Convertible Preferred Stock (Series A Preferred).
The Series A Preferred was convertible into Common Stock. The claim was
settled for $1,000 in the form of a note payable, subject to certain reductions
for early payment, together with deferred interest at 5% per annum, in five
years. In addition, the former lender agreed to forfeit its shares of Common
Stock (Successor Company) and New Warrants which were issued pursuant to the
Prepackaged Plan and immediately canceled.

Liquidity and Capital ExpendituresManagement expects its recent profit
improvement measures and the conversion of the Companys Senior Notes to Common
Stock (Successor Company), including the elimination of required interest
payments, to have a beneficial impact on cash flows provided by operating
activities. Although there is no additional credit available under the
Companys Exit Financing Agreement, the financial position of the Company has
improved as a result of the consummation of the Prepackaged Plan. The Company
is currently seeking financing to replace the Exit Financing Agreement, to
improve the liquidity of the Company and to reduce the cost of debt service.

For the six months ended June 30, 2000, the Company had capital
expenditures of $581 which were financed by cash flows from operating
activities. Capital expenditures were principally for refurbishing and
replacing the Companys pay telephones, related equipment, operating equipment
and computer hardware. The Company has no significant commitments for capital
expenditures at June 30, 2000.

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.




Item 3. Quantitive and qualitative disclosures about market risk

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. The Companys long-term obligations primarily consist of
borrowings and deferred fees under the Companys Exit Financing Agreement
aggregating approximately $50 million.

The Companys earnings and cash flows are subject to market risk resulting
from changes in interest rates with respect to its borrowings under its Exit
Financing 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

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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.




Part II. Other Information




Item 6. Exhibits and Reports on Form 8-K

Exhibits:



|     |                                                                            
|---- | ---------------------------------------------------------------------------
|(27) | Financial Data Schedule                                                    
|    
|(b)  | Reports on Form 8-K                                                        
|    
|     | The Company filed no reports on Form 8-K during the second quarter of 2000.

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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.          
|               
|August 14, 2000 |  | By: /s/ John D. Chichester           
|               
|               
|               
|               
|                |  | John D. Chichester                   
|               
|               
|               
|               
|                |  | President and Chief Executive Officer
|               
|August 14, 2000 |  | By: /s/ Richard P. Kebert            
|               
|               
|               
|               
|                |  | Richard P. Kebert                    
|               
|               
|               
|               
|                |  | Chief Financial Officer,             
|               
|               
|               
|               
|                |  | Treasurer and Secretary              
|               
|               
|               
|               
|                |  | (Principal Financial Officer and     
|               
|               
|               
|               
|                |  | Accounting Officer)                  

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