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

                                    FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                    For the fiscal year ended March 31, 1999

                                       OR

[ ] 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 0-15205

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

           Delaware                                             59-2518405
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)

      6428 Parkland Drive                                         34243
       Sarasota, Florida                                       (Zip Code)
(Address of principal executive offices)


                                 (941) 758-0389
                         (Registrant's telephone number,
                              including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                     Common Stock, Par Value, $.01 Per Share
                                (Title of Class)

                               Redeemable Warrants
                                (Title of Class)

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 __

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

The aggregate market value of the voting Common Stock held by  non-affiliates of
the  Registrant at June 17, 1999,  computed by reference to the closing price of
the  Registrant's  Common  Stock on such date as quoted by the  National  Market
System of NASDAQ, was approximately $20,498,466.  Shares of Common Stock held by
each officer,  director and holder of 5% or more of the outstanding Common Stock
have been  excluded in that such  persons may be deemed to be  affiliates.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

At June 17, 1999, there were 13,499,693 shares of the Registrant's  Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


<PAGE>

                                     PART I

Item 1. BUSINESS

General

The Company designs, develops,  manufactures and markets a comprehensive line of
integrated public  communications  products and services.  The Company's product
line includes  microprocessor-based  payphone terminals known in the industry as
"smart" or  "intelligent"  payphones,  software  systems  to manage and  control
networks of the Company's smart payphone terminals,  electromechanical  payphone
terminals also known in the industry as "dumb" payphones, replacement components
and assemblies,  and an offering of industry services including repair,  upgrade
and  refurbishment  of  equipment,  operator  services,  customer  training  and
technical  support.  The  Company  provides  customized  hardware  and  software
solutions designed to meet the specific  application  requirements of customers.
The Company's  payphone  terminals operate and provide service over domestic and
international  telephone  networks.  For a  more  detailed  description  of  the
Company's products, see "Products," below.

The Company markets its products and services to public  telecommunications  and
payphone  service  providers  in  the  United  States  and  in  certain  foreign
countries.  The Company's  customers  include  telephone  companies that provide
wireline and wireless local exchange services,  telephone companies that provide
wireline and  wireless  long-distance  telephone  services  and  companies  that
install  and  operate  payphone   terminals  as  independent   payphone  service
providers.  The Company's  international  business consists of export sales, and
the  Company  does not  presently  have any foreign  operations.  See "Sales and
Markets," below.

The Company's  principal  offices are located at 6428 Parkland Drive,  Sarasota,
Florida  34243,  and its  telephone  number at that  address is (941)  758-0389.
Unless the context  requires  otherwise,  Elcotel,  Inc.  and its  subsidiaries,
Technology Service Group, Inc. ("TSG") and Elcotel Direct, Inc., are referred to
herein collectively as the "Company" or "Elcotel".  Unless otherwise stated, all
dollar  amounts,  other than per share data,  set forth in Part I and Part II of
this Form 10-K report are stated in thousands.

Forward Looking Statements

The  statements  contained in this report on Form 10-K which are not  historical
facts contain  forward  looking  information  regarding the Company's  financial
position,  business strategy, plans, projections and future performance based on
the beliefs, expectations,  estimates, intentions or anticipations of management
as well  as  assumptions  made by and  information  currently  available  to the
Company's  management.  Such statements  reflect the current view of the Company
with  respect to future  events  and are  subject  to risks,  uncertainties  and
assumptions  related to various  factors that could cause the  Company's  actual
results to differ  materially  from those  expected  by the  Company,  including
competitive factors, customer relations, the integration of operations resulting
from  acquisitions,   the  risk  of  obsolescence  of  the  Company's  products,
relationships  with suppliers,  the risk of adverse  regulatory action affecting
the Company's  business or the business of the Company's  customers,  changes in
the international business climate,  product introduction and market acceptance,
general economic  conditions,  seasonality,  changes in industry practices,  the
outcome of litigation to which the Company is a party,  and other  uncertainties
detailed in this report and in the Company's  other filings with the  Securities
and Exchange Commission.


                                       2
<PAGE>

Recent Developments

Effective  June 11,  1999,  Mr.  Tracey L. Gray retired from his position as the
President and Chief  Executive  Officer of the Company,  and effective  June 10,
1999, Mr. C. Shelton James, Chairman of the Board of Directors, was appointed as
Acting  President and Chief  Executive  Officer.  The Company and Mr. James have
reached an  agreement in principle  with respect to a new  employment  agreement
that would supercede Mr. James's employment  agreement that had become effective
on October 20,  1998.  In  addition,  the  Company and Mr. Gray have  reached an
agreement in principle  with respect to the terms of his  retirement  that would
supercede Mr. Gray's  employment  agreement that was effective as of October 20,
1998. See Item 10 - "Directors and Executive Officers of the Registrant."

During the fiscal  year ended March 31, 1999  ("fiscal  1999"),  the Company was
involved in  negotiations  concerning a possible  business  combination  with an
international public  telecommunications  equipment  manufacturer.  During April
1999,  the  Company  decided  that the  terms  and  conditions  of the  business
combination  as then proposed  would not be, at that time, in the best long-term
interests of the Company's  stockholders,  and terminated the  negotiations.  In
connection  therewith,  the Company  charged to  operations  approximately  $1.2
million of expenses,  consisting  primarily of legal,  accounting and consulting
fees and  expenses  incurred  by the  Company  during  the  negotiations  and in
connection  with  due  diligence  investigations.  See  Item  7 -  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
Item 8 - "Consolidated Financial Statements and Supplementary Data."

During  the  fourth  quarter  of  fiscal  1999,  the  Company  adopted a plan to
reorganize certain sales and marketing  activities with the purpose of enhancing
customer  service,  strengthening  market focus and improving  productivity.  In
connection therewith, the Company charged $490 of reorganization expenses, which
include estimated costs of severance and salary  continuation  arrangements with
respect to terminated  employees,  to operations during the year ended March 31,
1999. See Item 7 - "Management's  Discussion and Analysis of Financial Condition
and Results of Operations" and Item 8 - "Consolidated  Financial  Statements and
Supplementary Data."

The Industry

Domestic Market. Public telecommunications  services,  including "coin" or "pay"
telephone  service,  in the United  States are provided by  regulated  telephone
companies, including independent telephone operating companies, such as GTE, and
the Regional Bell Operating  Companies ("RBOCs") created upon the divestiture of
AT&T; long distance carriers ("IXCs") such as AT&T; independent payphone service
providers;   and  competitive  local  exchange  carriers  ("CLECs").   Regulated
telephone companies,  long distance carriers and CLECs are collectively referred
to herein as "telephone  companies".  The operations of telephone  companies are
subject to extensive regulation by the Federal Communications Commission ("FCC")
and   state   regulatory   agencies   (see   "Government   Regulation   and  the
Telecommunications  Act," below).  Virtually  all services  offered by telephone
companies,  including payphone services, are provided in accordance with tariffs
filed with  appropriate  regulatory  agencies,  including  the FCC.  Independent
payphone  service  providers  are  subject to  regulations  of state  regulatory
agencies.

The Company believes that the RBOCs control approximately 60% (approximately 1.2
million units) of the payphone  terminals in service in the United  States.  The
remaining  installed base of payphone  terminals are owned and operated by other
telephone companies and independent payphone service providers.  The majority of
payphones deployed by the RBOCs are essentially  electronic devices that perform
the functions of normal residential  telephones,  with the additional ability to
hold and collect or refund coins. These payphone terminals require the supply of
service via a "coin line"  provided by telephone  companies  and the services of
the central offices of telephone companies to provide the


                                       3
<PAGE>

intelligence  required to process calls.  The majority of payphones  deployed by
independent  payphone service  providers are  microprocessor-based  systems that
incorporate  the  intelligence  in the payphone  terminal to internally  process
calls,  rate calls and  collect  and store data for  accounting,  coin and route
management  functions,  and  service is  supplied  via normal  "business"  lines
provided  by  telephone  companies.  Payphone  terminals  that  incorporate  the
intelligence to perform the functions of the central office within the telephone
are referred to in the  industry as "smart" or  "intelligent"  payphones.  These
intelligent  devices were  developed  to meet the  requirements  of  independent
payphone  service  providers  that  emerged  following  FCC rulings in 1984 that
authorized  competition  in the  operation of payphones  and provision of public
telecommunications access.

On February 8, 1996,  the  President  of the United  States  signed into law the
Telecommunications  Reform  Act of  1996  (the  "Telecommunications  Act" or the
"Act"), the most comprehensive  reform of communications law since the enactment
of the  Communications  Act  of  1934.  The  Telecommunications  Act  eliminated
long-standing legal barriers  separating local exchange carriers,  long distance
carriers, and cable television companies and preempted conflicting state laws in
an  effort  to  foster  greater  competition  in all  telecommunications  market
sectors,  improve the quality of services,  and lower prices. There are specific
provisions  in the Act that  relate  to the  payphone  operations  of  telephone
companies  and payment of  compensation  to payphone  service  providers by long
distance carriers. See "Government  Regulation and the Telecommunications  Act,"
below.

The  Company  believes  that the public  communications  industry  will  undergo
fundamental changes as a result of the Act and regulations adopted by the FCC to
implement its provisions (see "Government  Regulation and the Telecommunications
Act," below).  The Company  believes the Act and regulations  adopted by the FCC
may increase the number of providers of  telecommunications  services including,
perhaps,  providers of payphone services.  An increase in the number of payphone
service  providers may  stimulate  demand for new payphone  terminal  equipment,
particularly  terminal equipment that provides access to new revenue streams. In
that event,  the Company  believes that  existing  payphone  service  providers,
including  the RBOCs,  might seek to enhance their  technology  base in order to
improve operating  efficiencies and compete more effectively with each other and
with new entrants.  There can be no assurance,  however,  that these trends will
develop,  or that if they do develop,  they will have a beneficial impact on the
public   communications  market  generally  or  on  the  Company's  business  in
particular. See "Government Regulation and the Telecommunications Act," below.

A  significant  portion of revenues of payphone  service  providers is generated
from  commissions  on long  distance  traffic  that is routed to  inter-exchange
carriers  and other  operator  service  providers  (OSPs)  selected  by payphone
operators.  Services  offered by OSPs,  in addition to long  distance  services,
include live and automated operator assistance, and card validation, billing and
collection  services.  The number of access  code calls and toll free calls (800
and 888 numbers) ("toll free calls") routed to long distance  providers and OSPs
selected by  consumers  (dial-around  calls) has  increased  significantly  as a
result of  competition  and  promotion of toll free access code and prepaid card
services within the telecommunications  industry.  Prior to FCC rulings adopting
regulations to implement the Telecommunications  Act, payphone service providers
received per-phone dial-around compensation from long distance service providers
equal to $6.00  per  month  on toll  free  calls.  The new  regulations  provide
dialaround  compensation  to payphone  service  providers based on the number of
such toll free  calls (see  "Government  Regulation  and the  Telecommunications
Act," below).  As a result,  the Company  believes that the new regulations will
have a significant  favorable  impact on revenues of payphone  operators and may
also stimulate demand for new payphone terminal equipment. However, there can be
no  assurance  that all or part of these  new  regulations  will  survive  court
review. See "Government Regulation and the Telecommunications Act," below.


                                       4
<PAGE>

Over the past  several  years,  in response to the  competitive  pressures  from
independent  payphone  service  providers and in  anticipation of passage of the
Telecommunications  Act,  several of the RBOCs began to upgrade their  installed
base of payphone  terminals  with smart  technology.  The Company  believes that
approximately  20% to 30% of the  installed  base of  payphones  operated by the
RBOCs have been upgraded with smart payphone  systems,  including those provided
by  the  Company.  As  the   Telecommunications  Act  prevents  the  RBOCs  from
subsidizing   and  providing   services  to  their  payphone   operations  in  a
discriminatory  manner in  relation to  services  provided  to private  payphone
service providers,  the Company believes that the RBOCs will continue to upgrade
their  installed  base of payphones and  otherwise  look for ways to become more
efficient and competitive.

Over the last three years, a number of mergers and consolidations  have occurred
within the  telecommunications  industry  and the public  access  segment of the
industry.  SBC Communications,  Inc. and Pacific Telesis, Inc. (both RBOCs) have
merged. Bell Atlantic,  Inc. and NYNEX (both RBOCs) have merged. During the past
year,  mergers between SBC  Communications,  Inc. and Ameritech,  Inc.  (another
RBOC) and between GTE and Bell Atlantic, Inc. were announced. In addition, there
have  been a number of  acquisitions  and  mergers  among  independent  payphone
service  providers.  The mergers and consolidations in the industry have reduced
the number of customers and  potential  customers of the Company.  However,  the
Company believes that payphone service providers using multiple technologies may
move to standardize their technology and terminal equipment,  thereby increasing
demand for new payphone terminal equipment.

During the latter part of fiscal 1999, the demand for the Company's products was
constrained  by the  recent  merger  activity  among both  independent  payphone
service  providers  and domestic  telephone  companies,  and  on-going  disputes
related to the  amount and payor of  dial-around  compensation  required  by the
Telecommunications Act. Also, the payphone operating units of domestic telephone
companies began to eliminate  unprofitable  payphone  locations as part of their
efforts to improve  profitability  as separate  operating  units,  which reduced
their  product  requirements  with  respect to new  installations.  The  Company
believes, but cannot assure, that the demand of domestic telephone companies for
its products will begin to improve sometime during the next year.

The Company  believes that it is positioned to continue as a leading supplier to
the  domestic  public  access  communications  industry as a result of the broad
range of its product offerings (see "Products," below).

International  Market.  The  Company  believes  that there are  several  million
payphones  internationally in the installed base. Public communications services
in  foreign  countries  are  provided  by  large  government-controlled  postal,
telephone  and  telegraph  companies  ("PTTs"),   former  PTTs  that  have  been
privatized  for the  purpose of  investing  in and  expanding  telecommunication
networks and services, and cellular/wireless carriers. The Company believes that
a  trend  toward   privatization   and   liberalization   of  the  international
telecommunications  industry is opening the  international  markets,  previously
dominated by monopoly and government infrastructure, to increased competition.

Presently,  the density of payphone installations in many foreign countries on a
per  capita  basis is far less  than  that in the  United  States.  The  Company
believes  that many of these  countries  are seeking to expand and upgrade their
telecommunications  systems  and are funding  programs to provide  communication
services  to  the  public.  The  Company  believes  that  large  scale  payphone
deployment  programs  are  underway  in several  foreign  markets,  and that the
international  public  communications  industry will continue to evolve and be a
significant  growth  industry  over the next several  decades to the extent that
privatization  and  the  investment  in  both  wireline  and  wireless  networks
progresses.


                                       5
<PAGE>

Products

The Company designs, develops,  manufactures and markets a comprehensive line of
integrated public  communications  products and services.  The Company's product
line includes  microprocessor-based  payphone terminals known in the industry as
"smart" or  "intelligent"  payphones,  software  systems  to manage and  control
networks of the Company's smart payphone terminals,  electromechanical  payphone
terminals also known in the industry as "dumb" payphones, replacement components
and assemblies,  and an offering of industry services including repair,  upgrade
and  refurbishment  of  equipment,  operator  services,  customer  training  and
technical  support.  The  Company  provides  customized  hardware  and  software
solutions designed to meet the specific  application  requirements of customers.
The Company's  payphone  terminals operate and provide service over domestic and
international telephone networks.

Payphone  Terminals.  The Company's  intelligent  payphone terminal product line
consists  of  a  wide  range  of  models  including   domestic  coin  payphones,
international  coin payphones,  domestic and  international  card payphones that
accept  smart  cards  and  credit  cards,  and  multi-payment  (coin  and  card)
payphones,   for  both  coin  line  and  business  line  applications,   and  an
international card payphone for wireless and cellular applications.

The intelligence of the "smart"  payphone  resides in an internal,  programmable
printed  circuit board control module that gives call rating  information to the
user via audible voice prompts and then  completes the routing of the call based
on  programming.  These smart  terminals  operate  independently  of a telephone
company's  central office (CO). While there is an electronic board inside "dumb"
payphones,  it acts as a network  interface  device and requires no programming.
Dumb payphones  require a coin line for operation  because they are dependent on
the CO for  rating  and  routing of calls.  Historically,  independent  payphone
service providers have used smart payphones while telephone  companies have used
dumb payphones.

The Company's intelligent payphone terminals utilize  state-of-the-art  hardware
and software  technology and, except for wireless and cellular  applications and
certain  configurations  provided with Vacuum  Fluorescent  Displays ("VFD") and
backlit Liquid Crystal Displays ("LCD"), are powered by the low electric current
available  from the telephone  line.  Using the power  provided by the telephone
line  eliminates  the need for external  power  sources and avoids the expensive
cost of electrical installation.

The Company's  intelligent  payphone  terminals may be remotely  programmed  and
monitored by the Company's network management  systems,  and operate by means of
microprocessor-based  printed circuit board assemblies  containing the Company's
copyrighted software operating systems. The terminals  communicate with a caller
by digitized human voice messages activated by the microprocessor,  and have the
capability to internally process the functions  associated with call processing,
call  rating  and  collecting  data for  accounting,  coin and route  management
functions.  Call  timing and rating  functions  are  performed  via  proprietary
designed  "answer  detection" and "answer  supervision"  modules.  The Company's
present line of payphone  terminals are offered with various  standard  features
and options that provide, among others, the ability to:

         o        Monitor and report coin box status;

         o        Monitor and report the service  condition  of the payphone via
                  maintenance and diagnostic alarms;

         o        Report,   in  real  time,  any  critical   conditions  to  the
                  management system;

         o        Record and store call records, including called numbers, types
                  and length of calls and call revenue;


                                       6
<PAGE>

         o        Remotely retrieve programming information,  call records, cash
                  box status, and maintenance and diagnostic data;

         o        Program and monitor various  options,  rates,  alarms and free
                  phone numbers on-site or remotely;

         o        Download voice prompts;

         o        Calculate   time-of-day  discounts  and  control  other  timed
                  functions via clock and calendar features; and

         o        Download revisions to the phone's software operating system.

Hardware options  available with the Company's  payphone product line include an
array of  housings/cabinets  consisting  of the GTE style  housing,  the Western
Electric or AT&T style housing and custom designed  housings/cabinets,  an array
of electronic coin mechanisms to support domestic and foreign coins, displays to
support multilingual messages in languages selected by the customer,  speed dial
buttons, and card readers.  Software options include custom voice prompts,  card
validation, custom maintenance alarms and customized call routing features.

The Company's smart payphone terminals include the following:

         Gemini  System  III(TM)  Payphone  Terminals.  The  Gemini  System  III
         payphone  terminals  are  provided  in  GTE  style  and  Western  style
         configurations,  and are  equipped  with the Gemini  System III printed
         circuit board control  module.  This control module is  programmable to
         operate on either a business  (B-1) line or on a coin line. Its modular
         connector  design  allows the payphone  service  provider to choose the
         desired  feature set, which reduces  installation  time. In addition to
         the standard features,  the Gemini System III terminals include pin and
         tone   fraud   protection,    programmable    initial   rates,   curfew
         programmability,  and multilingual voice prompts. The Gemini System III
         terminals  are  offered  in  configurations  that  support  a data port
         interface for access to the Internet via laptop computers, and multiple
         payment  options,  including  coin,  credit cards and smart cards.  The
         features  included in the Gemini  System III  payphone  terminals  were
         designed  to meet the  special  application  requirements  of  domestic
         telephone companies,  and are marketed primarily to that segment of the
         market for installation in indoor and outdoor locations.

         Eclipse(TM)  and Komet(TM)  Payphone  Terminals.  The Eclipse and Komet
         payphone  terminals  are  sophisticated  GTE  style and  Western  style
         terminals,  respectively,  equipped with the 5502 printed circuit board
         control  module.  The 5502 control module operates on either a B-1 line
         or a coin line.  In addition to the standard  features,  the  extensive
         capabilities of these terminals  include a high-speed  modem for faster
         data  transmission and retrieval,  programmable  speed dial buttons for
         ease of use and generation of additional revenues,  and bilingual voice
         prompts.  The Eclipse and Komet payphone  terminals include a data port
         interface  for access to the  Internet  via laptop  computers,  and are
         configured for multiple payment options,  including coin,  credit cards
         and smart  cards.  Their LCD or  optional  VFD display  panels  augment
         audible voice instructions and provide  advertising  capability.  These
         products  are  marketed  to  both  domestic  telephone   companies  and
         independent payphone service providers for installation in high profile
         indoor  locations  such as  international  airports,  major  hotels and
         convention centers.

         Series-5  Payphone  Terminal.  The  Series-5  payphone  is a GTE  style
         terminal equipped with Series-5 control modules.  The Series-5 terminal
         is  generally  provided  in a  coin-only  configuration  that  operates
         exclusively  on a B-1 line.  The Series 5 terminal  is also  offered in
         configurations  that support multiple payment options,  including coin,
         credit cards and smart cards.  These products include standard features
         designed for domestic  independent  payphone


                                       7
<PAGE>

         service  providers  and are  marketed  primarily to that segment of the
         market for installation in indoor and outdoor locations.

         Olympian 5501/5500 Payphone Terminals. The Olympian 5501/5500 payphones
         are Western style  terminals  equipped with a 5501 or 5500 module.  The
         Olympian 5501 terminals operate on either a B-1 line or a coinline. The
         Olympian 5500 terminals operate  exclusively on a B-1 line. In addition
         to the standard  features,  the features of the Olympian 5501 terminals
         include programmable initial rates and timed local coin line calls. The
         Olympian terminals are offered in configurations  that support multiple
         payment options,  including coin,  credit cards and smart cards.  These
         products include standard  features  designed for domestic  independent
         payphone service  providers and are marketed  primarily to that segment
         of the market for installation in indoor and outdoor locations.

         IPT(TM)   Payphone   Terminal.   The  IPT   payphone   terminal  is  an
         international GTE style terminal equipped with the 5502 printed circuit
         board  control  module.  The  terminal  is  provided  in  either a coin
         configuration or a coin and card configuration, includes a LCD panel to
         augment audible voice  instructions and to display remaining card value
         when  applicable,   and  is  configured  to  accept  and  store  larger
         international  coins.  This  terminal  can  also be  configured  with a
         backlit LCD with an  auxiliary  power  source.  In addition to standard
         features, the IPT payphone terminal includes multi-lingual voice prompt
         capability, user selectable language, and customized tariff tables.

         International   Eclipse(TM)   Payphone  Terminal.   Like  its  domestic
         counterpart,   the   international   Eclipse  payphone  terminal  is  a
         sophisticated GTE style terminal equipped with the 5502 printed circuit
         board control module.  The  international  Eclipse payphone terminal is
         configured to accept and store larger  international coins. In addition
         to the standard features, the extensive capabilities of these terminals
         include a high-speed modem for faster data  transmission and retrieval,
         programmable  speed  dial  buttons  for ease of use and  generation  of
         additional  revenues,   and  bilingual  voice  prompts.  This  payphone
         terminal  includes a data port interface for access to the Internet via
         laptop  computers,  and is  configured  for multiple  payment  options,
         including coin, credit cards and smart cards. Their LCD or optional VFD
         display  panels  augment   audible  voice   instructions   and  provide
         advertising capability.

         Solarus(TM)  Payphone  Terminal.  The  Solarus  payphone  terminal is a
         custom  designed  stainless  steel  international   card-only  terminal
         equipped  with the 5502  printed  circuit  board  control  module,  and
         includes  a LCD panel to  augment  audible  voice  instructions  and to
         display remaining card value when applicable. This terminal can also be
         configured with programmable  speed dial buttons and a backlit LCD with
         an  auxiliary  power  source.  In addition to  standard  features,  the
         Solarus  payphone   terminal   includes   multi-lingual   voice  prompt
         capability, user selectable language, and customized tariff tables. The
         optional  cellular  model allows this payphone to operate in a wireless
         environment.


                                       8
<PAGE>

The Company's electromechanical or dumb payphone terminals perform the functions
of normal residential  telephones,  operate on a coin line and rely on the CO to
process calls. The Company's  electromechanical  payphone  terminals  consist of
coin  and  coinless  terminals.  Historically,  these  terminals  have  been the
products of choice for domestic telephone companies.  They are not programmable,
do not contain the  technology  to internally  process the functions  associated
with call processing,  call rating and collecting data for accounting,  coin and
route  management  functions  and are simple to  install  and to  maintain.  The
Company's electromechanical payphone terminals include:

         1D2 Dumb  Payphone  Terminal.  The 1D2  payphone  terminal is a Western
         style  terminal  equipped  with the 32C  chassis  board  for coin  line
         operation.  The basic  features of the 1D2  payphone  terminal  include
         power surge  protection,  volume  amplification  and optional pin fraud
         protection.   The  1D2   payphone   terminal   is  sold   domestically,
         predominately to telephone companies.

         11B Payphone Terminal. The 11B payphone terminal is a coinless terminal
         equipped  with a  network  interface  that is used  only  for  operator
         assisted or toll free access calls.  The 1D2 payphone  terminal is sold
         domestically, predominately to telephone companies.

Network  Management  Systems.  The Company designs,  develops and sells payphone
management  software systems to manage and control both small and large networks
of the Company's  installed  smart payphone  terminals.  The Company's  payphone
management  software  systems  operate on personal  computers in a multi-tasking
environment,  and provide  customers  with the ability to manage and control all
aspects  of  their  installed  payphone  network  interactively  from  a  single
location.  The Company's  management software systems provide customers with the
ability to remotely configure product features, control the download of software
changes, program files and rate files, monitor operating status, and to download
coin box, call record, maintenance and diagnostic data for accounting,  coin and
route management functions.

The Company's network management systems include:

         PNM Plus(TM) System. The PNM Plus system is a Windows-based  management
         system that is used to remotely program,  manage,  and monitor Eclipse,
         Komet,  and Series-5  payphone  terminals.  This software  system has a
         built-in 24-hour  monitoring  function that reports all pertinent phone
         activity,  including call detail records, maintenance reports and alarm
         reports. At the payphone service provider's discretion, performance and
         financial  reports  can be  scheduled  and  generated  for use the next
         business day. The monitoring  and reporting  function can be configured
         to be completely  hands-free  and to perform late at night,  optimizing
         the busy-hour performance.

         PollQuest(TM)   System.   The  PollQuest   system  is  a  Windows-based
         management system designed to remotely program,  manage and monitor the
         Company's  international payphone terminals.  PollQuest has the ability
         to generate call detail and maintenance reports,  manage communications
         with the payphones and generate performance-based reports.

         CoinNet(TM)  System.  The  CoinNet  system  is  an  Unix  or  DOS-based
         management system that is used to remotely program, manage, and monitor
         Gemini System III payphone terminals.  The CoinNet system provides call
         detail  reports,  maintenance  and alarm  reports,  and the  customized
         operating  characteristics  of each  Gemini  System III  payphone.  The
         CoinNet system has the ability to support installations of over 100,000
         terminals   and   communicate   with   large   numbers   of   payphones
         simultaneously.


                                       9
<PAGE>

The Company is also developing its next generation open architecture  Windows-NT
compatible  software  management  system  that  is  expected  to be  capable  of
communicating  with and managing all of the Company's  smart payphone  terminals
and those of other manufacturers. See "Research and Development," below.

Components and Assemblies. The Company supplies its microprocessor-based printed
circuit  board modules and retrofit kits (see  "Payphone  Terminals,"  above) to
RBOCs and other  telephone  companies that are upgrading the technology of their
installed  base of payphones  and to  independent  payphone  service  providers,
distributors  and  resellers.  In  addition,  the Company  supplies  replacement
components and assemblies that include, among others, electromechanical payphone
assemblies,  electronic coin mechanisms,  card readers, cash box switches,  dial
assemblies,  handsets, coin relays, and volume amplification assemblies. Some of
the replacement components and assemblies supplied by the Company include:

         32C Chassis. The 32C electromechanical  chassis provides the connection
         to the  telephone  network  via a coin line and  offers  certain  basic
         features  such as power  surge  protection.  The 32C Chassis is used in
         Western style payphone  terminals and is marketed primarily to domestic
         telephone companies.

         22B Electronic Coin Validator. The 22B Electronic Coin Validator,  also
         known as a Coin  Mechanism,  tests the validity of coins deposited into
         the terminals and reports the coin  information to the printed  circuit
         board control module.  Based on the information  received from the coin
         validator,  the  control  module  either  processes  the  call or gives
         audible  instructions to the user on how to  successfully  complete the
         call.  The 22B  Electronic  Coin  Validator  is used in  Western  style
         payphone  terminals  and is marketed  primarily  to domestic  telephone
         companies.

         UBX Cash Box Switch.  The UBX cash box switch is an  advanced  magnetic
         assembly that reliably  detects the removal and insertion of a cash box
         from a  payphone  terminal,  which is  reported  to the  circuit  board
         control module.  The reliable  reporting of cash box collections to the
         control module enables the accurate  reporting of collection  activity,
         alarm  conditions,  coin  status  and coin  revenue  to the  management
         system.

         Anti-Stuffing  Device. The Anti-Stuffing Device is the assembly that is
         installed  in a coin  return  bucket to combat  vandalism.  This device
         deters vandals from stuffing paper and various  materials into the coin
         return in an attempt to defraud the owner and/or the user of coins.

         Volume Amplification  Assembly.  The Volume  Amplification  Assembly is
         installed  in the payphone  terminal to amplify the voice  signals from
         the handset. The assembly provides three volume amplification settings.

         Dial Assembly.  The Dial  Assembly,  including  keypad,  reports called
         digits to the printed  circuit board control  module so that the called
         digits can be sent to the  network  through  the  telephone  line.  The
         Company offers a variety of reliable dial  assemblies  compatible  with
         the various housings and circuit boards in the installed payphone base.

         Relay Assembly.  The relay assembly  receives a signal from the circuit
         board  instructing  it to return or collect the coins  deposited in the
         payphone  terminal  based on the result of the  attempted  or completed
         phone call. The relay is an integral  component of the payphone's  coin
         path.


                                       10
<PAGE>

Customer Support Services.  The Company offers comprehensive  services to assist
customers  in managing,  maintaining  and  expanding  their  installed  payphone
network. The Company provides the following:  repair,  refurbishment and upgrade
of  customer-owned  terminals and components,  operator services (see "Sales and
Markets - Strategic  Alliances," below),  training,  technical support,  service
management, field engineering services, and rate file information.

         Repair,  Refurbishment  and Upgrade of Equipment.  The Company repairs,
         refurbishes  and  upgrades  payphone  terminal  equipment,  and related
         payphone components, owned and operated by its customers. The Company's
         refurbishing  activities involve the rebuilding of payphone  terminals,
         components  and  assemblies  to "like  new"  condition.  The  Company's
         upgrade  activities  include the modification of payphone terminals and
         assemblies to an updated or enhanced  technology.  The Company believes
         that  these  products  foster  stronger  business  relations  with  its
         customer  base and provides the Company with valuable  intelligence  to
         guide product development and equipment designs.

         Operator  Services.  The Company  offers a complete  line of  Coin-less
         Services,  also known in the industry as Operator Services. The Company
         has partnered with major providers to offer  competitive  One-Plus long
         distance rates and Zero-Plus commissions to payphone service providers.
         The Company's  Coin-less Services also provide daily Internet reporting
         and reliable payment schedules to its subscribers.

         Training.  The  Company's  training  staff is fluent with the Company's
         product  line.  A variety of training  classes are offered to customers
         including hardware maintenance and troubleshooting,  network management
         system  training and advanced  programming.  The classes are offered at
         the  Company's  headquarters,  in  cities  throughout  the U.S.  and on
         customer  premises,   at  their  request.  The  Company  believes  that
         investment   in  training  pays   dividends  to  customers,   as  their
         technicians  are  better  trained  and better  able to solve  technical
         issues.

         Technical   Support.   The  Company   maintains  a  technical   support
         organization  that  provides  telephone  support  services to customers
         twenty-four  hours a day via the  Company's  800  number,  website  and
         fax-back  program.  The  technical  support  staff  is  fluent  in  the
         Company's product line.

         Service  Management.  The Company  offers to its  customers a hands-off
         approach to operating a payphone network.  The Service  Management team
         is an in-house  group that programs  payphones,  updates  configuration
         files,  routinely  monitors  payphones  and  faxes  reports  weekly  to
         payphone  owners.  The only  tasks  for  which  the  payphone  owner is
         responsible  are the collection of coins and the cosmetic and technical
         maintenance of the payphone.  The service management program is offered
         on a monthly subscription basis and customer choices range from a basic
         offering to a package of services.

         Field  Engineering.  The Company  provides  field  engineering  support
         services  during  the  introductory  phase  of new  products  and  when
         customers  encounter  unusual  problems.  The Company's field engineers
         travel to customer premises and provide technical assistance to operate
         the Company's products.

         Rates. The Company provides up-to-date rate files necessary to rate and
         route phone calls in accordance  with all FCC,  state and long distance
         regulatory requirements.  These rate files are available 24 hours a day
         from the Company's website.


                                       11
<PAGE>

Sales and Markets

General.  The  Company  markets  its  payphone  products  and  systems to public
telecommunications  and  independent  payphone  service  providers in the United
States  and in  certain  foreign  countries.  The  Company's  customers  include
telephone  companies that provide wireline and wireless local exchange services,
telephone companies that provide wireline and wireless  long-distance  telephone
services  and  companies  that  install  and  operate   payphone   terminals  as
independent  payphone  service  providers.  The Company's  customers  range from
operators  of  small  private  payphone  routes  to  large  telephone  companies
including  the RBOCs,  AT&T Local  Services  and GTE. The Company is a leader in
sales of  microprocessor-based  payphone terminals,  software, and components in
the United  States.  The  Company's  international  business  consists of export
sales, and the Company does not presently have any foreign operations.

The Company's  marketing  activities  principally  include  advertising in trade
publications,  participation  at industry trade shows,  and hosting seminars and
training  programs  for its  customers.  The  Company  also  periodically  hosts
customer   conferences  covering  such  areas  as  current  and  future  product
development, regulatory and industry issues, and customer service.

The  Company  generally  enters into  non-exclusive  sales  agreements  with its
customers,  which include,  when applicable,  non-exclusive  licenses to use the
Company's   proprietary  operating  systems  and  payphone  management  software
systems.  Agreements between the Company and the RBOCs generally have terms from
one to five years,  are  renewable at the option of the  customers,  and contain
fixed sales  prices with  limited  provisions  for price  increases,  but do not
generally  specify  or commit the  customers  to  purchase a specific  volume of
products.  Also,  these  agreements  generally  contain clauses that require the
Company  to  provide  prices  and  other  terms at least as  favorable  as those
extended  to  other  customers  and  indemnify   customers   against   expenses,
liabilities, claims and demands resulting from the Company's products, including
those  related  to  patent  infringement.  These  agreements  may  generally  be
terminated at the option of the customer  upon notice to the Company,  or if the
Company  defaults  under any  material  provision  of an  agreement.  Agreements
between the Company and independent  payphone  service  providers  generally set
forth product  pricing and terms for  specified  purchase  volumes,  and include
provisions  that enable the Company to change  prices upon thirty (30) to ninety
(90) days notice. Agreements between the Company and its international customers
generally set forth the pricing and terms for specified  purchase  volumes,  and
sales prices are  generally  fixed with respect to the volume  stipulated in the
agreements.  The Company's  customers are not prohibited from using or reselling
competing products and are generally not required to purchase a minimum quantity
of products,  although the Company's price lists and agreements  offer discounts
based on volume.

All purchase orders from customers are subject to acceptance by the Company. The
Company's  policy  is to  grant  credit  to  customers  that the  Company  deems
creditworthy.  In addition,  the Company provides limited secured financing with
terms  generally  not exceeding  two years and interest  charged at  competitive
rates.


                                       12
<PAGE>

Sales by  geographic  region for the years ended March 31,  1999,  1998 and 1997
were as follows (also see Note 12 to Item 8 - "Consolidated Financial Statements
and Supplementary Data):

                                                  Year Ended March 31,
                                           ------------------------------------
                                              1999          1998           1997
                                           --------      --------       --------
United States                              $ 59,102      $ 37,051       $ 21,583
Canada                                        3,197         2,012            108
Latin America                                 2,400         6,168          1,655
Europe, Middle East and Africa                   31           195             99
Asia Pacific                                    495           824          3,180
Other Areas                                      38            --            207
                                           --------      --------       --------
Consolidated sales                         $ 65,263      $ 46,250       $ 26,832
                                           ========      ========       ========

Domestic Market.  The Company  believes that the domestic public  communications
market  represents a $6 billion  market  annually and that  products of the type
provided by the Company account for approximately $200 million of that market.

Domestically,  the Company sells its products  directly  through  regional sales
personnel and through distributors.  The Company presently has four distributors
that have limited exclusive selling  arrangements in assigned  territories.  The
Company's  direct sales force consists of eight  full-time  sales  employees and
four sales engineers located regionally throughout the United States.

International.  The  Company  markets  its  products  in  international  markets
directly  and  through  agent and  distributor  relationships  supported  by the
Company's  sales,  engineering and technical  support  personnel.  The Company's
direct sales force consists of a staff of two  international  sales managers and
three sales engineers located at the Company's headquarters facility.

The  Company  believes  that  the  international  public  communications  market
represents a significant growth opportunity, and the Company intends to continue
its  international  product  development  efforts as it addresses  international
opportunities.  The Company estimates that  international  markets may represent
sales opportunities approximating $2 billion over the next three years.

There have been many changes in international  markets since the Company's entry
into those markets in 1991.  Many  countries  around the world have moved in the
same   direction   as  the  United   States   following   the   breakup  of  its
telecommunications  monopoly in 1984. Privatization,  competition,  open foreign
investment and new laws and regulations have had a major impact on international
markets, resulting in new players and new opportunities for the various segments
of the  telecommunications  market,  including  the public access  segment.  The
Company  believes  that the  experience  and  resources  it has  developed  with
deregulation  of the United States public access market gives it an advantage in
addressing  international markets undergoing similar  deregulation.  The Company
believes  that  developing  countries  have placed a high  priority on expanding
telecommunications  services and payphones  are often a significant  part of the
capital expansion.


                                       13
<PAGE>

In order to take advantage of these opportunities, the Company has continued its
efforts to:

o  Employ  individuals with experience in the  international  telecommunications
   market;

o  Develop  a set of  products  capable  of  handling  the  requirements  of the
   international   market,  such  as  multi-currency   capability,   large  coin
   applications  and smart card  technology  which is  becoming  widely  used in
   electronic commerce applications;

o  Develop digital wireless payphone products;

o  Develop software and hardware that allow the Company's products to be adapted
   to the varying requirements of different countries; and

o  Develop distribution partnerships and strategic alliances.

The  Company has sold its  products to  customers  in Bolivia,  Morocco,  Chile,
Korea, Mexico, Ecuador,  Belize, Bermuda,  Guatemala,  Guam, Canada,  Argentina,
Venezuela and the Philippines.

Dependence  on  Customers.  During the fiscal  year ended  March 31,  1999,  one
customer  (Bell  Atlantic  Corporation)  accounted  for  20%  of  the  Company's
consolidated  sales.  During the fiscal  year ended  March 31,  1998,  no single
customer  accounted  for 10% or more of the Company's  sales.  During the fiscal
year  ended  March  31,  1997,  two  customers  (Lucent  Technologies  Inc.  and
Philippine Telegraph & Telephone,  Inc.) each accounted for approximately 12% of
the  Company's  sales.  The  Company's  domestic   distributors   accounted  for
approximately  7%, 5% and 11% of the  Company's  sales  during the fiscal  years
ended March 31, 1999, 1998 and 1997, respectively.

Sales to telephone companies increased during the years ended March 31, 1999 and
1998 principally due to acquisitions during the year ended March 31, 1998. Sales
to telephone companies  (primarily RBOCs) during the fiscal year ended March 31,
1999  aggregated  $32,507 as  compared  to $15,999  during  fiscal 1998 and $833
during fiscal 1997. Sales to independent  payphone operators,  foreign customers
and other  domestic  customers  during the  fiscal  year  ended  March 31,  1999
aggregated  $32,756 as compared to $30,251 during fiscal 1998 and $25,999 during
fiscal 1997.

The Company anticipates that certain of the RBOCs will account for a significant
percentage of the Company's sales in the years ahead.  Accordingly,  the loss of
one or more of these customers or a significant  decline in purchase volume from
one or more of these  customers  could  have a  material  adverse  effect on the
Company's sales.

Strategic Alliances. During May 1999, the Company entered into an agreement with
Caribbean Hotel Services, Incorporated ("CHS"). Under the agreement, the Company
agreed to  manufacture  CHS's  desktop video  payphone  terminal on an exclusive
basis,  and market the  terminal  and related  services  cooperatively  with CHS
domestically and internationally.  The Company believes that this alliance could
generate meaningful  revenues in the future,  although there can be no assurance
in that regard.

The  Company  began  marketing  operator  services  cooperatively  with a  large
domestic  operator service provider (the "OSP") during the latter part of fiscal
1998. Under the agreement, the Company markets operator services provided by the
OSP to  domestic  payphone  operators  at  agreed  upon  unbundled  rates.  Call
revenues,  net of  agreed  upon  charges  for  the  operator  services,  and the
Company's  administrative  fees, are payable to the payphone operators utilizing
the program.  The Company  believes that the program offers revenues to payphone
operators from operator  assisted calls competitive with other domestic operator
service  providers.  The Company's  sales  revenues  from its operator  services
program


                                       14
<PAGE>

were not  significant  during the fiscal  years  ended  March 31, 1999 and 1998.
However,  the Company  believes  that the program has the  potential to generate
meaningful revenues, although there can be no assurance in that regard.

Competition

The public communications  industry is highly competitive.  The Company competes
with  numerous  domestic and foreign  firms that  manufacture  and market public
access  terminals  and  products  similar to the  Company's  products  that have
financial,  management and technical resources  substantially greater than those
of the Company. In addition,  there are many other firms that have the resources
and ability to develop and market products that could compete with the Company's
products.  The Company believes its ability to compete depends upon many factors
within and outside its control,  including  the timing and market  acceptance of
new products developed by the Company and its competitors,  performance,  price,
reliability and customer service and support.

The Company believes that the primary competitive factors affecting its business
are quality,  service,  price and  delivery  performance.  The Company  competes
aggressively  in certain markets with respect to the pricing of its products and
attempts to reduce its manufacturing  costs rather than increase its prices. The
Company also attempts to maintain inventory at levels which enable it to provide
timely service and to fulfill the delivery requirements of its customers.

The Company believes that its principal competitors  domestically include Protel
Inc. (a subsidiary of  Inductotherm  Industries,  Inc.),  Intellicall,  Inc. and
Nortel  Networks  Corporation.  It is also  possible that new  competitors  with
financial,  management and technical resources  substantially greater than those
of the Company may emerge and acquire  significant  market  share.  Possible new
competitors   include   large  foreign   corporations   engaged  in  the  public
communications   business,   the  RBOCs  and  other  entities  with  substantial
resources.  Some  telecommunications   companies,  already  established  in  the
telephone  industry  with  substantial  engineering,  manufacturing  and capital
resources,  are positioned to enter the public  communications  market,  some of
which  are  foreign   manufacturers.   The  Telecommunications  Act  lifted  the
restriction on the manufacturing of  telecommunications  equipment by the RBOCs.
After  the FCC  finds  that an RBOC has  opened  its  local  exchange  market to
competition, the RBOC, through a separate affiliate, may manufacture and provide
telecommunications  equipment and may manufacture  customer premises  equipment,
such as payphone  terminals.  As a result of the Act, the Company could face new
competitors in the manufacture of payphones and payphone  components from one or
more of the RBOCs or their affiliates.

Internationally,  the Company competes with numerous foreign competitors, all of
which have financial,  management and technical resources  substantially greater
than  those of the  Company  and have  greater  experience  in  marketing  their
products  internationally.  These foreign  competitors  market payphone products
predominately  to the PTTs  and  thereby  dominate  the  international  payphone
market. In addition, the Company's  international  marketing efforts are subject
to the risks of doing  business  abroad.  The Company  believes that the primary
competitive  factors  affecting  its  international  business are the ability to
provide  products  that  meet  the  specific  application  requirements  of  the
customers, quality and price.


                                       15
<PAGE>

The Company expects that a number of personal  communications  technologies  are
becoming  increasingly  competitive  with  payphone  services  provided  by  the
telephone   companies  and  independent   payphone   service   providers.   Such
technologies  include  radio-based  paging  services,  cellular mobile telephone
services and personal communication services.  These competing services continue
to grow and could adversely affect the public communications industry.  However,
the Company  believes  that the payphone  industry  will  continue to be a major
provider of  telecommunications  access. In addition,  the Company believes that
some of these competing technologies,  such as paging services, may also benefit
the public communication industry by increasing call volume.

Although the Company expects to continue to be subject to intense competition in
the future,  the Company  believes  that its domestic  products and services are
currently  competitive  with  those  of  other  manufacturers  in such  areas as
equipment capability and quality, cost and service. Since the telecommunications
industry is subject to rapid technological  change, the Company will be required
to develop  enhancements,  new  products  and  services  in the future to remain
competitive.

Manufacturing, Assembly and Sources of Supply

The Company  performs  most of its  product  assembly  operations  in two leased
facilities, a 16,000 square foot manufacturing facility in Sarasota, Florida and
a 53,400 square foot  manufacturing  facility in Orange,  Virginia.  The Company
also  repairs,   refurbishes  and  upgrades  payphone  terminal   equipment  and
components at its Orange,  Virginia facility,  and repairs printed circuit board
control  module  assemblies at its  Sarasota,  Florida  facility.  The Company's
manufacturing  operations are designed so that production volumes within certain
limits could be readily  increased.  See Item 2 - "Properties."  The Company has
also  contracted with a foreign  manufacturer to produce  payphones and payphone
assemblies for the Company.

Components  for  the  Company's  control  modules,   electronic  assemblies  and
mechanical  assemblies are purchased from external  suppliers.  These  suppliers
must be approved by the Company's  design  engineering  group and  manufacturing
operations. Approval is based on quality, delivery, performance and cost. Design
engineering attempts to utilize components available from several manufacturers,
as well as avoiding single source component restraints. However, occasionally it
is necessary to use a single  source  component  and the Company  currently  has
several items in this  category.  While the Company  believes that it could find
alternative  suppliers  for its  components,  or in the  case of  single  source
components,  substitute  other  components  for the  ones  currently  used,  the
Company's  operations could be adversely  affected until alternative  sources or
substitute components could be obtained or designed into the Company's products.

The Company  outsources  the assembly of its  electronic  circuit board (control
module)  assemblies and many other  payphone  components to  subcontractors  and
established contract manufacturers.  The Company believes it could use alternate
subcontractors,  if necessary,  with minimal interruption to production,  as the
equipment  required  for these  assembly  operations  is industry  standard  and
suitable  subcontractors are available.  However, the Company's operations could
be adversely affected until alternative sources could be developed.

The Company's payphones are offered in various configurations based upon the GTE
style housing,  the Western  Electric style housing and various custom  designed
housings.  GTE style housings are supplied by one principal  supplier;  however,
alternative suppliers providing  essentially  equivalent housings are available.
The Company  acquired  tooling to manufacture the Western Electric style housing
as part of the acquisition of the public terminal assets of Lucent  Technologies
Inc.  during  the  year  ended  March  31,  1998  and  a  foreign  subcontractor
manufactures  these  housings  under a supply  agreement  with the Company.  The
Company  has  also  established   alternative  suppliers  providing  essentially
equivalent


                                       16
<PAGE>

housings.  Custom designed  housings are generally  available from sole sources.
While the Company  believes  that it could find  alternative  suppliers for such
housings, the Company's operations could be adversely affected until alternative
sources could be obtained.

The Company's  payphones are supplied with coin mechanisms that may be unique to
a particular configuration or that may be supplied by a sole source. The Company
acquired  tooling to manufacture the AT&T electronic coin scanning  mechanism as
part of the  acquisition of the public  terminal  assets of Lucent  Technologies
Inc.  during  the  year  ended  March  31,  1998  and  a  foreign  subcontractor
manufactures  these assemblies  under a supply  agreement with the Company.  The
other coin  mechanisms  used by the  Company are  available  from  various  sole
sources.  The Company  believes that it could redesign its products to use other
available coin mechanisms, develop alternative suppliers for such assemblies, or
use or develop  essentially  equivalent  assemblies.  However,  if a shortage or
termination of the supply of one or more of the electronic  coin mechanisms were
to occur, the Company's operations could be materially and adversely affected.

All  components  and  assemblies  are  identified by total  inventory  value and
deliveries are scheduled consistent with meeting production schedules.  Material
planning and scheduling is accomplished  utilizing a basic computerized Material
Requirements Planning (MRP) system.

The Company's  circuit board assemblies are subjected to various automated tests
and  defect-inducing  processes to improve their quality and reliability.  After
testing,  the circuit board  assemblies may be installed in and tested as a full
payphone  and shipped to the  customer or  packaged  separately  and shipped for
customer installation. The Company's Sarasota, Florida manufacturing and service
organizations  were ISO 9002  certified  in  December  1995 and the  Company  is
currently pursuing ISO 9002 certification for its Orange, Virginia manufacturing
and service  organizations and ISO 9001 certification for its Sarasota,  Florida
facility.

Warranty and Service

The Company provides the original purchaser with one to three-year warranties on
payphone products manufactured by the Company. When the Company resells products
from  other  manufacturers,  the  Company  passes  on the  other  manufacturer's
warranty to its  customers.  The  Company  provides  warranties  of 90 days with
respect to terminal  equipment  repaired,  refurbished  or  upgraded.  Under the
Company's warranty program,  the Company repairs or replaces defective parts and
components at no charge to its customers.  After warranties  expire, the Company
provides non-warranty repairs and services for a fee. The Company's distributors
are also authorized to repair the Company's products.

The Company's customer service staff at its corporate offices provides telephone
support  services to customers who have  installation or operational  questions.
The  Company  also  provides  field  engineering  support  services  during  the
introductory  phase  of  new  products  and  when  customers  encounter  unusual
problems.

In  addition,  the Company  provides  training  courses  given at the  Company's
facility  or  at  the  customer's  premises  on  the  installation,   operation,
maintenance and repair of the payphones and its software management systems. The
Company's distributors also provide training to their customers.


                                       17
<PAGE>

Product Development

The Company's  development  efforts during fiscal 1999 were targeted towards the
development  of  products  that  integrate  the  microprocessor  technology  and
software  systems of TSG and Elcotel,  address  digital  wireless  applications,
expand hardware and software product features,  and expand the Company's product
line  to  address  the  dynamic  product   requirements  of  both  domestic  and
international customers. In particular, the Company is attempting to develop and
is seeking patent protection for new lower cost advanced digital  microprocessor
based  control   modules  that  would  enable   integration   of  the  Company's
technologies in advanced video,  information and internet terminal  applications
to a  broad  range  of  vertical  markets.  In  addition,  the  Company  is also
developing its next generation open architecture software management system that
is expected to be capable of communicating with and managing all of the payphone
terminals  manufactured  by the  Company as well as  terminals  manufactured  by
others, and that will support large networks of  internet-capable  public access
terminals.  This  advanced  network  software  is also  expected  to provide the
capability to manage smart chip card and credit card applications,  information,
e-mail and e-commerce  applications,  among others.  The Company believes it may
begin to release its advanced technology based public access products during the
next year.

During  fiscal  1999,  the  Company  incurred  approximately  $6,121 in  Company
sponsored  research and development  costs towards the design and development of
payphone  terminal  equipment,  management  software systems and other products.
Research and  development  costs were $4,514 in fiscal 1998 and $2,623 in fiscal
1997.  During the years ended March 31, 1999 and 1998,  the Company  capitalized
software development costs of $639 and $100, respectively.

The  Company  believes  that  research  and  development  is  important  to  the
continuation and enhancement of the Company's competitive position and to expand
the size of its  addressable  market.  The Company's  ability to adequately fund
future  research  and  development  is  dependent  upon its  ability to generate
sufficient funds from operations or external sources.

Backlog

The amount of the  Company's  backlog is  subject  to  fluctuation  based on the
timing of the receipt and  completion  of orders.  The  Company  calculates  its
backlog by including  only items for which there are  purchase  orders with firm
delivery  schedules.  At May 31, 1999, the backlog of all products on order from
the Company was approximately  $5,877,  compared with a backlog of approximately
$10,284  at May  31,  1998.  The  Company's  backlog  at any  given  date is not
necessarily indicative of future revenues.

Licenses, Patents and Trademarks

The Company has developed,  at its expense, most of the software and engineering
designs  incorporated  in its  products.  The Company  owns nine  United  States
patents relating to payphone components,  its smart payphone platforms and other
technology  which expire  between April 2010 and May 2014. The Company also owns
several  trademarks used in the operation of its business.  Although the Company
believes that its patents and trademarks are important to its business,  it does
not believe that patent  protection or trademarks  are critical to the operation
or  success of its  business.  While the  Company  does not  believe  that it is
infringing on the patents of others, there can be no assurance that infringement
claims  will  not  be  asserted  in  the  future  or  that  the  results  of any
patent-related  litigation  would  not have a  material  adverse  effect  on the
Company's business.

The Company regards certain of its  manufacturing  processes and circuit designs
as  proprietary  trade  secrets and  confidential  information.  To protect this
information,  the Company relies  largely upon a combination of agreements  with
its contract manufacturers, confidentiality procedures, and employee


                                       18
<PAGE>

agreements.  However, there can be no assurance that the Company's trade secrets
will not be disclosed or misappropriated. Moreover, the Company's copyrights may
not protect it from unauthorized  duplication of its payphones or other products
which may be marketed without the Company's  knowledge or consent,  although the
Company has vigorously and  successfully to date defended its copyrights and has
stopped certain other organizations from continuing the unauthorized duplication
of the Company's payphone software.  However, the copyright  registrations would
not prevent a competitor from independently creating payphones or other products
that are functionally  equivalent to those of the Company.  The Company licenses
the use of its proprietary  software and designs through licensing provisions in
its sales agreements, and the provisions are designed to prevent duplication and
unauthorized use of the Company's software.

The  Company  licenses  certain   technologies,   including  patents  and  other
intellectual  property rights licensed in connection with the acquisition of the
public terminal assets of Lucent  Technologies  Inc. during the year ended March
31, 1998,  from third  parties  under  agreements  providing  for the payment of
royalties.  Royalty  expense  during  the years  ended  March 31,  1999 and 1998
approximated $220 and $86, respectively.

Other Risk Factors

The Company's business is subject to a number of risks, some of which are beyond
the Company's control.  Some of these risks are described below. Other risks are
described in other parts of this Form 10-K.

Integration of Acquired Businesses. As a result of the acquisition of the public
terminal  assets of Lucent  Technologies  Inc. and the acquisition of Technology
Service  Group,  Inc.  during the year ended  March 31,  1998,  the  Company has
devoted and continues to devote  significant  management  resources to integrate
the  operations of the acquired  businesses  with those of the Company,  thereby
detracting  from  attention  to the day to day  business  of the  Company.  Such
integration has included coordinating geographically separated organizations and
facilities,  integrating personnel and combining corporate cultures, integrating
the disparate  products  acquired,  and eliminating  unnecessary and duplicative
facilities, employees, programs and expenses.

Potential  Fluctuations in Quarterly  Results.  The Company's  operating results
have in the past been, and may continue to be, subject to quarterly fluctuations
as a result of a number of factors.  These factors include the  introduction and
market acceptance of new products;  the timing of orders;  variations in product
costs  or  mix  of  products   sold;   increased   competition   in  the  public
communications industry; and changes in general economic conditions and specific
economic conditions in the public  communications  industry,  any of which could
have an adverse impact on operations and financial results.

Technological   Change.  The  Company's  operating  results  will  depend  to  a
significant  extent on its  ability  to reduce  the  costs to  produce  existing
products  and  introduce  new  products  to  remain  competitive  in the  public
communications  market.  The  success of new  products is  dependent  on several
factors,   including  proper  new  product  definition,   product  cost,  timely
completion and  introduction  of new products,  differentiation  of new products
from those of the Company's competitors and market acceptance of those products.
There can be no  assurance  that the  Company  will  successfully  identify  new
product  opportunities,  develop  and bring new  products  to market in a timely
manner,  and achieve  market  acceptance  of its  products or that  products and
technologies  developed  by others  will not render the  Company's  products  or
technologies obsolete or noncompetitive.


                                       19
<PAGE>

Changes in  Telecommunications  Law and  Regulations.  Changes in  domestic  and
international   telecommunications   requirements  could  affect  sales  of  the
Company's products and the operations of the Company's customers.  In the United
States, the Company's  products must comply with various Federal  Communications
Commission  requirements  and  regulations.  In countries  outside of the United
States,  the  Company's  products  must  meet  various   requirements  of  local
telecommunications authorities. Failure by the Company to obtain timely approval
of products or promptly  modify  products as  necessary  to meet new  regulatory
requirements  could have a material  adverse  effect on the Company's  business,
operating results and financial condition.

International   Operations.   The  Company  conducts  business  internationally.
Accordingly,  the  Company's  future  results  could be adversely  affected by a
variety of  uncontrollable  and  changing  factors  including  foreign  currency
exchange  rates;  regulatory,  political  or economic  conditions  in a specific
country or region; trade protection measures and other regulatory  requirements;
government spending patterns; and natural disasters, among other factors. Any or
all of these  factors  could have a  material  adverse  impact on the  Company's
international business.

Volatility  of  Stock  Price.   The  Company's   Common  Stock  has  experienced
substantial price volatility, particularly as a result of variations between the
Company's actual or anticipated financial results and the published expectations
of analysts and  announcements by the Company and its competitors.  In addition,
the stock market has experienced extreme price and volume fluctuations that have
affected the market price of many  technology  companies in particular  and that
have often been unrelated to the operating performance of these companies. These
factors,  as well as general  economic and political  conditions,  may adversely
affect the market price of the Company's Common Stock in the future.

Employees

As of May 31, 1999, the Company employed 300 full-time employees. The Company is
not a party  to any  collective  bargaining  agreement  and  believes  that  its
relations with its employees are good.

Seasonality

The Company's sales are generally  stronger during periods when weather does not
interfere with the  maintenance and  installation  of payphone  equipment by the
Company's  customers.  Accordingly,  the  Company's  sales  could  be  adversely
affected during certain periods of the year.

Government Regulation and the Telecommunications Act

Overview.  Products  and  services  offered by the Company  and  operated by its
customers  are subject to varying  degrees of regulation at both the federal and
state  levels.  There can be no  assurance  that any changes in such  regulation
would  not have an  adverse  impact on the  operations  of the  Company  and its
customers.

Parts 15 and 68 of the FCC rules govern the technical requirements that payphone
and other telephone  products must meet in order to qualify for FCC registration
and  interconnection to the telephone  network.  The Company has performed those
tests  necessary to assure  compliance  with these  technical  requirements  and
obtained FCC registration for its various payphone terminal products.

The Company's  products must be tested and approved by various regulatory bodies
in  international  markets in which the Company  sells its  products,  and these
approvals must be obtained  before the importation of the products by customers.
The  appropriate  regulatory  body has  approved  the  products  exported by the
Company.


                                       20
<PAGE>

The regulation of  telecommunications  providers by the FCC and state regulatory
authorities has a direct effect on the Company's  product  designs.  The Company
designs its  products to comply with  regulations  applicable  to  provision  of
public communications  services. The Company's products may require modification
to comply with new  technical or regulatory  requirements  or other factors upon
adoption of new regulations by federal and state authorities.

State  regulatory  authorities  have adopted a variety of regulations  that vary
from  state to  state,  governing  technical  and  operational  requirements  of
privately   owned   payphones.   These   requirements   include  the  following:
dialtone-first   capability   to  allow  free  calls  to  operator,   emergency,
information and toll free numbers without a coin deposit; multi-coin capability;
calculation  of  time-of-day  and weekend  discounts;  prohibition  of post-call
charges;  advisement to callers of additional charges for additional time before
disconnecting;  provisions of certain information statements posted on cabinets;
provision  of local  telephone  directories;  mandatory  acceptance  of incoming
calls;  reduced charges for local calls from certain locations such as hospitals
or rest homes;  and  restrictions  as to the  location and hours of operation of
such  payphones.  The  states  have  also  established  tariffs  for  local  and
intrastate coin "sent-paid" calls, and in many instances for Zero-Plus Calls.

With  respect  to the use  restrictions  and  requirements,  such as  restricted
locations for payphones,  informational statements on cabinets, or the provision
of access  to the  carrier  of  choice,  the  owner/operators  of the  Company's
products  have  the  sole  responsibility  to  determine  and  comply  with  all
applicable use  requirements,  including the  responsibility  to ensure that the
rates charged  remain  current and do not exceed the maximum rates  permitted by
state or federal regulations for the particular location of the product.

Most states require that  owner/operators  of private  payphones be certified by
the  state's  public  utility  commission  and  file  periodic  reports.   As  a
manufacturer and seller of payphone terminals, the Company does not believe that
any states currently require the Company to be certified.

The  Telecommunications  Act. On September 20, 1996,  the FCC released its order
(the   "Order")   adopting   regulations   to  implement   the  section  of  the
Telecommunications  Act that mandated fair compensation for all payphone service
providers and otherwise  changed the regulatory regime for the payphone industry
pursuant to the Telecommunications Act. The Telecommunications Act requires that
the FCC  establish  a per call  compensation  plan to ensure  that all  payphone
service providers are fairly compensated for each and every completed intrastate
and  interstate  call using  their  payphone.  Among  other  matters,  the Order
addressed  compensation for non-coin calls and local coin calling rates, ordered
the  discontinuation  of payphone  subsidies  from basic  exchange  and exchange
access revenues which favored  payphones  operated by telephone  companies,  and
authorized RBOCs and other providers to select service providers.

The Order required  payphones  operated by regulated  telephone  companies to be
removed from regulation,  separating  payphone costs from regulated  accounts by
April 15, 1997.  This  requirement  was intended to eliminate all subsidies that
favored payphones operated by the telephone companies.  Telephone companies were
also  required to reduce  interstate  access  charges to reflect  separation  of
payphones from regulated  accounts.  In order to eliminate  discrimination,  the
telephone   companies  were  also  required  to  offer  coin  line  services  to
independent  payphone  service  providers  if they  continue  to  connect  their
payphones to central  office-driven coin line services.  The FCC did not mandate
unbundling of specific coin line related  services,  but did make  provisions to
allow  states  to  impose  further  payphone  services   requirements  that  are
consistent with the Order.

The Order authorized RBOCs to select the operator service provider serving their
payphones and for independent  payphone service providers to select the operator
service  provider  serving  their  payphones.  This  provision  preempted  state
regulations that required independent payphone service providers to route


                                       21
<PAGE>

intralata calls to the telephone companies.  The FCC, however, did not establish
conditions that require operator service  providers to pay independent  payphone
service providers the same commission levels as the RBOCs demand.

In the Order, the FCC decided that the dial-around  compensation rate for access
code calls and toll free  calls  should be equal to the  deregulated  local coin
call  rate.  The FCC also  established  an  interim  compensation  plan  whereby
compensation  for  access  code and toll free  calls  would be paid to  payphone
service providers. Under the first phase of the FCC's interim compensation plan,
payphone  service  providers  would be  compensated at a flat rate of $45.85 per
payphone per month, as compared to the previous compensation of $6.00 per month.
This  interim  rate was to expire on  September  1, 1997,  and replace all other
dial-around  compensation  prescribed  at  the  state  or  federal  level.  This
compensation was to be paid by the major inter-exchange  carriers based on their
share of toll revenues in the long distance  market.  By October 1, 1997,  under
the second phase of the interim compensation plan, all payphones would switch to
a per-call  compensation rate set at $.35 per toll free or access code call. The
carrier  that was the  primary  beneficiary  of the call would pay the  per-call
compensation.  After one year of  deregulation  of coin rates (October 1, 1998),
the permanent compensation rate would have been adjusted to equal the local coin
rate charge for a particular payphone.

On July 1, 1997, the United States Court of Appeals for the District of Columbia
Circuit  issued its  decision on appeals of certain  portions of the Order.  The
Court ruled that the FCC was  unjustified  in setting the per-call  compensation
rate at an amount equal to the deregulated  local coin rate. The Court also held
that  interim  compensation  for  Zero-Plus  calls must be  included  in the new
interim  compensation  plan.  Finally,  the Court upheld the FCC's  authority to
regulate  the rates  charged  for local coin calls  (thereby  eliminating  state
limitations  on such rates) and the FCC's decision to require the carrier rather
than the calling party to pay the compensation to payphone service providers for
toll free and access code calls.  The Court  vacated and remanded to the FCC for
further  consideration  the issues of compensation for toll free and access code
calls both on a permanent and an interim basis.

On October 9, 1997, the FCC adopted a revised  compensation  plan on remand from
the Court of Appeals.  The revised plan set  compensation at a rate of $.284 per
completed call, during the period October 7, 1997 through October 6, 1999. After
October 6, 1999, the per call  compensation  rate was set at the local coin rate
minus $.066.  The FCC's  decision was appealed to the U.S.  Court of Appeals for
the District of Columbia Circuit,  which reversed and remanded the matter to the
FCC.

On January 28, 1999,  the FCC adopted a Third Report and Order in its proceeding
implementing the payphone compensation provisions of the Telecommunications Act.
This Order stated that  compensation  issues should be determined by marketplace
negotiations.  In the absence of such a negotiated rate, the Order established a
default  compensation  rate  for  dial-around  and toll  free  calls of $.24 per
completed call. In addition,  the FCC applied the new rate  retroactively to all
compensation owed since October 7, 1997.  Multiple petitions for reconsideration
of the Order are  pending  before  the FCC,  which  seek  both to  increase  and
decrease the compensation  amount, and to change the compensation  amount from a
flat rate per call to a variable rate depending on call  duration.  There can be
no assurance as to the impact on dial-around  compensation  of such petitions to
the FCC and the  courts.  The  ultimate  outcome  with  respect  to  dial-around
compensation  will have a significant  impact on the business and  operations of
payphone service providers and thus the demand for payphones.

On January 29, 1998, the FCC adopted a rule that all operator service  providers
must orally disclose to callers how to obtain the total cost of the call, before
the call is connected,  by pressing up to two keys on the phone or by staying on
the line. Operator service providers need not provide an exact rate quote unless
the caller  specifically  requests it. Operator service  providers had to comply
with the new rule by July 1, 1998.  The Company's  products  provide rate quotes
and comply with the rule with respect to coin


                                       22
<PAGE>

calls.  Also,  payphone suppliers that offer automated operator service features
in their  products and  technology  that allows  payphone  service  providers to
validate  calling  and  credit  cards,  and use  stored  data  for  billing  and
collecting  Zero-Plus  calls  are  also  required  to  comply  with  the rule by
providing  rate quote  capability  in the  product.  The Company had  previously
included such technology in its product features and expected that it would have
to modify its product  software to provide the features to comply with the rule.
However,  the  Company  has since  discontinued  offering  such  features in its
products and, thus, the Company's  payphone terminal products must be programmed
to connect Zero-Plus calls to OSPs selected by the payphone operator in order to
process Zero-Plus calls. Accordingly,  the OSP selected by the payphone operator
is responsible for compliance with these rules, and such rules do not affect the
operation of the Company's products.

The Company  cannot  predict the outcome of future FCC actions  with  respect to
compensation  to payphone  service  providers or other  matters,  the outcome of
additional  rulings,  if any, by the courts, nor the impact that such additional
actions might have on the Company,  its  customers or the public  communications
industry in general.

Environmental Matters

In April 1997,  TSG received a formal "no further  action  status"  notification
from the Florida  Department  of  Environmental  Protection  (the "FDEP")  after
several years of evaluation,  assessment and monitoring of soil and  groundwater
contamination at one of its former facilities in Florida.  It is always possible
that the FDEP could  reopen the  investigation  in the  future and  require  the
Company to take further actions at the site. The Company cannot estimate a range
of costs,  if any,  that it could incur in the future  since such costs would be
dependent upon the scope of additional  actions, if any, that may be required by
the State of Florida.

TSG is a Potentially  Responsible Party ("PRP") for undertaking response actions
at a facility for the treatment,  storage,  and disposal of hazardous substances
operated by Seaboard Chemical Corporation from 1975 to 1989 at Jamestown,  North
Carolina. However, as a small generator "De Minimis" party, TSG was permitted to
execute a buy-out  agreement with respect to the  remediation  activities at the
site. The Company believes,  based on presently available  information,  that it
has no further  obligations  with respect to the site.  However,  if  additional
waste is  attributed to TSG, it is possible that the Company could be liable for
additional  costs. The Company cannot estimate a range of costs, if any, that it
could incur in the future since such costs would be dependent upon the amount of
additional waste, if any, that could be attributed to TSG.

TSG is also a PRP  with  respect  to  response  actions  at the  Galaxy/Spectron
Superfund Site in Elkton,  Maryland. TSG is also a De Minimis party with respect
to this  site,  and  believes  its  proportionate  share of  costs to  undertake
response  actions  will  likely  be  insignificant.  The  Company  has  received
notification  that the De Minimis  parties  will be able to buy out and obtain a
release  from any further  clean-up  liability  at the site at a cost  presently
estimated at $3.70 per gallon of contributed waste, which would amount, based on
information  available to the Company, to $3 with respect to TSG's contribution.
The Company has not  incurred  any costs with  respect to this site and believes
that its ultimate costs will not be material.


                                       23
<PAGE>

Item 2.   PROPERTIES

The Company owns and occupies two 24,000 square foot  buildings  located at 6428
Parkland Drive, Sarasota,  Florida. These buildings were constructed in 1987 and
1989, respectively. The two buildings are owned subject to mortgage indebtedness
pursuant to a promissory note with a bank.

The Company leases the following properties:

o  A 16,000 square foot  manufacturing  facility located at 6448 Parkland Drive,
   Sarasota,  Florida under a three-year  lease that commenced in December 1997;

o  A 53,400 square foot  manufacturing  facility located at 315 Waugh Boulevard,
   Orange,  Virginia under a one year lease agreement that commenced on July 31,
   1998 and that is renewable by the Company for three  additional  terms of one
   year each;

o  5,600 square feet of sales and engineering space located in a building at 225
   Curie Drive,  Alpharetta,  Georgia under a three-year lease that commenced on
   December 1, 1998.

The Company believes that its owned and leased space is adequate for its current
business.

Item 3.   LEGAL PROCEEDINGS

Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al. defendants.  San
Diego Superior Court Case No. 691635.

As  previously  reported,  this  putative  class action was filed in 1995 in the
Superior  Court of the State of California  for the County of San Diego alleging
that Amtel Communications, Inc. ("Amtel"), a former customer of the Company that
filed for  bankruptcy,  conspired with its own officers and  professionals,  and
with various telephone suppliers (including the Company) to defraud investors in
Amtel by operating a Ponzi scheme.  See Item 3, Legal  Proceedings  of Part I of
the  Company's  Form 10-KSB for the fiscal year ended March 31, 1996 and Item 1,
Legal  Proceedings  of Part II of the Company's  Form 10-Q for the quarter ended
September 30, 1996.

On September 28, 1998, the Company's  Motion for Summary Judgment was granted by
the Court and the Court dismissed the Company from the class action. On December
11, 1998,  the plaintiffs  appealed the Court's  decision to grant the Company's
Motion for Summary  Judgment.  The  Company  disputes  liability  and intends to
defend this matter vigorously,  although the Company cannot predict the ultimate
outcome of this litigation.

While the Company is subject to various  other legal  proceedings  incidental to
the conduct of its business,  there are no such pending legal  proceedings which
are material to the business of the Company.

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

No matter was submitted to a vote of security  holders through the  solicitation
of proxies or otherwise during the fourth quarter of the fiscal year ended March
31, 1999.


                                       24
<PAGE>

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is listed on the Nasdaq National Market System of The
Nasdaq  Market under the symbol  "ECTL." The  Company's  Redeemable  Warrants to
purchase  common stock were listed on the Nasdaq  National  Market System of The
Nasdaq  Market  under the symbol  "ECTLW"  from  February 3, 1998 to January 13,
1999. The Redeemable  Warrants  expired on May 9, 1999. The following table sets
forth the high and low sales  prices of the  Company's  Common Stock for each of
the quarterly periods during the years ended March 31, 1999 and 1998 as reported
by the Nasdaq National Market System:

                                                    High               Low
                                                    ----               ---
     Fiscal 1999:
        Quarter Ended June 30, 1998                6 23/32           4 3/16
        Quarter Ended September 30, 1998           6 1/2             4 1/4
        Quarter Ended December 31, 1998            6 1/4             4 3/4
        Quarter Ended March 31, 1999               5 7/8             3 1/4
     Fiscal 1998:
        Quarter Ended June 30, 1997                6 5/8             5 1/4
        Quarter Ended September 30, 1997           7 1/4             5 5/8
        Quarter Ended December 31, 1997            8 1/8             5 5/8
        Quarter Ended March 31, 1998               6 1/4             4 3/4

At June 17, 1999, the Company had 407 holders of record of its Common Stock.

The Company has never  declared or paid any cash  dividends  on its Common Stock
and does not intend to pay cash dividends in the foreseeable  future.  Under the
terms of a Restated  Loan and  Security  Agreement  between  the Company and its
bank,  the Company is prohibited  from paying  dividends,  other than  dividends
payable in Common Stock, without the prior written consent of the bank.

                                   ----------


                                       25
<PAGE>

Item 6. SELECTED FINANCIAL DATA

The following selected  financial data (in thousands,  except per share data) is
qualified  in its  entirety  by  reference  to the  more  detailed  consolidated
financial  statements and notes thereto included  elsewhere in this report.  See
Item 7 -  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations."

<TABLE>
<CAPTION>
                                                       Year Ended March 31,
                                      -------------------------------------------------------
                                         1999      1998         1997       1996        1995
                                         ----      ----         ----       ----        ----
<S>                                   <C>        <C>         <C>         <C>         <C>
Results of Operations (1)
Net sales                             $ 65,263   $ 46,250    $ 26,832    $ 21,462    $ 25,090
Cost of sales                           43,635     28,645      15,883      13,238      14,776
Selling, general and administrative
  expenses                              10,560      9,930       6,326       6,465       5,791
Engineering, research and
  development expenses                   6,121      4,514       2,623       2,257       1,758
Amortization expense                     2,084        654          32          25          --
Other charges (credits) (2)              1,772         --        (331)      1,844          --
Interest (income) expense                  517       (103)       (205)       (215)       (285)
Income tax expense (benefit)               213        853         876        (861)       (474)
Net income (loss)                     $    361   $  1,757    $  1,628    $ (1,291)   $  3,524
Earnings (loss) per common and
  common equivalent share (3):
    Basic                             $   0.03   $   0.18    $   0.20    $  (0.16)   $   0.48
    Diluted                           $   0.03   $   0.18    $   0.20    $  (0.16)   $   0.45
Financial Position
Current assets                        $ 31,327   $ 28,124    $ 10,982    $ 10,227    $  9,927
Current liabilities                     10,634      7,887       3,085       3,939       4,352
Working capital                         20,693     20,237       7,897       6,288       5,575
Total assets                            71,295     67,438      15,944      14,929      16,225
Long-term obligations                   10,355      9,891         232         432         782
Retained earnings (deficit)              3,680      3,319       1,562         (66)      1,225
Stockholders' equity                  $ 50,306   $ 49,660    $ 12,627    $ 10,558    $ 11,091
</TABLE>

(1)      On December 18, 1997, the Company  acquired  Technology  Service Group,
         Inc.  ("TSG")  pursuant to a merger and on September  30, 1997 acquired
         from Lucent  Technologies  Inc.  ("Lucent")  certain  assets related to
         Lucent's  payphone  manufacturing  and  component  parts  business (the
         "Lucent Assets").  The Company's  consolidated  statement of operations
         for the year ended March 31, 1999 includes the operating results of TSG
         and the  operating  results  from  the  Lucent  Assets.  The  Company's
         consolidated  statement of operations for the year ended March 31, 1998
         includes the operating  results of TSG and the  operating  results from
         the Lucent Assets from the respective dates of acquisition.

(2)      Other  charges for the year ended March 31,  1999  include  expenses of
         $1,240 incurred in connection with a possible business combination that
         was  terminated  by the  Company  and $490 of  charges  related  to the
         reorganization  of the Company's sales and marketing  organization (see
         Item 1 - "Business - Recent Developments"). Other charges (credits) for
         the years ended March 31, 1996 and 1997 represent an impairment reserve
         with respect to notes  receivable  due to the  bankruptcy of one of the
         Company's   customers,   legal  expenses   related  to  the  bankruptcy
         proceeding  and  adjustments  thereto  related to the settlement of the
         proceeding.  See  Item  8  -  "Consolidated  Financial  Statements  and
         Supplementary Data."

(3)      Earnings  per share have been  restated  for the years  ended March 31,
         1997,  1996 and 1995 to comply with  Statement of Financial  Accounting
         Standards No. 128, Earnings Per Share.


                                       26
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following discussion of financial condition and results of operations of the
Company should be read in conjunction with the consolidated financial statements
and notes thereto  included in Item 8 - "Consolidated  Financial  Statements and
Supplementary  Data".  Dollar  amounts,  except  per share  data,  are stated in
thousands.

Results of Operations

On December  18, 1997,  the Company  acquired  Technology  Service  Group,  Inc.
("TSG")  pursuant  to a merger for a total  purchase  price of  $35,605,  and on
September  30,  1997,  the  Company  acquired  from  Lucent   Technologies  Inc.
("Lucent")  certain  assets  related  to  Lucent's  payphone  manufacturing  and
component  parts  business (the "Lucent  Assets") for a total  purchase price of
$5,957 (the "fiscal 1998 acquisitions"). The Company's consolidated statement of
operations  for the year ended March 31, 1999 includes the operating  results of
TSG and the operating results from the Lucent Assets. The Company's consolidated
statement of operations for the year ended March 31, 1998 includes the operating
results  of TSG and the  operating  results  from the Lucent  Assets  from their
respective dates of acquisition.

Net income for the year ended March 31, 1999 ("fiscal  1999")  declined to $361,
or $.03 per diluted share,  from $1,757, or $.18 per diluted share, for the year
ended March 31, 1998 ("fiscal 1998") as compared to $1,628,  or $.20 per diluted
share,  for the year ended March 31, 1997  ("fiscal  1997").  The decline in net
income for fiscal 1999 is attributable to a number of factors,  including, among
others: (i) a reduction in gross profit margin as a percentage of sales; (ii) an
increase  in  costs  and  expenses  due  to the  fiscal  1998  acquisitions  and
integration  of the  operations  and assets  acquired;  (iii) expenses of $1,240
incurred  in  connection  with  negotiations   concerning  a  possible  business
combination  that  were  terminated  by the  Company;  and (iv) a charge of $490
related to the reorganization of the Company's sales and marketing organization,
all of which are more fully  explained  herein.  The Company's  earnings  before
interest, taxes, depreciation and amortization ("EBITDA") amounted to $4,338 for
fiscal 1999 compared to $3,806 for fiscal 1998 and $2,728 for fiscal 1997.

                       Fiscal 1999 compared to Fiscal 1998

The  following  table shows  certain  line items in the  Company's  consolidated
statements  of  operations  for fiscal 1999 and fiscal  1998 that are  discussed
below  together  with amounts  expressed  as a percentage  of sales and with the
change in the line item from period to period expressed as a percentage increase
or (decrease).

<TABLE>
<CAPTION>
                                           Fiscal        Percent         Fiscal         Percent      Percentage
                                            1999         of Sales         1998          of Sales        Change
                                        -------------  -------------  -------------   -------------  -------------

<S>                                         <C>                 <C>       <C>                  <C>             <C>
Net sales                                   $ 65,263            100%      $ 46,250             100%            41%
Cost of goods sold                            43,635             67         28,645              62             52
Selling, general and administrative
  expenses                                    10,560             16          9,930              21              6
Engineering, research and
  development expenses                         6,121              9          4,514              10             36
Amorization                                    2,084              3            654               1            219
Interest (income) expense                        517              1           (103)             --           (602)
Other charges                                  1,772              3             --              --             --
Income tax expense                               213             --            853               2            (75)
</TABLE>


                                       27
<PAGE>

Net sales  increased by $19,013,  or 41%, to $65,263 for fiscal 1999 as compared
to $46,250 for fiscal 1998 primarily due to an increase in volume, a significant
portion of which is  attributable to the fiscal 1998  acquisitions,  offset by a
slight  decline  in  average  selling  prices to  independent  payphone  service
providers.  Sales to domestic  independent  payphone  service  providers  during
fiscal 1999  represented  38% of the Company's  sales and increased by $4,024 or
19%, to $25,076,  from $21,052 during fiscal 1998.  Sales to domestic  telephone
companies  during  fiscal  1999  represented  50% of  the  Company's  sales  and
increased by $16,508,  or 103%,  to $32,507,  from $15,999  during  fiscal 1998.
Export sales  during  fiscal 1999  represented  12% of the  Company's  sales and
declined by $1,519,  or 17%, to $7,680,  from $9,199 during fiscal 1998.  During
fiscal 1999,  sales of payphone  terminals  and printed  circuit  board  control
modules and related  retrofit kits  accounted for $42,548,  or 65% of sales,  as
compared to $33,356,  or 72% of sales,  during  fiscal  1998.  Sales of payphone
components and assemblies  approximated  $11,820, or 18% of sales, during fiscal
1999 as  compared  to  $9,688,  or 21% of sales,  during  fiscal  1998.  Repair,
refurbishment and upgrade sales  approximated  $9,895,  or 15% of sales,  during
fiscal 1999 as compared to $2,285, or 5% of sales,  during fiscal 1998. Software
sales  approximated  $380 during  fiscal 1999 as compared to $382 during  fiscal
1998.  Sales related to other services  approximated  $620 during fiscal 1999 as
compared to $539 during fiscal 1998.  Fiscal 1998 sales include sales of $580 to
TSG prior to the  acquisition  date.  During the latter part of fiscal 1999, the
demand for the Company's  products was constrained by the recent merger activity
among  both  independent  payphone  service  providers  and  domestic  telephone
companies,  and on-going disputes related to the amount and payor of dial-around
compensation  required by the 1996  Telecommunications  Act.  Also, the payphone
operating  units of domestic  telephone  companies  began to eliminate  marginal
payphone locations as part of their efforts to improve profitability as separate
operating units,  which reduced their product  requirements  with respect to new
installations.  The  Company  believes,  but cannot  assure,  that the demand of
domestic  telephone  companies for its products  will begin to improve  sometime
during the next year. In addition, the Company believes, but cannot assure, that
the final resolution of dial-around  compensation  (depending upon the nature of
such final  resolution)  will  increase  the revenues and cash flows of payphone
service providers, which may stimulate demand for the Company's products.

Cost of sales as a percentage  of net sales  increased to 67% during fiscal 1999
from 62% during fiscal 1998 as a result of several factors,  including:  (i) the
increase  in  the   percentage  of  sales  to  domestic   telephone   companies,
particularly repair,  refurbishment and upgrade of customer owned equipment,  at
margins lower than those achieved from other products;  (ii) a slight  reduction
in average  selling  prices,  primarily to large  independent  payphone  service
providers;  (iii) the  introduction  of new  products,  such as the  Eclipse(TM)
payphone  terminal,  with an initially higher start-up  manufacturing  cost; and
(iv) a shift in export sales  towards such new  products.  The Company is in the
process  of  implementing  programs  to reduce  the cost of such  products,  and
believes,  but cannot  assure,  that its profit  margins will  improve  slightly
during the next year with respect to such products.

Selling, general and administrative expenses increased by $630, or approximately
6%, during fiscal 1999 as compared to fiscal 1998, and  represented 16% of sales
in fiscal 1999 versus 21% in fiscal 1998.  The increase in selling,  general and
administrative  expenses  results from inclusion of TSG's  operations for a full
year,  versus  a part of the  year in  fiscal  1998,  and an  increase  in sales
commissions  related  to the 41%  increase  in sales,  offset  significantly  by
reductions  in personnel  and  facilities  costs from the  integration  of TSG's
operations into those of the Company and from the restructuring of the Company's
selling and marketing  organization.  In addition,  the Company's  provision for
credit losses, which in fiscal 1998 included significant reserves related to the
impairment of certain  international notes,  declined from $1,352 in fiscal 1998
to $117 in fiscal 1999.

Engineering,   research  and  development   expenses  increased  by  $1,607,  or
approximately   36%,  during  fiscal  1999  as  compared  to  fiscal  1998,  and
represented 9% of sales in fiscal 1999 versus 10% in fiscal 1998.  During fiscal
1999, the Company  expanded its  engineering  resources in an attempt to develop


                                       28
<PAGE>

advanced   digital   microprocessor   based  technology  and  an  advanced  open
architecture   network   management   software  system  that  would  enable  the
integration of the Company's  technologies  in advanced  video,  information and
internet  terminal  applications for various vertical  markets.  The increase in
fiscal 1999 engineering, research and development expenses from the expansion of
product  development  activities  and the  inclusion of  development  activities
related to the TSG product line and the  technology  acquired  from Lucent for a
full year,  versus a part of the year in fiscal 1998,  was  partially  offset by
reductions  in personnel  and  facilities  costs from the  integration  of TSG's
development  activities  into  those  of  the  Company.  In  addition,  software
development costs  capitalized  during fiscal 1999 approximated $639 as compared
to approximately $100 in fiscal 1998.

Amortization  expense  during  fiscal  1999  increased  by $1,430 to 3% of sales
versus 1% of sales during fiscal 1998. The increase is primarily attributable to
amortization  of  goodwill  and  identifiable   intangible  assets  recorded  in
connection with the fiscal 1998  acquisitions  for an entire year as compared to
part of the year in fiscal 1998.

The Company incurred net interest expense during fiscal 1999 of $517 as compared
to net interest  income of $103 during  fiscal 1998  primarily as a result of an
increase  in  average  outstanding  indebtedness  related  to  the  fiscal  1998
acquisitions and capital additions, including capitalized software, of $2,148.

Other  charges  during  fiscal  1999  include  $1,240  of  expenses,  consisting
primarily of legal,  accounting and consulting  fees incurred in connection with
negotiations  concerning a possible business combination that were terminated by
the Company in April 1999 and $490 of charges related to the  reorganization  of
the Company's sales and marketing organization.

The  Company's  effective  tax rate  increased to 37% in fiscal 1999 from 33% in
fiscal 1998 primarily due to an increase in  nondeductible  expenses  consisting
primarily of amortization of goodwill.

                       Fiscal 1998 compared to Fiscal 1997

The  following  table shows  certain  line items in the  Company's  consolidated
statements  of  operations  for fiscal 1998 and fiscal  1997 that are  discussed
below  together  with amounts  expressed  as a percentage  of sales and with the
change in the line item from period to period expressed as a percentage increase
or (decrease).

<TABLE>
<CAPTION>
                                           Fiscal        Percent         Fiscal         Percent      Percentage
                                            1998         of Sales         1997          of Sales        Change
                                        -------------  -------------  -------------   -------------  -------------
<S>                                         <C>                 <C>       <C>                  <C>             <C>
Net sales                                   $ 46,250            100%      $ 26,832             100%            72%
Cost of goods sold                            28,645             62         15,883              59             80
Selling, general and administrative
  expenses                                     9,930             21          6,326              24             57
Engineering, research and
  development expenses                         4,514             10          2,623              10             72
Amortization                                     654              1             32              --          1,944
Interest (income)                               (103)            --           (205)             (1)           (50)
Other (credits)                                   --             --           (331)             (1)          (100)
Income tax expense                               853              2            876               3             (3)
</TABLE>

Net sales  increased by $19,418,  or 72%, to $46,250 for fiscal 1998 as compared
to $26,832 for fiscal 1997, primarily due to the fiscal 1998 acquisitions and an
increase  in volume  offset a slight  reduction  in  average  selling  prices to
independent payphone service providers. Sales to domestic independent


                                       29
<PAGE>

payphone  service  providers  during  fiscal 1998  represented  46% of sales and
increased by $3,098, or 17%, to $21,052,  from $17,954 during fiscal 1997. Sales
to domestic telephone  companies during fiscal 1998 represented 36% of sales and
increased  by $15,166 to $15,999,  from $833 during  fiscal  1997.  Export sales
during fiscal 1998 represented 20% of sales and increased by $1,154,  or 14%, to
$9,199,  from $8,045 during fiscal 1997.  During fiscal 1998,  sales of payphone
terminals and printed  circuit board control  modules and related  retrofit kits
accounted for $33,356, or 72% of sales, as compared to $23,572, or 88% of sales,
during  fiscal  1997.  Sales  of  software,  payphone  components  and  payphone
assemblies approximated $10,070, or 22% of sales, during fiscal 1998 as compared
to $2,910,  or 11% of sales,  during  fiscal  1997.  Repair,  refurbishment  and
upgrade  sales  approximated  $2,285,  or 5% of  sales,  during  fiscal  1998 as
compared to no such revenues during fiscal 1997. Sales related to other services
approximated  $539 during  fiscal 1998 as compared to $350 during  fiscal  1997.
Fiscal 1998 sales include sales of $580 to TSG prior to the acquisition date.

Cost of sales as a percentage  of net sales  increased to 62% during fiscal 1998
from 59% during  fiscal 1997 as a result of: (i) the increase in the  percentage
of sales to  domestic  telephone  companies  (from 3% in  fiscal  1997 to 35% in
fiscal 1998) at margins lower than those achieved from other products;  and (ii)
a slight  reduction in average  selling prices to independent  payphone  service
providers.

Selling,   general  and   administrative   expenses   increased  by  $3,604,  or
approximately   57%,  during  fiscal  1998  as  compared  to  fiscal  1997,  and
represented  21% of sales in fiscal 1998 versus 24% in fiscal 1997. The increase
in selling, general and administrative expenses is primarily attributable to the
acquisition of TSG, an increase in sales commissions related to the 72% increase
in sales,  an increase in sales and  marketing  personnel and an increase in the
Company's  provision for credit losses of $1,872,  which in fiscal 1998 included
significant  reserves related to the impairment of certain  international  notes
and in fiscal  1997  reflected a net  recovery of $171 with  respect to previous
impairment reserves.

Engineering,   research  and  development   expenses  increased  by  $1,891,  or
approximately   72%,  during  fiscal  1998  as  compared  to  fiscal  1997,  and
represented  10% of sales in fiscal 1998 and fiscal 1997. The increase in fiscal
1998 engineering, research and development expenses is primarily attributable to
the expansion of engineering  resources to support the technology  acquired from
Lucent and the acquisition of TSG. Software development costs capitalized during
fiscal 1998 approximated  $100.  During fiscal 1997, the Company  capitalized no
software development costs.

Amortization  expense during fiscal 1998 increased by $622 to 1% of sales during
fiscal 1998 due to amortization of goodwill and identifiable  intangible  assets
recorded in connection with the fiscal 1998 acquisitions.

The decrease in net interest income during fiscal 1998 is primarily attributable
to an increase  in average  outstanding  indebtedness  as a result of the fiscal
1998 acquisitions.

Other credits  during  fiscal 1997  represent the net recovery with respect to a
fiscal 1996 impairment  reserve on notes receivable due to the bankruptcy of one
of the Company's customers.

The  Company's  effective  tax rate  declined  to 33% in fiscal 1998 from 35% in
fiscal 1997  primarily due to an increase in research and  development  credits,
which was partially offset by an increase in state income tax expense.

Impact of Inflation

The  Company's  primary  costs,  inventory and labor,  increase with  inflation.
However,  the Company does not believe that  inflation and changing  prices have
had a material impact on its business.


                                       30
<PAGE>

Liquidity and Capital Resources

The Company  finances its operations,  working capital  requirements and capital
expenditures from internally  generated cash flows and financing available under
a loan agreement between the Company and its bank. The Company believes that its
anticipated  cash flow from  operations and financing  available  under the loan
agreement will be sufficient to fund its working capital  requirements,  capital
expenditures and long term debt obligations through March 31, 2000.

Financing  Activities.  On March 29, 1999, the Company and its bank entered into
an amendment (the  "Amendment") that modified the terms of the Restated Loan and
Security Agreement (the "Loan Agreement") between the parties dated November 25,
1997.  Pursuant to the Amendment:  (i) the Company's  working capital  revolving
credit  line was  reduced  from $15  million to $10  million;  (ii) the  Company
borrowed $4 million  pursuant to a term note payable in sixty (60) equal monthly
installments,  including interest at an annual interest rate of 7.55%; and (iii)
the Company  established  a $1.5  million  revolving  credit line to finance the
Company's  capital  expenditures.  The proceeds  from the term note were used to
reduce the Company's then outstanding indebtedness under the $15 million working
capital revolving credit line. Indebtedness outstanding under the Loan Agreement
is collateralized  by substantially  all of the assets of the Company.  The Loan
Agreement contains covenants that prohibit or restrict the Company from engaging
in certain  transactions  without the consent of the bank,  including mergers or
consolidations  and  disposition  of assets,  among  others.  Additionally,  the
Agreement  requires  the Company to comply with  specific  financial  covenants,
including  covenants with respect to cash flow,  working  capital and net worth.
Noncompliance  with  any of these  covenants  or the  occurrence  of an event of
default,  if not waived,  could  accelerate  the  maturity  of the  indebtedness
outstanding under the Loan Agreement.

The Company  borrows funds under its revolving  credit lines to finance  capital
expenditures,  increases in accounts and notes  receivable and  inventories  and
decreases in bank  overdrafts  (as drafts clear),  accounts  payable and accrued
liability  obligations to the extent that such requirements exceed cash provided
by operations,  if any. The Company also uses the financing  available under its
revolving  credit lines to fund  operations  and payments on long-term debt when
necessary. The Company measures its liquidity based upon the amount of funds the
Company is able to borrow under its revolving  credit lines,  which varies based
upon operating performance and the value of current assets and liabilities.

Indebtedness  outstanding under the working capital revolving credit line cannot
exceed the value of  eligible  collateral,  as  defined  in the Loan  Agreement,
consisting of domestic accounts receivable and inventories.  The working capital
revolving  credit line  matures on November 25,  2002.  The capital  expenditure
revolving  credit line  matures on July 31, 2000.  Interest on amounts  borrowed
under the revolving  credit lines is payable  monthly at the bank's  floating 30
day Libor rate plus 1.5% (6.44% at March 31, 1999).  Outstanding  debt under the
working capital  revolving credit line amounts to $5,185 and $7,645 at March 31,
1999 and 1998,  respectively.  At March 31, 1999, the Company was able to borrow
up to a maximum of $10,000 under the working capital revolving credit line based
on the value of eligible collateral.  At March 31, 1999,  outstanding debt under
the term note amounted to $4 million.  As of March 31, 1999, the Company had not
used the $1.5 million capital expenditure revolving credit line.

During the year ended  March 31,  1998,  the  initial  financing  under the Loan
Agreement was used to refinance and retire the Company's then  outstanding  debt
under a $2,000 working  capital line of credit and notes incurred to finance the
purchase  of the  Lucent  assets,  including  a $3,050  installment  note due on
October 2, 2004 and term  notes of $3,800  that were due on March 31,  1998.  In
addition,  on December 18, 1997,  the Company  retired  TSG's  outstanding  bank
indebtedness of $3,970 from proceeds drawn under the Loan Agreement.  During the
year ended March 31, 1999,  net payments  under the  Company's  working  capital
credit line amounted to $2,460. Net proceeds under the working capital revolving
credit


                                       31
<PAGE>

line during the year ended March 31,  1998  amounted to $3,675.  During the year
ended March 31, 1997,  net payments under the Company's  working  capital credit
line amounted to $965.

On November 26, 1997,  the Company  borrowed  $1,920  pursuant to the terms of a
mortgage  note and retired its then  outstanding  mortgage note with a principal
balance of $315 and a maturity  date of May 23,  1999.  The  November  26,  1997
mortgage  note  bears  interest  at a rate of 8.5% per annum and is  payable  in
fifty-nine equal monthly  installments of $19 and a final  installment of $1,533
due on November 26, 2002. Principal payments under the mortgage notes during the
years  ended  March 31,  1999,  1998 and 1997  amounted  to $66,  $452 and $431,
respectively.

During the years ended March 31, 1999,  1998 and 1997, the net proceeds from the
exercise of common stock options amounted to $285, $295 and $266, respectively.

Operating  Activities.  Cash used for  operating  activities  during fiscal 1999
amounted to $2,686. During fiscal 1998 and 1997, the Company generated cash from
operating  activities  of  $2,701  and  $2,921,  respectively.  Cash  flow  from
operations  before  changes in  operating  assets and  liabilities  decreased to
$4,412 in fiscal 1999 from $4,680 in fiscal 1998 as compared to $2,334 in fiscal
1997.  Changes in operating assets and liabilities  during fiscal 1999 and 1998,
particularly  accounts and notes receivable,  inventories,  accounts payable and
accrued liabilities,  have significantly reduced or exceeded cash flows provided
by  operations  before such  changes.  During  fiscal 1999 and fiscal 1998,  the
Company used $7,098 and $1,979 of cash to fund net increases in operating assets
and liabilities.  During fiscal 1997, the Company  generated cash of $587 from a
net reduction in operating assets and liabilities.

Extension of credit to customers and inventory purchases represent the principal
working  capital  requirements  of the Company.  The  Company's  current  assets
increased by $3,203,  or  approximately  11%,  from $28,124 at March 31, 1998 to
$31,327 at March 31, 1999,  predominantly from an increase in accounts and notes
receivable of $802 and an increase in inventory of $4,890.  Current  liabilities
increased  by $2,747,  or  approximately  35%,  from $7,887 at March 31, 1998 to
$10,634 at March 31, 1999,  predominantly  from an increase in accounts  payable
and  bank  overdrafts.  The  Company  experiences  varying  accounts  receivable
collection periods from its three primary customer markets. The Company believes
that  uncollectible  accounts and notes  receivable  will not have a significant
effect on future liquidity,  as a significant  portion of its accounts and notes
receivable are due from customers with substantial financial resources.

The level of  inventory  maintained  by the Company is  dependent on a number of
factors, including delivery requirements of its customers, availability and lead
time of  components  and the  ability of the  Company to  estimate  and plan the
volume of its  business.  The  Company  markets  a wide  range of  services  and
products and the  requirements  of its  customers  may vary  significantly  from
period to period. Accordingly, inventory levels may vary significantly.

Investing  Activities.  Net cash used for investing  activities during the years
ended  March 31,  1999,  1998 and 1997  amounted  to  $2,140,  $7,493  and $634,
respectively.  Cash  used  for the  acquisitions  of TSG and the  Lucent  assets
aggregated $447 and $5,957, respectively,  during the year ended March 31, 1998.
The Company's capital  expenditures  consist primarily of manufacturing  tooling
and equipment,  computer  equipment and building  improvements  required for the
support  of  operations.  Cash used for  capital  expenditures  and  capitalized
software  aggregated  $2,148,  $1,089 and $635  during the years ended March 31,
1999,  1998  and  1997,  respectively.  The  Company  has not  entered  into any
significant   commitments   for  the  purchase  of  capital  assets  other  than
manufacturing tooling in an amount of approximately $500.


                                       32
<PAGE>

Year 2000 Discussion

The Company is  continuing  its efforts to assess the impact of Year 2000 on its
business  and address Year 2000 issues.  Year 2000 issues  result from  computer
programs  designed to use two-digit date codes rather than four digits to define
the  applicable  year.  As  a  result,  there  is  a  risk  that  programs  with
time-sensitive  software may recognize a year using "00" as the year 1900 rather
than the year 2000, resulting in system miscalculations or system failures.

The Company has identified several general areas in which Year 2000 concerns may
be material if not  resolved  before  January 1, 2000.  These areas  include (1)
products and services of the Company,  (2)  management  information  systems and
other systems within the Company,  and (3) third parties that provide  materials
and services (including utilities) to the Company.

The Company  established a "Validation Test Plan" to assess Year 2000 compliance
of all products and services  currently  sold or supported by the Company.  This
test plan was designed to identify the products and services currently supported
by the Company, features of such products and services that required assessment,
and the approach  and  resources  required.  The  Validation  Test Plan was also
designed  to assess  Year 2000  compliance  of those  items in order of relative
importance to the Company.  As of April 1999,  the Company  believes that it has
completed  its Year 2000  compliance  testing  with  respect to the products and
systems it currently  sells and  supports.  In addition,  as of April 1999,  the
Company has completed substantially all Year 2000 software modifications to such
products, and the Company believes that such products are Year 2000 compliant or
Year 2000 compliant with issues. The Company continues to modify certain product
software or develop  Year 2000  complaint  software  for certain  products,  and
believes,  but cannot assure,  that the products the Company presently sells and
supports  will be Year 2000  compliant  or Year 2000  compliant  with  issues by
December 31,  1999.  The Company  believes  that  products  defined as Year 2000
compliant  with issues will  operate  properly  in year 2000 if  programmed  and
configured in accordance with the Company's published  guidelines.  Based on the
present status of the Company's compliance testing and remediation activities to
date,  the  Company  does not  believe  that it will incur  material  additional
engineering  expenses to bring the  remaining  products and systems it presently
sells and supports into Year 2000 compliance. However, there can be no assurance
that the Company's  tests pursuant to its Validation  Test Plan have detected or
will detect all  instances of Year 2000  noncompliance,  that the cost of future
remediation  activities  will not be material or that all software  upgrades for
all of the  Company's  products  and systems  will be  available by December 31,
1999.

Based  on the  Company's  compliance  testing  and  identification  of  software
modifications required to achieve Year 2000 compliance of its products, the only
products  historically  sold by the Company that will not be Year 2000 compliant
or  compliant  with  issues  are  products  the  manufacture  of which  has been
discontinued and that are no longer supported by the Company. These discontinued
products  are not Year 2000  compliant  and the Company does not intend to bring
these products into compliance,  and has so notified its customers.  The Company
does not believe that it has an obligation to bring these discontinued  products
into  compliance or an obligation to replace these products under its warranties
since those products were last sold more than five years ago.  Accordingly,  the
Company  has not  recorded  any  liability  related  to  these  products  in its
financial statements.

The Company has provided  information to its customers and others about its Year
2000  compliance  program.   The  Company's  web  site  describes  each  product
historically  supplied  by the  Company  and its  status  as  "compliant",  "not
compliant",  "compliant with issues" with an attached description of the issues,
or "compliance anticipated" with a projected release date.

The Company has  concluded  that its  internally  managed  call rating  software
should be rewritten to upgrade its features and to integrate  the software  into
the Company's new open architecture management


                                       33
<PAGE>

software system presently under  development,  in addition to the  modifications
required to bring the  software  into Year 2000  compliance.  The upgrade of the
Company's  call rating  software is being  undertaken by outside  consultants in
conjunction  with the Company's  personnel at an estimated cost of approximately
$150, and is expected to be completed by no later than December 31, 1999. If the
Company does not complete  the upgrade by December 31, 1999,  the Company  would
not be able to provide Year 2000  compliant  call rating files to its customers.
However, such files are available from third parties.

The risks associated with the failure of the Company's  products to be Year 2000
compliant include: (1) loss of data from or an adverse impact on the reliability
of data  generated by the Company's  products;  (2) loss of  functionality;  (3)
failure to communicate with other non-Company user applications of its customers
that may not be Year 2000 compliant;  and (4) potential  litigation by customers
with respect to products and services no longer supported.

The  Company  purchased  new  business  software  in June  1997,  and  based  on
representations  received  from  the  vendor,  the  Company  believes  that  its
management  information  system is Year 2000  compliant.  Based on the Company's
internal testing,  the Company believes that  substantially all of the Company's
related  operating  systems are also Year 2000  compliant  with the exception of
certain  items which the Company  does not  believe  are  material.  The Company
continues to assess Year 2000  compliance of its other internal  systems such as
engineering, shipping, payroll and EDI systems and is upgrading these systems as
required if  deficiencies  within these  systems are deemed to be critical.  The
costs related to such system  upgrades or acquisition of new Year 2000 compliant
software to date have not been material, but the costs to complete such upgrades
or  acquisitions  could be material.  The risks  associated with failure of such
systems to be Year 2000  compliant are primarily the increase in  administrative
related  functions and  increased  costs  associated  with such  functions.  The
Company  believes  that all  critical  internal  systems  will be  assessed  and
remediated by the end of the third calendar quarter of 1999.

The  Company  has  completed  an  inventory  and  tested all  internal  computer
equipment,  including personal computers,  related servers and software for Year
2000  compliance.  Based on the  Company's  testing,  the Company plans to spend
approximately $100 to replace and upgrade such equipment and software to achieve
Year 2000 compliance.  The Company believes that the necessary  replacements and
upgrades can be completed by the end of the third calendar quarter of 1999.

The Company has relationships  with various third parties in the ordinary course
of business.  The Company  continues to assess the  readiness of third  parties,
especially  critical suppliers and others that have material  relationships with
the Company, by sending questionnaires, evaluating responses and identifying the
risks with respect to Year 2000 plans of those third  parties.  The Company will
continue to identify the risks  associated with third parties based on responses
to those questionnaires and will then formulate appropriate contingency plans on
a case by case basis to mitigate such risks. The Company expects to complete its
assessment  of the readiness of third parties by the end of the third quarter of
calendar year 1999. The effect,  if any, on the Company's  results of operations
from failure of these third parties to be Year 2000  compliant is not reasonably
estimable but could be material.

The Company has begun,  but not yet  completed,  an analysis of the  operational
problems  that  would be  reasonably  likely to result  from the  failure of the
Company and certain third parties to complete efforts  necessary to achieve Year
2000 compliance on a timely basis.  The Company's Year 2000 efforts to date have
been undertaken largely with its existing engineering and information technology
personnel.  The Company does not  separately  track the costs  incurred for such
efforts and such costs are principally the related  compensation costs for those
personnel.


                                       34
<PAGE>

The Company presently has no contingency plans for Year 2000 compliance problems
that might  arise,  but will  develop  such  contingency  plans,  as the Company
identifies situations in which Year 2000 compliance could be a problem. However,
there can be no assurance that any contingency  plan will be timely or effective
to avoid a material disruption of the Company's operations.

Selected Quarterly Data

The following  sets forth a summary of selected  statements  of operations  data
(unaudited) for the quarters ended June 30, 1997,  September 30, 1997,  December
31, 1997 and March 31, 1998:

<TABLE>
<CAPTION>
                                                                 Quarter Ended
                                               ----------------------------------------------------------
                                               June 30,     September 30,     December 31,      March 31,
                                                 1997           1997              1997          1998 (1)
                                               --------     ------------      -----------       ---------
                                                                      Unaudited

<S>                                            <C>            <C>              <C>             <C>
Net sales                                      $ 6,753        $ 7,630          $ 13,592        $ 18,275
Cost of goods sold                               3,838          4,175             8,565          12,067
Net income                                     $   375        $   418          $    709        $    255
Earnings per common and
  common equivalent share:
    Basic                                      $  0.05        $  0.05          $   0.08        $   0.02
    Diluted                                    $  0.05        $  0.05          $   0.08        $   0.02
</TABLE>

      (1)   During the  quarter  ended  March 31,  1998,  the  Company  recorded
            additional  impairment  reserves  related  to  notes  receivable  of
            approximately $866 as a result of the deterioration of the financial
            condition of certain foreign customers.

The following  sets forth a summary of selected  statements  of operations  data
(unaudited) for the quarters ended June 30, 1998,  September 30, 1998,  December
31, 1998 and March 31, 1999:

<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                          ---------------------------------------------------------------
                                           June 30,         September 30,     December 31,      March 31,
                                             1998              1998              1998            1999 (1)
                                          --------          -------------     -----------       ---------
                                                                      Unaudited

<S>                                       <C>                <C>               <C>               <C>
Net sales                                 $ 15,636           $ 18,808          $ 16,859          $ 13,960
Cost of goods sold                          10,309             12,276            11,320             9,730
Net income (loss)                         $    237           $    865          $    779          $ (1,520)
Earnings (loss) per common and
  common equivalent share:
    Basic                                 $   0.02           $   0.06          $   0.06          $  (0.11)
    Diluted                               $   0.02           $   0.06          $   0.06          $  (0.11)
</TABLE>

      (1)   During the quarter ended March 31, 1999, the Company  recorded other
            charges  of  $1,772,   including  expenses  of  $1,240  incurred  in
            connection  with   negotiations   concerning  a  possible   business
            combination  that were terminated by the Company and $490 of charges
            related to the  reorganization  of the Company's sales and marketing
            activities.


                                       35
<PAGE>

Effects of New Accounting Standards

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133 ("SFAS 133"),  Accounting for Derivative
Instruments and Hedging Activities,  which establishes  standards for accounting
of derivative  instruments including certain derivative  instruments embedded in
other  contracts,  and  hedging  activities.  SFAS 133 is  effective  for fiscal
quarters of all fiscal years  beginning  after June 15, 1999.  SFAS 133 requires
entities to  recognize  derivative  instruments  as assets and  liabilities  and
measure them at fair value,  and to match the timing of gain or loss recognition
on hedging  instruments with the recognition of changes in the fair value of the
hedged  asset or  liability  that are  attributable  to the  hedged  risk or the
earnings  effect  of the  hedged  forecasted  transaction.  Management  does not
believe  that the  adoption  of SFAS 133 will have a  significant  impact on the
Company's consolidated financial statements.

In March 1998,  the  American  Institute of Certified  Public  Accountants  (the
"AICPA")  issued  Statement of Position 98-1,  "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software  developed or obtained
for  internal  use  and new  cost  recognition  principles  and  identifies  the
characteristics of internal use software. SOP 98-1 is effective for fiscal years
beginning  after  December 15, 1998. The adoption of SOP 98-1 is not expected to
have a  material  impact  on the  Company's  results  of  operations,  financial
position or cash flows.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to market risk,  including changes in interest rates, and
to foreign currency exchange rate risks. The Company does not hold any financial
instruments  for trading  purposes or any investments in cash  equivalents.  The
Company  believes that its primary  market risk exposure  relates to the effects
that changes in interest rates have on outstanding  debt obligations that do not
have fixed rates of interest. In addition,  changes in interest rates impact the
fair value of the Company's notes  receivable and debt  obligations.  Additional
information  relating  to the fair value of certain of the  Company's  financial
assets and  liabilities  is  included  in Note 1 to the  Company's  consolidated
financial statements included in Item 8 - "Consolidated Financial Statements and
Supplementary Data."

The Company's  international  business consists of export sales, and the Company
does not presently have any foreign  operations.  The Company's  export sales to
date have been denominated in U.S. dollars and as a result, no losses related to
foreign  currency  exchange rate  fluctuations  have been incurred.  There is no
assurance,  however,  that the  Company  will be able to  continue to export its
products  in U.S.  dollar  denominations  or that its  business  will not become
subject to significant  exposure to foreign  currency  exchange rate risks.  The
Company has  contracted  with a foreign  manufacturer  to produce  payphones and
payphone assemblies for the Company, and related purchases have been denominated
in U.S.  dollars.  Fluctuations in foreign exchange rates may affect the cost of
the Company's products.  However,  changes in purchase prices related to foreign
exchange rate  fluctuations to date have not been material.  The Company has not
entered into foreign  currency  exchange  forward  contracts or other derivative
arrangements to manage risks associated with foreign exchange rate fluctuations.

                                   ----------


                                       36
<PAGE>

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Independent Auditors' Report                                                  38

Consolidated Balance Sheets at March 31, 1999 and 1998                        39

Consolidated Statements of Operations for the years ended
  March 31, 1999, 1998 and 1997                                               40

Consolidated Statements of Cash Flows for the years ended
  March 31, 1999, 1998 and 1997                                               41

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended March 31, 1999, 1998 and 1997                           42

Notes to Consolidated Financial Statements                                    43

Financial Statement Schedules:

         All financial statement schedules are omitted because they are
         not   required  or  are  not   applicable,   or  the  required
         information is shown in the consolidated  financial statements
         or notes thereto

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

None.

                                   ----------


                                       37
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of Elcotel, Inc.:

We have audited the accompanying  consolidated  balance sheets of Elcotel,  Inc.
and subsidiaries  (the "Company") as of March 31, 1999 and 1998, and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1999.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of Elcotel,  Inc. and subsidiaries as
of March 31, 1999 and 1998,  and the results of their  operations and their cash
flows  for each of the  three  years  in the  period  ended  March  31,  1999 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE
Tampa, Florida
June 11, 1999


                                       38
<PAGE>

<TABLE>
<CAPTION>
                         ELCOTEL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands except per share amounts)

                                                                 March 31,   March 31,
                                                                   1999        1998
                                                                ----------  ----------
<S>                                                             <C>         <C>
ASSETS
Current assets:
    Cash                                                        $     16    $  1,655
    Accounts and notes receivable, less allowances for credit
        losses of $1,970 and $1,923, respectively                 12,209      11,407
    Inventories                                                   13,978       9,088
    Refundable income taxes                                        1,997         809
    Deferred tax asset - current portion                           2,215       4,141
    Prepaid expenses and other current assets                        912       1,024
                                                                --------    --------
        Total current assets                                      31,327      28,124

Property, plant and equipment, net                                 5,064       4,779
Notes receivable, less allowances for credit losses
    of $312 and $487, respectively                                   898         346
Identified intangible assets, net of accumulated amortization
    of $1,541 and $371, respectively                               7,734       8,904
Capitalized software, net of accumulated amortization of
    $240 and $55, respectively                                     1,573       1,078
Goodwill, net of accumulated amortization of $878
    and $190, respectively                                        23,218      23,906
Deferred tax asset                                                   948          --
Other assets                                                         533         301
                                                                --------    --------
                                                                $ 71,295    $ 67,438
                                                                ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Bank overdraft                                              $  1,428    $     --
    Accounts payable                                               4,186       3,210
    Accrued expenses and other current liabilities                 4,197       4,609
    Notes and debt obligations payable within one year               823          68
                                                                --------    --------
        Total current liablilities                                10,634       7,887

Notes and debt obligations payable after one year                 10,355       9,476
Deferred tax liability                                                --         415
                                                                --------    --------
    Total liabilities                                             20,989      17,778
                                                                --------    --------
Commitments and contingencies
Stockholders' equity:
    Common stock, $0.01 par value,
        30,000,000 shares authorized, 13,551,693
        and 13,416,850 shares issued, respectively                   136         134
    Additional paid-in capital                                    46,667      46,384
    Retained earnings                                              3,680       3,319
    Less - cost of 52,000 shares of common stock in treasury        (177)       (177)
                                                                --------    --------
        Total stockholders' equity                                50,306      49,660
                                                                --------    --------
                                                                $ 71,295    $ 67,438
                                                                ========    ========
</TABLE>

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


                                       39
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

                                                     Year ended March 31,
                                              --------------------------------
                                                 1999       1998        1997
                                              --------    --------    --------
Revenues and net sales:
  Product sales                               $ 54,748    $ 43,426    $ 26,482
  Services                                      10,515       2,824         350
                                              --------    --------    --------
                                                65,263      46,250      26,832
                                              --------    --------    --------
Cost of revenues and sales:
  Cost of products sold                         34,755      26,624      15,723
  Cost of services                               8,880       2,021         160
                                              --------    --------    --------
                                                43,635      28,645      15,883
                                              --------    --------    --------
Gross profit                                    21,628      17,605      10,949
                                              --------    --------    --------
Other costs and expenses:
  Selling, general and administrative           10,560       9,930       6,326
  Engineering, research and development          6,121       4,514       2,623
  Amortization                                   2,084         654          32
  Other charges (credits)                        1,772          --        (331)
  Interest expense (income)                        517        (103)       (205)
                                              --------    --------    --------
                                                21,054      14,995       8,445
                                              --------    --------    --------
Income before income tax expense                   574       2,610       2,504

Income tax expense                                (213)       (853)       (876)
                                              --------    --------    --------
Net income                                    $    361    $  1,757    $  1,628
                                              ========    ========    ========
Earnings per common and common
  equivalent share:
  Basic                                       $   0.03    $   0.18    $   0.20
                                              ========    ========    ========
  Diluted                                     $   0.03    $   0.18    $   0.20
                                              ========    ========    ========
Weighted average number of common
  and common equivalent shares outstanding:
  Basic                                         13,456       9,641       8,096
                                              ========    ========    ========
  Diluted                                       13,777       9,842       8,316
                                              ========    ========    ========

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


                                       40
<PAGE>

<TABLE>
<CAPTION>
                         ELCOTEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

                                                                       Year ended March 31,
                                                                  -----------------------------
                                                                    1999      1998       1997
                                                                  -------    -------    -------
Cash flows from operating activities
<S>                                                               <C>        <C>        <C>
    Net income                                                    $   361    $ 1,757    $ 1,628
    Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
        Depreciation and amortization                               3,247      1,299        429
        Provision for credit losses                                   117      1,352       (520)
        (Gain) loss on disposal of equipment                           12          2         (1)
        Deferred tax expense                                          563        270        798
        Stock option compensation                                     112         --         --
        Changes in operating assets and liabilities
          (net of acquisition of Technology Service Group, Inc.
          and certain assets from Lucent Technologies Inc.):
           Accounts and notes receivable                           (1,471)    (2,695)      (360)
           Inventories                                             (4,890)     3,125         67
           Refundable income taxes                                 (1,188)      (110)       412
           Prepaid expenses and other current assets                  112       (555)      (282)
           Other assets                                              (113)      (199)        28
           Accounts payable                                           976     (1,695)       241
           Accrued liabilities                                       (524)       150        481
                                                                  -------    -------    -------
    Net cash flow provided by (used in) operating activities       (2,686)     2,701      2,921
                                                                  -------    -------    -------
Cash flows from investing activities
    Net cash used for acquisition of Technology
        Service Group, Inc                                             --       (447)        --
    Acquisition of certain assets of Lucent Technologies Inc.          --     (5,957)        --
    Capital expenditures                                           (1,468)      (960)      (478)
    Capitalized software                                             (680)      (129)      (157)
    Proceeds from disposal of equipment                                 8         --          1
                                                                  -------    -------    -------
    Net cash flow used in investing activities                     (2,140)    (7,493)      (634)
                                                                  -------    -------    -------
Cash flows from financing activities
    Proceeds from exercise of common stock options                    285        295        266
    Net proceeds (payments) under revolving credit line            (2,460)     3,675       (965)
    Increase in bank overdraft                                      1,428         --         --
    Proceeds from notes payable                                     4,000      8,770         --
    Principal payments on notes payable                               (66)    (7,302)      (811)
                                                                  -------    -------    -------
    Net cash flow provided by (used in) financing activities        3,187      5,438     (1,510)
                                                                  -------    -------    -------
    Net increase (decrease) in cash                                (1,639)       646        777
    Cash at beginning of year                                       1,655      1,009        232
                                                                  -------    -------    -------
    Cash at end of year                                           $    16    $ 1,655    $ 1,009
                                                                  =======    =======    =======
</TABLE>
   The accompanying notes are an integral part of these financial statements.


                                       41
<PAGE>

<TABLE>
<CAPTION>
                         ELCOTEL, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    YEARS ENDED MARCH 31, 1999, 1998 AND 1997
                             (Dollars in thousands)

                                             Common Stock
                                       ------------------   Additional     Retained
                                        Shares               Paid-in       Earnings    Treasury
                                        Issued     Amount    Capital       (Deficit)    Stock       Total
                                       -------    -------   ----------     ---------   --------    ---------

<S>                                      <C>      <C>         <C>           <C>        <C>         <C>
Balance, March 31, 1996                  8,061    $    81   $   10,720     $     (66)  $   (177)   $ 10,558
Exercise of stock options                  173          1          265            --         --         266
Tax benefit from exercise of
    stock options                           --         --          175            --         --         175
Net income                                  --         --           --         1,628         --       1,628
                                       -------    -------   ----------     ---------   --------    --------
Balance, March 31, 1997                  8,234         82       11,160         1,562       (177)     12,627
Exercise of stock options                  158          2          293            --         --         295
Tax benefit from exercise of
    stock options                           --         --           62            --         --          62
Acquisition of Technology Service
    Group, Inc.                          5,025         50       35,208            --         --      35,258
Registration expenses of
    acquisition of Technology
    Service Group, Inc.                     --         --         (339)           --         --        (339)
Net income                                  --         --           --         1,757         --       1,757
                                       -------    -------   ----------     ---------   --------    --------
Balance, March 31, 1998                 13,417        134       46,384         3,319       (177)     49,660
Exercise of stock options                  135          2          283            --         --         285
Net income                                  --         --           --           361         --         361
                                       -------    -------   ----------     ---------   --------    --------
Balance, March 31, 1999                 13,552     $  136     $ 46,667     $   3,680   $   (177)   $ 50,306
                                       =======    =======   ==========     =========   ========    ========
</TABLE>

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


                                       42
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED MARCH 31, 1999, 1998 AND 1997
                  (Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Elcotel, Inc. and its wholly owned subsidiaries (the "Company") design, develop,
manufacture and market a comprehensive line of integrated public  communications
products and services. The Company's product line includes  microprocessor-based
payphone terminals known in the industry as "smart" or "intelligent"  payphones,
software  systems to manage and control networks of the Company's smart payphone
terminals,  electromechanical  payphone  terminals also known in the industry as
"dumb"  payphones,  replacement  components and  assemblies,  and an offering of
industry  services  including  repair,  upgrade and  refurbishment of equipment,
operator services, customer training and technical support.

Principles of Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Elcotel,  Inc. and its wholly  owned  subsidiaries.  All  material  intercompany
accounts and transactions have been eliminated in consolidation.

Revenue Recognition

Sales of products and related costs are recorded upon shipment or when customers
accept  title to such  goods.  The Company  recognizes  revenues  from  software
licenses upon delivery of the software.  Revenue from repair,  refurbishment and
upgrade of  customer-owned  equipment is recorded upon  shipment.  Revenues from
other services are recognized as the services are rendered.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined based
on the first-in,  first-out ("FIFO") method or standard cost, which approximates
cost on a FIFO basis.

Reserves to provide for losses due to  obsolescence  and excess  quantities  are
established in the period in which such losses become probable.

Property, Plant and Equipment

Property,   plant  and   equipment   are  recorded  at  cost  less   accumulated
depreciation.  Depreciation is computed by the  straight-line  method based upon
the  estimated  useful lives of the related  assets,  generally  three years for
computers,  five years for  equipment,  furniture  and fixtures and  thirty-five
years for buildings.

Additions,  improvements and expenditures that  significantly  extend the useful
life of an asset are  capitalized.  Expenditures for repairs and maintenance are
charged to operations  as incurred.  When assets are retired or disposed of, the
cost and accumulated depreciation thereon are removed from the accounts, and any
gains or losses are included in income.


                                       43
<PAGE>

Engineering, Research and Development Costs

Costs and  expenses  incurred  for the purpose of product  research,  design and
development  are charged to  operations as incurred.  Engineering,  research and
development  costs consist primarily of costs associated with development of new
products  and  manufacturing   processes.   The  Company  capitalizes   software
development  costs once  technological  feasibility has been achieved.  Once the
product is released,  the capitalized costs are amortized to operations based on
the straight-line method over the estimated useful life of the product, which is
generally five years. Capitalized software development costs are reported at the
lower  of  cost,  net of  accumulated  amortization,  or net  realizable  value.
Software development costs incurred prior to achieving technological feasibility
are  charged  to  research  and  development   expense  as  incurred.   Software
development  costs  capitalized  during the years  ended March 31, 1999 and 1998
approximated  $639 and $100,  respectively.  No software  development costs were
capitalized during the year ended March 31, 1997.

Amortization of Goodwill and Identified Intangible Assets

The excess of the purchase  price over the fair value of assets and  liabilities
of acquired businesses is being amortized to operations on a straight-line basis
over a period of 35 years. Identified intangible assets are being amortized over
the  following  estimated  useful  lives:  trade names and workforce - 35 years;
customer  contracts  -  3.45  years;  license  agreements  - 5  years;  patented
technology  -  4  years;   non-compete   agreement  -  2  years;   and  customer
relationships - 15 years.

Income Taxes

The  Company  uses the  liability  method  in  accounting  for  income  taxes in
accordance  with  Statement of  Financial  Accounting  Standards  No. 109 ("SFAS
109"),  Accounting for Income Taxes.  Income tax expense (benefit) is based upon
income  (loss)  recognized  for  financial  statement  purposes and includes the
effects of temporary  differences between such income (loss) and that recognized
for tax purposes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and are
measured  using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.  The deferred tax asset is reduced
by a valuation  allowance when, on the basis of available  evidence,  it is more
likely  than not that all or a portion  of the  deferred  tax asset  will not be
realized.

Earnings Per Common Share

Earnings per common share is computed in accordance  with Statement of Financial
Accounting  Standards No. 128 ("SFAS 128"),  Earnings Per Share,  which requires
disclosure  of basic  earnings per share and diluted  earnings per share.  Basic
earnings per share are  computed by dividing net income by the weighted  average
number of shares of common stock outstanding  during the year.  Diluted earnings
per share are computed by dividing net income by the weighted  average number of
shares  of  common  stock  outstanding  and  dilutive  potential  common  shares
outstanding  during the year. The weighted average number of shares  outstanding
during the years ended March 31,  1999,  1998 and 1997 for purposes of computing
basic earnings per share were 13,456,255, 9,640,530 and 8,095,539, respectively.
During the years ended March 31, 1999, 1998 and 1997, dilutive stock options had
the effect of increasing the weighted average number of shares  outstanding used
in the  computation  of diluted  earnings per share by 321,144  shares,  201,585
shares and 220,581 shares, respectively.


                                       44
<PAGE>

Fair Value of Financial Instruments

The  carrying  amount  of  cash,   accounts   receivable  and  accounts  payable
approximates  fair value due to the short maturity of the instruments.  The fair
value of notes  receivable  is  estimated by  discounting  the future cash flows
using current  interest rates offered for similar  transactions and approximates
carrying  value.  The fair value of the Company's debt  obligations is estimated
based on the interest  rates  currently  available to the Company for bank loans
with similar terms and average maturities and approximates carrying value.

Credit Policy and Concentration of Credit Risks

Credit is granted  under  various  terms to  customers  that the  Company  deems
creditworthy.  In addition,  the Company provides limited secured note financing
with terms generally not exceeding two years and interest charged at competitive
rates. Trade accounts and notes receivable are the primary financial instruments
that subject the Company to significant  concentrations of credit risk. In order
to minimize this risk, the Company  performs  ongoing credit  evaluations of its
customers.  With respect to notes  receivable,  the Company  generally  requires
collateral consisting primarily of the payphone terminals and related equipment.
Allowances  for credit  losses on accounts and notes  receivable  are  estimated
based  upon  expected   collectibility.   Allowances  for  impairment  of  notes
receivable are measured based upon the fair value of collateral or the Company's
estimate of the present value of future  expected cash flows in accordance  with
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan."

Warranty Reserves

The  Company  accrues  and  recognizes  warranty  expense  based  on  historical
experience and statistical  analysis.  The Company provides  warranties  ranging
from one to three years and passes on  warranties  on products  manufactured  by
others.

Stock Based Compensation Plans

The  Company  recognizes   compensation  expense  with  respect  to  stock-based
compensation plans based on the difference, if any, between the per-share market
value of the stock and the  option  exercise  price on the  measurement  date in
accordance  with  Accounting  Principles  Board  Opinion No. 25 ("APB  25").  In
addition, in accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"),  "Accounting for Stock-Based  Compensation," the Company discloses
the pro forma effects on net income and earnings per share assuming the adoption
of the fair value based method of accounting  for  compensation  cost related to
stock options and other forms of stock-based compensation set forth in SFAS 123.

Impairment of Long-Lived Assets

The  Company  evaluates  the  carrying  value of property  plant and  equipment,
goodwill and other intangible  assets when indicators of impairment are present,
and  recognizes  impairment  losses if the carrying  value of the assets is less
than expected  future cash flows of the underlying  business in accordance  with
Statement of Financial  Accounting  Standards No. 121 ("SFAS 121"),  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."  Impairment  losses are measured by the amount of the asset carrying values
in excess of fair market value.  No impairment  losses have been recorded during
the years ended March 31, 1999, 1998 and 1997.


                                       45
<PAGE>

Comprehensive Income

The  Company  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive  Income,"  during the
year ended March 31, 1999.  SFAS 130  establishes  standards  for  reporting and
display  of   comprehensive   income  and  its  components  in  a  full  set  of
general-purpose  financial  statements,  and  requires  that all items  that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as  other  financial  statements.  In  addition,  SFAS 130
requires  enterprises to classify items of other  comprehensive  income by their
nature  and  display  the  accumulated  balance  of other  comprehensive  income
separately from retained  earnings and additional  paid-in capital in the equity
section of a statement of financial position.  The Company had no items of other
comprehensive income during the years ended March 31, 1999, 1998, and 1997.

Disclosure about Segments of an Enterprise and Related Information

During the year ended March 31, 1999, the Company adopted Statement of Financial
Accounting  Standards No. 131 ("SFAS 131"),  "Disclosures  about  Segments of an
Enterprise and Related  Information." SFAS 131 establishes standards for the way
that public business  enterprises report information about operating segments in
annual and interim financial statements. See Note 12.

Derivative Financial Instruments and Hedging Activities

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 133 ("SFAS 133"),  "Accounting for Derivative
Instruments and Hedging Activities," which establishes  standards for accounting
of derivative  instruments including certain derivative  instruments embedded in
other  contracts,  and  hedging  activities.  SFAS 133 is  effective  for fiscal
quarters of all fiscal years  beginning  after June 15, 1999.  SFAS 133 requires
entities to  recognize  derivative  instruments  as assets and  liabilities  and
measure them at fair value,  and to match the timing of gain or loss recognition
on hedging  instruments with the recognition of changes in the fair value of the
hedged  asset or  liability  that are  attributable  to the  hedged  risk or the
earnings  effect  of the  hedged  forecasted  transaction.  Management  does not
believe  that the  adoption  of SFAS 133 will have a  significant  impact on the
Company's consolidated financial statements.

Computer Software Developed or Obtained for Internal Use

In March 1998,  the  American  Institute of Certified  Public  Accountants  (the
"AICPA")  issued  Statement of Position 98-1,  "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software  developed or obtained
for  internal  use  and new  cost  recognition  principles  and  identifies  the
characteristics of internal use software. SOP 98-1 is effective for fiscal years
beginning  after  December 15, 1998. The adoption of SOP 98-1 is not expected to
have a  material  impact  on the  Company's  results  of  operations,  financial
position or cash flows.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.


                                       46
<PAGE>

Reclassification of Prior Years

The Company's  consolidated  financial statements at March 31, 1998 and 1997 and
for the years then ended have been  reclassified to conform to the  presentation
at and for the year ended March 31, 1999.

NOTE 2 - ACQUISITIONS

The Company's  acquisitions  have been accounted for under the purchase  method.
Accordingly,  the purchase  prices have been  allocated  to assets  acquired and
liabilities assumed based on fair value at the dates of acquisition. The results
of acquired  businesses  and assets are included in the  consolidated  financial
statements of the Company from the dates of acquisition.

On December 18, 1997, the Company  acquired,  via a merger,  Technology  Service
Group, Inc. ("TSG"), and issued 4,944,292 shares of common stock in exchange for
the outstanding common stock of TSG based on an exchange ratio of 1.05 shares of
the Company's common stock for each share of common stock of TSG, and TSG became
a wholly owned subsidiary of the Company. In addition, the Company issued 80,769
shares of common  stock in  payment of certain  acquisition  expenses.  Further,
holders of options and rights to purchase shares of common stock of TSG pursuant
to option and stock purchase plans received options and rights to purchase, at a
proportionately  reduced per share exercise  price, a number of shares of common
stock of the Company equal to 1.05 times the number of shares of common stock of
TSG they were entitled to purchase  immediately prior to the merger.  Similarly,
holders of warrants to purchase shares of common stock of TSG received  warrants
to purchase, at a proportionately  reduced per share exercise price, a number of
shares of common  stock of the Company  equal to 1.05 times the number of shares
of common stock of TSG they were entitled to purchase  immediately  prior to the
merger.

A summary of the purchase price is set forth below.

Issuance of 4,944,292 shares of common stock
     stock at a market price of $6.50 per share              $ 32,138
Fair value of outstanding common stock
    warrants, options and purchase rights                       2,595
Costs and expenses of the merger                                  872
                                                             --------
Total purchase price                                         $ 35,605
                                                             ========

The Company  registered the shares of common stock issued pursuant to the Merger
and  incurred  registration  expenses of $339.  These  expenses  were charged to
paid-in capital during the year ended March 31, 1998.


                                       47
<PAGE>

A summary of the book value of the assets and liabilities of TSG at December 18,
1997 as compared to their estimated fair values recorded at the acquisition date
is set forth below.

                                                                     Estimated
                                                        Book            Fair
                                                        Value          Value
                                                       -------       ---------

Cash and temporary investments                         $   239       $    239
Accounts receivable                                      3,703          3,703
Inventories                                             11,103          6,490
Refundable income taxes                                    604            604
Deferred tax asset, current                                748          3,719
Prepaid expenses and other current assets                   12             12
Property, plant and equipment                              662            782
Capitalized software                                       875            846
Identified intangible assets                               147          6,684
Other assets                                                29             29
Accounts payable                                        (3,634)        (3,634)
Accrued expenses                                        (1,519)        (2,719)
Borrowings under lines of credit                        (3,970)        (3,970)
Deferred tax liability, non-current                         (4)        (1,276)
                                                       -------       --------
Net assets acquired                                    $ 8,995         11,509
                                                       =======
Excess of purchase price over net assets acquired                      24,096
                                                                     --------
Total                                                                $ 35,605
                                                                     ========

The fair value of identified  intangible  assets  includes  TSG's trade names of
$2,869,  assembled workforce of $1,372, patented technology of $419 and customer
contracts of $2,024 (see Note 6). The fair value of  inventories  was reduced by
$4,810 to reflect the estimated net realizable  value of inventories  related to
products  discontinued  by the  Company.  The fair value of accrued  liabilities
includes  estimated  liabilities  of $1,200  pursuant to a plan to exit  certain
activities of TSG and terminate and relocate employees of TSG (see Note 8).

On September  30,  1997,  the Company  acquired  from Lucent  Technologies  Inc.
("Lucent") inventories, machinery, equipment and tooling, as well as licenses of
certain patent and other intellectual  property rights,  related to the payphone
manufacturing  and component  parts business  conducted by Lucent.  The purchase
price, including acquisition expenses of $367, was $5,957.

A summary of the allocation of the purchase  price to the assets  acquired based
on the Company's estimates of their fair values is set forth below.

Inventories                                                   $ 2,991
Equipment and tooling                                             500
Intangible assets                                               2,591
Accrued warranty expense                                         (125)
Total purchase price                                          -------
                                                              $ 5,957
                                                              =======

Identified  intangible  assets are  comprised of license  agreements  of $938, a
non-compete agreement of $77 and customer relationships of $1,576 (see Note 6).


                                       48
<PAGE>

Assuming the acquisitions had occurred on April 1, 1997, the Company's pro forma
results of  operations  for the years  ended  March 31, 1998 and 1997 would have
been as follows:

                                         1998       1997
                                      --------   --------

 Net Sales                            $ 66,554   $ 60,304
                                      ========   ========
 Net income                           $     14   $  1,662
                                      ========   ========
 Basic earnings per share             $     --   $   0.21
                                      ========   ========
 Diluted earnings per share           $     --   $   0.20
                                      ========   ========

The pro forma  results of  operations  for the fiscal  year ended March 31, 1998
include the operating results of TSG from April 1, 1997 to December 18, 1997 and
pro forma adjustments  consisting of an increase in amortization of goodwill and
other  intangible  assets of $932 due to the increase in the  carrying  value of
intangible assets and amortization over their estimated useful lives, a decrease
in depreciation of $228 due to an increase in the carrying value of property and
equipment and depreciation over different  estimated useful lives, a decrease in
deferred  tax expense of $104  resulting  from the  allocation  to deferred  tax
assets and  liabilities  and a decrease in income tax expense of $179 to reflect
the pro forma effect on income tax expense  resulting from the acquisition.  The
pro forma  adjustments  related to the  acquisition  of Lucent's  assets for the
fiscal  year  ended  March 31,  1998  include an  increase  in  amortization  of
intangible  assets of $130, an increase in  depreciation  of $50, an increase in
interest expense of $245 and a decrease in income tax expense of $149.

The pro forma  results of  operations  for the fiscal  year ended March 31, 1997
include  the  operating  results of TSG from April 1, 1996 to March 31, 1997 and
pro forma adjustments  consisting of an increase in amortization of goodwill and
other  intangible  assets of $1,235 due to the increase in the carrying value of
intangible assets and amortization over their estimated useful lives, a decrease
in depreciation of $557 due to an increase in the carrying value of property and
equipment and depreciation over different  estimated useful lives, a decrease in
deferred tax expense of $7 resulting  from the allocation to deferred tax assets
and  liabilities and a decrease in income tax expense of $246 to reflect the pro
forma effect on income tax expense resulting from the acquisition. The pro forma
adjustments  related to the  acquisition of Lucent's  assets for the fiscal year
ended March 31, 1997 include an increase in amortization of intangible assets of
$260, an increase in  depreciation  of $100, an increase in interest  expense of
$490 and a decrease in income tax expense of $298.

NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE

Current  accounts and notes  receivable at March 31, 1999 and 1998 include notes
receivable due within one year of $803 and $2,318,  respectively,  net of credit
and impairment  allowances of $1,242 and $989,  respectively.  Notes  receivable
consist of trade notes  receivable  from customers with remaining  maturities of
two years or less, and are generally  collateralized  by the payphone  equipment
sold and giving rise to the asset. The notes bear interest at rates ranging from
12% to 16%.  Interest  income on impaired notes is recognized as the interest is
collected.  The  Company  recognizes  interest  income on notes  with no related
credit loss allowance as earned.


                                       49
<PAGE>

Changes in allowances for credit losses on accounts and notes receivable for the
years ended March 31, 1999, 1998 and 1997 are summarized as follows:

                                          1999        1998      1997
                                         -------    -------    -------

Balance, beginning of year               $ 2,410    $ 1,301    $ 3,106
Provision (reversal) for credit losses       117      1,352       (520)
Write-offs, net of recoveries               (245)      (243)    (1,285)
                                         -------    -------    -------
Balance, end of year                       2,282      2,410      1,301
Long-term allowances                        (312)      (487)       (97)
                                         -------    -------    -------
Current allowances                       $ 1,970    $ 1,923    $ 1,204
                                         =======    =======    =======

NOTE 4 - INVENTORIES

Inventories at March 31, 1999 and 1998 consisted of the following:

                             1999         1998
                           --------    --------

Finished products          $  1,875    $  1,383
Work-in-process                 924       1,545
Purchased components         11,630       6,260
                           --------    --------
                             14,429       9,188
Reserve for obsolescence       (451)       (100)
                           --------    --------
                           $ 13,978    $  9,088
                           ========    ========

Substantially  all inventories are pledged to secure bank indebtedness (See Note
7).

Changes in reserves for  potential  losses due to  obsolescence  and slow moving
inventories  for the years ended March 31, 1999, 1998 and 1997 are summarized as
follows:

                             1999     1998     1997
                             -----    -----    -----

Balance, beginning of year   $ 100    $ 100    $ 100
Provision for losses           406       13       --
Write-offs                     (55)     (13)      --
                             -----    -----    -----
Balance, end of year         $ 451    $ 100    $ 100
                             =====    =====    =====


                                       50
<PAGE>

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

Property,  plant and  equipment  at March 31, 1999 and 1998 is  comprised of the
following:

                                            1999       1998
                                           -------    -------

Land                                       $   372    $   372
Buildings                                    2,962      2,812
Engineering and manufacturing equipment      4,171      3,237
Furniture, fixtures and office equipment     1,841      1,502
                                           -------    -------
                                             9,346      7,923
Less accumulated depreciation               (4,282)    (3,144)
                                           -------    -------
                                           $ 5,064    $ 4,779
                                           =======    =======

Depreciation  expense  for the years ended March 31,  1999,  1998,  and 1997 was
$1,163,  $645, and $397,  respectively.  Substantially  all property,  plant and
equipment are pledged to secure bank indebtedness (see Note 7).

NOTE 6 - IDENTIFIED INTANGIBLE ASSETS

Identified  intangible assets recorded in connection with  acquisitions,  net of
accumulated amortization, at March 31, 1999 and 1998 consisted of the following:

                                              1999     1998
                                             ------   ------

Trade names, net of accumulated
    amortization of $105 and $23             $2,764   $2,846
Customer contracts, net of accumulated
    amortization of $754 and $168             1,270    1,856
Workforce, net of accumulated
    amortization of $50 and $11               1,322    1,361
License agreements, net of accumulated
    amortization of $281 and $101               657      837
Patented technology, net of accumulated
     amortization of $135 and $30               284      389
Non-compete agreement, net of accumulated
     amortization of $58 and $19                 19       58
Customer relationships, net of accumulated
     amortization of $158 and $19             1,418    1,557
                                             ------   ------
                                             $7,734   $8,904
                                             ======   ======


                                       51
<PAGE>

NOTE 7 - NOTES AND DEBT OBLIGATIONS PAYABLE

Notes and debt obligations  payable at March 31, 1999 and 1998 are summarized as
follows:

                                                      1999        1998
                                                    --------    --------

Secured Promissory Notes Payable to Bank:
   Revolving credit line due November 25, 2002      $  5,185    $  7,645
   7.55% installment note, payable in sixty equal
      monthly installments of $80                      4,000
   8.5% mortgage note, payable in fifty-nine
     equal monthly installments of $19 with
     remaining principal balance of $1,533 due
     on November 26, 2002                              1,833       1,899
Unsecured promissory note, payable in thirty
   equal monthly installments of $6                      160
                                                    --------    --------
                                                      11,178       9,544
 Amount payable within one year                         (823)        (68)
                                                    --------    --------
 Amount payable after one year                      $ 10,355    $  9,476
                                                    ========    ========


On March 29,  1999,  the Company and its bank  entered  into an  amendment  (the
"Amendment") that modified the terms of the Restated Loan and Security Agreement
(the "Loan Agreement")  between the parties dated November 25, 1997. Pursuant to
the Amendment,  the Company's  working capital revolving credit line was reduced
from $15 million to $10 million and the Company  borrowed $4 million pursuant to
an  installment  note and  established a $1.5 million  revolving  credit line to
finance the Company's capital expenditures. The proceeds from the term note were
used to reduce the  Company's  outstanding  indebtedness  under the $15  million
revolving  credit line.  Indebtedness  outstanding  under the Loan  Agreement is
collateralized by substantially all of the assets of the Company.

Indebtedness  outstanding under the working capital revolving credit line cannot
exceed the value of  eligible  collateral,  as  defined  in the Loan  Agreement,
consisting of domestic accounts receivable and inventories.  The working capital
revolving  credit line  matures on November 25,  2002.  The capital  expenditure
revolving  credit line  matures on July 31, 2000.  Interest on amounts  borrowed
under the revolving  credit lines is payable  monthly at the bank's  floating 30
day Libor rate plus 1.5%  (6.44% at March 31,  1999).  As of March 31,  1999 the
Company  was able to borrow  up to the  maximum  of  $10,000  under the  working
capital revolving credit line based on the value of eligible  collateral.  As of
March 31, 1999,  the Company had not used the $1.5 million  capital  expenditure
revolving credit line.

The Loan Agreement contains covenants that prohibit or restrict the Company from
engaging in certain  transactions  without  the  consent of the bank,  including
mergers or consolidations and disposition of assets, among others. Additionally,
the Loan Agreement  requires the Company to maintain a working  capital ratio of
1.5 to 1, a debt  service  coverage  ratio  of  1.3 to 1 and a  ratio  of  total
liabilities  to net  worth  of  1.25  to 1.  Noncompliance  with  any  of  these
conditions and covenants or the occurrence of an event of default, if not waived
or corrected,  could  accelerate  the maturity of the  indebtedness  outstanding
under the Loan  Agreement.  The Company is in compliance with the conditions and
covenants of the Loan Agreement at March 31, 1999.

During the year ended  March 31,  1998,  the  initial  financing  under the Loan
Agreement was used to refinance and retire the Company's then  outstanding  debt
under a $2,000 working  capital line of credit and notes incurred to finance the
purchase of the Lucent assets, including a $3,050 installment note due


                                       52
<PAGE>

on October 2, 2004 and term notes of $3,800 that were due on March 31, 1998.  In
addition,  on December 18, 1997,  the Company  retired  TSG's  outstanding  bank
indebtedness of $3,970 from proceeds drawn under the Loan Agreement.

On November 26, 1997,  the Company  borrowed  $1,920  pursuant to the terms of a
mortgage  note and retired its then  outstanding  mortgage note with a principal
balance of $315.

Scheduled  maturities  of notes and debt  obligations  payable for the next five
years are as follows:

Fiscal 2000       $   823
Fiscal 2001           883
Fiscal 2002           915
Fiscal 2003         7,632
Fiscal 2004           925
                  -------
                  $11,178
                  =======

NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued  expenses and other  current  liabilities  as of March 31, 1999 and 1998
consist of the following:

                                                       1999        1998
                                                     -------      ------

Payroll and payroll taxes                             $1,218      $1,443
Warranty expense                                       1,101       1,170
Relocation, severance and reorganization charges         615       1,048
Professional fees                                        248         145
Royalities and technology transfer fees                  284          --
Customer advances                                        457         254
Other                                                    273         549
                                                      ------      ------
                                                      $4,196      $4,609
                                                      ======      ======


During the year ended  March 31,  1999,  the Company  reorganized  its sales and
marketing  organization.  The  Company  accrued  and  recognized  reorganization
charges of $490,  which  included the  estimated  costs of severance  and salary
continuation   arrangements  and  related  employee  benefits  with  respect  to
terminated employees.  These charges are reflected as other charges (credits) in
the accompanying  consolidated  statement of operations for the year ended March
31, 1999.

In  connection  with the  acquisition  of TSG,  the  Company  assumed  estimated
liabilities of $1,200  pursuant to a plan to exit certain  activities of TSG and
terminate  and  relocate  employees  of  TSG.  These  liabilities  included  the
estimated costs of severance and salary  continuation  arrangements  and related
employee  benefits of $730 and the  estimated  costs to relocate  employees  and
property of TSG of $470.  The plan  provided for the closure of TSG's  corporate
facility and the  integration of TSG's general,  administrative  and engineering
activities  into those of the Company,  and  identified  the employees that were
expected to be relocated or terminated as a result of the acquisition.


                                       53
<PAGE>

Changes in accrued  relocation,  severance  and  reorganization  charges for the
years ended March 31, 1999 and 1998 are summarized as follows:

                                1999          1998
                               -------      -------

Balance, beginning of year     $ 1,048      $    --
Acquired obligations                --        1,200
Reorganization charges             490           --
Payments                          (923)        (152)
                               -------      -------
Balance, end of year           $   615      $ 1,048
                               =======      =======


Changes in accrued warranty expense for the years ended March 31, 1999, 1998 and
1997 are summarized as follows:

                                 1999       1998       1997
                               -------    -------    -------
Balance, beginning of year     $ 1,170    $   295    $   311
Acquired obligations                --      1,075         --
Expense provision                  419        240        295
Charges incurred                  (488)      (440)      (311)
                               -------    -------    -------
Balance, end of year           $ 1,101    $ 1,170    $   295
                               =======    =======    =======

NOTE 9 - SUPPPLEMENTAL CASH FLOW INFORMATION

A summary of the  Company's  supplemental  cash flow  information  for the years
ended March 31, 1999, 1998 and 1997 is as follows:

                                                       1999      1998      1997
                                                     -------   -------   -------

 Cash paid (received) during the year for
      Interest                                       $   861   $   427   $  122
      Income taxes                                       845       694     (383)

Non-cash investing and financing activities
     Tax benefit from exercise of options            $    --   $    62   $  175
     Issuance of common stock to acquire
       Technology Service Group, Inc. (see Note 2)        --    35,258       --
     Other assets acquired by issuance                              --       --
       of note payable                                   160        --       --

NOTE 10 - SHAREHOLDERS' EQUITY

Common Stock

The Company is authorized, under its Certificate of Incorporation to issue up to
30,000,000  shares of common  stock,  $0.01 par value.  Holders of voting common
stock are  entitled  to one vote per share on all  matters to be voted on by the
stockholders.  No dividends  have been declared or paid on the Company's  common
stock during the years ended March 31, 1999, 1998 and 1997.


                                       54
<PAGE>

Common Stock Warrants

At the  acquisition  date  of TSG,  TSG had  issued  and  outstanding  1,150,000
redeemable  warrants to purchase  575,000  shares of common stock at an exercise
price of $11.00 per share (the  "Redeemable  Warrants") and warrants to purchase
100,000  shares of common  stock at an  exercise  price of $10.80 per share (the
"Underwriter  Warrants").  In connection  with the  acquisition,  the Redeemable
Warrants were converted into warrants of the Company to purchase  603,750 shares
of common stock at a per share  exercise  price of $10.48,  and the  Underwriter
Warrants were converted into warrants of the Company to purchase  105,000 shares
of common stock at a per share exercise price of $10.29 (see Note 2).

The Redeemable  Warrants are redeemable by the Company at its option, as a whole
and not in part,  at $.05 per  Redeemable  Warrant  on 30  days'  prior  written
notice,  provided  that the  average  closing  bid price of common  stock of the
Company  equals or exceeds  $11.43  per share for 20  consecutive  trading  days
ending  within  five days  prior to the date of the  notice of  redemption.  The
Redeemable  Warrants are entitled to the benefit of  adjustments in the exercise
price and in the number of shares of common stock  deliverable upon the exercise
thereof upon the occurrence of certain events, including stock dividends,  stock
splits or similar reorganizations. On May 9, 1999, the Redeemable Warrants, none
of which had been exercised or redeemed, expired pursuant to their terms.

The  Underwriter  Warrants may be  exercised at any time until May 9, 2001,  the
expiration date of the Underwriter  Warrants.  The Underwriter  Warrants contain
anti-dilution provisions providing for adjustments of the number of warrants and
exercise price under certain  circumstances.  The Underwriter  Warrants grant to
the holders thereof  certain rights of  registration of the securities  issuable
upon their exercise.

Stock Option Plans

On July 2, 1991,  the  Company  adopted  the 1991 Stock  Option  Plan (the "1991
Plan").  The 1991 Plan  provides  the Board of Directors of the Company with the
authority  to  grant  to  employees,  officers  and  directors  of  the  Company
non-qualified  stock options and incentive  stock options  within the meaning of
Section 422A of the Internal  Revenue  Code.  At March 31, 1999, an aggregate of
2,100,000  shares of the  Company's  common  stock may be issued  under the 1991
Plan. The Board's authority to grant options under the 1991 Plan expires on July
2, 2001.

The Board has the authority to determine the number of shares subject to options
granted  and  such  other  terms  and  conditions  under  which  options  may be
exercised.  The per-share  option price of stock options  granted under the 1991
Plan shall not be less than the greater of the  per-share  fair market  value of
the  Company's  common  stock as of the  date of  grant or $.75,  or 110% of the
per-share  market  value with  respect to  incentive  stock  options  granted to
employees  owning 10% or more of the total combined  voting power of all classes
of the Company's  stock.  Options  granted under the 1991 Plan expire five years
from the date of grant or 30 days after  termination of  employment,  unless the
Board of Directors extends such 30-day period.

As of March 31, 1999,  options to purchase  311,959  shares of common stock were
available for grant under the 1991 Plan. The weighted  average exercise price of
options  outstanding  under the 1991 Plan at March 31,  1999,  1998 and 1997 was
$5.0908,  $4.7224 and $5.3463,  respectively.  At March 31, 1999, 1998 and 1997,
options   outstanding  under  the  1991  Plan  had  weighted  average  remaining
contractual lives of 3.0 years, 3.2 years and 4.12 years, respectively.


                                       55
<PAGE>

The following table summarizes information,  including the status and changes in
stock options  outstanding,  with respect to the 1991 Plan for each of the years
in the three-year period ended March 31, 1999:

                                            Number of          Option Price
                                             Shares          Range Per Share
                                            ---------       ----------------

Outstanding at March 31, 1996                 558,702        $.75 - $9.1875
     Granted                                   97,000        $5.25 - $7.375
     Exercised                               (178,729)        $.75 - $3.50
     Cancelled                                (85,525)      $1.81 - $9.1875
                                            ---------
Outstanding at March 31, 1997                 391,448       $1.3125 - $7.50
     Granted                                  285,400       $5.5625 - $6.00
     Exercised                                (69,385)      $1.3125 - $6.1875
     Cancelled                                (62,188)        $3.50 - $7.50
                                            ---------
Outstanding at March 31, 1998                 545,275        $1.81 - $7.375
     Granted                                  561,000       $4.5625 - $5.875
     Exercised                                (22,600)        $1.81 - $3.50
     Cancelled                                (57,675)       $3.50 - $6.9375
                                            ---------
Outstanding at March 31, 1999               1,026,000        $3.50 - $7.375
                                            =========

Options exercisable at March 31, 1999         291,255        $3.50 - $7.375
                                            =========
Options exercisable at March 31, 1998         137,800        $1.81 - $6.1875
                                            =========
Options exercisable at March 31, 1997         101,454       $1.3125 - $9.1875
                                            =========

On July 2,  1991,  the  Company  adopted a  Directors'  Stock  Option  Plan (the
"Directors  Plan").  The Directors Plan provides for the grant of  non-qualified
stock options to directors  who are not  employees of the Company.  At March 31,
1999, an aggregate of 225,000 shares of the Company's common stock may be issued
under the  Directors  Plan.  The Board's  authority to grant  options  under the
Directors Plan expires on July 2, 2001.

Pursuant to the Directors Plan,  each new  non-employee  director  automatically
receives a  non-qualified  option to purchase  4,000 shares of common stock upon
appointment or election to the Board. Thereafter, on March 31 of each year, each
non-employee  director  receives a non-qualified  stock option to purchase 1,000
shares  of  common  stock  for  each  committee  of  the  Board  on  which  such
non-employee  director is then  serving and for each  committee  of the Board on
which such  non-employee  director  is then  serving as  chairman.  Non-employee
directors  are also  eligible  for  discretionary  grants of  options  under the
Directors  Plan. The per-share  option price of stock options  granted under the
Directors  Plan shall not be less than the greater of the per-share  fair market
value of the  Company's  common stock as of the date of grant or $2.00.  Options
granted under the Directors Plan become  exercisable on the first anniversary of
the date of grant, and expire five years from the date of grant. Options granted
under the  Directors  Plan  expire  five years from the date of grant or 30 days
after the date a director ceases to serve as a director, except that such 30-day
period does not apply if director  status  ceased within one year after a change
in control of the Company.

As of March 31,  1999,  options to purchase  41,000  shares of common stock were
available  for grant under the Directors  Plan.  The weighted  average  exercise
price of options  outstanding  under the Directors Plan at March 31, 1999,  1998
and 1997 was $4.749, $4.7789 and $4.6244, respectively. At March 31, 1999,


                                       56
<PAGE>

1998 and 1997, options outstanding under the Directors Plan had weighted average
remaining   contractual   lives  of  3.9  years,   2.3  years  and  4.57  years,
respectively.

The following table summarizes information,  including the status and changes in
stock options  outstanding,  with respect to the Directors  Plan for each of the
years in the three-year period ended March 31, 1999:

                                        Number of          Option Price
                                         Shares          Range Per Share
                                        ---------      ------------------

Outstanding at March 31, 1996            98,000           $2.00 - $5.25
     Granted                             17,000               $6.31
     Exercised                          (15,000)              $2.00
     Cancelled                              --
                                        -------
Outstanding at March 31, 1997           100,000           $2.00 - $6.3125
     Granted                             28,000         $5.5625 - $5.8750
     Exercised                          (31,000)          $2.00 - $3.9375
     Cancelled                           (4,000)             $5.875
                                        -------
Outstanding at March 31, 1998            93,000           $3.81 - $6.3125
     Granted                             51,000         $3.5938 - $4.5625
     Exercised                          (22,000)          $3.81 - $5.25
     Cancelled                          (28,000)          $3.81 - $6.3125
                                        -------
Outstanding at March 31, 1999            94,000         $3.5938 - $6.3125
                                        =======

Options exercisable at March 31, 1999    43,000         $3.9375 - $6.3125
                                        =======
Options exercisable at March 31, 1998    69,000           $3.81 - $6.3125
                                        =======
Options exercisable at March 31, 1997    83,000           $2.00 - $5.25
                                        =======

In connection with the acquisition of TSG,  options to purchase 41,000 shares of
common stock outstanding under TSG's 1995 Non-Employee  Director Stock Plan (the
"1995 Directors  Plan") were converted into options to purchase 43,050 shares of
common stock of the Company. No additional options may be granted under the 1995
Directors Plan subsequent to the acquisition. Such options became exercisable in
full as a result of the  acquisition of TSG and expire one year after the date a
director  ceases to serve as a  director  of TSG or ten  years  from the date of
grant,  whichever  is earlier.  At March 31,  1998,  options to purchase  43,050
shares of common stock were  outstanding at exercise prices ranging from $4.7619
to $10.2971  per share,  and all such  options  were  exercisable.  The weighted
average exercise price of options  outstanding  under the 1995 Directors Plan at
March 31, 1998 was $7.8273,  and the remaining weighted average contractual life
of such options was .7 years.  During the year ended March 31, 1999, all options
outstanding under the 1995 Directors Plan expired unexercised.

In addition,  in connection  with the  acquisition  of TSG,  options to purchase
531,125 shares of common stock  outstanding  under TSG's 1994 Omnibus Stock Plan
(the "Omnibus  Plan") were converted into options to purchase  557,682 shares of
common  stock of the Company.  No  additional  options may be granted  under the
Omnibus Plan subsequent to the acquisition.  The options are exercisable in four
equal annual  installments  beginning on the date of grant, and expire ten years
from  the  date of  grant.  The  weighted  average  exercise  price  of  options
outstanding  under the  Omnibus  Plan at March 31, 1999 and 1998 was $3.0986 and
$3.0919, respectively. At March 31, 1999 and 1998, options outstanding under


                                       57
<PAGE>

the Omnibus Plan had weighted average  remaining  contractual lives of 5.2 years
and 6.5 years, respectively.

The following table summarizes information,  including the status and changes in
stock options outstanding,  with respect to the Omnibus Plan for the years ended
March 31, 1998 and 1999:

                                                  Number of        Option Price
                                                   Shares           Per Share
                                                  ---------    -----------------
Options assumed and converted                     557,682      $.9524 - $10.2637
     Exercised                                    (68,479)     $.9524 - $4.7619
     Cancelled                                    (40,297)     $.9524 - $10.2637
                                                  -------
Outstanding at March 31, 1998                     448,906      $.9524 - $10.2637
     Exercised                                    (90,244)     $.9524 - $4.7619
     Cancelled                                    (23,887)     $.9524 - $10.2637
                                                  -------
Outstanding at March 31, 1999                     334,775      $.9524 - $9.0476
                                                  =======

Options exercisable at March 31, 1999             320,662      $.9524 - $9.0476
                                                  =======
Options exercisable at March 31, 1998             402,614      $.9524 - $10.2637
                                                  =======

Accounting for Stock-Based Compensation

During the year ended March 31, 1999, the Company  modified the terms of certain
outstanding  options to include  provisions that would  accelerate their vesting
upon a change in control of the  Company  and to extend the  exercise  period of
vested  options  upon  certain  events.  As a result of the  modifications,  the
Company  recognized  stock-based  compensation  expense of $112  during the year
ended March 31, 1999.  The Company did not  recognize any  compensation  expense
with respect to stock options granted under the Company's plans during the years
ended March 31, 1998 and 1997.

A comparison of the Company's net income (loss) and earnings (loss) per share as
reported and on a pro forma basis for the years ended March 31,  1999,  1998 and
1997  assuming the Company had adopted the fair value based method of accounting
for  compensation  cost related to stock options and other forms of  stock-based
compensation set forth in SFAS 123 is as follows:

                                            1999           1998           1997
                                          --------      ---------      ---------

Net income (loss)           As reported   $   361       $  1,757      $   1,628
                            Pro forma     $  (173)      $  1,522      $   1,574

Basic income (loss)         As reported   $  0.03       $   0.18      $    0.20
  per share                 Pro forma     $ (0.01)      $   0.16      $    0.19

Diluted income (loss)       As reported   $  0.03       $   0.18      $    0.20
  per share                 Pro forma     $ (0.01)      $   0.15      $    0.19


                                       58
<PAGE>

The fair value of each option granted under the Company's  stock option plans is
estimated on the date of grant using the Black-Scholes Option pricing model. The
significant  weighted-average  assumptions used during the years ended March 31,
1999,  1998 and 1997 to estimate  the fair values of options  granted  under the
Company's stock option plans are summarized below:

                                       1999          1998           1997
                                   ---------      ---------  --------------
 1991 Plan
     Expected dividend yield              --             --             --
     Expected Volatility               47.07%         45.32%         54.90%
     Risk free interest rate            6.20%          6.20%          6.20%
     Expected life                  4.7 years      3.8 years      3.4 years

 Directors Plan
     Expected dividend yield              --             --             --
     Expected Volatility               45.33%         45.32%         54.90%
     Risk free interest rate            6.20%          6.20%          6.20%
     Expected life                  4.0 years      3.8 years      3.4 years

Based on these  assumptions,  the  weighted  average  fair value of each  option
granted  under the  Company's  1991 Plan during the years ended March 31,  1999,
1998 and 1997 was $2.25,  $2.46 and $3.10,  respectively.  The weighted  average
fair value of each option granted under the Company's  Directors Plan during the
years  ended  March  31,  1999,  1998 and  1997  was  $1.80,  $2.38  and  $2.86,
respectively.

Common Stock Reserved

The number of shares of common  stock  reserved  for  issuance  pursuant  to the
Company's stock option plans and outstanding  common stock warrants at March 31,
1999 and 1998 is summarized as follows:

                                           1999               1998
                                         ---------         ----------

Stock  Option Plans                      1,771,734          2,009,515
Redeemable Warrants                        603,750            603,750
Underwriter Warrants                       105,000            105,000


The Company adopted a Stockholder  Rights Plan and granted common stock purchase
rights  as a  dividend  at the rate of one  right  ("Right")  for each  share of
outstanding  common  stock of the  Company  held of  record  as of the  close of
business  on May 11,  1999.  When the Rights  become  exercisable,  the  holders
thereof will be entitled to purchase,  for an amount equal to $10 per Right (the
"Purchase  Price," which is subject to  adjustment)  common stock of the Company
with a fair  market  value  equal to two times such  amount.  Subject to certain
exceptions,  if certain persons or entities (an  "Acquiror"),  as defined in the
Stockholder Rights Agreement between the Company and its transfer agent,  become
the  beneficial  owners of 10% or more of the  common  stock of the  Company  or
announce a tender or exchange  offer which would result in its  ownership of 10%
or more of the common stock of the Company,  the Rights,  unless redeemed by the
Company,  become  exercisable ten (10) days after a public  announcement that an
Acquiror has become such. If,  following the Rights  becoming  exercisable,  the
Company is acquired in a merger or similar transaction, or if 50% or more of the
Company's assets or earning power are sold in one or more related  transactions,
the holders of the Rights would be entitled to purchase,  upon exercise,  common
stock  of the  acquiring  company  with a fair  market  value of two  times  the
Purchase Price.  The Rights may be redeemed at any time until ten days following
a public


                                       59
<PAGE>

announcement  that an  Acquiror  has become  such at $.001 per Right upon a vote
therefor by a majority of the outside directors.  Presently,  the Rights are not
exercisable nor are they separately  traded from the Company's common stock. The
Rights expire on May 11, 2009.

NOTE 11 - INCOME TAXES

Income  tax  expense  for the  years  ended  March  31,  1999,  1998 and 1997 is
comprised of the following:

                                       1999           1998         1997
                                       -----         -----        -----

Current tax expense (benefit):
Federal                                $(422)        $ 624        $ 253
State                                     72            21           --
                                       -----         -----        -----
                                        (350)          645          253
                                       -----         -----        -----
Deferred tax expense (benefit):
Federal                                  550           124          593
State                                     13            84           30
                                       -----         -----        -----
                                         563           208          623
                                       -----         -----        -----
Net tax expense                        $ 213         $ 853        $ 876
                                       =====         =====        =====


Deferred tax assets and  liabilities as of March 31, 1999 and March 31, 1998 are
comprised of the following:

                                               1999       1998
                                             --------   -------

Deferred tax assets:
Accounts and notes receivable reserves       $   845    $   893
Inventory and inventory reserves                 723      2,279
Warranty and other accruals                      847        680
Other assets and liabilities                                432
Tax credit carryforwards                       1,213        473
Net operating loss carryforwards               3,729      4,181
                                             -------    -------
                                               7,357      8,938
                                             -------    -------
Deferred tax liabilities:
Property, plant and equipment                     75        125
Intangible and other assets                    1,675      2,100
State taxes                                       85         78
                                             -------    -------
                                               1,835      2,303
                                             -------    -------
Excess of deferred tax assets over
  deferred tax liabilities                     5,522      6,635
Less valuation allowance                      (2,359)    (2,909)
                                             -------    -------
Net deferred tax asset                         3,163      3,726
Less current deferred tax asset               (2,215)    (4,141)
                                             -------    -------
Non-current deferred tax asset (liability)   $   948    $  (415)
                                             =======    =======

At March 31, 1999,  the Company has available net operating  loss  carryforwards
for  federal  and  state tax  purposes  of  approximately  $10,100  and  $9,000,
respectively, which expire from 2000 through 2014. In


                                       60
<PAGE>

addition,  the Company has available  approximately $1,213 in research and other
tax credit carryforwards, which expire from 2001 through 2014.

The  utilization  of net operating  loss  carryforwards  for federal  income tax
purposes is subject to an annual limitation of approximately $200 as a result of
a previous change in ownership of TSG. In addition,  these pre-change losses may
only be utilized to the extent that taxable  income is  generated by TSG.  These
limitations  do not reduce the total amount of net operating  losses that may be
taken for federal income tax purposes, but rather substantially limit the amount
that may be used during a particular  year. As a result,  it is more likely than
not that the Company  will be unable to use a  significant  portion of these net
operating  loss  carryforwards.  Accordingly,  the deferred tax asset related to
these  carryforwards  has been reduced by a valuation  allowance of $2,359 as of
March 31, 1999.

The  reconciliation  of income tax  attributable  to income before taxes for the
years ended March 31, 1999,  1998 and 1997  computed at the U.S.  statutory  tax
rate to the Company's effective tax rate is as follows:

                                                1999     1998     1997
                                                -----    ----     ----

U.S. statutory rate                             34.0%    34.0%    34.0%
Increases (decreases) resulting from:
      State taxes, net                          10.5      2.7       --
      Business credits                         (71.6)    (7.4)    (2.9)
      Amortization of goodwill                  40.8      2.5       --
      Stock option compensation                  6.6       --       --
      Expired net operating losses               7.8       --       --
      Other permanently nondeductible items      8.9       .9      3.9
                                                ----     ----     ----
 Effective rate                                 37.0%    32.7%    35.0%
                                                ====     ====     ====

NOTE 12 - DISCLOSURES ABOUT SEGMENTS AND RELATED INFORMATION

The Company has organized its business to address market segments, and has three
reportable segments:  the private segment, the telephone company segment and the
international   segment.   The  private  segment  provides  payphone  terminals,
software,   payphone   components   and  assemblies  and  services  to  domestic
independent  payphone service providers.  The telephone company segment provides
payphone terminals, software, payphone components and assemblies and services to
telephone  companies.  The  international  segment exports  payphone  terminals,
software and payphone components and assemblies to public communications service
providers  in  foreign  countries  including  telephone  companies  and  private
payphone service providers.

The accounting  policies of the segments are the same as those  described in the
summary of  significant  accounting  policies  set forth in Note 1. The  Company
evaluates its performance  based on profit or loss from operations before income
taxes.

The Company's  reportable  segments are based upon the market  segments that the
Company addresses.  The products provided by each of the reportable segments are
similar in nature.  There are no transactions  between the reportable  segments,
and external  customers  account for all sales revenue.  The information that is
provided to the chief operating  decision maker to measure the profit or loss of
reportable  segments  includes sales, cost of sales based on standards and gross
profit  based  on  standards.   Operating  expenses,   including   depreciation,
amortization  and interest are not included in the  information  provided to the
chief operating decision maker to measure performance of reportable segments.


                                       61
<PAGE>

The sales  revenue  and profit of each  reportable  segment  for the years ended
March 31, 1999, 1998 and 1997 is set forth below:

<TABLE>
<CAPTION>
                                   1999                         1998                        1997
                            ----------------------      ----------------------      ----------------------
                            Sales         Profit        Sales        Profit          Sales        Profit
                            --------      --------      --------     ---------      --------     ---------
<S>                         <C>           <C>           <C>           <C>           <C>            <C>
Private                     $ 25,076      $ 12,511      $ 21,052      $ 10,446      $ 17,954       $ 8,402
Telephone company             32,507         9,746        15,999         5,247           833           337
International                  7,680         2,350         9,199         4,176         8,045         2,831
-------------               --------      --------      --------      --------      --------      --------
                            $ 65,263      $ 24,607      $ 46,250      $ 19,869      $ 26,832      $ 11,570
                            ========      ========      ========      ========      ========      ========
</TABLE>

The Company does not allocate assets or other  corporate  expenses to reportable
segments.  A  reconciliation  of segment  profit  information  to the  Company's
financial statements is as follows:

                                             1999           1998          1997
                                           --------      --------      ---------

  Total profit of  reportable segments     $ 24,607      $ 19,869      $ 11,570
  Unallocated cost of sales                  (2,979)       (2,264)         (621)
  Unallocated corporate expenses            (21,054)      (14,995)       (8,445)
                                           --------      --------      --------
  Income before income taxes               $    574      $  2,610      $  2,504
                                           ========      ========      ========

Information  with  respect to sales of products  and  services  during the years
ended March 31, 1999, 1998 and 1997 is set forth below:

<TABLE>
<CAPTION>
                                                      1999         1998         1997
                                                    -------      -------      -------
<S>                                                 <C>          <C>          <C>
Private segment:
Payphone terminals                                  $10,835      $ 8,558      $ 8,300
Printed circuit board control modules and kits       12,051        9,987        7,712
Components and assemblies                             1,190        1,586        1,210
Rates and management system software                    380          382          382
Operator services                                       244          101           16
Other services                                          376          438          334
                                                    -------      -------      -------
                                                     25,076       21,052       17,954
                                                    -------      -------      -------
Telephone company segment:
Payphone terminals                                    7,420        5,822          833
Printed circuit board control modules and kits        6,607          327           --
Components and assemblies                             8,585        7,565           --
Repair, refurbishment and upgrade services            9,895        2,285           --
                                                    -------      -------      -------
                                                     32,507       15,999          833
                                                    -------      -------      -------
International segment:
Payphone terminals                                    5,503        8,540        4,092
Printed circuit board control modules and kits          132          122        2,635
Components and assemblies                             2,045          537        1,318
                                                    -------      -------      -------
                                                      7,680        9,199        8,045
                                                    -------      -------      -------
                                                    $65,263      $46,250      $26,832
                                                    =======      =======      =======
</TABLE>


                                       62
<PAGE>

The Company  sells its  payphone  products  in the United  States and in certain
foreign  countries.  The  Company's  international  business  consists of export
sales, and the Company does not presently have any foreign operations.  Sales by
geographic  region for the years  ended  March 31,  1999,  1998 and 1997 were as
follows:

                                      1999           1998          1997
                                     -------       -------       -------

United States                        $59,102       $37,051       $21,583
Canada                                 3,197         2,012           108
Latin America                          2,400         6,168         1,655
Europe, Middle East and Africa            31           195            99
Asia Pacific                             495           824         3,180
Other Areas                               38            --           207
                                     -------       -------       -------
                                     $65,263       $46,250       $26,832
                                     =======       =======       =======


During the year ended March 31,  1999,  one  customer in the  telephone  company
segment  accounted for 20% of the Company's  sales.  During the year ended March
31, 1998, no single customer  accounted for 10% or more of the Company's  sales.
During the year ended March 31,  1997,  one  customer in each of the private and
international segments accounted for approximately 12% of the Company's sales.

Ten domestic customers and five international customers account for $5,494 (47%)
and $2,060 (18%),  respectively,  of the Company's accounts  receivable at March
31, 1999. The domestic  customers include telephone  companies and distributors.
The  international  customers include cellular carriers and private operators in
Chile, Ecuador and Canada.

Five domestic  customers and three  international  customers account for (net of
specific allowances for credit losses) $508 (16%) and $1,760 (54%) respectively,
of the  Company's  notes  receivable at March 31, 1999.  The domestic  customers
include private  operators and the  international  customers include a telephone
company and private operators in Mexico and the Philippines.

NOTE 13 - SAVINGS PLAN

The  Company  has a savings  plan  pursuant  to Section  401(k) of the  Internal
Revenue Code, whereby eligible employees may voluntarily contribute a percentage
of their compensation,  but not in excess of the maximum allowed under the Code.
The TSG 401(k)  retirement and profit sharing plan was merged into the Company's
savings plan on January 1, 1999,  and the Company's  plan was amended to include
provisions at least as favorable as those of the TSG plan.  The Company  matches
up to 50% of the  participants'  contributions,  up to an  additional  2% of the
participants'  compensation.  Participants are 100% vested with respect to their
contributions to the plan. Vesting in Company matching  contributions  begins at
20% after one year of service with the Company and increases  annually each year
thereafter  until full (100%) vesting upon five years of service.  The plan pays
retirement benefits based on the participant's  vested account balance.  Benefit
distributions are generally available upon a participant's death,  disability or
retirement.  Participants  generally qualify to receive retirement benefits upon
reaching the age of 65. Early retirees  generally  qualify for benefits provided
they have reached age 55 and have completed 5 years of service with the Company.
Benefits  are  payable in lump sums equal to 100% of the  participant's  account
balance.  Plan expense approximated $151, $114 and $104,  respectively,  for the
years ended March 31, 1999, 1998 and 1997.


                                       63
<PAGE>

NOTE 14 - OTHER CHARGES (CREDITS)

During the year ended March 31, 1999,  the Company was involved in  negotiations
concerning   a   possible    business    combination   with   an   international
telecommunications  equipment  manufacturer.  During  April  1999,  the  Company
decided  that the terms  and  conditions  of the  business  combination  as then
proposed  would not be, at that time,  in the best  long-term  interests  of the
Company's   stockholders,   and  terminated  the  negotiations.   In  connection
therewith,  the Company  charged to  operations  approximately  $1.2  million of
expenses,  consisting  primarily of legal,  accounting and  consulting  fees and
expenses  incurred by the Company during the negotiations and in connection with
due diligence investigations. This charge, together with charges of $490 related
to the  reorganization  discussed in Note 8 and other  miscellaneous  charges of
$42, are reflected as other charges  (credits) in the accompanying  consolidated
statement of operations for the year ended March 31, 1999.

During the year ended  March 31,  1997,  the  Company  sold  equipment  that was
received  in  settlement  of  outstanding  obligations  due from a  customer  in
bankruptcy. The amount realized by the Company from this transaction resulted in
a $331  recovery,  net of legal  fees and  related  expenses,  in  excess of the
impairment loss previously recorded by the Company. The recovery is reflected as
other charges (credits) in the accompanying consolidated statement of operations
for the year ended March 31, 1997.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Litigation

The Company is a defendant  in a putative  class action  alleging  that a former
customer  of the  Company  that  filed  for  bankruptcy  conspired  with its own
officers and professionals,  and with various telephone suppliers (including the
Company) to defraud  investors  in that  customer by  operating a Ponzi  scheme.
Allegations include unlawful business practices,  fraudulent and unfair business
practices,  false and misleading  advertising,  fraud and deceit,  conspiracy to
defraud,  negligence and negligent  misrepresentation,  violations of California
law,  professional  negligence and legal malpractice and spoliation of evidence.
On September 28, 1998, the Company's  Motion for Summary Judgment was granted by
the Court and the Court dismissed the Company from the class action. On December
11, 1998,  the plaintiffs  appealed the Court's  decision to grant the Company's
Motion for Summary  Judgment.  The  Company  disputes  liability  and intends to
defend this matter vigorously.  However, the Company cannot predict the ultimate
outcome of this litigation.

While the Company is subject to various  other legal  proceedings  incidental to
its business,  there are no such pending legal proceedings which are material to
the business of the Company.

Operating Leases

Minimum future rental payments at March 31, 1999 under non-cancelable  operating
leases with an initial term of more than one year are summarized as follows:

Fiscal 2000                                        $ 178
Fiscal 2001                                          138
Fiscal 2002                                           37
                                                   -----
                                                   $ 353
                                                   =====


                                       64
<PAGE>

Rent  expense  for the years ended March 31,  1999,  1998 and 1997  approximated
$421, $253 and $159 respectively.

Royalty and Technology Transfer Fee Agreements

Pursuant  to the terms of patent  license  and  technology  transfer  agreements
entered  into in  connection  with the  acquisition  of the Lucent  assets,  the
Company  agreed to pay  royalties  and fees with  respect  to sales of  products
acquired for a period of two years ending September 30, 1999. Royalties and fees
under  these  agreements  during the fiscal  years ended March 31, 1999 and 1998
approximated $220 and $86, respectively.

Employment Contracts

Effective October 20, 1998, the Company entered into employment  agreements with
its  President and Chief  Executive  Officer and its  Chairman.  The  employment
agreement  between the Company and its  President  expires on September 30, 2001
and the  employment  agreement  between the Company and its Chairman  expires on
December 31, 1999, with each agreement  subject to certain  earlier  termination
and automatic renewal provisions.  Pursuant to the agreements, the President and
the  Chairman  are  entitled to minimum  compensation  of at least  $200,000 and
$94,000 annually,  respectively.  In addition,  these executives are entitled to
receive an annual  incentive  bonus based on the  financial  performance  of the
Company. If the Company without cause terminates the agreements,  the executives
are  entitled to receive the amount of  compensation,  bonus and  benefits  they
would  otherwise  have received for the remaining  term of the agreements or for
twelve  months  from the date of  notice  of  termination,  whichever  period is
longer.

Effective June 11, 1999,  the Company's  President and Chief  Executive  Officer
retired  from his  position  and the  Chairman of the Board of  Directors of the
Company was appointed as Acting President and Chief Executive  Officer effective
June 10, 1999. The Company and the Acting President and Chief Executive  Officer
have  reached  an  agreement  in  principle  with  respect  to a new  employment
agreement  that  would  supercede  his  employment  agreement  that  had  become
effective on October 20, 1998. In addition, the Company and the former President
and Chief Executive  Officer have reached an agreement in principle with respect
to the terms of his retirement  that would  supercede his  employment  agreement
that was effective as of October 20, 1998.

In addition,  the Company has entered into employment  agreements with its other
officers that continue in effect until either party to the agreement  terminates
the  agreement  with at least 60 days prior written  notice,  subject to certain
earlier  termination  provisions.  Pursuant to the agreements,  the officers are
entitled to minimum compensation  aggregating $767,000 annually. In addition, if
these  agreements are terminated by the Company without cause,  the officers are
entitled to receive the amount of compensation and benefits they would otherwise
have  received  for a period  of six  months  from the date of  termination  and
thereafter  until they locate  employment  comparable to their employment at the
date of termination but not for a period longer than twelve months from the date
of termination of employment.


                                       65
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth the name and age of each director and executive officer
of the Company,  their  positions and offices with the Company,  their period of
service  with the Company and their  business  experience  for at least the last
five years, and with respect to directors,  their principal occupation and other
directorships held in public companies.

Directors

Directors  are elected to serve for a one-year  term and until their  successors
are elected and qualified.  Directors of the Company who were serving as such at
the end of fiscal 1999 are as follows:

         Name                               Age                   Director Since

         C. Shelton James                    59                         1991

         Tracey L. Gray                      67                         1991

         Joseph M. Jacobs                    46                         1998

         Dwight Jasmann                      63                         1993

         Charles H. Moore                    69                         1993

         Thomas E. Patton                    58                         1989

         Mark L. Plaumann                    43                         1997

         David R. A. Steadman                62                         1997

Mr. James,  currently  Chairman of the Board,  was appointed as Acting President
and Chief Executive Officer effective June 10, 1999. He had previously served as
Chief Executive Officer of the Company from May 1991 until December 1997 and has
been a director of the Company since December 1990.  While Mr. James has devoted
a  substantial  amount of time to the Company since May 1991, he has also served
as Executive Vice President of Fundamental Management Corporation, an investment
management  company,  since  April 1990,  and was  appointed  President  of that
company in April 1993. He is a member of the boards of  Cyberguard  Corporation,
Concurrent  Computer   Corporation,   DRS  Technologies,   Technisource,   Inc.,
Fundamental Management Corporation, CSPI and SK Technologies,  Inc. From 1980 to
1989,  Mr. James was  Executive  Vice  President of Gould,  Inc., a  diversified
electronics company, and President of Gould's Computer Systems Division.

Mr. Gray retired from his position as the President and Chief Executive  Officer
of the  Company  effective  June 11,  1999.  He had served as  President  of the
Company since July 1991 and as Chief Operating  Officer of the Company from July
1991 until December 1997, at which time he became Chief Executive  Officer.  Mr.
Gray has been a director of the Company since August 1991.  From June 1986 until
joining  the  Company,  Mr.  Gray had been a Vice  President  of the  Government
Systems  Division,  Network  Systems  Division  and  Federal  Systems  Division,
respectively,  of Sprint in  Washington,  DC. Prior to that,  Mr. Gray served in
numerous  assignments with AT&T in corporate staff functions and retired as Vice
President,  Government Systems in 1985. He served as Chief Executive Officer and
a member of the board of Access  Engineering  Corporation from 1985 to 1986. Mr.
Gray  has  also  served  in  various   positions   with  industry   professional
associations. Mr. Gray is a member of the board of Canada Payphone Corporation.


                                       66
<PAGE>

Mr. Jacobs was appointed a director of the Company in February  1998. Mr. Jacobs
has been  President  of Wexford  Management  LLC,  a manager of several  private
investment   partnerships  including  Wexford  Partners  Fund  L.P.,  since  its
inception in January  1996.  From May 1994 to January 1996, he was President and
sole  shareholder  of Concurrency  Management  Corporation,  the  predecessor to
Wexford  Management  LLC. From 1982 to May 1994, Mr. Jacobs was employed by, and
since 1988 was the President of, Bear Stearns Real Estate Group, Inc.

Mr.  Jasmann  has been a director  of the  Company  since  December  1993 and is
currently  an  international  telecommunications  advisor.  From  August 1996 to
February  1998,  Mr.  Jasmann  was  President  and  General  Manager  for COMSAT
International  Ventures  in  Bethesda,  Maryland,  a  business  unit  of  COMSAT
Corporation  that  managed  telecommunications  companies  in thirteen  overseas
markets  serving the needs of national and  multinational  operators for digital
network  solutions.  From  January  1995 to July  1996,  Mr.  Jasmann  was  Vice
President of Human  Resources for AirTouch  Communications  in San Francisco,  a
domestic and international  operator of wireless  services.  From August 1992 to
December 1994, he was an  international  telecommunications  advisor for various
U.S. and foreign  telecommunications  operators. From February 1959 to May 1992,
Mr.  Jasmann held various  positions  with AT&T,  most recently as President and
Managing  Director  of  AT&T  Communications  Pacific  based  in Hong  Kong.  He
previously  served on the boards of the  Pacific  Telecommunications  Council in
Hawaii,  the  Information  Communication  Institute  of  Singapore,  Philcom,  a
Philippines  telephone  company,  COMSAT Max in India and COMSAT Brazil and also
was chairman of the board of COMSAT Argentina.

Mr. Moore has been a director of the Company since  December 1993. Mr. Moore has
been Director of Athletics for Cornell  University  since  November  1994.  From
November 1992 to October 1994,  Mr. Moore was Vice Chairman of Advisory  Capital
Partners, Inc., an investment advisory firm. From July 1988 to October 1992, Mr.
Moore served as President and Chief Executive Officer of Ransburg Corporation, a
producer of industrial  coating  systems and equipment,  and from August 1991 to
October  1992 as  Executive  Vice  President  of Illinois  Tool Works,  Inc.,  a
multinational  manufacturer  of highly  engineered  components and systems.  Mr.
Moore  is  currently  a  director  of  The  Sports   Authority  and  The  Turner
Corporation, and is Chairman of the Audit Committee of the United States Olympic
Committee.

Mr.  Patton has been a director of the Company  since July 1989.  Mr. Patton has
been a partner in the Washington,  D.C. law firm of Tighe,  Patton,  Tabackman &
Babbin,  engaged  in civil and  criminal  business  litigation,  securities  law
enforcement matters,  corporate finance and corporate  compliance,  since August
1994.  From 1979 until July 1994,  Mr.  Patton was a partner in the  Washington,
D.C. law office of Schnader,  Harrison, Segal & Lewis, LLP, engaged in civil and
criminal securities litigation and general business litigation.  Mr. Patton also
serves on the board of  directors  of  Information  Exchange,  Inc., a financial
services marketing database company.

Mr. Plaumann became a director of the Company in December 1997. Mr. Plaumann has
been a Managing  Director of Greyhawke Capital Advisors LLC, an investment firm,
since June 1998,  and a consultant to Wexford  Management  LLC since March 1998.
From  January  1996 to March 1998,  Mr.  Plaumann  was Senior Vice  President of
Wexford  Management LLC, a manager of several private  investment  partnerships.
From  February  1995 to January  1996,  Mr.  Plaumann  was a Vice  President  or
director of the  predecessor  entities of Wexford  Management  LLC. From 1990 to
January 1995, Mr. Plaumann was a managing director of Alvarez & Marsal,  Inc., a
crisis  management  consulting  firm.  From 1985 to 1990,  he served in  several
capacities with American Healthcare  Management,  Inc., an owner and operator of
hospitals,  most recently as its President.  From 1974 to 1985, Mr. Plaumann was
with Ernst & Young LLP in several  capacities  in its  auditing  and  consulting
divisions. Mr. Plaumann is a director of BCAM International,  Inc., an ergonomic
technology company, and Vivax Medical


                                       67
<PAGE>

Corporation,  a  manufacturer  of specialty  beds and wound care  products.  Mr.
Plaumann was a director of TSG prior to the acquisition of TSG in December 1997.

Mr. Steadman became a director of the Company in December 1997. Mr. Steadman has
been President of Atlantic  Management  Associates,  Inc., a management services
firm,  since  1988.  Mr.  Steadman  was an  employee  of the  Company  providing
management and business advice from immediately  after the acquisition of TSG in
December  1997 until March 1998,  after  having  previously  served in a similar
position with TSG. From 1990 to 1994, Mr. Steadman served as President and Chief
Executive Officer of Integra - A Hotel and Restaurant Company,  and from 1987 to
1988, as Chairman and Chief Executive Officer of GCA Corporation, a manufacturer
of automated  semiconductor  capital equipment.  From 1980 to 1987, Mr. Steadman
was a Vice President of Raytheon Company,  a defense  electronics  manufacturer,
and served in various  management  positions,  most recently as President of its
venture  capital  division.   Mr.  Steadman  is  a  director  of  Aavid  Thermal
Technologies,  Inc., which manufactures thermal management products and produces
computational fluid dynamics software and Tech/Ops Sevcon,  Inc., a manufacturer
of electronic  control  systems for vehicles.  Mr.  Steadman was Chairman of the
Board of  Directors  of TSG from 1994 until the  acquisition  of TSG in December
1997.

Pursuant to a stockholders' agreement among the Company,  Fundamental Management
Corporation and Wexford Partners Fund, L.P., each of which is a beneficial owner
of over  5% of the  outstanding  common  stock  of the  Company  (see  Item 12 -
"Security  Ownership of Certain Beneficial Owners and Management"),  Fundamental
and  Wexford  has  agreed to vote its shares of common  stock of the  Company in
favor of any nominees for director nominated by the incumbent Board of Directors
of the  Company  during  the  period  ending  after the next  annual  meeting of
stockholders of the Company,.

Executive Officers

Executive  officers are elected by the Board of  Directors  and serve until they
resign or are removed by the Board. The Company's  executive  officers that were
serving as such at the end of fiscal 1999 are as follows:

Name                              Age      Positions and Offices

C. Shelton James                  59       Chairman of the Board of Directors

Tracey L. Gray                    67       President and Chief Executive Officer

Eduardo Gandarilla                49       Executive Vice President,
                                           Sales and Marketing

David F. Hemmings                 52       Senior Vice President,
                                           Business Development
                                           and Technology/Systems
                                           Development

Kenneth W. Noack                  61       Vice President, Operations

William H. Thompson               46       Senior Vice President,
                                           Administration/Finance,
                                           Chief Financial Officer and Secretary

The business  experience  of Mr. James and Mr. Gray is set forth above under the
listing of directors of the Company.  Effective  June 11, 1999, Mr. Gray retired
from his position as the Company's  President and Chief Executive  Officer,  and
effective June 10, 1999,  Mr. James was appointed as Acting  President and Chief
Executive Officer.


                                       68
<PAGE>

Mr. Gandarilla was appointed  Executive Vice President of Sales and Marketing in
May 1998, having previously served as Vice President of International  Sales and
Marketing  since October 1996 after joining the Company in April 1996. From June
1995  until  April  1996,  he  was an  international  marketing  consultant  for
Compression Laboratories, Inc., a company, which manufactures video conferencing
equipment.  From July 1993 until June 1995, Mr. Gandarilla was managing director
of the business  communication  systems division of AT&T, based in Mexico.  From
1990 until July 1993, he was a managing director for Gestetner, a distributor of
office  equipment,  also  located in Mexico.  His previous  employment  included
managerial  positions with various  computer system  companies  located in Latin
America and Paris.

Mr. Hemmings joined the Company in June 1998 as Senior Vice President,  Business
Development and Technology/Systems  Development.  From June 1997 until May 1998,
he was President of NetInvest,  LLC, a company developing satellite and cellular
network operations in developing countries  worldwide.  From July 1993 until May
1997, Mr.  Hemmings was Executive  Vice  President of the worldwide  network and
business  systems  groups for Brite Voice  Systems,  Inc., a publicly held voice
processing  supplier.  From 1991 to June 1993,  he was Senior Vice  President of
Boston  Technology,  Inc.,  a publicly  held voice mail  supplier.  His previous
employment included  management  positions with such organizations as Sprint and
Harris Corporation.

Mr. Noack has served as Vice President of Operations since January 1993,  having
joined the Company in July 1992 as Director of Operations.  Prior to joining the
Company, he was with AT&T Paradyne Corporation in Largo, Florida since 1973, and
most  recently  was Vice  President  and  Director of  Operations  Planning  and
Materials.

Mr.    Thompson    joined   the   Company   as   Senior   Vice    President   of
Administration/Finance in December 1997, was elected Secretary in February 1998,
and became the Chief  Financial  Officer in December 1998. From February 1994 to
December 1997, Mr. Thompson served as Vice President of Finance, Chief Financial
Officer and Secretary of TSG, and from 1990 to 1994, he served as Vice President
of Finance of TSG.  Prior to joining TSG, Mr.  Thompson  held various  financial
executive positions with Cardiac Control Systems,  Inc., a publicly-held medical
device manufacturer,  from 1983 to 1990. From 1974 to 1983, Mr. Thompson, who is
a certified public accountant,  held various  positions,  most recently as Audit
Manager, with PriceWaterhouseCoopers LLP, certified public accountants.

                                   ----------


                                       69
<PAGE>

Item 11. EXECUTIVE COMPENSATION

This item contains information about compensation,  stock options and employment
arrangements and other information  concerning certain executive officers of the
Company.

Summary Compensation Table

The following  table sets forth the  compensation  earned for services  rendered
during the fiscal years indicated by the Company's  Chief Executive  Officer and
the four most highly  compensated  executive  officers of the Company other than
the Chief Executive  Officer whose salary and bonus exceeded $100,000 during the
fiscal year ended March 31, 1999 and who were serving as  executive  officers as
of March 31, 1999, and one other executive  officer that was not serving as such
as of March 31, 1999 ("named executive officers").

<TABLE>
<CAPTION>
                                                                                        Long Term
                                                                                         Compen-
                                                                                         sation
                                                  Annual Compensation                    Awards
                                           -------------------------------------        ---------
            (a)                  (b)         (c)            (d)             (e)            (g)           (i)
                                                                          Other         Securities
                                                                          Annual        Underlying   All Other
                                                                          Compen-        Option/       Compen-
    Name and Principal                                                    sation           SARs        sation
         Position                Year      Salary ($)      Bonus ($)      ($) (1)        (#) (2)         ($)
   -------------------           ----      ----------      ---------      -------        -------         ---
<S>                              <C>        <C>             <C>           <C>            <C>           <C>
Tracey L. Gray                   1999       195,635             --             --        50,000        5,168 (3)
President and Chief              1998       162,096         66,010             --        41,000        4,621
Executive Officer                1997       148,928         60,450             --            --        3,656

Eduardo Gandarilla (4)           1999       215,350          8,155         19,868        35,000        4,371 (5)
Executive Vice President         1998       184,453         17,965             --        10,000        2,066
                                 1997       162,123         12,000         44,617        50,000        2,030

David F. Hemmings (6)            1999       118,269         14,596         15,480        50,000        4,054 (7)
Senior Vice President            1998            --             --             --            --           --
                                 1997            --             --             --            --           --

Kenneth W. Noack                 1999       105,000          8,094             --        25,000        2,802 (8)
Vice President                   1998        98,167         16,687             --         8,000        2,580
                                 1997        75,554         13,663             --            --        1,961

Henry W. Swanson (9)             1999       117,000          4,445             --        25,000        2,994 (10)
Vice President                   1998       112,677         16,787             --         8,000        2,066
                                 1997        56,538             --         35,000        40,000        2,030

William H. Thompson (11)         1999       124,282         10,525         17,221        25,000        1,592 (12)
Senior Vice President            1998        35,551          3,725             --        30,000          281
                                 1997            --             --             --            --           --
----------
</TABLE>


                                       70
<PAGE>

Footnotes to Summary Compensation Table

(1)   Other annual compensation with respect to Mr. Gandarilla, Mr. Thompson and
      Mr.  Swanson  represents  reimbursements  of  relocation  expenses  and/or
      related  income  taxes.  Other  annual  compensation  with  respect to Mr.
      Hemmings   includes  an   employment   signing  bonus  of  $15,000  and  a
      reimbursement of relocation expenses of $480.

(2)   Represents the number of shares of Common Stock underlying options granted
      under the Company's 1991 Stock Option Plan.

(3)   Includes the taxable  portion of Company paid group term life insurance of
      $1,260 and  matching  contributions  of $3,908  made by the Company to the
      Company's 401(k) savings plan for the account of the executive.

(4)   The  salary  of Mr.  Gandarilla  includes  sales  commissions  paid to Mr.
      Gandarilla under the sales  compensation  plan between Mr.  Gandarilla and
      the Company.

(5)   Includes the taxable  portion of Company paid group term life insurance of
      $174 and  matching  contributions  of $4,197  made by the  Company  to the
      Company's 401(k) savings plan for the account of the executive.

(6)   Mr.  Hemmings  joined the Company on June 1, 1998 as Senior Vice President
      of Business Development and Technology/Systems Development.

(7)   Includes the taxable  portion of Company paid group term life insurance of
      $169 and  matching  contributions  of $2,308  made by the  Company  to the
      Company's  401(k)  savings  plan for the  account of the  executive.  Also
      includes $1,577 related to additional life insurance  premiums paid by the
      Company.

(8)   Includes the taxable  portion of Company paid group term life insurance of
      $702 and  matching  contributions  of $2,100  made by the  Company  to the
      Company's 401(k) savings plan for the account of the executive.

(9)   Mr. Swanson  serves the Company as the Vice  President of Development  and
      served as the executive officer of the Company's engineering, research and
      development activities until June 1, 1998.

(10)  Includes the taxable  portion of Company paid group term life insurance of
      $702 and  matching  contributions  of $2,292  made by the  Company  to the
      Company's 401(k) savings plan for the account of the executive.

(11)  Mr.  Thompson  joined the  Company on  December  18,  1997 as Senior  Vice
      President of Administration and Finance upon the acquisition of TSG.

(12)  Includes the taxable  portion of Company paid group term life insurance of
      $260 and  matching  contributions  of $1,332  made by the  Company  to the
      Company's 401(k) savings plan for the account of the executive.


                                       71
<PAGE>

Stock Option Grants in the Last Fiscal Year

The following table sets forth certain information with respect to stock options
to purchase  shares of the  Company's  Common Stock that were granted to each of
the named executive officers during the fiscal year ended March 31, 1999.

<TABLE>
<CAPTION>
                                                                                                               Potential
                                                                                                         Realizable Value at
                                                                                                              Assumed Annual
                                                                                                         Rates of Stock Price
                                                                                                              Appreciation
                                     Individual Grants                                                    for Option Term (2)
----------------------------------------------------------------------------------------------          ----------------------
            (a)                    (b)            (c)             (d)                   (e)               (f)           (g)
                                              % of Total
                                  Number        Options
                                    of        Granted to
                                Securities     Employees       Exercise
                                Underlying     in Fiscal         Price              Expiration
Name                            Options (1)      Year          ($/Share)               Date               5%           10%
----                            -----------   ----------       ---------            ----------          --------     ---------
<S>                              <C>              <C>          <C>                     <C>              <C>          <C>
Tracey L. Gray                   50,000           9%           $ 4.560                 7/13/03          $ 63,027     $ 139,273
Eduardo Gandarilla               35,000           6%           $ 4.560                 7/13/03            44,119        97,491
David F. Hemmings                50,000           9%           $ 5.090                 6/01/03            70,366       155,491
Kenneth W. Noack                 25,000           5%           $ 4.560                 7/13/03            31,513        69,636
Henry W. Swanson                 25,000           5%           $ 4.560                 7/13/03            31,513        69,636
William H. Thompson              25,000           5%           $ 4.560                 7/13/03            31,513        69,636

----------
</TABLE>

      (1)   These  options  were  granted at an exercise  price equal to the per
            share  market  value of the  Common  Stock on the  grant  date.  The
            options become exercisable  twenty-five  percent each year beginning
            one year after the date of grant.

      (2)   The potential  realizable  value is calculated  based on the term of
            the option (five years) at its date of grant.  It is  calculated  by
            assuming  that the stock price on the date of grant  appreciates  at
            the indicated annual rate compounded annually for the entire term of
            the option;  however,  the optionee  will not  actually  realize any
            benefit  from the option  unless the market  value of the  Company's
            stock price in fact increases over the option price.

                                   ----------


                                       72
<PAGE>

Aggregated  Stock Option  Exercises in the Last Fiscal Year and Fiscal  Year-End
Option Values

The following table sets forth for each of the named executive  officers certain
information with respect to stock options exercised during the fiscal year ended
March 31, 1999 and the number and value of exercisable and unexercisable options
held by named executive  officers as of March 31, 1999. The "Value  Realized" on
"Shares  Acquired  on  Exercise"  during the fiscal year ended March 31, 1999 is
based on the difference  between the closing market price of the Common Stock on
the  exercise  date and the  option  exercise  price per  share.  The  "Value of
Unexercised  In-the-Money Options at Fiscal Year End" is based on the difference
between the closing  market  price of the Common  Stock on March 31, 1999 ($3.75
per share) and the option exercise price per share.

<TABLE>
<CAPTION>
            (a)                    (b)            (c)             (d)                     (e)
                                                               Number of
                                                               Securities               Value of
                                                               Underlying             Unexercised
                                                              Unexercised             In-the-Money
                                                               Options at              Options at
                                  Shares                         Fiscal                  Fiscal
                                 Acquired                       Year-End                Year-End
                                    on           Value        Exercisable/            Exercisable/
                                 Exercise      Realized      Unexercisable           Unexercisable
Name                               (#)            ($)             (#)                     ($)
-------------------             ---------      ---------------------------           -------------
<S>                                <C>          <C>          <C>                        <C>
Tracey L. Gray                     5,000        19,388       49,000/87,000              5,000/0
Eduardo Gandarilla                    --            --       27,500/67,500                  0/0
David F. Hemmings                     --            --            0/50,000                  0/0
Kenneth W. Noack                   8,000        30,520       20,562/33,188              3,000/0
Henry W. Swanson                      --            --       22,000/51,000                  0/0
William H. Thompson                   --            --       63,073/49,677             88,124/0
</TABLE>

Employment  Contracts  and  Termination  of  Employment  and  Change in  Control
Arrangements

Mr. C.  Shelton  James.  The Company and Mr. James  entered  into an  employment
agreement that became effective as of October 20, 1998. The agreement expires on
December 31, 1999, subject to certain earlier  termination and automatic renewal
provisions.  Pursuant to the agreement,  Mr. James serves as the Chairman of the
Board of Directors and an employee of the Company,  and is paid an annual salary
of at least  $94,000.  Under the  agreement,  the base  salary  of Mr.  James is
subject to annual review for merit and other  increases at the discretion of the
Board.  Mr. James is also entitled to the same  benefits  made  available to the
other senior  executives of the Company on the same terms and conditions as such
executives.  Under the terms of the  agreement,  Mr.  James is also  entitled to
receive an annual  incentive  bonus  equal to 50% of base  salary if the Company
achieves  its after tax profit plan for the year.  If the Company is  profitable
and  earns  less  than its  plan,  then  such  bonus is based on the  percentage
achievement of the annual plan times 50% of base salary. If the Company achieves
profits in excess of its annual plan,  then, at the discretion of the Board,  an
additional  bonus in excess of 50% of base salary may be paid. In addition,  the
agreement  provides that outstanding  options held by Mr. James immediately vest
in the event of a change in  control of the  Company,  including  the  transfer,
exchange  or  sale  of a  substantial  portion  of  the  Company's  assets  to a
non-affiliated third party, a merger or consolidation of the Company pursuant to
which the stockholders of the Company own less than 50% of the surviving


                                       73
<PAGE>

entity or the entity into which the common  stock of the Company is converted or
if  any  person,  other  than  Wexford  Management  LLC  or  its  affiliates  or
Fundamental Management Corporation or its affiliates,  become the owner directly
or indirectly of securities of the Company or its successor  representing 35% or
more of the combined voting power of the Company's or its successor's securities
then  outstanding.  If the Company without cause  terminates the agreement,  Mr.
James is entitled to receive the amount of  compensation,  bonus and benefits he
would  otherwise  have received for the  remaining  term of the agreement or for
twelve  months  from the date of  notice  of  termination,  whichever  period is
longer.

Effective  June 10,  1999,  Mr.  James was  appointed  as the  Company's  Acting
President and Chief Executive Officer. The Company and Mr. James have reached an
agreement in principle  with respect to a new  employment  agreement  that would
supercede his employment  agreement  that became  effective on October 20, 1998.
Also,  effective June 10, 1999, Mr. James began to receive compensation based on
an annual salary of $250,000 and a non-accountable  monthly expense allowance of
$2,000.

Mr.  Tracey L.  Gray.  The  Company  and Mr.  Gray  entered  into an  employment
agreement that became effective as of October 20, 1998. The employment agreement
expires  on  September  30,  2001,   subject  to  certain  earlier   termination
provisions.  Pursuant to the agreement,  Mr. Gray is paid an annual salary of at
least $200,000.  His base salary is subject to annual review for merit and other
increases at the discretion of the Board.  Mr. Gray is also entitled to the same
benefits  made  available to the other senior  executives  of the Company on the
same terms and conditions as such executives.  In addition, Mr. Gray is entitled
to receive an annual  incentive bonus equal to 50% of base salary if the Company
achieves  its after tax profit plan for the year.  If the Company is  profitable
and  earns  less  than its  plan,  then  such  bonus is based on the  percentage
achievement of the annual plan times 50% of base salary. If the Company achieves
profits in excess of its annual plan,  then, at the discretion of the Board,  an
additional  bonus in  excess of 50% of base  salary  may be paid.  Further,  the
agreement  provides that  outstanding  options held by Mr. Gray immediately vest
and continue in effect until the  termination of such options in accordance with
their terms in the event Mr. Gray's  employment is terminated  without cause. In
addition,  if the agreement is terminated by the Company without cause, Mr. Gray
is entitled to receive the amount of  compensation,  bonus and benefits he would
otherwise  have received for the  remaining  term of the agreement or for twelve
months from the date of notice of termination, whichever period is longer.

Effective June 11, 1999, Mr. Gray retired from his position as the President and
Chief Executive Officer of the Company. The Company and Mr. Gray have reached an
agreement in principle  with respect to the terms of his  retirement  that would
supercede his employment agreement that was effective as of October 20, 1998.

Other Executive Officers. Each of Messrs.  Gandarilla,  Hemmings, Noack, Swanson
and Thompson entered into an employment  agreement with the Company which became
effective as of December 10, 1998 and that continue in effect until either party
to the agreement  terminates  the agreement  with at least 60 days prior written
notice,  subject to certain  earlier  termination  provisions.  Pursuant  to the
agreements,  Messrs. Gandarilla,  Hemmings, Noack, Swanson and Thompson are paid
annual salaries of at least $155,000, $150,000, $105,000, $117,000 and $125,000,
respectively,  and with  respect  to Mr.  Gandarilla  commissions  on the  basis
determined by the Company.  Their base salaries are subject to annual review for
merit and other  increases at the discretion of the Board.  Messrs.  Gandarilla,
Hemmings, Noack, Swanson and Thompson are reimbursed (in accordance with Company
policy  from  time to time in  effect)  for  all  reasonable  business  expenses
incurred by them in the performance of their duties.

Pursuant to the terms of the agreements,  Messrs.  Gandarilla,  Hemmings, Noack,
Swanson and  Thompson are entitled to the same  benefits  made  available to the
other senior  executives of the Company and on the same terms and  conditions as
such executives.  Messrs. Gandarilla,  Hemmings, Noack, Swanson and Thompson are
also  entitled to receive an annual  incentive  bonus,  if any, as determined or
approved by the


                                       74
<PAGE>

Board  or  the  Compensation  Committee  pursuant  to  the  Company's  incentive
compensation plan. Pursuant to the terms of the agreements,  Messrs. Gandarilla,
Hemmings,  Noack,  Swanson and Thompson will be granted such options to purchase
shares of the Company's common stock as approved by the Compensation Committee.

In addition,  pursuant to the terms of the agreements,  outstanding options held
by Messrs. Gandarilla, Hemmings, Noack, Swanson and Thompson immediately vest in
the  event of a change  in  control  of the  Company,  including  the  transfer,
exchange  or  sale  of   substantially   all  of  the  Company's   assets  to  a
non-affiliated third party, a merger or consolidation of the Company pursuant to
which the  stockholders of the Company own less than 50% of the surviving entity
or the entity into which the common  stock of the Company is converted or if any
person,  other than Wexford  Management  LLC or its  affiliates  or  Fundamental
Management  Corporation  or  its  affiliates,  becomes  the  owner  directly  or
indirectly of securities  of the Company or its  successor  representing  35% or
more of the combined voting power of the Company's or its successor's securities
then outstanding.  Also, vested outstanding options held by Messrs.  Gandarilla,
Hemmings,  Noack,  Swanson and Thompson  continue in effect in  accordance  with
their  terms,  but not to  exceed  one  year  from the  date of  termination  of
employment in the event their  employment is terminated  other than for cause or
upon death or disability. In addition, if these agreements are terminated by the
Company without cause, Messrs. Gandarilla, Hemmings, Noack, Swanson and Thompson
are  entitled  to receive the amount of  compensation  and  benefits  they would
otherwise  have received for a period of six months from the date of termination
and thereafter  until they locate  employment  comparable to their employment at
the date of termination  but not for a period longer than twelve months from the
date of termination of employment.

Under the terms of the agreements, Messrs. Gandarilla,  Hemmings, Noack, Swanson
and Thompson are  indemnified by the Company with respect to claims made against
them as  officers  and/or  employees  of the  Company or any  subsidiary  of the
Company  to the  fullest  extent  permitted  by  the  Company's  Certificate  of
Incorporation, its Bylaws and Delaware corporation law.

Directors' Compensation

Directors who are not employees of the Company receive an annual retainer fee of
$5,000  plus  $1,500 for each Board  meeting  attended,  and $500 for each Board
committee  meeting  attended.  Directors  are also  reimbursed  for  expenses in
attending Board and Board committee meetings.

Non-employee  directors of the Company  automatically  receive  "formula"  stock
option  grants  under  the  Company's   Directors'   Stock  Option  Plan.   Each
non-employee  director  first  elected to the Board  automatically  receives  an
option  to  purchase  4,000  shares  of  Common  Stock on the date of his or her
election to the Board. In addition, each non-employee director then serving on a
committee of the Board and each  non-employee  director then serving as chairman
of a committee of the Board automatically receives on the last day of the fiscal
year (March 31) an option to purchase  1,000 shares of Common Stock with respect
to each such  committee  and each such  chairmanship.  In addition,  on July 13,
1998, the  Directors'  Stock Option Plan was amended to provide for the grant of
stock options to  non-employee  directors at the discretion of the  Compensation
and Stock Option Committee.

On July 13, 1998, the Company granted options to purchase 5,000 shares of Common
Stock at an exercise  price of $4.5625 per share to each  non-employee  director
(Messrs.  Jacobs, Jasmann, Moore, Patton, Plaumann and Steadman) pursuant to the
Company's  Directors'  Stock Option Plan.  In addition,  on March 31, 1999,  the
Company granted  formula  options to Messrs.  Jacobs,  Jasmann,  Moore,  Patton,
Plaumann and Steadman pursuant to the Company's  Directors' Stock Option Plan to
purchase 2,000 shares,  4,000 shares,  4,000 shares,  4,000 shares, 2,000 shares
and 5,000 shares of Common Stock, respectively,  at an exercise price of $3.5938
per share. Options granted pursuant to the Directors' Stock


                                       75
<PAGE>

Option Plan become fully exercisable one year after the date of grant and expire
five years from the date of grant.

Also,  during the fiscal  year ended  March 31,  1999,  the Board  approved  the
payment of certain additional fees to members of the Compensation  Committee and
a Special  Acquisition  Committee  established during the year.  Additional fees
paid to each of  Messrs.  Jasmann,  Plaumann  and  Steadman  as  members  of the
Compensation  Committee amounted to $1,000 during the year ended March 31, 1999.
Additional fees paid to Messrs.  Jasmann,  Moore, Patton and Steadman as members
of the Special  Acquisition  Committee  with respect to the year ended March 31,
1999 aggregated $12,700, $10,200, $10,400 and $19,200, respectively.

Compensation Committee Interlocks and Insider Participation

The Compensation  Committee of the Board,  which during the year ended March 31,
1999  consisted  of Messrs.  Dwight  Jasmann,  Mark L.  Plaumann  and David R.A.
Steadman,  makes decisions concerning executive  compensation.  Messrs. Jasmann,
Plaumann and Steadman are neither  officers nor  employees of the Company or any
of its  subsidiaries.  During fiscal 1999,  no executive  officer of the Company
served as a member of the  compensation  committee  or as  director  of  another
entity of which any executive officers thereof served as a director or member of
the Compensation  Committee of the Company.  Mr. Steadman was an employee of the
Company  from  December  18, 1997 to March 31,  1998,  and was an  employee  and
Chairman of the Board of Directors of TSG prior to the Company's  acquisition of
TSG on December 18, 1997.


                                       76
<PAGE>

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  tables  sets  forth  certain  information  regarding  beneficial
ownership  of the  outstanding  Common  Stock  of the  Company  at June 2,  1999
according  to  information  supplied to the Company by: (i) each person known by
the Company to own beneficially  more than 5% of the Common Stock;  (ii) each of
the directors of the Company;  (iii) each of the named executive  officers;  and
(iv) all current  directors  and  executive  officers of the Company as a group.
Under rules  adopted by the  Securities  and  Exchange  Commission,  a person is
deemed to be a beneficial  owner of Common Stock with respect to which he has or
shares voting power (which includes the power to vote or to direct the voting of
the security),  or investment  power (which includes the power to dispose of, or
to direct the disposition  of, the security).  A person is also deemed to be the
beneficial  owner of shares  with  respect  to which he could  obtain  voting or
investment  power  within  60 days,  such as upon the  exercise  of  options  or
warrants.  The numbers and  percentages  assume for each person or group listed,
the exercise of all warrants and stock options held by such person or group that
are  exercisable  within 60 days of June 2, 1999,  but not the  exercise of such
warrants  and stock  options  owned by any  other  person.  Except as  otherwise
indicated in the footnotes,  the Company believes that the beneficial  owners of
the Common Stock listed below have sole investment and voting power with respect
to the shares of Common Stock shown as beneficially owned by them.

Security Ownership of Certain Beneficial Owners

Name and Address                         Number of Shares            Percentage
of Beneficial Owner                      Beneficially Owned           of Class
-------------------------------------------------------------------------------
Wexford Partners Fund L.P.               2,617,269 (1)                 19.4%
411 West Putnam Avenue
Greenwich, Connecticut 06830

Fundamental Management Corporation         959,202 (2)                  7.1%
4000 Hollywood Boulevard
Suite 610N
Hollywood, Florida 33021

----------

(1)   Includes 10,000 shares that may be purchased by Mr. Jacobs,  a director of
      the Company and an affiliate  of Wexford  Partners  Fund L.P.,  and 10,000
      shares that may be  purchased by Mr.  Plaumann,  a director of the Company
      and a consultant to and former employee of Wexford, upon exercise of stock
      options  within 60 days as to which Wexford  Partners Fund L.P.  exercises
      shared voting or investment power.

(2)   On June 2, 1999, Fundamental Management Corporation, as General Partner of
      various limited partnerships,  effected an in-kind distribution of 524,446
      shares  of Common  Stock of the  Company  to the  holders  of the  limited
      partnership interests.


                                       77
<PAGE>

Security Ownership of Management

                                                Number of Shares      Percentage
Name                                           Beneficially Owned      of Class
--------------------------------------------------------------------------------
Tracey L. Gray                                    205,784   (1)            1.5%
Joseph M. Jacobs                                2,617,269   (2)           19.4%
C. Shelton James                                1,133,072   (3)            8.4%
Dwight Jasmann                                     13,890   (4)               *
Charles H. Moore                                   17,100   (5)               *
Thomas E. Patton                                   15,000   (6)               *
Mark L. Plaumann                                   10,000   (7)               *
David R.A. Steadman                                82,202   (8)               *
Eduardo Gandarilla                                 51,250   (9)               *
David F. Hemmings                                  22,500   (10)              *
Kenneth W. Noack                                   58,472   (11)              *
Henry W. Swanson                                   30,250   (12)              *
William H. Thompson                                72,129   (13)              *
All directors and executive officers as
as a group (13 persons)                         4,318,918   (14)          30.9%

*      Less than 1%

----------
      (1)   Includes  71,750 shares that may be purchased upon exercise of stock
            options within 60 days.

      (2)   Includes  2,597,269 shares held by Wexford Partners Fund L.P., as to
            which shares Mr. Jacobs disclaims beneficial  ownership,  and 20,000
            shares that may be purchased  upon exercise of stock options  within
            60 days.

      (3)   Includes 959,202 shares held by Fundamental Management  Corporation,
            as to which shares Mr. James  disclaims  beneficial  ownership,  and
            58,250  shares that may be purchased  upon exercise of stock options
            within 60 days.

      (4)   Includes  11,000 shares that may be purchased upon exercise of stock
            options within 60 days.

      (5)   Includes  75 shares held by Mr.  Moore's  wife and 25 shares held by
            Mr. Moore's  daughter.  Includes 16,000 shares that may be purchased
            upon exercise of stock options within 60 days.

      (6)   Includes 500 shares held jointly with Mr.  Patton's  wife.  Includes
            14,000  shares that may be purchased  upon exercise of stock options
            within 60 days.

      (7)   Represents  10,000  shares that may be  purchased  upon  exercise of
            stock options within 60 days.

      (8)   Includes  80,250 shares that may be purchased upon exercise of stock
            options within 60 days.

      (9)   Represents  51,250  shares that may be  purchased  upon  exercise of
            stock options within 60 days.

      (10)  Includes  12,500 shares that may be purchased upon exercise of stock
            options within 60 days.

      (11)  Includes  28,812 shares that may be purchased upon exercise of stock
            options within 60 days.

      (12)  Represents  30,250  shares that may be  purchased  upon  exercise of
            stock  options  within 60 days.


                                       78
<PAGE>

      (13)  Includes  71,500 shares that may be purchased upon exercise of stock
            options within 60 days.

      (14)  Includes a total of 959,202  shares held by  Fundamental  Management
            Corporation, 2,597,269 shares held by Wexford Partners Fund L.P. and
            600 shares held by family  members as to which shares the respective
            officers and directors disclaim beneficial ownership.  Also includes
            465,562  shares that may be purchased upon exercise of stock options
            within 60 days. On June 2, 1999, Fundamental Management Corporation,
            as General  Partner of various  limited  partnerships,  effected  an
            in-kind  distribution  of  524,446  shares  of  Common  Stock of the
            Company to the holders of the limited partnership  interests.  After
            such  distribution,  all directors and executive officers as a group
            beneficially own 4,318,918  shares, or 30.9%, of the Common Stock of
            the Company.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Tracey L. Gray, the Company's  President and Chief  Executive  Officer until
June 11, 1999, is a majority  stockholder of NuTel Systems,  Inc.  ("NuTel"),  a
customer of the  Company.  During the year ended March 31, 1999,  the  Company's
sales to NuTel aggregated $32. At March 31, 1999, notes and accounts  receivable
from NuTel  amounted to $43. The Company's  sales to NuTel during the year ended
March 31, 1999 have been made on an arms length  basis at sales prices and terms
no more  favorable than made to other  customers  acquiring  similar  amounts of
products from the Company.

In  connection   with  the   acquisition  of  TSG,  the  Company   entered  into
stockholders'  agreement with  Fundamental  Management  Corporation  and Wexford
Partners  Fund,  L.P.,  each of  which is a  beneficial  owner of over 5% of the
Company's outstanding common stock. Pursuant to the stockholders' agreement, the
Company  has  agreed  to  file a  registration  statement  with  respect  to the
Company's common stock owned by Wexford or Fundamental  within 45 days after any
request by both  Fundamental  and Wexford.  The Company would generally bear the
expenses of such registration.

                                   ----------


                                       79
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

    (a) List of Documents filed as part of this Report.

        (1) Financial Statements - See the index to the financial statements in
            Item 8.

        (2) Financial Statement Schedules - See the index to the financial
            statement schedules in Item 8.

        (3) Exhibits -


Exhibit No.                  Description of Exhibit
-----------                  ----------------------

3.1         Certificate of Incorporation,  as amended (incorporated by reference
            to Exhibit 3.1 to  Registrant's  Annual  Report on Form 10-K for the
            year ended March 31, 1998)

3.2         By-Laws,  as amended  (incorporated  by  reference to Exhibit 3.2 to
            Registrant's Annual Report on Form 10-K for the year ended March 31,
            1992)

4.1         Form of Common  Stock  Certificate  (incorporated  by  reference  to
            Registrant's  Registration  Statement on Form 8-A dated November 21,
            1986)

4.2         Representative's Warrant Agreement between Technology Service Group,
            Inc. and Brookehill Equities,  Inc. dated May 10, 1996 (incorporated
            by reference to Exhibit 4.3 to Registrant's  Registration  Statement
            on Form S-4, File No. 333-38439)

4.3         Warrant Agreement between Technology Service Group, Inc. and Liberty
            Bank and Trust  Company of Oklahoma  City,  N.A.  dated May 10, 1996
            (incorporated   by   reference   to  Exhibit  4.2  to   Registrant's
            Registration Statement on Form S-4, File No. 333-38439)

4.4         Supplemental  Warrant Agreement  between the Registrant,  Technology
            Service Group, Inc. and Brookehill Equities, Inc. dated December 18,
            1997 (filed herewith)

4.5         Supplemental  Warrant Agreement  between the Registrant,  Technology
            Service Group, Inc., Liberty Bank and Trust Company of Oklahoma City
            N.A. and American  Stock  Transfer and Trust Company dated  December
            23, 1997 (filed herewith)


                                       80
<PAGE>

4.6         Rights Agreement,  dated as of May 10, 1999,  between Registrant and
            American Stock Transfer and Trust Company (incorporated by reference
            to Exhibit 99.1 to Registrant's Form 8-K dated April 19, 1999)

10.1*       1991 Stock Option  Plan,  as amended  (incorporated  by reference to
            Exhibit 10.10 to Registrant's  Quarterly Report on Form 10-Q for the
            quarter ended December 31, 1998)

10.2*       Directors Stock Option Plan, as amended  (incorporated  by reference
            to Exhibit 10.11 to Registrant's  Quarterly  Report on Form 10-Q for
            the quarter ended December 31, 1998)

10.3*       1994  Omnibus  Stock  Plan  of  Technology   Service   Group,   Inc.
            (incorporated  by reference to Exhibit 10.3 to  Registrant's  Annual
            Report on Form 10-K for the year ended March 31, 1998)

10.4*       1995 Non-Employee  Director Stock Option Plan of Technology  Service
            Group,   Inc.   (incorporated   by  reference  to  Exhibit  10.4  to
            Registrant's Annual Report on Form 10-K for the year ended March 31,
            1998)

10.5        Restated Loan Agreement  between  Registrant and  NationsBank,  N.A.
            dated November 25, 1997  (incorporated  by reference to Exhibit 10.1
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1997)

10.6        First Amendment to Loan and Security  Agreement  between  Registrant
            and NationsBank, N.A. dated March 29, 1999 (filed herewith)

10.7        Promissory Note between Registrant and NationsBank, N.A. dated March
            29, 1999 (filed herewith)

10.8        First   Replacement   Promissory   Note   between   Registrant   and
            NationsBank, N.A. dated March 29, 1999 (filed herewith)

10.9        Second   Replacement   Promissory   Note  between   Registrant   and
            NationsBank, N.A. dated March 29, 1999 (filed herewith)

10.10       Mortgage   Modification   and  Future  Advance   Agreement   between
            Registrant and NationsBank,  N.A. November 26, 1997 (incorporated by
            reference to Exhibit 10.3 to Registrant's  Quarterly  Report on Form
            10-Q for the quarter ended December 31, 1997)


                                       81
<PAGE>

10.11*      Amended and Restated Employment Agreement between Elcotel,  Inc. and
            Tracey L. Gray dated October 20, 1998  (incorporated by reference to
            Exhibit 10.1 to Registrant's  Quarterly  Report on Form 10-Q for the
            quarter ended December 31, 1998)

10.12*      Amended and Restated Employment Agreement between Elcotel,  Inc. and
            C. Shelton James dated October 20, 1998  (incorporated  by reference
            to Exhibit 10.2 to  Registrant's  Quarterly  Report on Form 10-Q for
            the quarter ended December 31, 1998)

10.13*      Employment  Agreement  between  Elcotel,  Inc. and David F. Hemmings
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.3
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.14*      Employment  Agreement between Elcotel,  Inc. and William H. Thompson
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.4
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.15*      Employment  Agreement  between  Elcotel,  Inc.  and Kenneth W. Noack
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.5
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.16*      Employment  Agreement  between  Elcotel,  Inc.  and Henry W. Swanson
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.6
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.17*      Employment  Agreement  between Elcotel,  Inc. and Darold R. Bartusek
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.7
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.18*      Employment Agreement between Elcotel,  Inc. and Hugh H. Durden dated
            December  10, 1998  (incorporated  by  reference  to Exhibit 10.8 to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            December 31, 1998)

10.19*      Employment  Agreement between Elcotel,  Inc. and Eduardo  Gandarilla
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.9
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)


                                       82
<PAGE>

10.20       Technology  and Transfer  Agreement  between  Registrant  and Lucent
            Technologies   Inc.  dated  September  30,  1997   (incorporated  by
            reference to Exhibit 2.2 to  Registrant's  Form 8-K dated  September
            30, 1997)

10.21       Patent License Agreement between Registrant and Lucent  Technologies
            Inc. dated September 30, 1997  (incorporated by reference to Exhibit
            2.3 to Registrant's Form 8-K dated September 30, 1997)

10.22       Stockholders' Agreement (incorporated by reference to Exhibit 2.3 to
            Registrant's Registration Statement on Form S-4, File No. 333-38439)


21.1        Subsidiaries of the Registrant (filed herewith)

23.1        Independent Auditor's Consent (filed herewith)

27          Financial Data Schedule (Edgar filing only)

* Management compensation agreements and plans.

       (b)        Reports on Form 8-K

                  No reports on Form 8-K were filed by the Registrant during the
                  fourth quarter of the fiscal year ended March 31, 1999.


                                       83
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized, on the 28th day of June
1999.

                                            ELCOTEL, INC.
                                    By: /s/ C. Shelton James
                                        ---------------------------
                                            C. Shelton James
                                            Acting President &
                                            Chief Executive Officer

KNOW ALL MEN BY THESE  PRESENTS,  that each individual  whose signature  appears
below  constitutes and appoints each of C. Shelton James and William H. Thompson
jointly and severally his true and lawful  attorneys-in-fact and agent with full
powers of substitution  for him and in his name,  place and stead in any and all
capacities to sign on his behalf, individually and in each capacity stated below
and to file any and all  amendments  to this Annual Report on Form 10-K with the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents  and each of them full power and  authority  to do and  perform  each and
every act and thing requisite and necessary to be done in and about the premises
as fully as he might or could do in person,  hereby ratifying and confirming all
that said  attorneys-in-fact  and agents, or any of them, or their substitute or
substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
           Signature                          Title                                       Date

<S>                                           <C>                                         <C>
By: /s/ C. Shelton James                      Acting President & Chief                    June 28,1999
    --------------------------                Executive Officer, Director
        C. Shelton James                      and Chairman of the Board

By: /s/ William H. Thompson                   Senior Vice President,                      June 28, 1999
    --------------------------                Chief Financial Officer,
        William H. Thompson                   Secretary (principal financial
                                              officer)

By: /s/ Scott M. Klein                        Controller (principal                       June 28, 1999
    --------------------------                accounting officer)
        Scott M. Klein

By: /s/ Tracey L. Gray                        Director                                    June 28, 1999
    --------------------------
        Tracey L. Gray

By: /s/ Joseph M. Jacobs                      Director                                    June 28, 1999
    --------------------------
        Joseph M. Jacobs

By: /s/ Dwight Jasmann                        Director                                    June 28, 1999
    --------------------------
        Dwight Jasmann

By: /s/ Charles H. Moore                      Director                                    June 28, 1999
    --------------------------
        Charles H. Moore

By: /s/ Thomas E. Patton                      Director                                    June 28, 1999
    --------------------------
        Thomas E. Patton

By: /s/ Mark L. Plaumann                      Director                                    June 28, 1999
    --------------------------
        Mark L. Plaumann

By: /s/ David R.A. Steadman                   Director                                    June 28, 1999
    --------------------------
        David R.A. Steadman
</TABLE>


                                       84
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.                 Description of Exhibit
-----------                 ----------------------

3.1           Certificate  of   Incorporation,   as  amended   (incorporated  by
              reference  to Exhibit 3.1 to  Registrant's  Annual  Report on Form
              10-K for the year ended March 31, 1998)

3.2           By-Laws,  as amended  (incorporated by reference to Exhibit 3.2 to
              Registrant's  Annual  Report on Form 10-K for the year ended March
              31, 1992)

4.1           Form of Common  Stock  Certificate  (incorporated  by reference to
              Registrant's Registration Statement on Form 8-A dated November 21,
              1986)

4.2           Representative's  Warrant  Agreement  between  Technology  Service
              Group,  Inc.  and  Brookehill  Equities,  Inc.  dated May 10, 1996
              (incorporated   by  reference  to  Exhibit  4.3  to   Registrant's
              Registration Statement on Form S-4, File No. 333-38439)

4.3           Warrant  Agreement  between  Technology  Service  Group,  Inc. and
              Liberty Bank and Trust Company of Oklahoma  City,  N.A.  dated May
              10, 1996 (incorporated by reference to Exhibit 4.2 to Registrant's
              Registration Statement on Form S-4, File No. 333-38439)

4.4           Supplemental Warrant Agreement between the Registrant,  Technology
              Service Group, Inc. and Brookehill  Equities,  Inc. dated December
              18, 1997 (filed herewith)

4.5           Supplemental Warrant Agreement between the Registrant,  Technology
              Service  Group,  Inc.,  Liberty Bank and Trust Company of Oklahoma
              City N.A. and American  Stock  Transfer  and Trust  Company  dated
              December 23, 1997 (filed herewith)

4.6           Rights Agreement, dated as of May 10, 1999, between Registrant and
              American  Stock  Transfer  and  Trust  Company   (incorporated  by
              reference to Exhibit 99.1 to Registrant's Form 8-K dated April 19,
              1999)

10.1*         1991 Stock Option Plan, as amended  (incorporated  by reference to
              Exhibit 10.10 to  Registrant's  Quarterly  Report on Form 10-Q for
              the quarter ended December 31, 1998)

10.2*         Directors Stock Option Plan, as amended (incorporated by reference
              to Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for
              the quarter ended December 31, 1998)

<PAGE>

10.3*         1994  Omnibus  Stock  Plan  of  Technology   Service  Group,  Inc.
              (incorporated by reference to Exhibit 10.3 to Registrant's  Annual
              Report on Form 10-K for the year ended March 31, 1998)

10.4*         1995 Non-Employee Director Stock Option Plan of Technology Service
              Group,  Inc.   (incorporated  by  reference  to  Exhibit  10.4  to
              Registrant's  Annual  Report on Form 10-K for the year ended March
              31, 1998)

10.5          Restated Loan Agreement between  Registrant and NationsBank,  N.A.
              dated November 25, 1997 (incorporated by reference to Exhibit 10.1
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1997)

10.6          First Amendment to Loan and Security  Agreement between Registrant
              and NationsBank, N.A. dated March 29, 1999 (filed herewith)

10.7          Promissory  Note between  Registrant and  NationsBank,  N.A. dated
              March 29, 1999 (filed herewith)

10.8          First   Replacement   Promissory   Note  between   Registrant  and
              NationsBank, N.A. dated March 29, 1999 (filed herewith)

10.9          Second   Replacement   Promissory  Note  between   Registrant  and
              NationsBank, N.A. dated March 29, 1999 (filed herewith)

10.10         Mortgage   Modification  and  Future  Advance   Agreement  between
              Registrant and NationsBank,  N.A. November 26, 1997  (incorporated
              by reference to Exhibit 10.3 to Registrant's  Quarterly  Report on
              Form 10-Q for the quarter ended December 31, 1997)

10.11*        Amended and Restated  Employment  Agreement between Elcotel,  Inc.
              and  Tracey  L. Gray  dated  October  20,  1998  (incorporated  by
              reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
              10-Q for the quarter ended December 31, 1998)

10.12*        Amended and Restated  Employment  Agreement between Elcotel,  Inc.
              and C.  Shelton  James dated  October 20,  1998  (incorporated  by
              reference to Exhibit 10.2 to Registrant's Quarterly Report on Form
              10-Q for the quarter ended December 31, 1998)

10.13*        Employment  Agreement between Elcotel,  Inc. and David F. Hemmings
              dated December 10, 1998 (incorporated by reference to Exhibit 10.3
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)


                                       2
<PAGE>

10.14*        Employment Agreement between Elcotel, Inc. and William H. Thompson
              dated December 10, 1998 (incorporated by reference to Exhibit 10.4
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)

10.15*        Employment  Agreement  between Elcotel,  Inc. and Kenneth W. Noack
              dated December 10, 1998 (incorporated by reference to Exhibit 10.5
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)

10.16*        Employment  Agreement  between Elcotel,  Inc. and Henry W. Swanson
              dated December 10, 1998 (incorporated by reference to Exhibit 10.6
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)

10.17*        Employment Agreement between Elcotel,  Inc. and Darold R. Bartusek
              dated December 10, 1998 (incorporated by reference to Exhibit 10.7
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)

10.18*        Employment  Agreement  between  Elcotel,  Inc.  and Hugh H. Durden
              dated December 10, 1998 (incorporated by reference to Exhibit 10.8
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)

10.19*        Employment Agreement between Elcotel,  Inc. and Eduardo Gandarilla
              dated December 10, 1998 (incorporated by reference to Exhibit 10.9
              to  Registrant's  Quarterly  Report on Form  10-Q for the  quarter
              ended December 31, 1998)

10.20         Technology and Transfer  Agreement  between  Registrant and Lucent
              Technologies  Inc.  dated  September  30,  1997  (incorporated  by
              reference to Exhibit 2.2 to Registrant's  Form 8-K dated September
              30, 1997)

10.21         Patent   License   Agreement   between   Registrant   and   Lucent
              Technologies  Inc.  dated  September  30,  1997  (incorporated  by
              reference to Exhibit 2.3 Registrant's Form 8-K dated September 30,
              1997)

10.22         Stockholders'  Agreement (incorporated by reference to Exhibit 2.3
              to  Registrant's  Registration  Statement  on Form  S-4,  File No.
              333-38439)

21.1          Subsidiaries of the Registrant (filed herewith)

23.1          Independent Auditor's Consent (filed herewith)

27            Financial Data Schedule (Edgar filing only)

* Management compensation agreements and plans.


                                       3