ELCOTEL INC, S-4/A, 1997-10-28

ELCOTEL INC
S-4/A, 1997-10-28
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997
REGISTRATION NO. 333-38439
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------

AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------

ELCOTEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

---------------

DELAWARE 3661 59-2518405
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

6428 PARKLAND DRIVE
SARASOTA, FLORIDA 34243
(941) 758-0389

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

RONALD M. TOBIN
VICE PRESIDENT,
TREASURER AND SECRETARY
ELCOTEL, INC.
6428 PARKLAND DRIVE
SARASOTA, FLORIDA 34243
(941) 758-0389

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

---------------

COPIES TO:

LARRY P. LAUBACH, ESQ. ROGER BARZUN, ESQ. SHAHE SINANIAN, ESQ.
SCHNADER HARRISON SEGAL & GENERAL COUNSEL GREENBERG TRAURIG
LEWIS LLP TECHNOLOGY SERVICE HOFFMAN LIPOFF
1600 MARKET STREET GROUP, INC. ROSEN & QUENTEL
SUITE 3600 60 HUBBARD STREET 153 EAST 53RD STREET
PHILADELPHIA, PA 19103 CONCORD, MA 01742 35TH FLOOR
(215) 751-2360 (508) 287-4275 NEW YORK, NY 10022
(212) 801-9235

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
effective time of the merger of a wholly-owned subsidiary of the registrant
with and into Technology Service Group, Inc. ("TSG") as described in the
Agreement and Plan of Merger dated as of August 13, 1997, as amended.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]

---------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

================================================================================
<PAGE>

ELCOTEL, INC.

CROSS-REFERENCE SHEET

CROSS-REFERENCE SHEET FOR
REGISTRATION STATEMENT ON
FORM S-4 AND PROSPECTUS

<TABLE>
<CAPTION>
ITEM CAPTION IN PROXY STATEMENT-
NUMBER CAPTION IN FORM S-4 PROSPECTUS
------ ------------------- ---------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus.......................... Facing Page of Registration
Statement; Cross Reference Sheet;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................. Inside Front Cover Page;
Available Information; Table of
Contents; Incorporation of
Certain Documents by Reference
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information......................... Summary; Certain Risk Factors;
The Merger--Certain Federal
Income Tax Consequences; No
Appraisal of Dissenters' Rights;
The Meetings--Elcotel Annual
Meeting--Share Ownership of
Officers, Directors and Certain
Stockholders; TSG Special
Meeting--Share Ownership of
Officers, Directors and Certain
Stockholders

4. Terms of the Transaction............ Summary; The Merger Agreement

5. Pro Forma Financial Information..... Summary--Selected Historical and
Pro Forma Consolidated Financial
Data; Unaudited Pro Forma
Consolidated Financial
Information
6. Material Contacts with the Company
Being Acquired...................... The Merger--Background of the
Merger
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters........... Not Applicable

8. Interests of Named Experts and
Counsel............................. Experts

9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... Not Applicable

B. INFORMATION ABOUT THE REGISTRANT

10. Information with Respect to S-3
Registrants......................... Not Applicable

11. Incorporation of Certain Information
by Reference........................ Not Applicable

12. Information with Respect to S-2 or
S-3 Registrants..................... Available Information--
Incorporation of Certain
Documents by Reference

13. Incorporation of Certain Information
by Reference........................ Available Information--
Incorporation of Certain
Documents by Reference
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
ITEM CAPTION IN PROXY STATEMENT-
NUMBER CAPTION IN FORM S-4 PROSPECTUS
------ ------------------- ---------------------------
<C> <S> <C>
14. Information with Respect to
Registrants Other than S-2 or S-3
Registrants.......................... Not Applicable

C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED

15. Information with Respect to S-3
Companies............................ Not Applicable

16. Information with Respect to S-2 or S-
3 Companies.......................... Not Applicable

17. Information with Respect to Companies
other than S-2 or S-3 Companies...... Technology Service Group, Inc.

D. VOTING AND MANAGEMENT INFORMATION

18. Information if Proxies, Consents or
Authorizations are to be Solicited... The Meetings--Elcotel Annual
Meeting-TSG Special Meeting; The
Merger--No Appraisal or
Dissenters' Rights; Interests of
Certain Persons and Employee
Matters; Technology Service
Group, Inc.

19. Information if Proxies, Consents or
Authorizations are not to be
Solicited in an Exchange Offer....... Not Applicable
</TABLE>
<PAGE>

ELCOTEL, INC.
6428 PARKLAND DRIVE, SARASOTA, FLORIDA 34243

NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD 9:00 A.M., DECEMBER 5, 1997

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Elcotel, Inc. ("Elcotel") will be held on Friday, December 5,
1997, at 9:00 A.M., local time, at The Waterside Room, 216 Sarasota Quay,
Sarasota, Florida 34236, for consideration of and action by the holders of
Elcotel Common Stock upon the following matters:

1. The election of a Board of Directors consisting of seven directors,
with each director to serve until the next annual meeting of stockholders
or until the election and qualification of his or her respective successor;

2. The approval of the issuance of shares of common stock, par value
$0.01 per share, of Elcotel ("Elcotel Common Stock") in connection with the
proposed merger of Elcotel Hospitality Service, Inc., a wholly-owned
subsidiary of Elcotel ("Merger Subsidiary"), with and into Technology
Service Group, Inc. ("TSG") pursuant to an Agreement and Plan of Merger,
dated as of August 13, 1997, as amended, among Elcotel, TSG and Merger
Subsidiary (the "Merger") and any other actions as may be required in
furtherance of the Merger;

3. The approval of an amendment to the Certificate of Incorporation of
Elcotel to increase the number of shares of Elcotel Common Stock authorized
for issuance to 30,000,000;

4. The ratification of the appointment of Deloitte & Touche llp as
Elcotel's independent public accountants for the fiscal year ending March
31, 1998;

5. The approval of an amendment to the 1991 Stock Option Plan to increase
by 500,000 the number of shares reserved for issuance pursuant to such
plan;

6. The approval of an amendment to the Directors Stock Option Plan to,
among other things, increase by 50,000 the number of shares reserved for
issuance pursuant to such plan; and

7. The transaction of such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof, and matters
incident to the conduct of the Annual Meeting.

The Board of Directors of Elcotel has fixed the close of business on October
22, 1997, as the record date for the determination of holders of Elcotel
Common Stock entitled to notice of, and to vote at, the Annual Meeting or any
adjournment or postponement thereof. The Merger, the Merger Agreement and the
other matters enumerated above are more fully described in the accompanying
Joint Proxy Statement-Prospectus.

STOCKHOLDERS (WHETHER THEY OWN ONE OR MANY SHARES AND WHETHER THEY EXPECT TO
ATTEND THE ANNUAL MEETING OR NOT) ARE REQUESTED TO VOTE, SIGN, DATE AND RETURN
PROMPTLY THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES.

By Order of the Board of Directors

/s/ Ronald M. Tobin

Ronald M. Tobin, Secretary

October 31, 1997
<PAGE>

TECHNOLOGY SERVICE GROUP, INC.
20 MANSELL COURT EAST, SUITE 200
ROSWELL, GEORGIA 30076

NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD 10:00 A.M., DECEMBER 5, 1997

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Technology Service Group, Inc. ("TSG") will be held on Friday,
December 5, 1997, at 10:00 A.M., local time, at Deloitte & Touche LLP, 125
Summer Street, Boston, MA 02110, for consideration of and action by the
holders of TSG Common Stock upon the following matters:

1. The approval of the proposed merger of Elcotel Hospitality Service,
Inc., a wholly-owned subsidiary of Elcotel, Inc. ("Merger Subsidiary"),
with and into TSG pursuant to an Agreement and Plan of Merger, dated as of
August 13, 1997, as amended, among Elcotel, Inc., TSG and Merger Subsidiary
(the "Merger") and any other actions as may be required in furtherance of
the Merger;

2. The transaction of such other business as may properly come before the
Special Meeting and any adjournment or postponement thereof, and matters
incident to the conduct of the Special Meeting.

The Board of Directors of TSG has fixed the close of business on October 22,
1997, as the record date for the determination of holders of TSG Common Stock
entitled to notice of, and to vote at, the Special Meeting or any adjournment
or postponement thereof. The Merger, the Merger Agreement and the other
matters enumerated above are more fully described in the accompanying Joint
Proxy Statement-Prospectus.

By Order of the Board of Directors
/s/ William H. Thompson

William H. Thompson, Secretary

October 31, 1997
<PAGE>

JOINT PROXY STATEMENT OF

ELCOTEL, INC.
AND
TECHNOLOGY SERVICE GROUP, INC.

----------------

PROSPECTUS OF ELCOTEL, INC.

----------------

5,753,584 SHARES OF ELCOTEL COMMON STOCK (PAR VALUE $.01 PER SHARE)
WARRANTS TO PURCHASE 708,570 SHARES OF ELCOTEL COMMON STOCK

This Joint Proxy Statement-Prospectus is being furnished to the stockholders
of Elcotel, Inc., a Delaware corporation ("Elcotel"), in connection with the
solicitation of proxies by its Board of Directors for use at the Annual
Meeting of Stockholders of Elcotel (the "Elcotel Annual Meeting") to be held
on December 5, 1997, at 9:00 A.M., local time, at The Waterside Room, 216
Sarasota Quay, Sarasota, Florida 34236, and at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying notice of
annual meeting of stockholders of Elcotel. This Joint Proxy Statement-
Prospectus is also being furnished to the stockholders of Technology Service
Group, Inc., a Delaware corporation ("TSG"), in connection with the
solicitation of proxies by its Board of Directors for use at the Special
Meeting of Stockholders of TSG (the "TSG Special Meeting") to be held on
December 5, 1997, at 10:00 A.M., local time, at Deloitte & Touche llp, 125
Summer Street, Boston, MA 02110, and at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying notice of
special meeting of stockholders of TSG.

This Joint Proxy Statement-Prospectus also constitutes the prospectus of
Elcotel that is a part of the Registration Statement of Elcotel filed with the
Securities and Exchange Commission with respect to shares of common stock, par
value $0.01 per share of Elcotel ("Elcotel Common Stock") and warrants to
purchase Elcotel Common Stock to be issued in connection with the Merger (the
"Merger") of Elcotel Hospitality Service, Inc., a wholly-owned subsidiary of
Elcotel ("Merger Subsidiary"), with and into TSG pursuant to an Agreement and
Plan of Merger, dated as of August 13, 1997, as amended (the "Merger
Agreement"), among Elcotel, TSG and Merger Subsidiary. Upon consummation of
the Merger, (i) TSG will become a direct wholly-owned subsidiary of Elcotel;
(ii) each issued and outstanding share of common stock, par value $0.01 per
share of TSG ("TSG Common Stock"), will be converted into the right to receive
1.05 shares of Elcotel Common Stock (the "Exchange Ratio"); and (iii) each
outstanding option, warrant and right to purchase TSG Common Stock will be
converted into an option, warrant or right, as the case may be, to purchase
1.05 shares of Elcotel Common Stock for each share of TSG Common Stock
purchasable pursuant to such option, warrant or right immediately prior to the
effective time of the Merger. See "The Merger Agreement-Conversion of TSG
Shares; Conversion of Options to Purchase TSG Common Stock; Conversion of
Warrants to Purchase TSG Common Stock." A copy of the Merger Agreement is
attached hereto as Appendix A and incorporated herein by reference.

Consummation of the proposed Merger is subject to various conditions,
including the approval of the holders of the requisite number of shares of
Elcotel Common Stock and TSG Common Stock, all as described in the Joint Proxy
Statement-Prospectus. The proposed Merger will be consummated as soon as
practical after all such approvals are obtained and the other conditions to
the Merger are satisfied or waived.

On August 13, 1997, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the last reported
closing sales prices on the Nasdaq National Market of Elcotel Common Stock and
TSG Common Stock were $6.25 and $6.875, respectively. On October 27, 1997, the
latest practicable trading day prior to the printing of this Joint Proxy
Statement-Prospectus, the last reported closing sales prices on the Nasdaq
National Market of Elcotel Common Stock and TSG Common Stock were $6.50 and
$7.25, respectively.
<PAGE>

The information contained or incorporated by reference herein with respect
to Elcotel has been provided by Elcotel, and the information contained or
incorporated herein by reference with respect to TSG has been provided by TSG.

This Joint Proxy Statement-Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Elcotel and TSG on or about October
31, 1997.

SEE "CERTAIN RISK FACTORS" AT PAGE 15 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN ELCOTEL COMMON STOCK.

THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS OF ELCOTEL AND
TSG ARE URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT-
PROSPECTUS IN ITS ENTIRETY.

THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

----------------

The date of this Joint Proxy Statement-Prospectus is October 31, 1997.

4
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 1
SUMMARY................................................................... 3
The Companies........................................................... 3
Elcotel Annual Meeting.................................................. 4
TSG Special Meeting..................................................... 6
The Merger.............................................................. 7
Recent Developments..................................................... 9
Comparative Market Prices............................................... 10
Unaudited Comparative Per Share Data.................................... 11
Selected Historical Consolidated Financial Data......................... 12
Selected Historical and Pro Forma Consolidated Financial Data of
Elcotel................................................................ 14
CERTAIN RISK FACTORS...................................................... 15
Integration of Operations............................................... 15
Fixed Exchange Ratio Despite Possible Change in Stock Prices............ 15
Dependence on Key Personnel............................................. 16
Intense Competition..................................................... 16
Risks Associated with International Market.............................. 16
Technological Obsolescence.............................................. 17
Government Regulation; Possible Adverse Effect of Future Regulatory
Changes................................................................ 17
Dividends Not Likely.................................................... 18
Control of Elcotel...................................................... 18
Dilution to Elcotel Stockholders........................................ 18
Debt Refinancing........................................................ 18
Limited Number of Customers in Certain Markets.......................... 18
Dependence on Certain Manufacturers; Single Sources of Supply........... 19
Fixed Price Products.................................................... 19
Patents and Technology.................................................. 19
Potential Environmental Liabilities..................................... 19
THE MEETINGS.............................................................. 20
Elcotel Annual Meeting.................................................. 20
TSG Special Meeting..................................................... 22
Solicitation of Proxies................................................. 24
THE MERGER................................................................ 24
General................................................................. 24
Background of the Merger................................................ 24
Elcotel's Reasons For The Merger; Recommendations of The Elcotel Board.. 28
Opinion of Murray Devine................................................ 29
TSG's Reasons for the Merger; Recommendations of The TSG Board.......... 30
Certain Federal Income Tax Consequences................................. 31
Interests of Certain Persons and Employee Matters....................... 32
Refinancing of TSG and Elcotel Indebtedness............................. 33
Accounting Treatment.................................................... 34
Antitrust............................................................... 34
No Appraisal or Dissenters' Rights...................................... 34
Resales of Elcotel Common Stock......................................... 34
Nasdaq National Markets................................................. 34
THE MERGER AGREEMENT...................................................... 35
General................................................................. 35
Effective Time.......................................................... 35
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Corporate Matters...................................................... 35
Conversion of TSG Shares............................................... 35
Conversion of Options to Purchase TSG Common Stock..................... 36
Conversion of Warrants to Purchase TSG Common Stock.................... 36
Conduct of TSG Pending The Merger...................................... 36
Conduct of Elcotel Pending the Merger.................................. 38
Appointment of Directors............................................... 39
No Solicitation........................................................ 39
Representations and Warranties......................................... 40
Capitalization of TSG.................................................. 40
Capitalization of Elcotel.............................................. 41
General Conditions Precedent to the Merger............................. 42
Conditions Precedent to Obligations of Elcotel......................... 42
Conditions Precedent to Obligations of TSG............................. 42
Termination............................................................ 43
Termination Fees and Expenses.......................................... 43
VOTING AGREEMENT......................................................... 44
Voting of TSG Common Stock............................................. 44
Voting of Elcotel Common Stock......................................... 44
FUNDAMENTAL/WEXFORD STOCKHOLDERS' AGREEMENT.............................. 44
Restrictions on Transfers.............................................. 45
Tag Along Rights....................................................... 45
Termination............................................................ 45
Registration Rights.................................................... 45
Voting of Capital Stock................................................ 46
LUCENT ACQUISITION....................................................... 46
TECHNOLOGY SERVICE GROUP, INC............................................ 47
General................................................................ 47
Developments During Fiscal 1997........................................ 47
History................................................................ 48
The Public Payphone Industry........................................... 49
Products and Services.................................................. 51
Sales and Markets...................................................... 54
Competition............................................................ 56
Manufacturing, Assembly and Sources of Supply.......................... 57
Warranty and Service................................................... 58
Licenses, Patents and Trademarks....................................... 58
Design and Product Developments........................................ 59
Employees.............................................................. 59
Backlog................................................................ 59
Seasonality............................................................ 59
Potential Environmental Liabilities.................................... 60
Government Regulation.................................................. 60
Properties............................................................. 62
MARKET FOR TSG'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS............ 63
SELECTED TSG FINANCIAL DATA.............................................. 64
TSG MANAGEMENT'S DISCUSSION AND ANALYSIS OF TSG'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 65
Overview............................................................... 65
Background--The Acquisition............................................ 65
Results of Operations.................................................. 66
</TABLE>

ii
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Liquidity and Capital Resources......................................... 72
Selected Quarterly Data................................................. 79
New Accounting Pronouncements........................................... 80
DIRECTORS AND EXECUTIVE OFFICERS OF TSG................................... 81
Directors............................................................... 81
Executive Officers...................................................... 82
Section 16(a) Beneficial Ownership Reporting Compliance................. 83
Security Ownership of Certain Beneficial Holders and Management......... 83
Security Ownership of Certain Beneficial Holders........................ 84
Security Ownership of Management........................................ 85
TSG EXECUTIVE COMPENSATION................................................ 86
Summary Compensation Table.............................................. 86
Option Grants in the Last Fiscal Year................................... 87
Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-
End Option Values...................................................... 87
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements........................................................... 87
Report of the Compensation Committee on Executive Compensation.......... 89
Directors' Compensation................................................. 91
Compensation Committee Interlocks and Insider Participation............. 91
Performance Graph....................................................... 92
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF TSG..................... 93
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................... 93
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION........... 97
Basis of Presentation................................................... 97
Merger Consideration.................................................... 97
Lucent Acquisition Purchase Price....................................... 100
Unaudited Pro Forma Consolidated Balance Sheet Adjustments Related to
Merger................................................................. 100
Unaudited Pro Forma Balance Sheet Adjustments Related to the Lucent Ac-
quisition.............................................................. 102
Unaudited Pro Forma Consolidated Statements of Operations Adjustments
Related to the Merger.................................................. 103
Unaudited Pro Forma Consolidated Statements of Operations Adjustments
Related to the Lucent Acquisition...................................... 104
Unaudited Pro Forma Income per Common and Common Equivalent Share....... 104
Preliminary Integration and Consolidation Plan.......................... 105
Financing Plan.......................................................... 105
DESCRIPTION OF ELCOTEL CAPITAL STOCK...................................... 105
Common Stock............................................................ 105
Change of Control....................................................... 105
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 106
ADDITIONAL MATTERS SUBMITTED TO THE VOTE OF ELCOTEL'S STOCKHOLDERS........ 107
Additional Proposal No. 1: Election of Directors........................ 107
Additional Proposal No. 2: Amendment to Certificate of Incorporation.... 109
Additional Proposal No. 3: Ratification of Appointment of Independent
Public Accountants..................................................... 110
Additional Proposal No. 4: Amendment to 1991 Stock Option Plan.......... 110
Additional Proposal No. 5: Amendment to Directors Stock Option Plan..... 113
OTHER INFORMATION REGARDING ELCOTEL....................................... 116
Directors and Officers.................................................. 116
Section 16 Compliance................................................... 117
Security Ownership of Certain Beneficial Owners And Management.......... 118
ELCOTEL EXECUTIVE COMPENSATION............................................ 120
Summary Compensation Table.............................................. 120
Stock Option Grants..................................................... 121
Stock Option Exercises and Holdings..................................... 121
</TABLE>

iii
<PAGE>

<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Severance Arrangements........................................... 121
ELCOTEL COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION...................................................... 122
ELCOTEL STOCK PERFORMANCE CHART.................................... 124
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ELCOTEL.......... 124
LEGAL MATTERS...................................................... 125
EXPERTS............................................................ 125
STOCKHOLDER PROPOSALS.............................................. 125
APPENDICES
Merger Agreement................................................. Appendix A
Opinion of Murray Devine......................................... Appendix B
Consolidated Financial Statements of TSG......................... Appendix C
</TABLE>

iv
<PAGE>

AVAILABLE INFORMATION

Each of Elcotel and TSG is subject to the information and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and in accordance therewith files periodic reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commission's regional offices located at 7 World Trade Center, Suite 1300,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such reports, proxy statements and
other information also can be obtained at prescribed rates by writing to the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, Elcotel and TSG are each required to file
electronic versions of such material with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system. The Commission maintains a World Wide Web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the Commission. Electronic filings are publicly available
on the Commission's World Wide Web site within 24 hours of acceptance. The
address of such site is http://www.sec.gov. Elcotel Common Stock and TSG
Common Stock are each quoted on the Nasdaq National Market. Reports, proxy
statements and other information filed by Elcotel and TSG with the Nasdaq
National Market may also be inspected at the Offices of the National
Association of Securities Dealers, Inc. (the "NASD"), Market Listing Section,
1735 K Street, N.W., Washington, D.C. 20006.

Elcotel has filed with the Commission a registration statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"1933 Act") with respect to the securities of Elcotel to be issued pursuant to
the Merger Agreement. As permitted under the 1933 Act and the 1934 Act, this
Joint Proxy Statement-Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits thereto. Such additional
information can be inspected and copied or obtained from the Commission in the
manner described above. Statements contained in this Joint Proxy Statement-
Prospectus, or in any document incorporated in this Joint Proxy Statement-
Prospectus by reference, as to the contents of any other document referred to
herein or therein are not necessarily complete, and each such statement is
qualified in all respects by reference to the copy of such other document
filed as an exhibit to the Registration Statement or such other document.

This Joint Proxy Statement-Prospectus is accompanied by a copy of Elcotel's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and
Elcotel's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents which have been filed by Elcotel pursuant to the
1934 Act are hereby incorporated by reference in this Joint Proxy Statement-
Prospectus:

1. Elcotel's Annual Report on Form 10-K for the fiscal year ended March
31, 1997;

2. Elcotel's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997;

3. Elcotel's Current Reports on Form 8-K, dated July 1, 1997, August 13,
1997 and September 30, 1997.

The information relating to Elcotel contained in this Joint Proxy Statement-
Prospectus does not purport to be comprehensive and should be read together
with the information in the documents incorporated by reference herein.

All documents filed by Elcotel pursuant to Sections 13(a), 13(c), 14 or
15(d) of the 1934 Act subsequent to the date of this Joint Proxy Statement-
Prospectus and prior to the date of the Elcotel Annual Meeting shall be deemed
to be incorporated by reference in this Joint Proxy Statement-Prospectus and
be a part hereof from the dates of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Joint
Proxy
<PAGE>

Statement-Prospectus to the extent that a statement contained herein, or in
any other subsequently filed document which also is or is deemed to be
incorporated herein, modifies or supersedes such statement. Any such statement
so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this Joint Proxy Statement-Prospectus.

THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER, UPON REQUEST FROM, IN THE CASE OF DOCUMENTS RELATING TO
ELCOTEL, RONALD M. TOBIN, SECRETARY, ELCOTEL, INC., 6428 PARKLAND DRIVE,
SARASOTA, FLORIDA 34243, TELEPHONE NUMBER (941) 758-0389, AND IN THE CASE OF
DOCUMENTS RELATING TO TSG, WILLIAM H. THOMPSON, SECRETARY, TECHNOLOGY SERVICE
GROUP, INC., 20 MANSELL COURT EAST, SUITE 200, ROSWELL, GEORGIA 30076,
TELEPHONE NUMBER (770) 587-0208. IN ORDER TO ENSURE TIMELY DELIVERY OF THESE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 28, 1997.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY EITHER ELCOTEL OR TSG. THIS JOINT
PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, NOR DOES IT CONSTITUTE THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH OR FROM ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE ANY SUCH SOLICITATION IN SUCH JURISDICTION. THE
DELIVERY OF THIS JOINT PROXY STATEMENT-PROSPECTUS WILL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF ELCOTEL OR TSG SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

2
<PAGE>

SUMMARY

The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement-Prospectus and does not purport to be complete. This
summary is subject to and qualified in its entirety by reference to the more
detailed information contained elsewhere in this Joint Proxy Statement-
Prospectus, the Appendices hereto and the documents referred to herein and
incorporated herein by reference. Stockholders of Elcotel and TSG are urged to
review carefully this Joint Proxy Statement-Prospectus, including the Merger
Agreement attached hereto as Appendix A and the other Appendices attached
hereto, and the documents incorporated herein by reference. Unless otherwise
defined herein, all capitalized terms are as defined in the Merger Agreement.

This Joint Proxy Statement-Prospectus (including the documents incorporated
by reference herein) contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to Elcotel and TSG that are based on the beliefs of the
management of Elcotel or TSG, as applicable, as well as assumptions made by and
information currently available to the management of Elcotel or TSG, as
applicable. When used in this Joint Proxy Statement-Prospectus, the words
"anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to Elcotel, TSG or the management of either of
them, identify forward-looking statements. Such statements, which include,
without limitation, statements as to the benefits expected to be realized as a
result of the Merger and the matters set forth herein under "The Merger,"
reflect the current views of Elcotel or TSG, as applicable, with respect to
future events, the outcome of which is subject to certain risks, including
among others, those set forth in "Certain Risk Factors." Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results or outcomes may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
Stockholders of Elcotel and TSG are urged to consider the foregoing in
evaluating the information contained herein.

THE COMPANIES

ELCOTEL, INC.

Elcotel designs, develops, manufactures and markets micro-processor based
public communication products and software which provide services over both
domestic and international wireline and wireless (cellular) telephone networks.
The principal products of Elcotel are coin and card operated intelligent pay
telephones ("payphones") and management systems to support payphone operators.
Elcotel markets intelligent prepaid card systems internationally in support of
its payphone card applications. When Elcotel's products are combined with
personal computer (PC) based payphone management systems, they perform
substantially the same functions as payphones controlled by the central offices
of regulated telephone operating companies (hereinafter referred to as
"telcos"). The markets for Elcotel's products are both domestic and
international private payphone operators and telcos providing public
communications services. Elcotel is one of the leaders in sales of
microprocessor-based payphone products to domestic private payphone operators.
Elcotel's payphones support coin, credit card and debit card applications and
are controlled internally by a microprocessor, memory chips, and other
electronic components which automate the call management functions performed by
the payphone.

The principal executive offices of Elcotel are located at 6428 Parkland
Drive, Sarasota, Florida 34243 and its telephone number is (941) 758-0389. As
used in this Joint Proxy Statement-Prospectus, the term "Elcotel" refers to
Elcotel, Inc. and its subsidiaries, unless the context otherwise requires.

TECHNOLOGY SERVICE GROUP, INC.

3
<PAGE>

systems are based upon microprocessor technology and perform a variety of
functions, including calling card, debit ("prepay") card and credit card
operations, data storage, call progress detection, call rating and maintenance,
diagnostic and coin administration functions. TSG's payphone software
management system, CoinNet(TM), is an integral component of TSG's
microprocessor-based payphone systems. TSG also provides payphone and payphone
component repair, refurbishment and upgrade conversion services to the
regulated telephone operating companies in the United States, which consist of
the Regional Bell Operating Companies ("RBOCs") and telcos. See "Technology
Service Group, Inc.--Products and Services."

TSG operates in one business segment as a provider of public communication
systems, products and services to communications providers in the United States
and foreign markets. TSG presently markets its products and services primarily
to the RBOCs in the United States and to cellular service providers in certain
international markets. TSG has derived substantially all of its revenues from
sales to four RBOCs. See "Technology Service Group, Inc.--Sales and Markets."

The principal executive offices of TSG are located at 20 Mansell Court East,
Suite 200, Roswell, Georgia 30076, and its telephone number is (770) 587-0208.
As used in this Joint Proxy Statement-Prospectus, the term "TSG" refers to
Technology Service Group, Inc. and its subsidiaries, unless the context
otherwise requires.

ELCOTEL HOSPITALITY SERVICE, INC.

Elcotel Hospitality Service, Inc. ("Merger Subsidiary"), a corporation
organized under the laws of the State of Delaware, is a direct wholly-owned
subsidiary of Elcotel, and was incorporated in 1987. Since 1990, Merger
Subsidiary has had no material assets and has not engaged in any activities
except in connection with the Merger. The principal executive offices of Merger
Subsidiary are located at 6428 Parkland Drive, Sarasota, Florida and its
telephone number is (941) 758-0389.

ELCOTEL ANNUAL MEETING

TIME, DATE, PLACE AND PURPOSE

The annual meeting of stockholders of Elcotel (the "Elcotel Annual Meeting")
will be held at The Waterside Room, 216 Sarasota Quay, Sarasota, Florida, 34236
on December 5, 1997, at 9:00 a.m., local time. The purpose of the Elcotel
Annual Meeting is to consider and vote upon the following matters: (i) the
election of a Board of Directors consisting of seven directors, with each
director to serve until the next annual meeting of stockholders of Elcotel or
until the election and qualification of his or her respective successor; (ii)
the approval of the issuance of shares of common stock, par value $0.01 per
share, of Elcotel ("Elcotel Common Stock") in connection with the proposed
merger of Merger Subsidiary with and into TSG pursuant to an Agreement and Plan
of Merger, dated as of August 13, 1997, as amended, among Elcotel, TSG and
Merger Subsidiary (the "Merger") and the approval of any other actions as may
be required in furtherance of the Merger; (iii) the approval of an amendment to
the Certificate of Incorporation of Elcotel to increase the number of shares of
Elcotel Common Stock authorized for issuance to 30,000,000; (iv) the
ratification of the appointment of Deloitte & Touche llp as Elcotel's
independent public accountants for the fiscal year ending March 31, 1998; (v)
the approval of an amendment to the 1991 Stock Option Plan to increase by
500,000 the number of shares reserved for issuance pursuant to such plan; (vi)
the approval of an amendment to the Directors Stock Option Plan to, among other
things, increase by 50,000 the number of shares reserved for issuance pursuant
to such plan; and (vii) the transaction of such other business as may properly
come before the Elcotel Annual Meeting and any adjournment or postponement
thereof, and matters incident to the conduct of the Annual Meeting. See "The
Merger" and "Additional Matters Submitted to the Vote of Elcotel's
Stockholders."

4
<PAGE>

RECORD DATE; REQUIRED VOTE

Only holders of record of Elcotel Common Stock at the close of business on
October 22, 1997 (the "Elcotel Record Date") are entitled to receive notice of
and to vote at the Elcotel Annual Meeting. At the close of business on the
Elcotel Record Date, there were 8,210,352 shares of Elcotel Common Stock
outstanding, each of which entitles the registered holder thereof to one vote.
See "The Meetings--Elcotel Annual Meeting--Record Date; Required Vote; Quorum."

Approval of the amendment to the Certificate of Incorporation of Elcotel to
increase the number of shares of Elcotel Common Stock authorized for issuance
to 30,000,000 (the "Elcotel Amendment") will require the affirmative vote of a
majority of the shares of Elcotel Common Stock outstanding as of the Elcotel
Record Date. Approval of the issuance of Elcotel Common Stock pursuant to the
Merger Agreement, ratification of the appointment of Deloitte & Touche LLP as
the independent public accountants of Elcotel for the fiscal year ending March
31, 1998 and approval of the amendments to the 1991 Stock Option Plan and the
Directors Stock Option Plan will require the affirmative vote of a majority of
the shares of Elcotel Common Stock present in person or represented by properly
executed proxy at the Elcotel Annual Meeting. The election of each director
will require the affirmative vote of a plurality of the shares of Elcotel
Common Stock present in person or represented by properly executed proxy at the
Elcotel Annual Meeting. See "The Meetings--Elcotel Annual Meeting--Record Date;
Required Vote; Quorum."

THE BOARD OF DIRECTORS OF ELCOTEL (THE "ELCOTEL BOARD") BY A VOTE OF 5 TO 2
HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT ELCOTEL STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE ISSUANCE OF ELCOTEL COMMON STOCK PURSUANT TO THE
MERGER AGREEMENT AND ANY OTHER ACTIONS REQUIRED IN FURTHERANCE OF THE MERGER.
SEE "THE MERGER--ELCOTEL'S REASONS FOR THE MERGER; RECOMMENDATION OF THE
ELCOTEL BOARD." THE ELCOTEL BOARD UNANIMOUSLY RECOMMENDS THAT ELCOTEL
STOCKHOLDERS VOTE "FOR" (I) THE ELECTION OF THE DIRECTOR NOMINEES SPECIFIED
HEREIN, (II) THE APPROVAL OF THE ELCOTEL AMENDMENT, (III) THE RATIFICATION OF
THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS ELCOTEL'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR ENDING MARCH 31, 1998, (IV) THE APPROVAL OF THE
AMENDMENT TO THE 1991 STOCK OPTION PLAN AND (V) THE APPROVAL OF THE AMENDMENTS
TO THE DIRECTORS STOCK OPTION PLAN. SEE "THE MERGER--ELCOTEL'S REASONS FOR THE
MERGER; RECOMMENDATION OF THE ELCOTEL BOARD."

SHARE OWNERSHIP OF OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS

At the close of business on the Elcotel Record Date, directors and executive
officers of Elcotel and their respective affiliates were the beneficial owners
of an aggregate of approximately 2,308,961 shares (approximately 27.5%) of the
Elcotel Common Stock then outstanding (which amount includes the shares owned
by Fundamental Management Corporation ("Fundamental") referred to in the next
sentence). As of the Elcotel Record Date, Fundamental owned an aggregate of
1,439,223 shares (approximately 17.5%) of the Elcotel Common Stock then
outstanding. See "The Meetings--Elcotel Annual Meeting--Share Ownership of
Officers, Directors and Certain Stockholders" and "Other Information Regarding
Elcotel--Security Ownership of Certain Beneficial Owners and Management."
Fundamental has agreed to vote its shares of Elcotel Common Stock in favor of
the issuance of Elcotel Common Stock in connection with the Merger and has
generally agreed not to transfer such shares before the consummation of the
Merger or termination of the Merger Agreement. Such agreement increases the
likelihood that the vote of the Elcotel stockholders required for the issuance
of Elcotel Common Stock in connection with the Merger will be obtained. See
"The Voting Agreement."

5
<PAGE>

TSG SPECIAL MEETING

TIME, DATE, PLACE AND PURPOSE

A special meeting of stockholders of TSG (the "TSG Special Meeting") will be
held at Deloitte & Touche llp, 125 Summer Street, Boston, MA 02110, on December
5, 1997 at 10:00 A.M., local time. See "The Meetings--TSG Special Meeting." The
purpose of the TSG Special Meeting is to consider and vote upon the following
matters: (i) the approval of the proposed merger of Merger Subsidiary with and
into TSG pursuant to an Agreement and Plan of Merger, dated as of August 13,
1997, as amended, among Elcotel, TSG and Merger Subsidiary (the "Merger
Agreement") and the approval of any other actions as may be required in
furtherance of the Merger; and (ii) the transaction of such other business as
may properly come before the Special Meeting and any adjournment or
postponement thereof, and matters incident to the conduct of the Special
Meeting.

RECORD DATE; REQUIRED VOTE

Only holders of record of TSG Common Stock at the close of business on
October 22, 1997 (the "TSG Record Date") are entitled to receive notice of and
to vote at the TSG Special Meeting. At the close of business on the TSG Record
Date, there were 4,708,851 shares of TSG Common Stock outstanding, each of
which entitles the registered holder thereof to one vote. See "The Meetings--
TSG Special Meeting--Record Date; Required Vote; Quorum."

Approval of the Merger will require the affirmative vote of a majority of the
shares of TSG Common Stock outstanding as of the TSG Record Date. See "The
Meetings--TSG Special Meeting--Record Date; Required Vote; Quorum."

THE BOARD OF DIRECTORS OF TSG (THE "TSG BOARD") HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT TSG STOCKHOLDERS VOTE "FOR" THE APPROVAL
OF THE MERGER AGREEMENT AND THE APPROVAL OF ANY OTHER ACTIONS AS MAY BE
REQUIRED IN FURTHERANCE OF THE MERGER. SEE "THE MERGER--TSG'S REASONS FOR THE
MERGER; RECOMMENDATION OF THE TSG BOARD."

SHARE OWNERSHIP OF OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS

At the close of business on the TSG Record Date, directors and executive
officers of TSG and their affiliates were the beneficial owners of an aggregate
of approximately 3,276,854 shares (approximately 65%) of the TSG Common Stock
then outstanding (which amount includes the shares owned by Wexford Partners
Fund, L.P., a Delaware limited partnership ("Wexford"), referred to in the next
sentence). As of the TSG Record Date, Wexford owned an aggregate of 2,444,286
shares (approximately 52%) of the TSG Common Stock then outstanding. See "The
Meetings--TSG Special Meeting--Share Ownership of Officers, Directors and
Certain Stockholders" and "Directors and Executive Officers of TSG--Security
Ownership of Certain Beneficial Holders and Management." Wexford has agreed to
vote its shares of TSG Common Stock in favor of the approval of the Merger
Agreement and has generally agreed not to transfer such shares before the
consummation of the Merger or termination of the Merger Agreement. Such
agreement ensures that the vote of TSG stockholders required to consummate the
Merger will be obtained. See "The Meetings--Required Vote" and "The Voting
Agreement."

6
<PAGE>

THE MERGER

At the effective time of the Merger ("Effective Time"), Merger Subsidiary
will merge into TSG, with TSG as the surviving corporation of the Merger. As a
result of the Merger, TSG will become a wholly-owned subsidiary of Elcotel. The
Effective Time of the Merger will be at such time as the certificate of merger
is filed with the Delaware Secretary of State, or at such subsequent date or
time as Elcotel and TSG agree and specify in the certificate of merger. The
filing of the certificate of merger will occur no later than the fifth business
day after satisfaction or waiver of the conditions to the consummation of the
Merger set forth in the Merger Agreement unless another date is agreed to in
writing by TSG, Elcotel and Merger Subsidiary (the "Closing Date").

THE MERGER CONSIDERATION

At the Effective Time of the Merger, each share of TSG Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares of
TSG Common Stock owned by TSG as treasury stock and shares of TSG Common Stock
owned by Elcotel or any direct or indirect wholly-owned subsidiary of Elcotel
or TSG) will by virtue of the Merger and without any action on the part of the
holder thereof be automatically converted into the right to receive 1.05 fully
paid and nonassessable shares of Elcotel Common Stock. No fractional shares of
Elcotel Common Stock will be issued in connection with the Merger. In lieu of
any fractional shares, Elcotel will pay to each holder of TSG Common Stock
otherwise entitled to receive a fractional share, an amount in cash equal to
such fraction multiplied by the arithmetic mean of the closing sales prices for
Elcotel Common Stock reported on the Nasdaq National Market for each of the
five consecutive trading days on which Elcotel Common Stock was traded
immediately preceding the Effective Time. See "The Merger Agreement--Conversion
of TSG Shares." Holders of options and rights to purchase shares of TSG Common
Stock ("TSG Stock Options") pursuant to TSG's option and stock purchase plans
will receive options and rights to purchase, at a proportionately reduced per
share exercise price, a number of shares of Elcotel Common Stock equal to 1.05
times the number of shares of TSG Common Stock they were entitled to purchase
immediately prior to the Effective Time under such TSG Stock Options. See "The
Merger Agreement--Conversion of Options to Purchase TSG Common Stock." Holders
of warrants to purchase TSG Common Stock ("TSG Warrants") will receive warrants
to purchase, at a proportionately reduced per share exercise price, a number of
shares of Elcotel Common Stock equal to 1.05 times the number of shares of TSG
Common Stock they were entitled to purchase immediately prior to the Effective
Time under such TSG Warrants. See "The Merger Agreement--Conversion of Warrants
to Purchase TSG Common Stock."

TERMINATION

The Merger Agreement may be terminated before the effective time
notwithstanding approval by the stockholders of Elcotel or TSG, under the
circumstances specified in the Merger Agreement, including by mutual written
agreement of Elcotel and TSG and termination by either party if the Merger is
not consummated by December 31, 1997. See "The Merger Agreement--Termination."

TERMINATION FEES AND EXPENSES

Under certain circumstances, either Elcotel or TSG may be required to pay a
termination fee or to reimburse the other party for its reasonable out-of-
pocket expenses if the Merger is not consummated. Under certain circumstances
Elcotel may be required to reimburse TSG for certain costs if the Merger is not
consummated. See "The Merger Agreement--Termination Fees and Expenses."

RECOMMENDATION OF THE ELCOTEL BOARD

The Elcotel Board has approved the Merger Agreement and recommends that the
stockholders of Elcotel vote FOR the approval of the issuance of Elcotel Common
Stock pursuant to the Merger Agreement and any

7
<PAGE>

other actions required in furtherance of the Merger. For a discussion of the
factors considered by the Elcotel Board in reaching its conclusions, see "The
Merger--Elcotel's Reasons for the Merger; Recommendation of the Elcotel Board."

OPINION OF ELCOTEL'S FINANCIAL ADVISOR

In determining to approve the Merger Agreement, the Elcotel Board considered,
among other factors, the oral opinion, confirmed in a written opinion dated
August 5, 1997, of Murray, Devine & Co. ("Murray Devine") to the effect that as
of such date the Merger is fair to the stockholders of Elcotel from a financial
point of view. The full text of the Murray Devine opinion, which sets forth a
description of the assumptions made, matters considered and limitations on the
review undertaken, is attached to this Joint Proxy Statement-Prospectus as
Appendix B. Elcotel stockholders are urged to read the Murray Devine opinion
carefully in its entirety. The Merger Agreement does not require that such
opinion be updated prior to the Effective Time. See "The Merger--Opinion of
Murray Devine."

RECOMMENDATION OF THE TSG BOARD

The TSG Board has approved the Merger Agreement and recommends that the
stockholders of TSG vote FOR the adoption of the Merger Agreement and any other
actions as may be required in furtherance of the Merger. For a discussion of
the factors considered by the TSG Board in reaching its conclusions, see "The
Merger--TSG's Reasons for the Merger; Recommendation of the TSG Board."

INTERESTS OF CERTAIN PERSONS

In considering the recommendations of the Elcotel Board and the TSG Board
with respect to the Merger and the transactions contemplated thereby, holders
of Elcotel Common Stock and of TSG Common Stock, respectively, should be aware
that certain members of Elcotel's and TSG's management and of the Elcotel Board
and the TSG Board have certain interests in the Merger that are in addition to
the interests of stockholders of Elcotel and TSG generally, including, among
other things, (i) the conversion pursuant to the Merger Agreement of the TSG
Stock Options into options to acquire Elcotel Common Stock, with adjustments to
the exercise price per share and number of shares subject thereto based on the
Exchange Ratio, and their immediate exercisability as a result of the Merger,
pursuant to the terms of the plans governing the TSG Stock Options (the "TSG
Option Plans") and stock option agreements, whether or not such TSG Stock
Options were exercisable immediately prior to the Effective Time; (ii) the
payment of a $200,000 investment banking fee to an affiliate of Wexford, the
holder of approximately 52% of the outstanding TSG Common Stock; and (iii) the
employment agreements that Elcotel will enter into with C. Shelton James, the
Chief Executive Officer and Chairman of the Board of Elcotel, Tracey Gray, the
President of Elcotel, and Vincent Bisceglia, the President and Chief Executive
Officer of TSG, in connection with the Merger. See "The Merger--Interests of
Certain Persons and Employee Matters."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The Merger is intended to be a tax-free reorganization as a result of which
no income, gain or loss will be recognized by Elcotel or TSG and no income,
gain or loss will be recognized by TSG stockholders upon exchange of their TSG
Common Stock for Elcotel Common Stock pursuant to the Merger Agreement, except
in respect of cash received by holders of TSG Common Stock in lieu of
fractional shares of Elcotel Common Stock. It is a condition precedent to the
obligations of TSG pursuant to the Merger Agreement that TSG receive an opinion
of counsel to the effect that neither TSG nor any of its stockholders will
recognize gain or loss for United States federal income tax purposes as a
result of the Merger (other than in respect of any cash paid in lieu of
fractional shares). See "The Merger--Certain Federal Income Tax Consequences"
and "The Merger Agreement--Conditions Precedent to Obligations of TSG."

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<PAGE>

ACCOUNTING TREATMENT

The Merger will be accounted for by Elcotel under the "purchase" method of
accounting. Accordingly, the merger consideration will be allocated to the
assets and liabilities of TSG based on their estimated fair values with the
excess recorded as goodwill. See "Unaudited Pro Forma Consolidated Financial
Information."

NO APPRAISAL OR DISSENTERS' RIGHTS

Under the Delaware General Corporation Law ("Delaware Law"), neither the
holders of Elcotel Common Stock nor the holders of TSG Common Stock are
entitled to appraisal or dissenters' rights in connection with the approval of
the Merger Agreement and the transactions contemplated thereby. See "The
Merger--No Appraisal or Dissenters' Rights."

RECENT DEVELOPMENTS

On September 30, 1997, Elcotel acquired from Lucent Technologies Inc.
("Lucent") certain assets related to Lucent's payphone manufacturing and
component parts business (the "Lucent Acquisition"). The purchase price was
approximately $6 million, subject to adjustment based upon a final inventory
valuation. See "Unaudited Pro Forma Financial Information--Lucent Acquisition
Purchase Price." Elcotel acquired from Lucent the inventory, machinery,
equipment, tooling and certain other assets related to the payphone
manufacturing and component parts business conducted by Lucent, as well as a
license of certain patent and other intellectual property rights related
thereto. Elcotel did not acquire any employees or facilities of Lucent pursuant
to such acquisition. The customers for Lucent's payphones and component parts
consisted principally of RBOCs and other telcos. Elcotel believes that
approximately 60% (approximately 1.2 million units) of the current installed
base of payphones in the United States are payphones of the design purchased by
Elcotel pursuant to the Lucent Acquisition. Elcotel believes that a significant
part of the revenues that may arise from the assets acquired by Elcotel
pursuant to the Lucent Acquisition will consist of the sale of components and
replacement parts with respect to that installed base of payphones.

9
<PAGE>

COMPARATIVE MARKET PRICES

Since June 13, 1995, shares of Elcotel Common Stock have been traded on the
Nasdaq National Market and quoted under the symbol ECTL. From December 1, 1993
to June 12, 1995 Elcotel Common Stock was reported by the National Association
of Securities Dealers Automated Quotation System ("Nasdaq") under the same
symbol and bid and asked quotations were reported by Nasdaq. The following
table sets forth, for the periods indicated, the high and low bid quotations or
high and low closing sales prices per share of Elcotel Common Stock for each of
the periods indicated as reported by Nasdaq or the Nasdaq National Market. Bid
quotations reflect interdealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions. Elcotel did
not pay any cash dividends with respect to the Elcotel Common Stock during any
of the periods indicated below.

<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
------------ -------- ------
<S> <C> <C>
Elcotel's Fiscal Year Ended March 31, 1996:
Quarter Ended June 30, 1995............................... $ 9 1/2 $3 1/4
Quarter Ended September 30, 1995.......................... 10 1/4 6 3/4
Quarter Ended December 31, 1995........................... 9 5 1/2
Quarter Ended March 31, 1996.............................. 8 5/8 5
Elcotel's Fiscal Year Ended March 31, 1997:
Quarter Ended June 30, 1996............................... 8 5
Quarter Ended September 30, 1996.......................... 9 1/4 5 1/4
Quarter Ended December 31, 1996........................... 7 3/4 5 7/8
Quarter Ended March 31, 1997.............................. 8 5/8 6
Elcotel's Fiscal Year Ending March 31, 1998:
Quarter Ended June 30, 1997............................... 6 5/8 5 1/4
Quarter Ended September 30, 1997.......................... 7 1/4 5 5/8

In May 1996, TSG completed an initial public offering (the "TSG IPO") of
1,150,000 units (the "Units"), each Unit consisting of one share of TSG Common
Stock and one redeemable warrant ("Public Warrant") at a price of $9.00 per
Unit for gross proceeds of $10,350,000. From May 10, 1996 to October 7, 1996,
TSG Common Stock was listed on the Nasdaq Small Cap Market under the symbol
TSGI and bid and asked quotations were reported by Nasdaq. On October 7, 1996,
the TSG Common Stock was listed on the Nasdaq National Market under the same
symbol. The following table sets forth, for the periods indicated, the high and
low bid quotations or high and low closing sales prices per share of TSG Common
Stock for each of the periods indicated as reported by Nasdaq or the Nasdaq
National Market. Prior to the TSG IPO, there was no established public trading
market for TSG Common Stock. TSG did not pay any cash dividends with respect to
the TSG Common Stock during any of the periods indicated below.

<CAPTION>
PERIOD ENDED HIGH LOW
------------ -------- ------
<S> <C> <C>
TSG's Fiscal Year Ended March 28, 1997:
May 10, 1996 through June 28, 1996........................ $12 3/4 $9 3/8
Quarter Ended September 27, 1996.......................... 11 1/2 8 1/4
Quarter Ended December 27, 1996........................... 11 6 7/8
Quarter Ended March 28, 1997.............................. 7 7/8 4 1/4
TSG's Fiscal Year Ending April 3, 1998:
Quarter Ended June 27, 1997............................... 6 1/32 4 1/2
Quarter Ended September 27, 1997.......................... 7 5/8 4 1/4
</TABLE>

10
<PAGE>

The following table sets forth the closing sale prices per share of Elcotel
Common Stock and TSG Common Stock as reported by the Nasdaq National Market on
August 13, 1997, the last full trading day prior to the public announcement of
the execution of the Merger Agreement, and on October 27, 1997, the latest
practicable trading day prior to the printing of this Joint Proxy Statement-
Prospectus. The following table also sets forth the equivalent market value of
TSG Common Stock based on the Exchange Ratio as of August 13, 1997 and October
27, 1997.

<TABLE>
<CAPTION>
ELCOTEL TSG TSG
DATE COMMON STOCK COMMON STOCK EQUIVALENT
---- ------------ ------------ ----------
<S> <C> <C> <C>
August 13, 1997......................... $6.25 $6.875 $6.5625
October 27, 1997........................ $6.50 $7.25 $6.825
</TABLE>

Stockholders are urged to obtain current quotations for the market prices of
Elcotel Common Stock and TSG Common Stock. No assurance can be given as to the
market price of Elcotel Common Stock or TSG Common Stock at the Effective Time.
The Exchange Ratio is fixed in the Merger Agreement, and changes in the market
price of Elcotel Common Stock or TSG Common Stock will not prevent consummation
of the Merger. Accordingly, the market value of the shares of Elcotel Common
Stock that holders of TSG Common Stock will receive in the Merger may vary
significantly from the prices shown above. See "Certain Risk Factors--Fixed
Exchange Ratio Despite Possible Change in Stock Prices."

UNAUDITED COMPARATIVE PER SHARE DATA

The following table sets forth certain historical and pro forma per share
data for Elcotel Common Stock for Elcotel's fiscal year ended March 31, 1997
and three months ended June 30, 1997, and certain historical and equivalent pro
forma per share data for TSG Common Stock for TSG's fiscal year ended March 28,
1997 and three months ended June 27, 1997. The information presented herein
should be read in conjunction with the selected historical consolidated
financial data and unaudited pro forma consolidated financial information found
elsewhere in this Joint Proxy Statement-Prospectus as well as the historical
financial information of Elcotel incorporated herein by reference. Historical
per share data are derived from audited or unaudited financial statements of
Elcotel and TSG, as the case may be. Pro forma per share data for Elcotel
Common Stock are derived from the unaudited pro forma consolidated financial
information found elsewhere in this Joint Proxy Statement-Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
Elcotel Common Stock
Net Income
Historical.................................... $0.20 $0.05
Pro Forma..................................... 0.09 0.00
Book Value (at end of period)
Historical.................................... 1.54 1.58
Pro Forma(1).................................. 3.59 3.61
TSG Common Stock
Net Income
Historical.................................... 0.22 0.02
Equivalent Pro Forma(2)....................... 0.09 0.00
Book Value (at end of period)
Historical.................................... 2.79 2.80
Equivalent Pro Forma(2)....................... 3.77 3.79
</TABLE>
- --------
(1) The per share amounts used in the pro forma calculations were computed by
adding the number of shares of Elcotel Common Stock to be issued in
connection with the Merger to the actual number of outstanding shares of
Elcotel Common Stock for the respective periods.
(2) Equivalent pro forma per share amounts have been calculated by multiplying
the Elcotel pro forma per share amounts by the Exchange Ratio of 1.05 of
Elcotel Common Stock for each share of TSG Common Stock.

11
<PAGE>

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

Elcotel. The selected historical consolidated financial data of Elcotel
presented below as of March 31, 1997 and 1996 and for each of the three years
in the period ended March 31, 1997 has been derived from and should be read in
conjunction with the consolidated financial statements, including the notes
thereto, of Elcotel set forth in Elcotel's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997 incorporated by reference in this Joint Proxy
Statement-Prospectus. The selected historical consolidated financial data of
Elcotel presented below as of June 30, 1997 and for the three month periods
ended June 30, 1997 and 1996 has been derived from and should be read in
conjunction with the condensed consolidated financial statements, including the
notes thereto, of Elcotel set forth in Elcotel's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997 incorporated by reference in this
Joint Proxy Statement-Prospectus. See "Incorporation of Certain Documents by
Reference." The selected historical consolidated financial data of Elcotel
presented below as of March 31, 1995, 1994, and 1993 and for the years in the
periods ended March 31, 1994 and 1993 has been derived from and should be read
in conjunction with the consolidated financial statements, including the notes
thereto, of Elcotel set forth in Elcotel's Annual Report on Form 10-KSB for the
fiscal years ended March 31, 1995 and 1994 which are not included in this Joint
Proxy Statement-Prospectus. The selected historical consolidated financial data
of Elcotel presented below as of June 30, 1996 has been derived from and should
be read in conjunction with the condensed consolidated financial statements,
including the notes thereto, of Elcotel set forth in Elcotel's Quarterly Report
on Form 10-QSB for the fiscal quarter ended June 30, 1996 which is not included
in this Joint Proxy Statement-Prospectus.

ELCOTEL, INC.

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE YEAR ENDED THREE MONTHS
MARCH 31, ENDED JUNE 30,
----------------------------------------- ---------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Sales................... $10,622 $20,216 $25,090 $21,462 $26,832 $ 5,551 $ 6,753
Cost of goods sold...... 6,561 12,232 14,776 13,238 15,883 3,254 3,838
Income (loss) before ex-
traordinary item....... 92 2,041 3,524 (1,291) 1,628 197 375
Income (loss) per share
before extraordinary
item................... 0.02 0.30 0.45 (0.16) 0.20 0.02 0.05
Net income (loss)....... 123 4,002 3,524 (1,291) 1,628 197 375
Net income (loss) per
share.................. $ 0.02 $ 0.59 $ 0.45 $ (0.16) $ 0.20 $ 0.02 $ 0.05
FINANCIAL POSITION:
Working capital (defi-
cit)................... $(4,812) $ 4,224 $ 5,575 $ 6,288 $ 7,897 $ 6,033 $ 8,126
Total assets............ 10,911 10,234 16,225 14,929 15,944 15,099 17,204
Long-term obligations... -- 950 782 432 232 382 183
Stockholders' equity.... 337 6,638 11,091 10,558 12,627 10,796 13,002
Book value per share.... $ 0.06 $ 0.94 $ 1.44 $ 1.31 $ 1.54 $ 1.34 $ 1.58
</TABLE>

TSG. The selected historical consolidated financial data of TSG presented
below as of March 29, 1996, March 28, 1997 and June 27, 1997 and for the seven
months ended October 30, 1994, five months ended March 31, 1995, years ended
March 29, 1996 and March 28, 1997 and three months ended June 28, 1996 and June
27, 1997 has been derived from and should be read in conjunction with the
consolidated financial statements, including the notes thereto, of TSG set
forth in this Joint Proxy Statement-Prospectus as Appendix C. The selected
historical consolidated financial data of TSG at April 2, 1993, April 1, 1994
and March 31, 1995 and for the years ended April 2, 1993 and April 1, 1994 has
been derived from and should be read in conjunction with the consolidated
financial statements and notes thereto of TSG set forth in TSG's Registration
Statement on Form S-1 effective on May 10, 1996 which is not included in this
Joint Proxy Statement-Prospectus. The selected

12
<PAGE>

historical financial data of TSG at June 28, 1996 presented below has been
derived from and should be read in conjunction with the consolidated financial
statements and notes thereto set forth in TSG's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1996 which is not included in this Joint Proxy
Statement-Prospectus. The consolidated historical financial information of TSG
is not comparable from period to period because of the acquisition of TSG by
Wexford Partners Fund, L.P. on October 1, 1994 (the "Acquisition"). See "TSG
Management's Discussion and Analysis of TSG's Financial Condition and Results
of Operations."

TECHNOLOGY SERVICE GROUP, INC.

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE THE
SEVEN FIVE AT OR FOR THE
AT OR FOR THE MONTHS MONTHS AT OR FOR THE THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED ENDED
------------------ ----------- --------- ------------------- -----------------
APRIL 2, APRIL 1, OCTOBER 30, MARCH 31, MARCH 29, MARCH 28, JUNE 28, JUNE 27,
1993(1) 1994(1) 1994(1) 1995 1996 1997 1996 1997
-------- -------- ----------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net Sales............... $30,536 $31,049 $11,109 $9,161 $33,201 $33,472 $12,078 $6,217
Cost of goods sold...... 24,083 25,762 9,176 8,226 26,082 26,639 9,840 5,123
Net income (loss)....... (1,998) (5,485) (423) (1,065) 1,177 1,010 585 38
Net income per
share(2)............... $ -- $ -- $ -- $(0.30) $ 0.30 $ 0.22 $ 0.13 $ 0.02
FINANCIAL POSITON:
Working capital (defi-
cit)................... $ 1,270 $(3,264) $ (611) 1,695 $ 4,394 $ 8,221 $ 7,815 $8,403
Total assets............ 18,869 13,421 10,397 15,670 19,634 19,772 22,977 18,568
Long-term obligations... 2,068 957 4,028 6,333 7,309 -- 888 --
Stockholders' equity
(deficit).............. 3,858 (1,405) (1,821) 2,105 3,600 13,127 12,653 13,164
Book value per
share(3)............... $ -- $ -- $ -- $ 0.60 $ 1.03 $ 2.79 $ 2.70 $ 2.80
</TABLE>
- --------
(1) Represents selected consolidated financial data of TSG's predecessor prior
to the Acquisition.
(2) Income (loss) per share is not presented for periods prior to the five
months ended March 31, 1995 since such data is not meaningful for periods
prior to the Acquisition.
(3) Book value per share is not presented at April 2, 1993 and April 1, 1994
since such data is not meaningful for periods prior to the Acquisition.

13
<PAGE>

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF ELCOTEL

The following table sets forth certain selected consolidated financial data
of Elcotel for the year ended March 31, 1997 and as of and for the three months
ended June 30, 1997 and certain selected unaudited pro forma consolidated
financial information of Elcotel for the year ended March 31, 1997 and as of
and for the three months ended June 30, 1997 after giving effect to the Merger
and the Lucent Acquisition. The selected consolidated historical financial data
and the selected unaudited pro forma consolidated financial information of
Elcotel presented below should be read in conjunction with the consolidated
financial statements, including the notes thereto, of Elcotel set forth in
Elcotel's Annual Report on Form 10-K for the fiscal year ended March 31, 1997
and Elcotel's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1997 incorporated in this Joint Proxy Statement-Prospectus by reference and
the unaudited pro forma consolidated financial information set forth in this
Joint Proxy Statement-Prospectus.

The selected unaudited pro forma consolidated financial information at June
30, 1997 set forth below was prepared as if the Merger and the Lucent
Acquisition had been consummated on June 30, 1997. The selected unaudited pro
forma consolidated financial information for the year ended March 31, 1997 and
three months ended June 30, 1997 set forth below was prepared as if the Merger
and the Lucent Acquisition had been consummated on April 1, 1996.

The unaudited pro forma financial information set forth in this Joint Proxy
Statement-Prospectus has been prepared assuming the Merger and the Lucent
Acquisition are accounted for using the purchase method of accounting.
Accordingly, the unaudited pro forma consolidated financial information assumes
that (1) the Merger consideration consisting of (i) the fair value of
securities to be issued by Elcotel to effect the Merger, (ii) the fair value of
outstanding common stock, options and warrants of TSG to be converted into
Elcotel securities, and (iii) the estimated direct costs and expenses to be
incurred by Elcotel in connection with the transaction, is allocated to the
assets and liabilities of TSG based on their estimated fair values and (2) the
aggregate purchase price related to the Lucent Acquisition is allocated to the
assets acquired based on their estimated fair values.

The selected unaudited pro forma consolidated financial information presented
below reflects pro forma adjustments that are directly attributable to the
Merger and the Lucent Acquisition and the use of the purchase method of
accounting. The selected unaudited pro forma consolidated operations data does
not reflect anticipated cost reductions or revenue enhancements expected to be
realized from the Merger or the anticipated revenues, gross profit and
operating expenses from the Lucent Acquisition. Accordingly, the unaudited pro
forma consolidated operations data for the year ended March 31, 1997 and three
months ended June 30, 1997 are not necessarily indicative of the consolidated
results of operations as they might have been had the Merger and Lucent
Acquisition actually occurred on the dates indicated, nor are they necessarily
indicative of future results.

ELCOTEL, INC.

SELECTED PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
AT OR FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------------- --------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
OPERATIONS:
Sales................................. $26,832 $60,304 $ 6,753 $12,970
Cost of goods sold.................... 15,883 42,586 3,838 9,011
Net income............................ 1,628 1,213 375 3
Net income per share.................. $ 0.20 $ 0.09 $ 0.05 $ 0.00
FINANCIAL POSITION:
Working capital....................... $ 8,126 $14,870
Total assets.......................... 17,204 65,940
Long-term obligations................. 183 2,797
Stockholders' equity.................. 13,002 47,882
Book value per share.................. $ 1.58 $ 3.61
</TABLE>

14
<PAGE>

CERTAIN RISK FACTORS

Holders of TSG Common Stock, in evaluating whether to approve the Merger and
thereby become holders of Elcotel Common Stock, and holders of Elcotel Common
Stock, in evaluating whether to approve the issuance of Elcotel Common Stock
in connection with the Merger, should carefully consider the following risk
factors, in addition to the other information included and incorporated by
reference in this Joint Proxy Statement--Prospectus.

INTEGRATION OF OPERATIONS

The integration of operations following the Merger and the Lucent
Acquisition will require the dedication of management resources which will
detract from attention to the day-to-day business of Elcotel subsequent to the
Merger. The difficulties of integration are increased by the necessity of
coordinating geographically separated organizations, integrating personnel
with disparate business backgrounds, and combining two different corporate
cultures. Following the Merger, Elcotel is expected to seek to reduce expenses
by eliminating duplicative or unnecessary facilities, employees, research and
development programs and other expenses in the areas of sales, marketing,
advertising and administration. Elcotel will utilize existing systems which it
believes have been effective in controlling costs and improving margins to
achieve improved operating efficiencies in TSG's manufacturing and inventory
management. Additionally, Elcotel will seek to combine sales and marketing
channels, promotional activities, and product marketing strategies. There can
be no assurance that Elcotel will be able subsequent to the Merger to reduce
expenses in this fashion, that there will not be high costs associated with
such activities, and that there will not be other material adverse effects of
such activities. In particular, the realization of cost savings will depend
upon an effective and expedient transition schedule which may span a period of
six months to one year. The near-term effect could be a reduction in net
income for the year subsequent to the Merger and short-term dilution.

FIXED EXCHANGE RATIO DESPITE POSSIBLE CHANGE IN STOCK PRICES

The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the market price of either Elcotel Common Stock or TSG
Common Stock. Additionally, neither Elcotel nor TSG has the right to terminate
the Merger Agreement in the event of any increase or decrease in the market
price of either Elcotel Common Stock or TSG Common Stock. The market price of
Elcotel Common Stock at the Effective Time may vary from its price at the date
of this Joint Proxy Statement--Prospectus and the dates of the Elcotel Annual
Meeting and TSG Special Meeting, possibly by a material amount. Such
variations may be the result of changes in the business, operations or
prospects of Elcotel or TSG, market assessments of the likelihood that the
Merger will be consummated and the timing thereof, regulatory considerations,
general market and economic conditions and other factors, many of which will
be beyond the control of Elcotel or TSG. Because the Effective Time may occur
at a date later than the date of the Elcotel Annual Meeting and the TSG
Special Meeting, there can be no assurance that the market price of Elcotel
Common Stock on such date will be indicative of its market price at the
Effective Time. Elcotel and TSG have no intention of resoliciting stockholder
approval should the market prices of Elcotel Common Stock or TSG Common Stock
change materially after the date of the Elcotel Annual Meeting or the TSG
Special Meeting, as the case may be. The Effective Time will occur no later
than the fifth business day after satisfaction or waiver of the conditions to
the consummation of the Merger set forth in the Merger Agreement, unless
another date is agreed to in writing. Because the Exchange Ratio will not be
adjusted to reflect changes in the market value of Elcotel Common Stock or TSG
Common Stock, the market value of the Elcotel Common Stock issued in the
Merger, and the value of the TSG Common Stock surrendered in the Merger, may
be higher or lower than the value of such shares at the time the Merger was
negotiated or approved by stockholders. Stockholders of Elcotel and TSG are
urged to obtain current market quotations for Elcotel Common Stock and TSG
Common Stock. See "Summary--Comparative Market Prices."

15
<PAGE>

DEPENDENCE ON KEY PERSONNEL

Following the Merger, Elcotel's business will be dependent upon the
performance of certain key individuals, including C. Shelton James, its
Chairman of the Board, Tracey Gray, its President and Chief Executive Officer,
and Vincent Bisceglia, its Chief Operating Officer. The loss of services of
any of these persons could have a material adverse effect on Elcotel. In
connection with the Merger, Elcotel will enter into employment agreements with
each of Messrs. James, Gray and Bisceglia, but these agreements do not ensure
that Messrs. James, Gray and Bisceglia will remain employed by Elcotel. See
"The Merger--Interests of Certain Persons and Employee Matters--Employment
Agreements."

INTENSE COMPETITION

The public communications industry is highly competitive. Prior to 1984, the
telcos held a monopoly in the pay telephone industry, and they continue to
have a dominant share of the public communications market. Elcotel competes
with firms in the United States (principally Intellicall, Protel, Quadrum and,
prior to the Merger, TSG) that manufacture and market to telcos and
independent payphone operators privately-owned payphones and other products
similar to Elcotel's products. In addition, there are many other firms which
have the resources and ability to develop and market products which could
compete with Elcotel's products. Elcotel expects possible competition from
other companies. 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. Telcos also compete with private payphone
operators by making site owner compensation arrangements more attractive for
their existing phones, thereby reducing the site owners' incentive to use
privately owned payphones. Many existing and potential competitors have
financial, marketing, management and technical resources substantially greater
than those of Elcotel. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than Elcotel. It is also possible that new competitors may emerge and
acquire significant market share. Possible new competitors include large
foreign corporations, RBOCs and other entities with substantial resources.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on Elcotel's business, results of operations and financial condition.
There can be no assurance that Elcotel will be able to compete successfully
against current or future competitors or that competitive pressures will not
have a material adverse effect on Elcotel's business, results of operations
and financial condition. The market for international public communications is
highly competitive, and numerous competitors are larger, better capitalized
and have greater experience in marketing their products internationally. See
"Technology Service Group, Inc.--Competition; Sales and Markets."

Telecommunications technology is constantly changing. Alternative means of
communicating, such as radio-based paging services, cellular mobile telephone
services and personal communication services, are becoming more popular. To
date, such alternative means of communicating have not reduced the need for or
replaced payphones. As competing technologies are developed, however, or
become substantially less expensive, there is some risk that public payphones
will become less widely used. In such event, the demand for payphone products
and services could be materially and adversely affected. Elcotel expects
competition from such competing technologies. In addition, even if payphones
continue to exist or proliferate world-wide, technological advances could
occur that would render Elcotel's technology and know-how non-competitive.
Such development would have a material adverse effect on Elcotel. See
"Technology Service Group, Inc.--Competition."

RISKS ASSOCIATED WITH INTERNATIONAL MARKET

Elcotel's export sales to international markets approximated $1,920,000,
$1,536,000, and $8,045,000 during fiscal 1995, 1996 and 1997, respectively.
Conducting business internationally is subject to a number of potential risks,
including political instability, foreign currency fluctuations, adverse
movements in exchange rates, economic instability, the imposition of tariffs
and import and export controls, changes in governmental policies (including
U.S. policy toward foreign countries), general credit and business risks and
other factors, one or more

16
<PAGE>

of which, if they occur, could have an adverse effect on Elcotel's ability to
generate international sales or operations. Elcotel's sales to date have been
denominated in U.S. dollars and as a result, no losses related to currency
fluctuations have been incurred. For the same reason, Elcotel has not engaged
in currency hedging activities. There is no assurance, however, that Elcotel
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 risks. Finally, many of Elcotel's known and potential
international competitors have substantially more financial and other
resources than Elcotel and, therefore, are formidable competitors. See
"Technology Service Group, Inc.--Competition; Sales and Markets."

TECHNOLOGICAL OBSOLESCENCE

Because of rapid technological changes in the telecommunications industry,
there can be no assurance that Elcotel's payphones will not be rendered
obsolete or unmarketable in the future due to the introduction of new products
or technological developments by other companies. Elcotel believes that it
will be required to develop enhancements, new products and services in the
future to remain competitive. See "Technology Service Group, Inc.--The Public
Payphone Industry."

GOVERNMENT REGULATION; POSSIBLE ADVERSE EFFECT OF FUTURE REGULATORY CHANGES

Products and services offered by Elcotel 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 changes in such regulation, if proposed and
adopted, would not have an adverse impact on the operations of Elcotel and its
customers. The privately owned pay telephone industry is highly regulated by
the Federal Communications Commission (the "FCC") and the various state public
utilities commissions. Certain of Elcotel's products must comply with FCC
rules. Parts 15 and 68 establish technical standards and procedural and
labeling requirements for equipment subject to those rules. While Elcotel
believes that its products currently comply with the technical requirements of
the FCC and the states, there can be no assurance that additional or different
technical requirements will not be adopted which would require Elcotel to
modify its telephones or that rate or other regulatory changes will not be
adopted which might adversely affect Elcotel's operations or its customers.
See "Technology Service Group, Inc.--Government Regulation."

The Telecommunications Reform Act of 1996 requires that the FCC establish a
per call compensation plan to ensure that all payphone service providers are
fairly compensated for every completed intrastate and interstate call using
their payphones. In September 1996, the FCC established an interim
compensation plan for payphone service providers for access code and
subscriber 800 calls. Under that interim compensation plan, payphone service
providers were compensated at a flat rate of $45.85 per payphone per month
(compared to the previous compensation of $6.00 per month) until September 1,
1997 and thereafter at the rate of $.35 per 800 or access code call. The
United States Court of Appeals for the District of Columbia Circuit has
vacated the FCC's action in adopting the interim compensation plan and
remanded to the FCC for further consideration the issue of compensation for
such calls on a permanent and interim basis. On October 9, 1997 the FCC issued
an order addressing certain issues with respect to payphone compensation
previously remanded to it by the Court of Appeals. The FCC set the per call
compensation rate at $.284 per call during the period October 7, 1997 through
October 6, 1999. After that period, the compensation rate would be whatever is
charged at the phone for a local call, less $.066, the amount the FCC
determined to be the avoided cost in completing a non-coin call. The FCC must
still determine the compensation rate for the period November 6, 1996 through
October 6, 1997 and which carriers must pay compensation for that period. It
is likely that the FCC's latest action may also be challenged in court. The
ultimate outcome with respect to per call compensation will have a significant
impact on the business and operations of Elcotel's customers. Elimination or
significant reductions in the amount, or delays in the payment, of per call
compensation may reduce demand for payphones and the ability of Elcotel to
collect its receivables from its customers. See "Technology Service Group,
Inc.--Government Regulation."

The Telecommunications Act of 1996 also deregulated many elements of the
telecommunications industry as a means of stimulating competition. This
deregulation could affect the payphone products industry. Although

17
<PAGE>

Elcotel believes that deregulation generally will benefit it, there can be no
assurance that Elcotel will benefit from deregulation or that it will not be
adversely affected by deregulation. Elcotel will monitor future changes in
federal and state regulations and may be required to modify its products to
comply with additional technical requirements or other factors which could
result in Elcotel's products not being in compliance with federal or state
regulations.

DIVIDENDS NOT LIKELY

Elcotel does not anticipate paying any cash dividends to its stockholders in
the foreseeable future. Elcotel's current borrowing arrangement with its bank
prohibits Elcotel from paying cash dividends without the bank's consent. It is
likely that any new borrowing arrangements entered into in connection with the
Merger will have a similar prohibition. See "The Merger--Refinancing of TSG
and Elcotel Indebtedness."

CONTROL OF ELCOTEL

Upon consummation of the Merger, Wexford and Fundamental will beneficially
own in the aggregate approximately 30% of the outstanding Elcotel Common
Stock. Pursuant to the Stockholders' Agreement to be entered into among
Elcotel, Fundamental and Wexford (the "Fundamental/Wexford Stockholders'
Agreement") on the Closing Date, Wexford and Fundamental have agreed to vote,
during the period ending immediately after the second annual meeting of
Elcotel stockholders which occurs after the Annual Meeting, all of their
shares of Elcotel Common Stock in favor of any nominees for director of
Elcotel nominated by the incumbent Elcotel Board. Fundamental and Wexford will
have substantial influence over all matters requiring approval of the
stockholders of Elcotel. The combined voting power of Fundamental and Wexford
may have the effect of discouraging certain types of transactions involving an
actual or potential change in control of Elcotel where such change in control
is not in the interest of at least one of Fundamental or Wexford.

DILUTION TO ELCOTEL STOCKHOLDERS

The owners of the outstanding Elcotel Common Stock immediately prior to the
Merger will own approximately 62%, and the former TSG stockholders will own
approximately 38%, of the Elcotel Common Stock outstanding immediately after
the consummation of the Merger.

DEBT REFINANCING

In connection with the consummation of the Merger, Elcotel intends to
refinance the existing indebtedness of TSG to its bank and of Elcotel to its
bank. Elcotel intends to seek a revolving line of credit of approximately $15
million for such refinancing. There can be no assurance that Elcotel will be
able to obtain such a line of credit or as to the terms of such line of
credit. See "The Merger--Refinancing of TSG and Elcotel Indebtedness."

LIMITED NUMBER OF CUSTOMERS IN CERTAIN MARKETS

TSG derives substantially all of its revenues from certain of the RBOCs. The
loss of any one of such RBOC customers or a significant reduction in sales to
such RBOCs would have a material adverse effect on TSG's business and, after
the Merger, Elcotel's business. TSG's ability to maintain and increase its
sales is dependent on its ability to compete for and maintain satisfactory
relationships with the RBOCs, particularly TSG's current significant
customers. Elcotel will be subject to this risk, although it will be lessened
somewhat because the amount of sales to this limited number of customers will
represent a smaller percentage of the total sales of Elcotel after the Merger
than such amount represented as a percentage of TSG's total sales. See
"Technology Service Group, Inc.--Sales and Markets."

Pursuant to the Telecommunications Act of 1996, the RBOCs will be permitted
to manufacture and provide telecommunications equipment and to manufacture
customer premises equipment when certain competitive conditions have been met.
It is possible that one or more RBOCs will decide to manufacture payphone
products, which could cause Elcotel to compete with such RBOCs for customers.
The existence of such a competitive relationship would decrease demand for
Elcotel's products by such RBOCs. See "Technology Service Group, Inc.--
Government Regulation."

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DEPENDENCE ON CERTAIN MANUFACTURERS; SINGLE SOURCES OF SUPPLY

Elcotel generally assembles its smart payphone products from assemblies
produced by certain manufacturers under contractual arrangements. To the
extent that such manufacturers encounter difficulties in their production
processes that delay shipment to Elcotel or that affect the quality of items
supplied to Elcotel, Elcotel's ability to satisfy its sales obligations or
otherwise to meet supply schedules with its customers can be adversely
affected. In the event that contract manufacturers delay shipments or supply
defective materials to Elcotel, and such delays or defects are material,
Elcotel's customer relations could deteriorate and its sales and operating
results could be materially and adversely affected.

After the Merger, many of Elcotel's products in terms of revenues will
contain components or assemblies that are purchased from single sources.
Elcotel believes that there are alternative sources of supply for most of the
components and assemblies currently purchased from single sources. Some of the
components and assemblies used by Elcotel for which there are not immediately
available alternative sources of supply are provided to Elcotel under standard
purchase arrangements. If a shortage or termination of the supply of any one
or more of such components or assemblies were to occur, however, Elcotel's
business could be materially and adversely affected. In such event, Elcotel
would have to incur the costs associated with redesigning its products to
include available components or assemblies or otherwise obtain adequate
substitutes, which costs could be material. Also, any delays with respect to
redesigning products or obtaining substitute components would materially
adversely affect Elcotel's business. See "Technology Service Group, Inc.--
Manufacturing, Assembly and Sources of Supply."

FIXED PRICE PRODUCTS

TSG's agreements with its manufacturers generally provide that TSG will bear
certain cost increases incurred by the manufacturer. Accordingly, TSG's
manufacturing costs may fluctuate based on costs incurred by its contract
manufacturers and such fluctuations could have a material and adverse impact
on Elcotel's earnings after the Merger. TSG's sales agreements with customers
generally have fixed product prices with limited price escalation provisions.
Consequently, there is a risk that after the Merger Elcotel may not be able to
pass on price increases to those customers. In the event Elcotel's costs
increase or orders are lost due to price increases, Elcotel's profitability
would be adversely affected. See "Technology Service Group, Inc.--Sales and
Markets."

PATENTS AND TECHNOLOGY

After the Merger, Elcotel will own several patents covering aspects of its
payphone products. As a result of the Lucent Acquisition, Elcotel is licensed
under several patents covering aspects of the payphone products acquired from
Lucent. However, Elcotel views its business as not being primarily dependent
upon patent protection. Elcotel does not believe that it is infringing on the
patents of others. There can be no assurance, however, that infringement
claims will not be asserted in the future or that the results of any patent
related litigation would not be material to Elcotel. TSG has a license
agreement under which certain minimum annual royalties must be paid to the
licensor in the event that a patent for the licensed algorithm is issued. TSG
management does not believe that a patent for the algorithm will be issued due
to existing prior art, but TSG cannot assure that such patent will not be
issued. If a patent were to be issued, significant royalties would be payable
regardless of whether or not the algorithm is incorporated into TSG's
products. See "Technology Service Group, Inc.--Licenses, Patents and
Trademarks" and "Consolidated Financial Statements of "Technology Service
Group, Inc." in Appendix C.

POTENTIAL ENVIRONMENTAL LIABILITIES

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in the future and require TSG to take further actions at the site. TSG 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.

During the year ended March 28, 1997, TSG was 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,
TSG, as a small generator "De Minimis" party, executed a buy-out agreement
with respect to the remediation activities at a cost of approximately $8,200
during the year ended March 28, 1997. TSG believes, based on information
presently available to TSG, that it has no further obligations with respect to
the site. However, if additional waste is attributed to TSG, it is possible
that TSG could be liable for additional costs. TSG 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 has also been notified that it is a PRP with respect to response actions
at the Galaxy/Spectron Superfund Site in Elkton, Maryland. TSG, however, is
also a De Minimis party with respect to this site, and TSG believes its
proportionate share of costs to undertake response actions will likely be
insignificant. TSG 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 to $2,849 with respect to TSG's contribution. TSG
has not incurred any costs with respect to this site and believes that its
ultimate costs will not be material.

These potential environmental liabilities could have an adverse effect on
Elcotel after the Merger. See "Technology Service Group, Inc.--Potential
Environmental Liabilities."

THE MEETINGS

ELCOTEL ANNUAL MEETING

General; Matters to be Considered

The Elcotel Annual Meeting will be held at The Waterside Room, 216 Sarasota
Quay, Sarasota, Florida 34236, on Friday, December 5, 1997, at 9:00 a.m.,
local time. The purpose of the Elcotel Annual Meeting is to consider and vote
upon the following matters: (i) the election of a Board of Directors
consisting of seven directors, with each director to serve until the next
annual meeting of stockholders of Elcotel or until the election and
qualification of his or her respective successor; (ii) the approval of the
issuance of shares of Elcotel Common Stock in connection with the proposed
merger of Merger Subsidiary with and into TSG pursuant to the Merger and any
other actions as may be required in furtherance of the Merger; (iii) the
approval of an amendment to the Certificate of Incorporation of Elcotel to
increase the number of shares of Elcotel Common Stock authorized for issuance
to 30,000,000; (iv) the ratification of the appointment of Deloitte & Touche
llp as Elcotel's independent public accountants for the fiscal year ending
March 31, 1998; (v) the approval of an amendment to the 1991 Stock Option Plan
to increase by 500,000 the number of shares reserved for issuance pursuant to
such plan; (vi) the approval of an amendment to the Directors Stock Option
Plan to, among other things, increase by 50,000 the number of shares reserved
for issuance pursuant to such plan; and (vii) the transaction of such other
business as may properly come before the Elcotel Annual Meeting and any
adjournment or postponement thereof, and matters incident to the conduct of
the Annual Meeting. See "The Merger" and "Additional Matters Submitted to the
Vote of Elcotel's Stockholders."

Revocability of Proxies; Default Voting of Proxies

Any person giving a proxy has the power to revoke it at any time before its
exercise by a later dated proxy, a written revocation sent to the Secretary of
Elcotel, or attendance at the Elcotel Annual Meeting and voting in person. In
the absence of contrary instructions, properly executed proxies, received and
unrevoked, will be voted

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by the persons named in the proxy: (i) for the election of the directors
nominated by the Elcotel Board; (ii) for approval of the issuance of shares of
Elcotel Common Stock pursuant to the Merger Agreement and any other actions as
may be required in furtherance of the Merger; (iii) for the approval of an
amendment to the Certificate of Incorporation of Elcotel to increase the
number of shares of Elcotel Common Stock authorized for issuance to
30,000,000; (iv) for the ratification of Deloitte & Touche llp as Elcotel's
independent public accountants for the fiscal year ending March 31, 1998; (v)
for the approval of an amendment to the 1991 Stock Option Plan to increase by
500,000 the number of shares reserved for issuance pursuant to such plan; (vi)
for the approval of an amendment to the Directors Stock Option Plan to, among
other things, increase by 50,000 the number of shares reserved for issuance
pursuant to such plan; and (vii) in their discretion, on such other business
as may properly come before the Elcotel Annual Meeting and matters incident to
the conduct of the Elcotel Annual Meeting.

Board of Directors' Recommendations

THE ELCOTEL BOARD BY A VOTE OF 5 TO 2 HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT ELCOTEL STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE ISSUANCE
OF ELCOTEL COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND ANY OTHER ACTIONS
REQUIRED IN FURTHERANCE OF THE MERGER. SEE "THE MERGER--ELCOTEL'S REASONS FOR
THE MERGER; RECOMMENDATION OF THE ELCOTEL BOARD." THE ELCOTEL BOARD
UNANIMOUSLY RECOMMENDS THAT ELCOTEL STOCKHOLDERS VOTE "FOR" (I) THE ELECTION
OF THE DIRECTOR NOMINEES SPECIFIED HEREIN, (II) THE APPROVAL OF THE ELCOTEL
AMENDMENT, (III) THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP
AS ELCOTEL'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING MARCH
31, 1998, (IV) THE APPROVAL OF THE AMENDMENT TO THE 1991 STOCK OPTION PLAN AND
(V) THE APPROVAL OF THE AMENDMENTS TO THE DIRECTORS STOCK OPTION PLAN. SEE
"THE MERGER--ELCOTEL'S REASONS FOR THE MERGER; RECOMMENDATION OF THE ELCOTEL
BOARD."

Record Date; Required Vote; Quorum.

Only holders of record of Elcotel Common Stock at the close of business on
the Elcotel Record Date (which is October 22, 1997) are entitled to receive
notice of and to vote at the Elcotel Annual Meeting. At the close of business
on the Elcotel Record Date, there were 8,210,352 shares of Elcotel Common
Stock outstanding. Each share of Elcotel Common Stock is entitled to one vote
on all matters presented to the Elcotel Annual Meeting with no right to vote
cumulatively.

Elcotel's Bylaws provide that the presence, in person or by proxy, of a
majority of the issued and outstanding shares of Elcotel Common Stock entitled
to vote at the Elcotel Annual Meeting will constitute a quorum. A quorum, once
established, will not be broken by the withdrawal from the Elcotel Annual
Meeting of enough votes to leave less than a quorum, and the votes present at
the Elcotel Annual Meeting after the establishment of a quorum will be
sufficient to transact all business at the Elcotel Annual Meeting. Shares
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the meeting, but
with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as shares that are present and entitled
to vote for purposes of determining the presence of a quorum.

In the event that a quorum is not present at the Elcotel Annual Meeting, it
is expected that the Elcotel Annual Meeting will be adjourned or postponed to
solicit additional proxies, except that shares represented by proxies which
have been voted "against," or have abstained with respect to the proposal to
approve the issuance of shares of Elcotel Common Stock pursuant to the Merger
Agreement and any other actions required in furtherance of the Merger, will
not be used to vote "for" postponement or adjournment of the Elcotel Annual
Meeting for the purpose of allowing additional time for soliciting additional
votes "for" such adoption.

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<PAGE>

Approval of the amendment to the Certificate of Incorporation of Elcotel to
increase the number of shares of Elcotel Common Stock authorized for issuance
to 30,000,000 will require the affirmative vote of a majority of the shares of
Elcotel Common Stock outstanding as of the Elcotel Record Date. Approval of
the issuance of Elcotel Common Stock pursuant to the Merger Agreement (as
required by rules applicable to companies whose securities are traded on the
Nasdaq National Market), ratification of the appointment of Deloitte & Touche
llp as the independent public accountants of Elcotel for the fiscal year
ending March 31, 1998 and the approval of the amendments to the 1991 Stock
Option Plan and the Directors Stock Option Plan will require the affirmative
vote of a majority of the shares of Elcotel Common Stock present in person or
represented by properly executed proxy at the Elcotel Annual Meeting. The
election of each director will require the affirmative vote of a plurality of
the shares of Elcotel Common Stock present in person or represented by
properly executed proxy at the Elcotel Annual Meeting. Abstentions will be
counted for purposes of determining the total number of votes cast with
respect to a particular matter. Broker non-votes will not be counted for
purposes of determining the number of votes cast with respect to the
particular proposal on which the broker has expressly not voted. Broker non-
votes with respect to Elcotel proposals set forth in this Joint Proxy
Statement-Prospectus will therefore not be considered votes cast and,
accordingly, will not affect the determination as to whether a majority of
votes cast has been obtained with respect to a particular matter, other than
with respect to the approval of the Elcotel Amendment which requires the
affirmative vote of a majority of the outstanding shares of Elcotel Common
Stock.

Share Ownership of Officers, Directors and Certain Stockholders

At the close of business on the Elcotel Record Date, directors and executive
officers of Elcotel and their respective affiliates were the beneficial owners
of an aggregate of approximately 2,308,961 shares (approximately 27.5%) of the
Elcotel Common Stock then outstanding (which amount includes the shares owned
by Fundamental referred to in the next sentence). As of the Elcotel Record
Date, Fundamental owned an aggregate of 1,439,223 shares (approximately 17.5%)
of the Elcotel Common Stock then outstanding. See "Other Information Regarding
Elcotel--Security Ownership of Certain Beneficial Owners and Management."
Pursuant to a Voting Agreement, dated as of August 13, 1997, among Elcotel,
Wexford, Fundamental, Vincent Bisceglia and C. Shelton James ("Voting
Agreement"), Fundamental has agreed to vote its shares of Elcotel Common Stock
in favor of the issuance of Elcotel Common Stock in connection with the Merger
and has generally agreed not to transfer such shares before the consummation
of the Merger or termination of the Merger Agreement. Such agreement increases
the likelihood that the vote of the Elcotel stockholders required for the
issuance of Elcotel Common Stock in connection with the Merger will be
obtained. See "The Voting Agreement."

TSG SPECIAL MEETING

General; Matters to be Considered

The TSG Special Meeting will be held at Deloitte & Touche llp, 125 Summer
Street, Boston, MA 02110 on Friday, December 5, 1997, at 10:00 A.M., local
time. The purpose of the TSG Special Meeting is to consider and vote upon the
following matters: (i) the approval of the Merger Agreement and any other
actions as may be required in furtherance of the Merger; and (ii) the
transaction of such other business as may properly come before the TSG Special
Meeting and any adjournment or postponement thereof, and matters incident to
the conduct of the TSG Special Meeting.

Revocability of Proxies; Default Voting of Proxies

Any person giving a proxy has the power to revoke it at any time before its
exercise by a later dated proxy, a written revocation sent to the Secretary of
TSG, or attendance at the TSG Special Meeting and voting in person. In the
absence of contrary instructions, properly executed proxies, received and
unrevoked, will be voted by the persons named in the proxy: (i) for the
approval of the Merger Agreement and any other actions as may be required in
furtherance of the Merger; and (ii) in their discretion, on such other
business as may properly come before the TSG Special Meeting and matters
incident to the conduct of the TSG Special Meeting.

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Board of Directors' Recommendations

THE TSG BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT TSG STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER
AGREEMENT AND ANY OTHER ACTIONS AS MAY BE REQUIRED IN FURTHERANCE OF THE
MERGER. SEE "THE MERGER--TSG'S REASONS FOR THE MERGER; RECOMMENDATION OF THE
TSG BOARD."

Record Date; Required Vote; Quorum.

Only holders of record of TSG Common Stock at the close of business on the
TSG Record Date (which is October 22, 1997) are entitled to receive notice of
and to vote at the TSG Special Meeting. At the close of business on the TSG
Record Date, there were 4,708,851 shares of TSG Common Stock outstanding. Each
share of TSG Common Stock is entitled to one vote on all matters presented to
the TSG Special Meeting with no right to vote cumulatively.

TSG's Bylaws provide that the presence, in person or by proxy, of a majority
of the issued and outstanding shares of TSG Common Stock entitled to vote at
the TSG Special Meeting will constitute a quorum. A quorum, once established,
will not be broken by the withdrawal from the TSG Special Meeting of enough
votes to leave less than a quorum, and the votes present at the TSG Special
Meeting after the establishment of a quorum will be sufficient to transact all
business at the TSG Special Meeting. Shares represented by proxies that
reflect abstentions or "broker non-votes" (i.e., shares held by a broker or
nominee which are represented at the meeting, but with respect to which such
broker or nominee is not empowered to vote on a particular proposal) will be
counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum.

Approval of the Merger Agreement will require the affirmative vote of a
majority of the shares of TSG Common Stock outstanding as of the TSG Record
Date. Because Wexford (which owns approximately 52% of the shares of TSG
Common Stock outstanding and has generally agreed not to transfer those shares
before the consummation of the Merger or termination of the Merger Agreement)
has agreed to vote those shares in favor of the approval of the Merger
Agreement, such agreement ensures that the vote of TSG stockholders required
to approve the Merger Agreement will be obtained. See "The Voting Agreement."
Abstentions will be counted for purposes of determining the total number of
votes cast with respect to a particular matter. Broker non-votes will not be
counted for purposes of determining the number of votes cast with respect to
the particular proposal on which the broker has expressly not voted. Broker
non-votes with respect to TSG proposals set forth in this Joint Proxy
Statement-Prospectus will therefore not be considered votes cast. Accordingly,
broker non-votes will affect the determination as to whether a majority of
votes cast has been obtained with respect to the approval of the Merger
Agreement, which approval will require the affirmative vote of a majority of
the outstanding shares of TSG Common Stock, but may not affect the
determination as to whether a majority of votes has been obtained with respect
to any other matters as may be voted upon. However, as indicated above,
approval of the Merger Agreement by the stockholders of TSG is ensured because
Wexford has agreed to vote its shares in favor of the approval of the Merger
Agreement.

Share Ownership of Officers, Directors and Certain Stockholders

At the close of business on the TSG Record Date, directors and executive
officers of TSG and their affiliates were the beneficial owners of an
aggregate of approximately 3,276,854 shares (approximately 65%) of the TSG
Common Stock then outstanding (which amount includes the shares owned by
Wexford referred to in the next sentence). As of the TSG Record Date, Wexford
owned an aggregate of 2,444,286 shares (approximately 52%) of the TSG Common
Stock then outstanding. See "Directors and Executive Officers of TSG--Security
Ownership of Certain Beneficial Holders and Management." Wexford has agreed to
vote its shares of TSG Common Stock in favor of the approval of the Merger
Agreement and has generally agreed not to transfer such shares before the
consummation of the Merger or termination of the Merger Agreement. Such
agreement ensures that the vote of TSG stockholders required to consummate the
Merger will be obtained. See "The Voting Agreement."

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SOLICITATION OF PROXIES

Proxies are being solicited hereby on behalf of the Elcotel Board and the
TSG Board. In addition to the use of the mails, solicitation may be made in
person or by telephone or otherwise by directors, officers and regular
employees of Elcotel and TSG. Such directors, officers and regular employees
will not be additionally compensated for such solicitation, but may be
reimbursed for out-of-pocket expenses incurred in connection therewith. If
undertaken, the expense of such solicitation is expected to be nominal.
Elcotel may retain the services of third parties to aid in the solicitation of
proxies. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of Elcotel Common Stock and TSG Common
Stock. Elcotel and TSG will reimburse such custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred in connection
therewith.

THE MERGER

GENERAL

The description of the Merger and the Merger Agreement contained in this
Joint Proxy Statement-Prospectus does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of
which is attached hereto as Appendix A and incorporated herein by reference.

At the Effective Time, Merger Subsidiary will merge with and into TSG,
leaving TSG as the surviving corporation in the Merger and a wholly-owned
subsidiary of Elcotel. The Merger will become effective at such time as the
certificate of merger is filed with the Delaware Secretary of State, or at
such later time as is agreed by Elcotel and TSG and specified in the
certificate of merger. The filing of the certificate of merger will occur no
later than the fifth business day after satisfaction or waiver of the
conditions precedent to the consummation of the Merger (see "The Merger
Agreement--General Conditions Precedent to the Merger") unless another date is
agreed to in writing by Elcotel, TSG and Merger Subsidiary.

At the Effective Time, each share of TSG Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of TSG Common Stock
owned by TSG as treasury stock and shares of TSG Common Stock owned by Elcotel
or any subsidiary of Elcotel or TSG), will automatically be converted into the
right to receive 1.05 fully paid and nonassessable shares of Elcotel Common
Stock. Holders of TSG Stock Options will receive options and rights to
purchase, at a proportionately reduced per share exercise price, a number of
shares of Elcotel Common Stock equal to 1.05 times the number of shares of TSG
Common Stock they were entitled to purchase immediately prior to the Effective
Time under such TSG Stock Options. Holders of TSG Warrants will receive
warrants to purchase, at a proportionately reduced per share exercise price, a
number of shares of Elcotel Common Stock equal to 1.05 times the number of
shares of TSG Common Stock they were entitled to purchase immediately prior to
the Effective Time under such TSG Warrants.

BACKGROUND OF THE MERGER

In the third calendar quarter of 1994, Elcotel and TSG had preliminary
discussions with respect to a possible purchase of TSG by Elcotel. Elcotel
made two offers to purchase TSG for combinations of cash and Elcotel Common
Stock. TSG rejected both offers in favor of Wexford's offer to purchase TSG
for cash only. For a description of the acquisition of TSG by Wexford, see
"Technology Service Group, Inc.--History."

On January 30, 1997, Rodney O'Connor and Robert L. Reisley of Cameron
Associates, a financial adviser to Elcotel, met with C. Shelton James, Chief
Executive Officer and Chairman of the Board of Elcotel, and Tracey Gray,
President of Elcotel, at Elcotel's headquarters to discuss strategic
alternatives to maximize shareholder value, including the sale of Elcotel to a
third party, a merger and/or the acquisition of one or more companies
operating in the public communications equipment industry. TSG was identified
as an attractive acquisition target because the two companies complement one
another in terms of their respective customer bases, product lines and market
focus. Several other benefits were also identified including the potential for
gross margin

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<PAGE>

improvement and consolidation savings, greater industry visibility, synergies
in marketing, and, if the transaction were structured as a merger, greater
liquidity for investors due to an increase in the public float of the combined
company's stock.

In early February 1997, Vincent Bisceglia, the President and Chief Executive
Officer of TSG, received a telephone call from Mr. Gray regarding Elcotel's
interest in exploring a possible combination of TSG and Elcotel. Mr. Bisceglia
was receptive to the concept. Pursuant to authorization from Mr. James, Mr.
Reisley contacted TSG's Chairman of the Board, David Steadman, to discuss the
potential benefits of merging the two companies. Mr. Steadman indicated that
he understood the rationale for the combination and recommended that, in view
of the size of Wexford's holding of TSG stock, Mr. Reisley contact Robert M.
Davies, Executive Vice President of Wexford Management. Mr. Bisceglia had a
further discussion with Mr. Gray on February 19, 1997 concerning the structure
of a merger and the advantages and problems that might be encountered in a
combination of the two companies.

On February 21, 1997, Messrs. Reisley and O'Connor of Cameron Associates and
Messrs. Davies and Mark L. Plaumann of Wexford Management met in the offices
of Wexford Management. Mr. Reisley and Mr. O'Connor reviewed the merits of
combining Elcotel and TSG and proposed merging the two companies in a cashless
transaction, in which TSG stockholders would receive shares of Elcotel Common
Stock. Mr. Davies indicated that he held similar views regarding consolidation
opportunities and as the investment manager of the majority stockholder of
TSG, Wexford Management would consider such a transaction based on an
appropriate valuation of TSG and adequate representation on the combined
company's board of directors. The parties agreed to exchange certain financial
information and to instruct Mr. Gray and Mr. Bisceglia to begin discussions
regarding the management and organizational structure of a combined company.
On February 27, 1997, TSG and Elcotel executed a confidentiality agreement
with respect to information to be exchanged by the two companies.

During the first two weeks of March 1997, the parties exchanged financial
information and began preliminary negotiations on a transaction structure.
Messrs. Gray and Bisceglia also met several times to discuss the
organizational structure and customer-related issues involved in a combination
of the two companies.

On March 14, 1997, the TSG Board held a meeting at which Mr. Bisceglia
reported on the meetings that had taken place between Wexford Management, on
behalf of Wexford, and Cameron Associates. Mr. Bisceglia noted that over the
prior eighteen months he had had discussions with five different companies in
the payphone industry about possible acquisitions, none of which proceeded
beyond the preliminary discussion stage. He also reminded directors that TSG
had had discussions with Elcotel in 1994 when TSG was in the beginning stages
of its restructuring. The TSG Board then discussed the fact that TSG and
Elcotel could complement each other as to products, customers and technology
since Elcotel sells mainly to the private payphone market, while TSG's main
customers are the RBOCs. Mr. Plaumann, a director of TSG and an officer of
Wexford Management, presented to the TSG Board an analysis showing that there
could be both margin and consolidation savings in a merger of the two
companies and that the resulting entity would be approximately twice the
current size of TSG. Directors discussed TSG's options for going forward and
concluded by giving management authorization to continue discussions with
Elcotel.

On March 20, 1997, Mr. Bisceglia had a further discussion with Mr. Gray
about the composition of the board of directors, key management positions and
employment agreements for certain employees of the combined entity. On April
7, 1997, representatives of TSG, Wexford Management, Fundamental and Elcotel
met in New York City in an attempt to establish a basis for continuing merger
discussions. The parties decided to work toward a definitive merger agreement
in parallel with the continuation of a due diligence investigation by each
company into the business, operations and finances of the other company. On
April 9, 1997, Messrs. Bisceglia and Gray discussed the information each
company would need to conduct the due diligence review.

At the Elcotel Board meeting held on April 14, 1997, Mr. James and Mr. Gray
informed the Elcotel Board that they had had informal preliminary discussions,
through Mr. Reisley of Cameron Associates, concerning a

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possible merger with TSG. Messrs. James and Gray reported that TSG was in the
payphone and refurbishment business, with TSG's customer base consisting of
large telcos and some international customers. A business combination would be
complementary since Elcotel's strengths were in the independent payphone
operator market whereas TSG's biggest market was the telco market and
international wireless market. Preliminary discussions contemplated the merger
to be non-dilutive with an approximate one-to-one exchange of shares, giving
Elcotel stockholders approximately 62% and TSG stockholders approximately 38%
of the company after the merger. The Elcotel Board authorized Elcotel
management to proceed with a due diligence investigation of TSG.

At the TSG Board meeting held on April 15, 1997, Mr. Bisceglia reported to
directors on the April7 meeting in New York City. After a discussion, the TSG
Board decided that all but the most sensitive due diligence investigation
should be completed by both companies before signing a definitive merger
agreement. The TSG Board also discussed the advisability of retaining a firm
knowledgeable in the industry to do an independent analysis of Elcotel and its
technology so that the TSG Board could be as fully informed as possible. In
that connection, the TSG Board authorized management to retain Corporate
Builders L.P. through one of its principals, Glenn Bierman, an individual who
had done an analysis of Elcotel for TSG in the past. At this meeting, Mr.
Plaumann reported that his discussions with Elcotel on behalf of Wexford were
centering on an exchange ratio of 1.05 shares of Elcotel Common Stock for each
share of TSG.

During the week of May 12, 1997, Elcotel personnel and its counsel visited
the New York offices of TSG's counsel to review various due diligence
materials of TSG. TSG personnel conducted a similar due diligence review at
the Philadelphia offices of Elcotel's counsel the following week.

On May 16, 1997, TSG's Board met to review the proposed merger and received
a preliminary report from Glenn Bierman in which he reviewed the work he had
done to date and indicated that in his view the merger as proposed would be
beneficial to TSG.

On May 22, 1997, the Elcotel Board met, and Mr. Gray updated the Elcotel
Board on the results of the due diligence review held the previous week at the
New York offices of TSG's counsel and further discussions with TSG about a
possible merger. After discussions, the Elcotel Board unanimously determined
that the proposal to merge the two companies was unacceptable as presented,
due to Elcotel's concern about TSG's ability to achieve its revenue
projections and to improve its gross margins. The Elcotel Board voted to cease
the due diligence review.

After the Elcotel Board meeting, Mr. Reisley informed Mr. Plaumann of
Elcotel's concerns. At Mr. Plaumann's suggestion, he and Mr. Bisceglia met
with Mr. Gray and Mr. Reisley on June 4, 1997 to discuss Elcotel's concerns.
Mr. Bisceglia provided additional details on the potential to increase
revenues and improve gross margins, and information on a new contract not
included in its business plan, all of which attempted to address the concerns
raised by Elcotel.

At the June 9, 1997 meeting of the Elcotel Board, Mr. James advised the
Elcotel Board that since its May 22, 1997 meeting, Mr. Gray and Mr. Bisceglia
had had further discussions, and that TSG had provided additional information
to Elcotel to support TSG's potential to increase its revenues and improve
gross margins. Mr. Gray discussed TSG's revenue sources, TSG's technology and
the basis for potential gross margin improvements. He also described TSG's new
smart phone board and the potential markets for that product. Mr. James
requested authority to proceed with the due diligence review of TSG and to
have Elcotel management report the results to the Elcotel Board. After
extensive discussion, the Elcotel Board concluded that it was advisable to
allow management to proceed with the due diligence review in order to evaluate
whether there was an opportunity for Elcotel to increase shareholder value.
All members of the Elcotel Board voted in favor of the motion, except Mr.
Thomas Wiltse, who voted against. Mr. Wiltse stated that Elcotel should focus
on its current business plan, and that pursuing the merger with TSG could have
an adverse impact on Elcotel's ability to implement its business plan. Mr.
Wiltse expressed continued concerns about TSG's ability to achieve its
projections, the level of TSG's debt and the amount of goodwill created by the
proposed transaction. Mr. Wiltse made a written submission to the Elcotel
Board, dated June 9, 1997, explaining his position.

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At TSG's Board meeting held on June 24, 1997, Mr. Bisceglia reported to the
TSG Board on the progress of TSG's due diligence investigation of Elcotel. Mr.
Bierman of Corporate Builders L.P. joined the meeting to brief directors on
his analysis of Elcotel and TSG and to report that in his view the proposed
merger with Elcotel would be advantageous for TSG from a financial, business
and technological point of view. The TSG Board then discussed at length the
merits of the proposed merger, including that the stock of both companies is
thinly traded and that the stock prices of the companies are not indicative of
their values. The TSG Board also noted that Elcotel has a large number of
customers, growth in its international sales, and excellent margins, while by
comparison, TSG has a relatively smaller number of larger customers, lower
margins, and is only starting to penetrate international markets. The Board
then decided to continue with the merger negotiations on the basis of the
proposed 1.05 to 1 exchange ratio. The TSG Board also considered whether to
seek a fairness opinion from an investment bank with respect to the proposed
merger. In concluding that it was not necessary or useful to do so, the Board
took into account the work done to date by Corporate Builders L.P. to evaluate
the proposed merger, the familiarity of TSG's management with Elcotel arising
from the discussions held in 1994, and the strategic (as opposed to the purely
financial) reasons, for the merger. The Board decided that it should obtain
some general financial advice and support in connection with the ongoing
negotiations and decided to retain Wexford Management to provide analytical
support, liaison with Elcotel's representatives, and assistance with
negotiations and valuations for a fee of $200,000 (including expenses) payable
only if the Merger is consummated. See "The Merger--Interests of Certain
Parties and Employee Matters."

On July 14, 1997, Mr. Bisceglia and William Thompson, Chief Financial
Officer of TSG, attended an Elcotel Board meeting at the invitation of Mr.
Gray. Mr. Bisceglia made a presentation describing TSG's domestic and
international markets, and answered questions from Elcotel Board members. Mr.
James explained the reasons he believed the merger was a sound strategy to
increase shareholder value. He stated that the combination of Elcotel and TSG
would create a company that would be the largest supplier of payphone products
in the United States and that the combined company could gain critical mass in
the international markets. He further stated that the merger was advisable due
to the economies of scale to be realized. A motion was approved to give
management authority to negotiate and enter into a definitive merger
agreement, subject to obtaining a fairness opinion, director review of the
definitive agreement and completion of a due diligence and financial review.
Messrs. Gray, James, Jasmann, Moore and Patton voted for the motion and Mr.
Suplee voted against the motion, stating that he was in favor of the Merger,
but that the purchase price was too high. Mr. Wiltse was not present at the
meeting.

On July 16, 1997, the TSG Board met to discuss the formal written report of
Corporate Builders L.P., a due diligence analysis of Elcotel prepared by the
management of TSG, and some comparative analyses prepared by Wexford
Management. At the meeting, Mr. Bisceglia advised the directors of an informal
agreement concerning the composition of the post-merger board of directors.
Directors decided that both the board structure and the composition of senior
management should be made a formal part of the merger agreement so that TSG's
stockholders would have assurance as to the management of the combined
entities for at least the first year after the Merger. Mr. Plaumann reported
to the Board that he had found little information about comparable companies
against which to measure Elcotel and its relative value to TSG. The Board then
voted to proceed with negotiations and formally approved the agreement by
which Wexford Management was engaged as the TSG financial advisor.

At the July 22, 1997 telephonic meeting of the Elcotel Board, Mr. Gray
reported on TSG's current sales projections and TSG's backlog of domestic
sales. He also reported that TSG had signed a new sales contract with an RBOC
that was expected to provide incremental revenue not reflected in TSG's
projections. Members of the Elcotel Board discussed TSG's ability to achieve
its forecasts. The Board discussed several firms as possible candidates to
deliver a fairness opinion, and approved the selection of Murray Devine.

On July 31, 1997 members of Elcotel's management visited TSG's Roswell,
Georgia headquarters to review strategy for the combined entity and to discuss
technology, product and customer issues.

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At its August 5, 1997 meeting, the Elcotel Board discussed the near final
draft of the Merger Agreement and related documents. Several due diligence
reports were presented. Representatives of Murray Devine orally advised the
Elcotel Board that in Murray Devine's opinion, the Merger was fair, from a
financial point of view, to Elcotel. Murray Devine also discussed the
procedures it had performed and its analysis. The Elcotel Board discussed
various questions raised by individual board members. After extensive
discussion, the Elcotel Board approved the current draft of the Merger
Agreement and the Merger by a vote of 5 to 2. Messrs. Gray, James, Jasmann,
Moore and Patton voted to approve the Merger and Messrs. Suplee and Wiltse
voted against.

On August 11, 1997, the TSG Board held a special meeting to review a near
final draft of the Merger Agreement, the Voting Agreement and both companies'
disclosure schedules. Directors discussed some of the key merger terms,
including the Exchange Ratio, the treatment of warrant and option holders, the
representations, warranties and covenants being made by TSG in the Merger
Agreement, the terms under which the Merger Agreement may be terminated by one
or both of the parties, and the effect on the Merger of the Voting Agreement.
Mr. Bisceglia noted that he had been informed that Elcotel's financial adviser
had rendered an affirmative opinion as to the fairness of the Merger Agreement
to the stockholders of Elcotel from a financial point of view and that the
Elcotel Board had approved the Merger Agreement. At the end of the meeting,
TSG's directors adopted formal resolutions by which they stated their opinion
that the terms of the Merger are fair and in the best interests of TSG and its
stockholders; authorized management to sign the Merger Agreement on behalf of
TSG; granted to management the authority to negotiate improvements in the
terms and conditions to the extent they are able to do so; and authorized the
call of a meeting of stockholders to consider the approval of the Merger.

On August 13, 1997, representatives of Elcotel and TSG executed the Merger
Agreement, and Fundamental, Wexford and Elcotel and the other parties executed
the Voting Agreement. On August 14, 1997, Elcotel and TSG each issued a press
release announcing the proposed Merger.

ELCOTEL'S REASONS FOR THE MERGER; RECOMMENDATION OF THE ELCOTEL BOARD

The Elcotel Board has approved the Merger Agreement and recommended that the
stockholders of Elcotel vote to approve the issuance of Elcotel Common Stock
pursuant to the Merger Agreement and any other actions required in furtherance
of the Merger. In reaching its conclusion, the Elcotel Board considered a
number of factors, including:

. The judgment and advice of Elcotel's senior management, including in
respect of the conditions in the payphone industry and the strategic
options available to Elcotel.

. The oral analyses and opinion of Murray Devine presented to the Elcotel
Board on August 5, 1997 and written opinion dated August 5, 1997, to the
effect that as of such date the Exchange Ratio is fair to the
stockholders of Elcotel from a financial point of view. A copy of the
written opinion dated August 5, 1997 of Murray Devine, setting forth the
assumptions made, factors considered and scope of the review undertaken
by Murray Devine, is attached as Appendix B hereto. Elcotel stockholders
are urged to read the opinion of Murray Devine carefully and in its
entirety. See "The Merger--Opinion of Murray Devine; Background of the
Merger."

. The financial condition, results of operations and cash flows of Elcotel
and TSG, both on a historical and a prospective basis.

. The terms and conditions of the Merger Agreement, including the amount
and form of consideration to be paid pursuant to the Merger Agreement.

. Historical market prices and trading information with respect to Elcotel
Common Stock and TSG Common Stock.

. The Voting Agreement which provides, among other things, for Fundamental
to vote its shares of Elcotel Common Stock, and for Wexford to vote its
shares of TSG Common Stock, in favor of adoption of the Merger
Agreement.

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. Complementary technologies and market positions of TSG and Elcotel.

. Ability of the combined company to take advantage of domestic and
international sales opportunities.

. Increased interest from the investment community and an expanded trading
market for Elcotel Common Stock.

The foregoing discussion of the information and factors considered and given
weight by the Elcotel Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the Elcotel Board did not find it practicable to and did not attempt to rank
or assign relative weights to the foregoing factors. In addition, individual
members of the Elcotel Board may have given different weights to different
factors.

Elcotel's business combination with TSG pursuant to the Merger is an
integral part of Elcotel's strategy to expand into the telco markets
domestically, improve its cellular based technology for international
applications and establish a service capability related to payphone repair,
reconditioning and refurbishing. Elcotel's acquisition of TSG pursuant to the
Merger supports a number of important strategic objectives of Elcotel. Elcotel
believes the Merger will enable Elcotel to achieve market diversification, and
in particular, to provide Elcotel with a meaningful share of the market for
sales of payphones to RBOCs which it has yet to penetrate. Elcotel believes
the Merger will position Elcotel as a major supplier to both domestic and
international payphone markets offering a more complete line of products.

Following the Merger, as soon as reasonably practicable, Elcotel expects to
rename all TSG entities Elcotel-TSG and integrate them with Elcotel's
operations. Elcotel believes the elimination of duplicate overhead expenses
may result in a reduction in annual combined operating costs, beginning during
the six-month period after the Effective Time. In addition, Elcotel believes
that there are other cost reductions and cost avoidance opportunities
presented by the Merger (including eliminating duplicate sales and marketing
activities, eliminating duplicate development programs, achieving
manufacturing cost reductions from higher volume and improvements in TSG's
processes, and reducing inventories and manufacturing overhead expenses), as
well as opportunities for enhanced revenue growth from the telephone companies
in the domestic and international markets. Elcotel believes that the potential
cost reductions from the integration of TSG's business, the avoidance of costs
and expenses that would be incurred by TSG and Elcotel as separate entities,
and the potential revenue enhancements will enable the combined business to
absorb the amortization of intangible assets, including goodwill, resulting
from the Merger. However, there can be no assurance in that regard.

THE ELCOTEL BOARD BY A VOTE OF 5 TO 2 HAS RECOMMENDED THAT THE HOLDERS OF
ELCOTEL COMMON STOCK VOTE "FOR" ADOPTION OF THE ISSUANCE OF ELCOTEL COMMON
STOCK PURSUANT TO THE MERGER AGREEMENT AND ANY OTHER ACTIONS REQUIRED IN
FURTHERANCE OF THE MERGER.

OPINION OF MURRAY DEVINE

Elcotel engaged Murray Devine to act as its financial advisor in connection
with the transactions contemplated by the Merger Agreement based upon Murray
Devine's qualifications, expertise and reputation. On August 5, 1997, Murray
Devine rendered an oral opinion to the Elcotel Board which was confirmed by
delivery of its written opinion dated August 5, 1997 (the "Murray Devine
Opinion") to the effect that, as of such date, and based upon and subject to
the assumptions, limitations and qualifications set forth in such opinion, the
Merger pursuant to the Merger Agreement is fair, from a financial point of
view, to Elcotel.

THE FULL TEXT OF THE MURRAY DEVINE OPINION IS SET FORTH AS APPENDIX B TO
THIS JOINT PROXY STATEMENT-PROSPECTUS AND SHOULD BE READ CAREFULLY IN ITS
ENTIRETY, INCLUDING WITHOUT LIMITATION THE DESCRIPTIONS OF THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE
REVIEW UNDERTAKEN IN ARRIVING AT SUCH OPINION. THE MURRAY DEVINE OPINION
ADDRESSES

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THE FAIRNESS OF THE MERGER TO ELCOTEL FROM A FINANCIAL POINT OF VIEW AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF ELCOTEL OR TSG AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE ELCOTEL ANNUAL MEETING OR TSG SPECIAL
MEETING.

The Murray Devine Opinion does not constitute an opinion as to the price at
which Elcotel Common Stock will actually trade at any time. The type and
amount of consideration was determined in arm's length negotiations between
Elcotel and TSG in which negotiations Cameron Associates, not Murray Devine,
advised Elcotel. No restrictions or limitations were imposed upon Murray
Devine with respect to the investigations made or procedures followed by
Murray Devine in rendering its opinion. In arriving at its opinion, Murray
Devine, among other things: (i) reviewed the Merger Agreement and other
related documents; (ii) reviewed such publicly available business and
financial information relating to Elcotel and TSG as Murray Devine deemed
appropriate; (iii) reviewed certain internal financial and operating
information relating to Elcotel and TSG (including financial plans) prepared
by their respective managements; (iv) discussed the past and current
operations and financial condition and prospects of Elcotel with the senior
management of Elcotel; (v) discussed the past and current operations and
financial condition and prospects of TSG with the senior management of TSG;
(vi) reviewed pro forma financial statements (including financial plans) of
Elcotel and TSG on a combined basis (the "Combined Companies") prepared
jointly by the management of Elcotel and TSG; and (vii) reviewed recent stock
market data relating to Elcotel and TSG. In addition, Murray Devine compared
certain financial and securities data of Elcotel and TSG with various other
companies whose securities are traded in public markets and conducted such
other financial studies, analyses and investigations as Murray Devine deemed
appropriate for purposes of rendering its opinion.

In rendering its opinion, Murray Devine did not independently verify any of
the foregoing information and relied on its being complete and accurate in all
material respects and further relied upon the assurances of Elcotel management
that they are unaware of any facts that would make the information provided to
Murray Devine incomplete or misleading in any material respect. Murray Devine
also assumed that the financial plans have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of Elcotel's
and TSG's management as to the expected future financial performance of
Elcotel and TSG. Murray Devine did not make any independent evaluation or
appraisal of the individual assets of Elcotel or TSG, nor was Murray Devine
furnished with any such appraisals.

The Murray Devine opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on information made
available to it as of, the date of its opinion. Murray Devine does not have
any obligation to revise or reaffirm its opinion before the Effective Time or
thereafter.

Murray Devine was selected to render an opinion in connection with the
Merger based upon Murray Devine's qualifications, expertise and reputation,
including the fact that Murray Devine, as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, and valuations for
corporate and other purposes.

Murray Devine received a non-contingent fee of $100,000.

TSG'S REASONS FOR THE MERGER; RECOMMENDATION OF THE TSG BOARD

On August 11, 1997, the TSG Board, by unanimous vote, approved the Merger
Agreement and the transactions contemplated thereby (including the Merger) and
decided to recommend adoption of the Merger Agreement and the transactions
contemplated thereby to TSG's stockholders. In reaching these conclusions, the
TSG Board considered, among other things, the following factors:

. The terms and conditions of the Merger Agreement, including the amount
and form of consideration to be paid pursuant to the Merger Agreement.

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<PAGE>

. Historical market prices and trading information with respect to Elcotel
Common Stock and TSG Common Stock.

. The Voting Agreement which provides, among other things, for Wexford to
vote its shares of TSG Common Stock and for Fundamental to vote its
shares of Elcotel Common Stock, in favor of adoption of the Merger
Agreement.

The foregoing discussion of the information and factors considered by the
TSG Board is not intended to be exhaustive, but includes material factors
considered by the Board. In reaching its determination to approve the Merger
Agreement and the transactions contemplated thereby, the TSG Board did not
assign any relative or specific weights to the various factors considered by
it nor did it specifically characterize any factor as positive or negative
(except as described above), and individual directors may have given different
weights to different factors and may have viewed certain factors more
positively or negatively than others.

TSG's merger with Elcotel is an essential element of TSG's strategy to build
critical mass, broaden its customer base and enhance its product offering.
TSG's strategy to combine with Elcotel is reflective of the combined
companies' strategy to become a leading global provider of public
communications products and services.

FOR THE REASONS DESCRIBED ABOVE, THE TSG BOARD UNANIMOUSLY RECOMMENDS THAT
THE HOLDERS OF TSG COMMON STOCK VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT
AND THE APPROVAL OF ANY OTHER ACTIONS REQUIRED IN FURTHERANCE OF THE MERGER.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

Following is a summary of material federal income tax consequences of the
Merger based on current law. Neither Elcotel nor TSG has requested or will
request any ruling from the IRS as to the United States federal income tax
consequences of the Merger. Future legislative, judicial or administrative
changes or interpretations, which may be retroactive, could alter or modify
the statements set forth herein. This summary may not apply to certain classes
of taxpayers, including, without limitation, insurance companies, tax-exempt
organizations, financial institutions, dealers in securities, nonresident
aliens, foreign corporations, persons who acquired shares of TSG Common Stock
pursuant to the exercise of employee stock options or rights or otherwise as
compensation, and persons who hold shares of TSG Common Stock in a hedging
transaction or as part of a straddle or conversion transaction. Also, this
summary does not address state, local or foreign tax consequences of the
Merger. Consequently, each holder of TSG Common Stock (a "Holder") should
consult such Holder's own tax advisor as to the specific tax consequences of
the Merger to such Holder.

The Merger is intended to be treated as a "reorganization" within the
meaning of Section 368(a) of the Code. Accordingly, for federal income tax
purposes, no income, gain or loss will be recognized by either Elcotel or TSG
as a result of the Merger, and Holders who exchange shares of TSG Common Stock
for shares of Elcotel Common Stock pursuant to the Merger will be treated as
follows: (i) no income, gain or loss will be recognized by a Holder with
respect to the receipt of Elcotel Common Stock; (ii) the aggregate adjusted
tax basis of shares of Elcotel Common Stock (including a fractional share
interest in Elcotel Common Stock deemed received and redeemed as described in
(iv) below) received by a Holder will be the same as the aggregate adjusted
tax basis of the shares of TSG Common Stock exchanged therefor; (iii) the
holding period of shares of Elcotel Common Stock (including the holding period
of a fractional share interest in Elcotel Common Stock deemed received and
redeemed as described in (iv) below) received by a Holder will include the
holding period of the TSG Common Stock exchanged therefor, provided that such
shares of TSG Common Stock are held as capital assets at the Effective Time;
and (iv) a Holder of TSG Common Stock who receives cash in lieu of a
fractional share interest in Elcotel Common Stock will be treated as having
received such fractional share interest and then as having received the cash
in redemption of such fractional share interest.

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It is a condition to the consummation of the Merger that TSG receive an
opinion of counsel to the effect that neither TSG nor any of its stockholders
will recognize gain or loss for United States federal income tax purposes as a
result of the Merger (other than in respect of any cash paid in lieu of
fractional shares). The opinion referred to in this paragraph will be based
upon certain facts, assumptions and representations and/or covenants,
including those contained in certificates of officers of Elcotel, TSG and,
possibly, others. If such opinion is not received, the Merger will not be
consummated unless the condition requiring its receipt is waived. TSG
currently anticipates that such opinion will be delivered and that TSG will
not waive the condition requiring receipt of such opinion. Such opinion will
not be binding upon the IRS and no assurance can be given that the IRS will
not take a contrary position.

Conversion pursuant to the Merger Agreement of the TSG Stock Options into
options to acquire Elcotel Common Stock should not change the federal income
tax treatment of the TSG Stock Options. The conversion is intended to satisfy
Section 424(a) of the Internal Revenue Code, so that it will not constitute a
modification of the TSG Stock Options. In the absence of a modification, the
date the TSG Stock Options were granted will continue to be considered the
date of grant, for purposes of qualifying for favorable federal income tax
treatment upon disposition of stock purchased pursuant to an incentive stock
option or the 1995 Employee Stock Purchase Plan.

INTERESTS OF CERTAIN PERSONS AND EMPLOYEE MATTERS

In considering the recommendation of the Elcotel Board and the TSG Board
with respect to the Merger, stockholders of Elcotel and TSG should be aware
that certain members of the management of Elcotel and TSG and of the Elcotel
Board and the TSG Board have certain interests in the Merger that are in
addition to the interests of stockholders of Elcotel and TSG generally.

Directorships. Pursuant to the Merger Agreement, Elcotel has agreed to
invite to become directors of Elcotel following the Merger: David Steadman,
who has an employment agreement with TSG and is Chairman of its Board of
Directors; Mark Plaumann, a member of the Board of Directors of TSG and Senior
Vice President of Wexford Management, an affiliate of Wexford, the holder of
approximately 52% of the outstanding TSG Common Stock; Kenneth Rubin, Vice
President of Wexford; and Vincent Bisceglia, President and Chief Executive
Officer of TSG, who will enter into an employment agreement with Elcotel in
connection with the Merger. During the period ending immediately after the
second annual meeting of Elcotel stockholders following this Elcotel Annual
Meeting, Fundamental and Wexford have agreed to vote their shares in favor of
any nominees for director of Elcotel nominated by the incumbent Elcotel Board.
See "Fundamental/Wexford Stockholders' Agreement--Voting of Capital Stock."
Immediately after the Merger, the Elcotel Board will include two
representatives of Fundamental, Mr. James and Charles Moore, and two
representatives of Wexford, Messrs. Plaumann and Rubin.

Investment Banking Fee. Pursuant to an agreement entered into in July 1997,
TSG will pay a $200,000 investment banking fee to Wexford Management, an
affiliate of Wexford, the holder of approximately 52% of the outstanding TSG
Common Stock, for services rendered in connection with the Merger if the
Merger or other transaction involving the sale of all or substantially all of
TSG is consummated. In the event the Merger does not close, TSG has agreed to
reimburse Wexford Management for up to $5,000 of out-of-pocket costs and
expenses. At its option, Elcotel can pay the $200,000 fee to Wexford
Management by the issuance of 30,769 shares of Elcotel Common Stock.

Treatment of Stock Options. The conversion pursuant to the Merger Agreement
of the TSG Stock Options into options to acquire Elcotel Common Stock will
result in adjustments to the per share exercise price and number of shares
subject thereto based on the Exchange Ratio. The Merger will result in the
acceleration and immediate vesting of: all outstanding TSG Stock Options
granted to Mr. Bisceglia and Mr. Steadman under TSG's 1994 Omnibus Plan
(options to purchase approximately 57,500 shares of TSG Common Stock,
including options to purchase 50,000 shares which otherwise vest on November
1, 1997) pursuant to the terms of their stock option agreements; 50% of
unvested TSG Stock Options granted to the other executive officers of TSG

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(options to purchase approximately 48,750 shares of TSG Common Stock,
including 18,750 shares which otherwise vest on November 1, 1997) pursuant to
the terms of an Officers' Policy adopted by the TSG Board, and all outstanding
TSG Stock Options granted to TSG's directors under TSG's 1995 Non-Employee
Director Plan (options to purchase approximately 12,000 shares of TSG Common
Stock) pursuant to the terms of the plan and their stock option agreements.
All other options outstanding under TSG Stock Options will vest according to
their terms.

Employment Agreements. In connection with the Merger, Elcotel has entered
into employment agreements with each of Vincent Bisceglia, President and Chief
Executive Officer of TSG, C. Shelton James, Chief Executive Officer of Elcotel
and Chairman of its Board of Directors, and Tracey Gray, President of Elcotel.
See "The Merger Agreement--General Conditions Precedent to the Merger." Mr.
James will be elected Chairman of the Board of Directors of Elcotel, will
receive an annual salary of not less than $94,000, subject to annual increase,
and will be entitled to an annual incentive bonus computed as a percentage of
base salary based on whether certain performance goals are met and additional
stock options as approved by the Compensation and Stock Committee of the
Elcotel Board. Mr. Gray will be elected President and Chief Executive Officer
of Elcotel, will receive an annual salary of not less than $170,000, subject
to annual increase, and will be entitled to an annual incentive bonus computed
as a percentage of base salary based on whether certain performance goals are
met and additional stock options as approved by the Compensation and Stock
Committee of the Elcotel Board. Mr. Bisceglia will be elected Executive Vice
President and Chief Operating Officer (or, at Elcotel's choice, to a higher
office), will receive an annual salary of not less than $160,000, subject to
annual increase, and will be entitled to retain all options granted to him as
an employee of TSG that will be converted to options to purchase Elcotel
Common Stock (see "The Merger Agreement--Conversion of Options to Purchase TSG
Common Stock), an additional option to purchase 50,000 shares of Elcotel
Common Stock and an incentive bonus for Elcotel's fiscal year ending March 31,
1998 equal to 2% of TSG's operating profits (defined as net income before
taxes, amortization, depreciation, interest, gains and losses arising from
revaluation of assets, and effects of the Merger on TSG's operations). For
fiscal years beginning after March 31, 1998, Mr. Bisceglia will be entitled to
participate in any bonus program maintained for senior executives of Elcotel
to the same extent and on the same terms as the Chief Executive Officer of
Elcotel. After a transition period ending seven months after the consummation
of the Merger, Mr. Bisceglia will be required to relocate his residence to the
Sarasota, Florida area. Elcotel will reimburse Mr. Bisceglia for certain
expenses in connection with such relocation. Mr. Bisceglia's employment
agreement with Elcotel will supercede any prior employment agreements with
TSG. Each of these employment agreements of Elcotel will continue until
December 31, 1998, subject to earlier termination for cause or for certain
other reasons. Each employment agreement will continue for additional one-year
periods thereafter unless Elcotel gives written notice of nonrenewal at least
180 days prior to the end of any such period. Upon non-renewal of the
employee's employment term or the employee's death or permanent disability,
the employee will be entitled to severance equal to six months (or, for Mr.
Bisceglia if he has relocated his residence to Sarasota, Florida, one year) of
salary and benefits and any bonus and stock options to which such employee is
entitled. Elcotel may terminate the employee's employment without cause if
Elcotel pays the employee severance as described in the preceding sentence for
at least one year. Pursuant to these agreements, each employee is indemnified
by Elcotel with respect to claims made against him as a director, officer
and/or employee of Elcotel or any subsidiary of Elcotel to the fullest extent
permitted by Elcotel's Certificate of Incorporation, its Bylaws or Delaware
Law.

Registration Rights. Pursuant to the Fundamental/Wexford Stockholders'
Agreement, Wexford, Acor S.A., a holder of approximately 9.7% of the
outstanding TSG Common Stock, and Fundamental will receive certain
registration rights with respect to Elcotel Common Stock beneficially owned by
them, including the Elcotel Common Stock issued to Wexford pursuant to the
Merger. See "Fundamental/Wexford Stockholders' Agreement--Registration
Rights."

REFINANCING OF TSG AND ELCOTEL INDEBTEDNESS

Elcotel intends to refinance with one bank the existing indebtedness of TSG
to its bank and of Elcotel to its bank in connection with the consummation of
the Merger. Elcotel believes it will require a revolving line of credit of
approximately $15 million. There can be no assurance whether it will be able
to obtain such a line of credit or as to the terms of such line of credit.

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ACCOUNTING TREATMENT

The Merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles ("GAAP").
Accordingly, the merger consideration will be allocated to the assets and
liabilities of TSG based on their estimated fair values with the excess
recorded as goodwill. See "Unaudited Pro Forma Consolidated Financial
Information."

ANTITRUST

No filing in respect of the Merger is required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.

NO APPRAISAL OR DISSENTERS' RIGHTS

Under Delaware Law, holders of TSG Common Stock are not entitled to
appraisal or dissenters' rights in connection with the Merger because the TSG
Common Stock is designated as a National Market security on an interdealer
quotation system by the NASD and the consideration which such holders will be
entitled to receive in the Merger will consist solely of (i) Elcotel Common
Stock, which will also be designated as a National Market security on an
interdealer quotation system by the NASD, and (ii) cash in lieu of fractional
shares. Under Delaware Law, holders of Elcotel Common Stock are not entitled
to appraisal or dissenters' rights in connection with the Merger because
Elcotel is not a constituent corporation to the Merger.

RESALES OF ELCOTEL COMMON STOCK

All shares of Elcotel Common Stock issued pursuant to the Merger will be
freely transferable, except that shares of Elcotel Common Stock received by
any person who may be deemed to be an "affiliate" of TSG prior to the Merger
(for purposes of Rule 145 promulgated under the 1933 Act) may not be resold
except in transactions permitted by Rule 145 or as otherwise permitted under
the 1933 Act. Persons deemed to be affiliates of TSG are those individuals or
entities that control, are controlled by, or are under common control with,
such party and generally include executive officers and directors of such
party as well as certain principal stockholders of such party.

TSG has agreed to deliver to Elcotel, at least 30 days before the Effective
Time, a letter identifying all persons who are, at the time of the TSG Special
Meeting, deemed to be "affiliates" (as defined in the preceding paragraph) of
TSG, and to use its best efforts to cause each person so identified to deliver
to Elcotel at or before the Effective Time, a written agreement substantially
in the form previously approved by Elcotel and TSG, providing that such person
will not sell, pledge, transfer or otherwise dispose of any Elcotel Common
Stock received by such person in exchange for shares of TSG Common Stock
pursuant to the Merger, except pursuant to an effective registration statement
or in compliance with such Rule 145 or another exemption from the registration
requirements of the 1933 Act. Elcotel will be entitled to issue appropriate
stop transfer instructions to the transfer agent for the Elcotel Common Stock
to be issued to such affiliates pursuant to the Merger, consistent with the
terms of such letter. This Joint Proxy Statement-Prospectus does not cover any
resale of Elcotel Common Stock received by affiliates of TSG in connection
with the Merger. Pursuant to the Fundamental/Wexford Stockholders' Agreement,
Wexford and Acor S.A., a holder of approximately 9.7% of the outstanding TSG
Common Stock, have been granted certain registration rights with respect to
the resale of Elcotel Common Stock. See "Fundamental/Wexford Stockholders'
Agreement."

NASDAQ NATIONAL MARKET

Elcotel will use its best efforts to cause the shares of Elcotel Common
Stock to be issued in connection with the Merger to be approved for listing on
the Nasdaq National Market at or prior to the Effective Time.

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THE MERGER AGREEMENT

The following summary of the Merger Agreement contained in this Joint Proxy
Statement-Prospectus is not intended to be a complete description of the terms
and conditions thereof and is qualified in its entirety by reference to the
full text thereof, which is incorporated herein by reference and a copy of
which is attached hereto as Appendix A. Unless otherwise defined in this Joint
Proxy Statement-Prospectus, the capitalized terms used in this section have
the meanings ascribed thereto in the Merger Agreement.

GENERAL

The Merger Agreement provides that, subject to the terms and conditions
thereof and in accordance with Delaware law, at the Effective Time, Elcotel
and TSG will consummate the Merger pursuant to which (i) Merger Subsidiary
will be merged with and into TSG and the separate corporate existence of
Merger Subsidiary will thereupon cease, and (ii) TSG, the surviving
corporation, will become a direct wholly-owned subsidiary of Elcotel and will
continue to be governed by the laws of the State of Delaware.

EFFECTIVE TIME

The Effective Time of the Merger will be at such time as the certificate of
merger is filed with the Delaware Secretary of State, or at such later time as
Elcotel and TSG agree and specify in the certificate of merger. The filing of
the certificate of merger will occur no later than the fifth business day
after satisfaction or waiver of the conditions precedent to the consummation
of the Merger. See "The Merger Agreement--General Conditions Precedent to the
Merger." Elcotel and TSG currently anticipate that the Effective Time will
occur on or before December 31, 1997. However, there can be no assurance that
the conditions to the Merger will be satisfied by such date or at all, or that
the Merger Agreement will not be terminated.

CORPORATE MATTERS

The certificate of incorporation of Merger Subsidiary will be the
certificate of incorporation of the surviving corporation, except that, at the
Effective Time, the name of the surviving corporation will be changed to "TSG"
or such other name as Elcotel may designate on or before the Effective Time,
until thereafter amended in accordance with applicable law and such
certificate of incorporation.

The bylaws of Merger Subsidiary in effect at the Effective Time will be the
bylaws of the surviving corporation, until thereafter amended in accordance
with applicable law, the certificate of incorporation of the surviving
corporation and such bylaws.

CONVERSION OF TSG SHARES

The Merger Agreement provides that each share of TSG Common Stock issued and
outstanding immediately prior to the Effective Time (other than TSG Common
Stock owned by TSG as treasury stock, and, if any, TSG Common Stock owned by
Elcotel or any direct or indirect wholly-owned subsidiary of Elcotel or TSG)
will, at the Effective Time, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into the right to receive 1.05
shares of fully paid and nonassessable Elcotel Common Stock (such conversion
rate, the "Exchange Ratio").

In lieu of any fractional share of Elcotel Common Stock to which a holder of
TSG Common Stock would be entitled, Elcotel will pay to each former
stockholder of TSG who otherwise would be entitled to receive a fractional
share of Elcotel Common Stock an amount in cash determined by multiplying (i)
such fraction by (ii) the arithmetic mean of the closing sales prices for the
Elcotel Common Stock reported on the Nasdaq National Market for each of the
five consecutive trading days on which Elcotel Common Stock was traded
immediately preceding the Effective Time as quoted in the Wall Street Journal
or other reliable financial newspaper or publication.

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<PAGE>

All shares of TSG Common Stock owned by TSG as treasury stock and any shares
of TSG Common Stock owned by Elcotel or any direct or indirect wholly owned
subsidiary of Elcotel will, at the Effective Time, be canceled and retired and
will cease to exist and no Elcotel Common Stock will be delivered in exchange
therefor.

The Merger Agreement provides that, on and after the Effective Time, holders
of certificates which immediately prior to the Effective Time represented
outstanding shares of TSG Common Stock (the "Certificates") will cease to have
any rights as stockholders of TSG, except the right to receive the
consideration set forth in the Merger Agreement for each share of TSG Common
Stock held by them.

BEFORE THE EFFECTIVE TIME, ELCOTEL WILL APPOINT AN AGENT FOR THE PURPOSE OF
EXCHANGING CERTIFICATES REPRESENTING TSG COMMON STOCK FOR THE MERGER
CONSIDERATION (THE "EXCHANGE AGENT"). WITHIN FIVE BUSINESS DAYS AFTER THE
EFFECTIVE TIME, ELCOTEL OR THE EXCHANGE AGENT WILL MAIL TO EACH HOLDER OF
RECORD OF A CERTIFICATE WHOSE SHARES OF TSG COMMON STOCK WERE CONVERTED IN THE
MERGER INTO THE RIGHT TO RECEIVE ELCOTEL COMMON STOCK A LETTER OF TRANSMITTAL
AND INSTRUCTIONS FOR USE IN EFFECTING THE SURRENDER OF SUCH CERTIFICATES IN
EXCHANGE FOR ELCOTEL COMMON STOCK.

TSG STOCKHOLDERS SHOULD NOT FORWARD TSG STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED SUCH TRANSMITTAL LETTERS. TSG STOCKHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.

CONVERSION OF OPTIONS TO PURCHASE TSG COMMON STOCK

In accordance with the Merger Agreement, at the Effective Time, each
outstanding TSG Stock Option, whether vested or unvested, will be converted
into an option to acquire, on the same terms and conditions as were applicable
under the TSG Stock Option, a number of shares of Elcotel Common Stock equal
to 1.05 times the number of shares of TSG Common Stock which the option holder
was entitled to purchase immediately prior to the Effective Time under such
TSG Stock Option, at a price per share of Elcotel Common Stock equal to
(i) the aggregate exercise price for the shares of TSG Common Stock otherwise
purchasable pursuant to the TSG Stock Option divided by (ii) the aggregate
number of shares of Elcotel Common Stock deemed purchasable pursuant to the
TSG Stock Option, with any fractional share of Elcotel Common Stock resulting
from such calculation for such holder being rounded up to the nearest whole
share. However, in the case of any option to which Section 421 of the Internal
Revenue Code applies by reason of such option's qualification under Section
422 or 423 of the Code, the option price, the number of shares purchasable
pursuant to such option and the terms and conditions of exercise of such
option will be determined in order to comply with Section 424 of the Code.

Elcotel will prepare and file with the Commission a registration statement
on Form S-8 or other appropriate form with respect to shares of Elcotel Common
Stock subject to TSG Stock Options issued under TSG Option Plans and will use
its reasonable efforts to have such registration statement declared effective
as soon as practicable following the Effective Time.

CONVERSION OF WARRANTS TO PURCHASE TSG COMMON STOCK

In accordance with the Merger Agreement, at the Effective Time, the TSG
Underwriter Warrants and each TSG Public Warrant (which in the aggregate
provide for the right to acquire 675,000 shares of TSG Common Stock) will
become a warrant to acquire, at a proportionately reduced exercise price per
share, a number of shares of Elcotel Common Stock equal to 1.05 times the
number of shares of TSG Common Stock that the warrant holder was entitled to
purchase immediately prior to the Effective Time under such TSG Warrants.

CONDUCT OF TSG PENDING THE MERGER

In the Merger Agreement, TSG has agreed that, until the Effective Time,
except as expressly provided in the Merger Agreement or with the prior written
consent of Elcotel (which approval will not be unreasonably

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<PAGE>

withheld or delayed with respect to (c), (d), (h), (i), (j), (n) or (o), or
(k) as it applies to filing any amended tax return):

(a) TSG will not adopt or propose any change in its Certificate of
Incorporation or any change in its Bylaws;

(b) TSG will not, and will not permit any subsidiary of TSG to, adopt a
plan or agreement of complete or partial liquidation, or resolutions
providing for or authorizing such liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
TSG or any of its subsidiaries (other than a liquidation or dissolution of
any subsidiary or a merger or consolidation between wholly owned
subsidiaries);

(c) TSG will not, and will not permit any subsidiary of TSG to, make any
investment in or any acquisition of the business of any Person or any
material amount of assets (other than inventory);

(d) TSG will not, and will not permit any subsidiary of TSG to, sell or
otherwise dispose of any assets (other than inventory) in an amount that
would be material to TSG and its subsidiaries, taken as a whole, except in
the ordinary course of business consistent with past practice;

(e) TSG will not, and will not permit any subsidiary of TSG to, declare,
set aside or pay any dividend or other distribution payable in cash, stock
or property with respect to its capital stock other than dividends paid by
any subsidiary of TSG to TSG or any other subsidiary of TSG, or split,
combine, reclassify or take similar action with respect to any of its
capital stock or TSG securities or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or TSG securities;

(f) TSG will not, and will not permit any subsidiary of TSG to, redeem,
purchase or otherwise acquire directly or indirectly any of TSG's capital
stock or any TSG securities;

(g) Subject to certain exceptions, TSG will not, and will not permit any
subsidiary of TSG to, enter into or amend in any material respect any
employment contract with any of its officers, directors or employees
earning annual compensation of more than $50,000, adopt or amend any TSG
benefit plan in any material respect or make any payments, awards or
distributions under any TSG benefit plan or otherwise not consistent with
past practice or custom except (i) as required by a contract in existence
on August 13, 1997 and disclosed to Elcotel; or (ii) as necessary to make
any TSG benefit plan disclosed to Elcotel meet the requirements of ERISA to
the extent such amendment is described to or is approved by Elcotel;

(h) TSG will not, and will not permit any subsidiary of TSG to, (i) enter
into (or commit to enter into) any new lease or renew any existing lease
(except pursuant to commitments in existence on August 13, 1997 for such
lease or lease renewal) or (ii) purchase or acquire or enter into any
agreement to purchase or acquire any real estate;

(i) TSG will not, and will not permit any subsidiary of TSG to, make or
commit to make any capital expenditures in excess of $150,000 in the
aggregate exclusive of existing commitments with Avex Electronics, Inc. for
capital expenditures not exceeding $200,000 in the aggregate.

(j) TSG will not, and will not permit any subsidiary of TSG to, change
any tax election, change any annual tax accounting period, change any
method of tax accounting, file any amended Tax Return, enter into any
closing agreement relating to any Tax, settle any Tax claim or assessment,
surrender any right to claim a Tax refund or consent to any extension or
waiver (other than a reasonable extension or waiver) of the limitations
period applicable to any Tax claim or assessment, if any such action would
have the effect of increasing the aggregate Tax liability or reducing the
aggregate tax assets of TSG and its subsidiaries, taken as a whole, or, to
the knowledge of TSG, Elcotel and its subsidiaries, taken as a whole;

(k) TSG will not, and will not permit any subsidiary of TSG to, (i) incur
any indebtedness for borrowed money or guarantee any such indebtedness
other than in the ordinary course of its business consistent with past
practice, or (ii) voluntarily purchase, cancel, prepay or otherwise provide
for a complete or partial discharge in advance of a scheduled repayment
date with respect to, or waive any right under, any indebtedness for
borrowed money;

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<PAGE>

(l) SG will not, and will not permit any subsidiary of TSG to, enter into
any contract or amend or modify any existing contract, or engage in any new
transaction outside the ordinary course of business consistent with past
practice or not on an arm's length basis, with any affiliate of such party
or any of its subsidiaries;

(m) TSG will not, and will not permit any subsidiary of TSG to, agree or
commit to do any of the foregoing; and

(n) TSG will not, and will not permit any subsidiary of TSG to, take or
agree or commit to take any action that would make any representation or
warranty of TSG in the Merger Agreement inaccurate at, or as of any time
prior to, the Effective Time.

CONDUCT OF ELCOTEL PENDING THE MERGER

In the Merger Agreement, Elcotel has agreed that until the Effective Time,
except as expressly provided in the Merger Agreement or with the prior written
consent of TSG (which consent will not be unreasonably withheld or delayed
with respect to (c), (d), (h), (i), (j), (n) or (o), or (k) as it applies to
filing an amended tax return):

(a) Elcotel will not adopt or propose any change in its Certificate of
Incorporation or any change in its Bylaws, except as and to the extent
required to consummate the Merger;

(b) Elcotel will not, and will not permit any subsidiary of Elcotel to,
adopt a plan or agreement of complete or partial liquidation, or
resolutions providing for or authorizing such liquidation or a dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of Elcotel or any of its subsidiaries (other than a
liquidation or dissolution of any subsidiary or a merger or consolidation
between wholly owned subsidiaries);

(c) Except with respect to the acquisition of certain assets, Elcotel
will not, and will not permit any subsidiary of Elcotel to, make any
investment in or any acquisition of the business of any Person or any
material amount of assets (other than inventory);

(d) Elcotel will not, and will not permit any subsidiary of Elcotel to,
sell or otherwise dispose of any assets (other than inventory) in an amount
that would be material to Elcotel and its subsidiaries, taken as a whole,
except in the ordinary course of business consistent with past practice;

(e) Elcotel will not, and will not permit any subsidiary of Elcotel to,
declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock, other than
dividends paid by any subsidiary of Elcotel to Elcotel or any other
subsidiary of Elcotel, or split, combine, reclassify or take similar action
with respect to any of its capital stock or Elcotel securities or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or Elcotel
securities;

(f) Elcotel will not, and will not permit any subsidiary of Elcotel to,
redeem, purchase or otherwise acquire directly or indirectly any of
Elcotel's capital stock or any Elcotel securities;

(g) Elcotel will not, and will not permit any subsidiary of Elcotel to,
enter into or amend in any material respect any employment contract with
any of its officers, directors or employees earning annual compensation of
more than $50,000 (other than as contemplated by the Merger Agreement),
adopt or amend any Elcotel benefit plan in any material respect or make any
payments, awards or distributions under any Elcotel benefit plan or
otherwise not consistent with past practice or custom except (i) as
required by a contract in existence on the date hereof and disclosed to
TSG; (ii) as necessary to make any Elcotel benefit plan disclosed to TSG
meet the requirements of ERISA to the extent such amendment is described to
or is approved by TSG;

(h) Elcotel will not, and will not permit any subsidiary of Elcotel to,
(i) enter into (or commit to enter into) any new lease or renew any
existing lease (except pursuant to commitments in existence on August 13,
1997 for such lease or lease renewal) or (ii) purchase or acquire or enter
into any agreement to purchase or acquire any real estate;

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<PAGE>

(i) Except with respect to the acquisition of certain assets, Elcotel
will not, and will not permit any subsidiary of Elcotel to, make or commit
to make any capital expenditures in excess of $150,000 in the aggregate;

(j) Elcotel will not, and will not permit any subsidiary of Elcotel to,
change any tax election, change any annual tax accounting period, change
any method of tax accounting, file any amended Tax Return, enter into any
closing agreement relating to any Tax, settle any Tax claim or assessment,
surrender any right to claim a Tax refund or consent to any extension or
waiver (other than a reasonable extension or waiver) of the limitations
period applicable to any Tax claim or assessment, if any such action would
have the effect of increasing the aggregate Tax liability or reducing the
aggregate tax assets of Elcotel and its subsidiaries, taken as a whole, or,
to the knowledge of Elcotel, TSG and its subsidiaries, taken as a whole;

(k) Elcotel will not, and will not permit any subsidiary of Elcotel to,
(i) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of its business consistent
with past practice or other than in connection with the transactions
contemplated by the Merger Agreement, or (ii) voluntarily purchase, cancel,
prepay or otherwise provide for a complete or partial discharge in advance
of a scheduled repayment date with respect to, or waive any right under,
any indebtedness for borrowed money;

(l) Elcotel will not, and will not permit any subsidiary of Elcotel to,
enter into any contract or amend or modify any existing contract, or engage
in any new transaction outside the ordinary course of business consistent
with past practice or not on an arm's length basis, with any affiliate of
such party or any of its subsidiaries;

(m) Elcotel will not, and will not permit any subsidiary of Elcotel to,
agree or commit to do any of the foregoing; and

(n) Elcotel will not, and will not permit any subsidiary of Elcotel to,
take or agree or commit to take any action that would make any
representation or warranty of Elcotel in the Merger Agreement inaccurate
at, or as of any time prior to, the Effective Time.

APPOINTMENT OF DIRECTORS

Elcotel will invite David Steadman, Mark Plaumann, Kenneth Rubin and Vincent
Bisceglia to become members of the Board of Directors of Elcotel immediately
following the Effective Time and will increase the size of the Elcotel Board
to nine members, to include those four persons, C. Shelton James, Tracey Gray,
Charles Moore and two independent directors who are currently members of the
Board of Directors of Elcotel, immediately following the Effective Time.

NO SOLICITATION

TSG has agreed that (a) it will not, and will cause its subsidiaries and the
officers, directors, employees, investment bankers, consultants and other
agents of TSG and its subsidiaries and the affiliates of TSG not to, directly
or indirectly, initiate, solicit, encourage (including by way of furnishing
information) or facilitate or take any action to initiate, solicit, encourage
or facilitate any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, consolidation or other business
combination including TSG or any of its Subsidiaries or any acquisition or
similar transaction (including, without limitation, a tender or exchange
offer) involving the purchase of (x) all or any significant portion of the
assets of TSG and its subsidiaries taken as a whole, (y) 5% or more of the
outstanding shares of TSG Common Stock or (z) 15% of the outstanding shares of
the capital stock of any subsidiary of TSG (any such proposal or offer
referred to as an "Alternative Proposal"), or engage in any discussions or
negotiations concerning, or provide any confidential information or data to
any person or group relating to an Alternative Proposal (excluding the
transactions contemplated by the Merger Agreement) or otherwise facilitate any
effort or attempt to make or implement an Alternative Proposal; (b) it will
immediately cease and cause to be terminated and will cause its subsidiaries
and the officers, directors, employees, investment bankers, consultants and
other agents of TSG and its subsidiaries and the affiliates of TSG to
immediately cease

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<PAGE>

and terminate, any existing activities, discussions or negotiations with any
parties with respect to any of the foregoing; and (c) it will notify Elcotel
immediately if any such inquiries, proposals or offers are received by, any
such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, it or any of such persons;
except, however, that the TSG Board of Directors may (i) furnish information
to (but only pursuant to a confidentiality agreement in customary form and
having terms and conditions substantially comparable to the Elcotel-TSG
confidentiality agreement) or enter into discussions or negotiations with any
person or group that makes an unsolicited bona fide Alternative Proposal, only
to the extent that, (A) the TSG Board, based upon the written opinion of
outside counsel, determines in good faith that such action is required for the
TSG Board to comply with its fiduciary duties to stockholders imposed by
Delaware Law, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or group, TSG provides written
notice to Elcotel to the effect that it is furnishing information to, or
entering into discussions or negotiations with such person or group, and (C)
TSG keeps Elcotel informed of the status and material information including
the identity of such person or group with respect to any such discussions or
negotiations and any Alternative Proposal and the material terms thereof and
gives Elcotel at least 24 hours' advance notice of any information to be
supplied to, and at least 48 hours' advance notice of any agreement to be
entered into with, any person or group making such Alternative Proposal; and
(ii) to the extent required, comply with Rule 14e-2 promulgated under the 1934
Act with regard to an Alternative Proposal.

REPRESENTATIONS AND WARRANTIES

In the Merger Agreement, TSG has made customary representations and
warranties to Elcotel with respect to, among other things, its organization,
capitalization, corporate authorization, financial statements, public filings,
employee benefit plans, insurance, compliance with laws, the capitalization of
TSG, transactions with affiliates, litigation, absence of defaults, contracts,
tax matters, labor matters, assets, real property, environmental matters,
consents and approvals, information provided by it for inclusion in the Joint
Proxy Statement-Prospectus, agreements with third party payors, votes
required, undisclosed liabilities and the absence of any material adverse
change in TSG since March 28, 1997.

In addition, TSG has represented to Elcotel that except for a fee payable to
Wexford Management, no investment bank, broker, finder, or other intermediary
or other individual, entity or organization, is entitled to any fee or
commission from TSG or any subsidiary of TSG upon consummation of the
transactions contemplated by the Merger Agreement.

In the Merger Agreement, Elcotel has made customary representations and
warranties to TSG with respect to, among other things, its organization,
capitalization, corporate authorization, financial statements, public filings,
employee benefit plans, insurance, compliance with laws, the capitalization of
Elcotel, transactions with affiliates, litigation, absence of defaults,
contracts, tax matters, labor matters, assets, real property, environmental
matters, consents and approvals, information provided by it for inclusion in
this Joint Proxy Statement-Prospectus, agreements with third party payors,
votes required, undisclosed liabilities and the absence of any material
adverse change in Elcotel since March 31, 1997.

In addition, Elcotel has represented to TSG that except for a fee payable to
Cameron Associates, no investment bank, broker, finder, or other intermediary
or other individual, entity or organization, is entitled to any fee or
commission from Elcotel or any subsidiary of Elcotel upon consummation of the
transactions contemplated by the Merger Agreement. Elcotel has also
represented to TSG that it has received the written opinion of Murray Devine
to the effect that, as of the date of the Merger Agreement, the consideration
to be received by holders of TSG Common Stock in the Merger is fair to Elcotel
from a financial point of view.

CAPITALIZATION OF TSG

As of the close of business on October 13, 1997, 4,708,851 shares of TSG
Common Stock were issued and outstanding, no shares of TSG Common Stock were
issued and held in the treasury of TSG, and 1,491,149 shares of TSG Common
Stock were reserved for issuance under the TSG Option Plans and the TSG
Warrants.

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Options to purchase 576,250 shares of TSG Common Stock were outstanding under
the TSG Option Plans. This amount does not include approximately 9,306 shares
subject to a pending offering under the Stock Purchase Plan. The offering
period for this plan commenced on July 14, 1997 and will end on January 9,
1998. The estimated 9,306 shares of TSG Common Stock to be issued under this
plan is based on a stock price of $5 per share on July 14, 1997 and eligible
employees with $39,551 of estimated aggregate compensation deductions (based
on current compensation levels). Warrants to purchase 675,000 shares of TSG
Common Stock were outstanding under the TSG Warrants.

TSG has agreed not to issue or otherwise dispose of any shares of, or
securities convertible into or options, warrants, calls, commitments or rights
of any kind to acquire, any shares of capital stock of any class or series of
TSG or its subsidiaries, other than the issuance of (i) options with an
exercise price at least equal to the fair market value of the TSG Common Stock
on the date of grant for up to 20,000 shares of TSG Common Stock under the
Omnibus Plan as in effect on August 13, 1997, (ii) rights to purchase shares
of TSG Common Stock granted pursuant to the Stock Purchase Plan as in effect
on August 13, 1997 during the offering period that commenced on July 14, 1997
and that will end on January 9, 1998, estimated at 9,306 shares of TSG Common
Stock based on a stock price of $5.00 per share on July 14, 1997 and eligible
employees with $39,551 of estimated aggregate compensation deductions (based
on current compensation levels), (iii) options granted automatically under the
Director Plan as in effect on August 13, 1997, and (iv) issuances of TSG
Common Stock pursuant to the exercise of options granted pursuant to the TSG
Option Plans and the exercise of TSG Warrants which were outstanding on August
13, 1997; and TSG will not amend the terms of any option, warrant, right or
other security outstanding under any of the TSG Option Plans or commence any
new offering under the Stock Purchase Plan.

CAPITALIZATION OF ELCOTEL

The currently authorized capital stock of Elcotel consists solely of
20,000,000 shares of Elcotel Common Stock. The Elcotel Board has declared the
advisability of and recommended to its stockholders that this amount be
increased to 30,000,000 pursuant to action of such stockholders at the Elcotel
Annual Meeting. See "Additional Matters Submitted to the Vote of Elcotel's
Stockholders--Additional Proposal No. 2: Amendment to Certificate of
Incorporation." As of the close of business on September 15, 1997, 8,188,521
shares of Elcotel Common Stock were issued and outstanding, 52,000 shares of
Elcotel Common Stock were issued and held in the treasury of Elcotel, and
1,055,934 shares of Elcotel Common Stock were reserved for issuance under the
Elcotel 1991 Stock Option Plan and the Elcotel Directors Stock Option Plan
(collectively the "Elcotel Plans") and options to purchase 648,838 shares of
Elcotel Common Stock under the Elcotel Plans ("Elcotel Options") were
outstanding. The Elcotel Board has also declared the advisability of and
recommended to its stockholders that the amounts reserved for issuance under
the 1991 Stock Option Plan and the Directors Stock Option Plan be increased by
500,000 and 50,000 shares, respectively. See "Additional Matters Submitted to
the Vote of Elcotel's Stockholders--Additional Proposal No. 4: Amendment to
1991 Stock Option Plan and Additional Proposal No. 5: Amendments to Directors
Stock Option Plan."

Elcotel has agreed not to issue or otherwise dispose of any shares of, or
securities convertible into or options, warrants, calls, commitments or rights
of any kind to acquire, any shares of capital stock of any class or series of
Elcotel or its subsidiaries, other than (i) issuances pursuant to the exercise
of options granted pursuant to the Elcotel Plans which were outstanding on
August 13, 1997 (or granted as contemplated in (ii) hereafter) and (ii) any
grant of options to purchase Elcotel Common Stock to new employees of Elcotel
or any of its subsidiaries pursuant to the Elcotel Plans that could result in
the issuance of not more than 75,000 shares in the aggregate of Elcotel Common
Stock.

Immediately following the consummation of the Merger, it is expected that
approximately 13,213,605 shares of Elcotel Common Stock will be issued and
outstanding, 52,000 shares of Elcotel Common Stock will be held in the
treasury of Elcotel, options to purchase 648,838 shares of Elcotel Common
Stock under the Elcotel Plans will be outstanding, warrants to purchase
708,750 shares of Elcotel Common Stock will be outstanding and options to
purchase approximately 614,834 shares of Elcotel Common Stock issued pursuant
to the conversion of options that were outstanding pursuant to the TSG Option
Plans will be outstanding.

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GENERAL CONDITIONS PRECEDENT TO THE MERGER

The respective obligations of Elcotel, on the one hand, and TSG, on the
other hand, to consummate the Merger are subject to the satisfaction (or
waiver by the party for whose benefit such conditions exist) of the following
conditions: (a) the Merger Agreement will have been approved and adopted by
the stockholders of TSG in accordance with Delaware law and the issuance of
Elcotel Common Stock pursuant to the Merger Agreement will have been approved
by the stockholders of Elcotel by the requisite vote under applicable law and
under the applicable rules of the Nasdaq National Market, as the case may be;
(b) the Registration Statement on Form S-4 will have become effective in
accordance with the provisions of the 1933 Act, and no stop order suspending
such effectiveness will have been issued and remain in effect and no
proceeding seeking such an order will be pending or threatened and Elcotel
will have received all state securities or blue sky permits and other
authorizations necessary to issue the Elcotel Common Stock pursuant to the
Merger Agreement; (c) the shares of Elcotel Common Stock to be issued in the
Merger will have been approved for listing on the Nasdaq National Market; (d)
there shall not be pending any suit, action or proceeding by any Governmental
Authority (i) seeking to restrain or prohibit the consummation of the Merger
or any of the other transactions contemplated by the Merger Agreement, or
seeking to obtain from Elcotel or TSG any damages the amount of which would be
reasonably likely to have a material adverse effect on TSG or Elcotel, or (ii)
seeking to prohibit or limit the ownership or operation by Elcotel, TSG or any
of their respective subsidiaries of, or to compel Elcotel, TSG or any of their
respective subsidiaries to dispose of or hold separate, any material portion
of the business or assets of Elcotel, TSG or any of their respective
subsidiaries, as a result of the Merger or any of the other transactions
contemplated by the Merger Agreement; and (e) Elcotel shall have entered into
an employment agreement with each of Vincent Bisceglia, currently President
and Chief Executive Officer of TSG, Shelton James, currently Chief Executive
Officer of Elcotel and Chairman of its Board, and Tracey Gray, currently
President of Elcotel and a member of its Board (such employment agreements
have already been entered into, effective upon consummation of the Merger).

CONDITIONS PRECEDENT TO OBLIGATIONS OF ELCOTEL

The obligations of Elcotel to consummate the Merger are subject to the
satisfaction of the following conditions: (a) the representations and
warranties made by TSG in the Merger Agreement shall be true and correct as of
the Closing Date as though made on and as of the Closing Date or, in the case
of representations and warranties made as of a specified date earlier than the
Closing Date, on and as of such earlier date, and TSG shall have delivered to
Elcotel a certificate, dated the Closing Date to such effect; (b) TSG shall
have performed and complied with each agreement, covenant and obligation
required by the Merger Agreement to be so performed or complied with by TSG at
or prior to the Closing, and TSG shall have delivered to Elcotel a
certificate, dated the Closing Date to such effect; (c) there shall not have
been any change in the consolidated business, results of operations, financial
condition or prospects of TSG and its subsidiaries, taken as a whole, between
March 28, 1997 and the Closing Date which would have a material adverse effect
on TSG; (d) Elcotel shall have received consents or waivers from such Persons
as are necessary for Elcotel to consummate the transactions contemplated by
the Merger Agreement; (e) at the Closing, Elcotel shall have received from
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, counsel to TSG, a written
opinion reasonably satisfactory to Elcotel, dated as of the Closing Date; and
(f) Wexford and Fundamental shall have each entered into the
Fundamental/Wexford Stockholders' Agreement.

CONDITIONS PRECEDENT TO OBLIGATIONS OF TSG

The obligations of TSG to consummate the Merger are subject to the
satisfaction of the following conditions: (a) the representations and
warranties made by Elcotel and Merger Subsidiary in the Merger Agreement shall
be true and correct as of the Closing Date as though made on and as of the
Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date,
and Elcotel and Merger Subsidiary shall each have delivered to TSG a
certificate, dated the Closing Date to such effect; (b) Elcotel and Merger
Subsidiary shall each have performed and complied with each agreement,
covenant and obligation required by the Merger Agreement to be so performed or
complied

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with by Elcotel or Merger Subsidiary at or prior to Closing, and Elcotel and
Merger Subsidiary shall each have delivered to TSG a certificate, dated the
Closing Date to such effect; (c) there shall not have been any change in the
consolidated business, results of operations, financial condition or prospects
of Elcotel and its subsidiaries, taken as a whole, between March 31, 1997 and
the Closing Date which would have a material adverse effect on Elcotel; (d)
TSG shall have received consents or waivers from such Persons as are necessary
for TSG to consummate the transactions contemplated by the Merger Agreement;
(e) at the Closing, TSG shall have received from Schnader Harrison Segal &
Lewis llp, counsel to Elcotel, a written opinion reasonably satisfactory to
TSG, dated as of the Closing Date; (f) Fundamental/Wexford and Elcotel shall
have each entered into the Fundamental/Wexford Stockholders' Agreement; and
(g) TSG shall have received an opinion of counsel to the effect that neither
TSG nor any of its stockholders will recognize gain or loss for U.S. federal
income tax purposes as a result of the Merger (other than in respect of any
cash paid in lieu of fractional shares).

TERMINATION

The Merger Agreement may be terminated and the transactions contemplated
thereby may be abandoned at any time prior to the Effective Time either prior
to or after approval by the holders of Elcotel Common Stock or TSG Common
Stock: (a) by mutual written agreement of TSG and Elcotel; (b) by either TSG
or Elcotel (i) if the Merger shall not have been consummated on or prior to
December 31, 1997 and such failure to consummate the Merger is not caused by
or substantially attributable to a breach of the Merger Agreement by the
terminating party; (ii) if the approval of TSG stockholders or the approval of
Elcotel stockholders is not obtained by reason of the failure to obtain the
requisite vote of stockholders; (iii) under certain circumstances, in the
event of a breach of a representation, warranty, covenant or agreement on the
part of the non-terminating party set forth in the Merger Agreement, or in the
event of non-occurrence of a condition precedent to the terminating party's
obligations (see "The Merger Agreement--Conditions Precedent to Obligations of
Elcotel; Conditions Precedent to Obligations of TSG"); or (iv) in the event a
court order is issued restricting or prohibiting the Merger; (c) by TSG if (i)
the TSG Board determines in good faith, based upon the written opinion of
outside counsel, that termination of the Merger Agreement is required for the
TSG Board to comply with its fiduciary duties to stockholders imposed by law
by reason of an unsolicited bona fide superior proposal having been made or
(ii) the Elcotel Board shall have withdrawn or modified in a manner materially
adverse to TSG its approval or recommendation of the Merger Agreement or the
Merger; or (d) by Elcotel if the TSG Board (i) shall have withdrawn or
modified in a manner materially adverse to Elcotel its approval or
recommendation of the Merger Agreement or the Merger or (ii) shall have
recommended a superior proposal to the stockholders of TSG or TSG shall have
entered into a definitive agreement providing for a superior proposal with a
person other than Elcotel.

TERMINATION FEES AND EXPENSES

If the Merger Agreement is terminated because the TSG Board has determined
that termination is required for the TSG Board to comply with its fiduciary
duties to stockholders by reason of an unsolicited superior proposal having
been made or the TSG Board or recommends such a proposal to its stockholders,
or TSG enters into an agreement providing for such a superior proposal, then
TSG must pay Elcotel a termination fee of $1,300,000. If either party
terminates the Merger Agreement because the stockholders of TSG have voted not
to approve the Merger and prior to such termination any person or group has
made an alternative proposal, or if Elcotel terminates the Merger Agreement
because the TSG Board has withdrawn or modified its favorable recommendation
of the Merger in a manner materially adverse to Elcotel, then TSG must pay to
Elcotel up to $500,000 for Elcotel's out-of-pocket expenses relating to the
Merger Agreement. Elcotel must pay TSG's out-of-pocket expenses in an amount
up to $500,000 if either party terminates the Merger Agreement because Elcotel
has failed to obtain the approval of its stockholders, or if TSG terminates
the Merger Agreement because the Elcotel Board has withdrawn or modified its
favorable recommendation of the Merger in a manner materially adverse to TSG.
The same out-of-pocket expenses must be paid by the non-terminating party when
either party terminates the Merger Agreement in the event of certain material
breaches of the Merger Agreement on the part of the non-terminating party or
certain conditions precedent to the terminating party's obligations under the
Agreement have not been fulfilled. Additionally, under a manufacturing
agreement between Elcotel and TSG

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dated September 26, 1997, Elcotel is obligated to reimburse TSG for certain
costs in establishing a new manufacturing facility, not to exceed $100,000, in
the event, subject to certain conditions, that the Merger is not consummated.
See "Technology Service Group, Inc.--Properties." Also, in the event the
Merger is not consummated, Elcotel will be obligated to issue a credit to TSG
for the difference between the purchase price of a certain product recently
purchased by TSG from Elcotel and the amount that TSG would have paid if TSG
had purchased a comparable product from another supplier. The total amount of
such credit would depend on the number of units purchased by TSG from Elcotel,
but Elcotel does not expect that the total amount of such credit will exceed
$100,000. Except as described above, all costs and expenses incurred in
connection with the Merger, the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such costs or
expenses, whether or not the Merger is consummated. However, if the Merger is
consummated, Elcotel has agreed to issue 30,769 shares of Elcotel Common Stock
in payment of TSG's investment banking fee payable to Wexford Management.

VOTING AGREEMENT

Following is a summary of the material terms of the Voting Agreement, which
is filed as an exhibit to the Registration Statement and is incorporated
herein by reference. The following summary of the Voting Agreement contained
in this Joint Proxy Statement-Prospectus is not intended to be a complete
description of the terms and conditions thereof and is qualified in its
entirety by reference to the full text thereof.

VOTING OF TSG COMMON STOCK

Wexford has agreed that until the first to occur of (a) the Effective Time
of the Merger or (b) termination of the Voting Agreement in accordance with
its terms, (i) Wexford will not sell or transfer any TSG Common Stock owned by
Wexford (the "Wexford Shares") or any interest therein to any person, other
than an affiliate of Wexford who agrees to be bound by the terms of the Voting
Agreement to the same extent as Wexford, or other than upon the exercise by
A.T.T. IV, N.V. of the option to purchase up to 142,857 shares of TSG Common
Stock owned by Wexford pursuant to the Stock Purchase and Option Agreement
dated as of May 3, 1996 among TSG, Wexford, Firlane Business Corp., Acor S.A.
and A.T.T. IV, N.V., and (ii) at any meeting of the holders of TSG Common
Stock, or in connection with any written consent of the holders of TSG Common
Stock, Wexford will appear at the meeting or otherwise cause the Wexford
Shares to be counted as present thereat for purposes of establishing a quorum,
and vote or consent the Wexford Shares (A) in favor of the adoption of the
Merger Agreement and the approval of other actions contemplated by the Merger
Agreement and the Voting Agreement and any actions required in furtherance of
either agreement; and (B) against any action or agreement that would result in
a breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of TSG under the Merger Agreement or the Voting
Agreement.

VOTING OF ELCOTEL COMMON STOCK

Fundamental has agreed that until the first to occur of (a) the Effective
Time of the Merger or (b) termination of the Voting Agreement in accordance
with its terms, (i) Fundamental will not sell or transfer any Elcotel Common
Stock owned by Fundamental (the "Fundamental Shares") or any interest therein
to any person, other than an affiliate of Fundamental who agrees to be bound
by the terms of the Voting Agreement to the same extent as Fundamental, and
(ii) at any meeting of the holders of Elcotel Common Stock, or in connection
with any written consent of the holders of Elcotel Common Stock, Fundamental
will appear at the meeting or otherwise cause the Fundamental Shares to be
counted as present thereat for purposes of establishing a quorum, and vote or
consent the Fundamental Shares (A) in favor of the issuance of Elcotel Common
Stock in the Merger and any actions required in furtherance thereof or in
furtherance of the Merger, and (B) against any action or agreement that would
result in a breach in any respect of any covenant, representation or warranty
or any other obligation or agreement of Elcotel under the Merger Agreement or
the Voting Agreement.

FUNDAMENTAL/WEXFORD STOCKHOLDERS' AGREEMENT

Following is a summary of the material terms of the Fundamental/Wexford
Stockholders' Agreement to be entered into among Elcotel, Fundamental and
Wexford on the Closing Date. The following summary of the Fundamental/Wexford
Stockholders' Agreement contained in this Joint Proxy Statement-Prospectus is
not

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intended to be a complete description of the terms and conditions thereof and
is qualified in its entirety by reference to the full text thereof. The
Fundamental/Wexford Stockholders' Agreement is filed as an exhibit to the
Registration Statement and is incorporated herein by reference.

RESTRICTIONS ON TRANSFERS

Each of Wexford and Fundamental will not transfer any of the Elcotel capital
stock owned by it during the six month period beginning on the effective date
of the Merger; except that Fundamental may sell capital stock not to exceed
75,000 shares and Wexford may sell capital stock not to exceed 125,000 shares
(i) during the three-month period beginning on the day after the effective
date of the Merger and (ii) during the three-month period beginning three
months after the effective date of the Merger. Commencing on the date which is
six months after the effective date of the Merger, Wexford and Fundamental
may, subject to certain restrictions, transfer shares of capital stock owned
by them in accordance with applicable law. Notwithstanding the foregoing, (a)
Wexford may sell to A.T.T. IV, N.V. up to 142,857 shares (subject to
adjustment) of capital stock pursuant to a certain option agreement and (b)
Wexford or Fundamental may sell its capital stock to an affiliate.

TAG ALONG RIGHTS

If Wexford or Fundamental (collectively the "Stockholders") proposes to sell
any shares of its capital stock otherwise permitted to be sold pursuant to the
terms of the Fundamental/Wexford Stockholders' Agreement, but excluding (i)
sales to certain affiliates or to A.T.T. IV, N.V. as described above or (ii)
any sale in which all of the Stockholders agree and are permitted to
participate, then such Stockholder must offer (the "Participation Offer") to
include in the proposed sale a number of shares of capital stock of the other
Stockholders, not to exceed the number of shares equal to the product of (A)
the aggregate number of shares of capital stock to be sold by such offering
Stockholder to the proposed transferee(s) and (B) a fraction the numerator of
which is equal to the number of shares of capital stock owned by such other
Stockholder and the denominator of which is equal to the number of shares of
capital stock held by all Stockholders. If any Stockholder has accepted the
Participation Offer, the offering Stockholder will reduce to the extent
necessary the amount of capital stock it otherwise would have sold in the
proposed sale so as to permit the other Stockholders who have accepted the
Participation Offer to sell the number of shares that they are entitled to
sell, and the offering Stockholder and such other Stockholders will sell the
number of shares specified in the Participation Offer in accordance with the
terms of such sale.

TERMINATION

The Fundamental/Wexford Stockholders' Agreement will terminate as follows:
(i) upon the unanimous agreement of all Stockholders and Elcotel; (ii) upon
the happening of certain bankruptcy-related events with respect to Elcotel;
(iii) Elcotel is merged with or into another company and the stockholders of
Elcotel immediately prior to such merger do not own after such merger
substantially all of the capital stock of Elcotel or the surviving entity of
such merger in substantially the same proportions or whose shares of capital
stock will not be listed on a national securities exchange or quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System;
or (iv) with respect to a specific Stockholder, at such time as such
Stockholder and certain related entities collectively own less than 5% of the
outstanding Elcotel Common Stock (but such Stockholder and its related
entities' registration rights pursuant to the Fundamental/Wexford
Stockholders' Agreement will only terminate upon such Stockholder and such
entities owning no outstanding Elcotel Common Stock). In any event, the
Fundamental/Wexford Stockholders' Agreement will terminate on the fifth
anniversary of the Closing Date of the Merger.

REGISTRATION RIGHTS

Elcotel has agreed to file with the Commission, within forty-five days after
the effective date of the Merger, a "shelf" registration statement on Form S-3
or other appropriate available form, covering the Elcotel Common Stock issued
to Wexford pursuant to the Merger, any other Elcotel Common Stock beneficially
owned by

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Wexford, any Elcotel Common Stock beneficially owned by Fundamental, any
Elcotel Common Stock beneficially owned by Acor S.A. and any other securities
issuable with respect to such Elcotel Common Stock by way of a stock dividend
or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation, or reorganization (with certain
exceptions). Registration expenses are generally borne by Elcotel.

VOTING OF CAPITAL STOCK

During the period ending immediately after the second annual meeting of
stockholders of Elcotel which occurs after the Elcotel Annual Meeting at which
the Merger is approved, each of the Stockholders has agreed that it will vote
(or cause to be voted) its shares of capital stock in favor of any nominees
for director nominated by the incumbent Elcotel Board.

LUCENT ACQUISITION

On September 30, 1997, Elcotel acquired from Lucent Technologies Inc.
("Lucent") certain assets related to Lucent's payphone manufacturing and
component parts business (the "Lucent Acquisition"). The purchase price was
approximately $6.04 million, subject to adjustment based upon a final
inventory valuation. See "Unaudited Pro Forma Consolidated Financial
Information--Lucent Acquisition Purchase Price." Elcotel acquired from Lucent
the inventory, machinery, equipment, tooling and certain other assets related
to the payphone manufacturing and component parts business conducted by
Lucent, as well as a license of certain patent and other intellectual property
rights related thereto. Elcotel did not acquire any employees or facilities of
Lucent pursuant to such acquisition. As part of the acquisition, Elcotel is
expected to enter into a contract with a Taiwanese manufacturer that had been
Lucent's manufacturing source for its payphones. Elcotel borrowed $6,850,000
from its bank in connection with financing the Lucent Acquisition and the
purchase of certain capital equipment. The customers for Lucent's payphones
and component parts consisted principally of RBOCs and other telcos. Elcotel
believes that approximately 60% (approximately 1.2 million units) of the
current installed base of payphones in the United States are payphones of the
design purchased by Elcotel pursuant to the Lucent Acquisition. Elcotel
believes that a significant part of the revenues that may arise from the
assets acquired by Elcotel pursuant to the Lucent Acquisition will consist of
the sale of components and replacement parts with respect to that installed
base of payphones.

Since 1995, Elcotel and Lucent had been involved in a strategic marketing
alliance primarily directed to international markets. In addition, Elcotel
produced and sold to Lucent a privately labeled Elcotel payphone using
Lucent's payphone housing and Elcotel's payphone network management system
which Lucent incorporated into its own payphone systems. Both companies
marketed that product in international markets.

In addition, Lucent and Elcotel jointly marketed their respective products
in the United States, including the private labeled Elcotel payphone. As
indicated above, Elcotel believes there are approximately 1.2 million
payphones in operation in the United States of the design which was previously
sold by Lucent to RBOCs and other telcos. Elcotel believes that many of these
payphone units may require upgrades so that those payphones would internally
process more of the functions associated with the payphone rather than
performing those functions through a remote central office system. In
addition, Elcotel believes these payphone units will require continuing repair
and replacement of components, which had previously been supplied by Lucent.

In January 1997, Lucent decided to cease its international business and
agreed to assign its customer contracts with respect to such international
business to Elcotel for completion of those orders, subject to the customer's
approval. With Elcotel's purchase of certain of Lucent's domestic payphone
assets, Elcotel believes that it will enhance its payphone opportunities in
the United States markets with RBOCs and other telcos. Elcotel believes that
if it is able to obtain most of the replacement parts and payphone housing
business from those customers to which Lucent previously sold, it could expect
annual revenues of approximately $12 million from that business. Elcotel also
believes that if it obtains such amount of business, Elcotel's overall
earnings will increase as a result. Elcotel believes that the Merger and the
Lucent Acquisition will allow it to reduce its levels of inventory, improve
manufacturing efficiencies, expand its sales to RBOCs and other telcos and
improve service to its customers.

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TECHNOLOGY SERVICE GROUP, INC.

GENERAL

TSG designs, develops, manufactures and markets public communication
products including wireline and wireless payphone systems, electronic wireline
payphone products and payphone components. TSG's payphone systems are based
upon microprocessor technology and perform a variety of functions, including
calling card, debit ("prepay") card and credit card operations, data storage,
call progress detection, call rating and maintenance, diagnostic and coin
administration functions. TSG's CoinNet(TM) payphone software management
system is an integral component of TSG's microprocessor-based payphone
systems. TSG also provides payphone and payphone component repair,
refurbishment and upgrade conversion services to the telcos which consist of
the RBOCs and other local exchange carriers. See "Products and Services."

TSG operates in one business segment as a provider of public communication
systems, products and services to communications providers in the United
States and foreign markets. TSG presently markets its products and services
primarily to the RBOCs in the United States and to cellular service providers
in certain international markets. TSG has derived substantially all of its
revenues from sales to four RBOCs. See "Sales and Markets." TSG is presently
developing a new microprocessor-based wireline payphone processor for
international markets and for the RBOC and independent markets in the United
States.

The term "Predecessor" refers to TSG for all periods prior to October31,
1994, the date TSG Acquisition Corp., a wholly-owned subsidiary of Wexford,
acquired all of the outstanding capital stock of TSG (see "History--
Acquisition;" "TSG Management's Discussion and Analysis of TSG's Financial
Condition and Results of Operations" and "Consolidated Financial Statements of
Technology Service Group, Inc." included as Appendix C. TSG's principal
executive offices are located at 20 Mansell Court East, Suite 200, Roswell,
Georgia 30076, and its telephone number at that address is (770) 587-0208.

DEVELOPMENTS DURING FISCAL 1997

Initial Public Offering. In May 1996, TSG completed the TSG IPO, an initial
public offering of 1,150,000 units (the "Units"), each Unit consisting of one
share of TSG Common Stock and one redeemable warrant ("Public Warrant"), at a
price of $9.00 per Unit for gross proceeds of $10,350,000. In connection with
such initial public offering, TSG issued, for nominal consideration, warrants
to the underwriter to purchase 100,000 shares of TSG Common Stock (the
"Underwriter Warrants"). Net proceeds from the offering, after underwriting
discounts and expenses of $1,231,897 and other expenses of $824,953, amounted
to $8,293,169. The net proceeds of the offering were used to repay TSG's then
outstanding indebtedness of $2,509,524 under bank term and installment notes;
to repay $3,808,589 of indebtedness outstanding under a bank revolving credit
agreement; and to repay $2.8 million of outstanding indebtedness under 10%
interest-bearing subordinated promissory notes payable to stockholders. See
"History--Acquisition;" "TSG Management's Discussion and Analysis of TSG's
Financial Condition and Results of Operations;" and "Consolidated Financial
Statements of Technology Service Group, Inc." included as Appendix C.

Stock Purchase Agreement. TSG, Wexford, Acor S.A., Firlane Business Corp.
("Firlane"), and A.T.T. IV, N.V. ("ATTI") entered into a Stock Purchase and
Option Agreement on May 3, 1996 (the "Stock Purchase Agreement"). Wexford,
Acor S.A. and Firlane, concurrently with the TSG IPO, sold to ATTI an
aggregate of 366,300 shares of TSG Common Stock at a price of $8.14 per share
and options to purchase an additional 183,150 shares of TSG Common Stock at an
exercise price of $11.00 per share (the "Options") at a price of $.10 per
Option. Wexford sold 285,714 shares and Options to purchase 142,857 shares.
Acor S.A. sold 53,114 shares and Options to purchase 26,557 shares. Firlane
sold 27,472 shares and Options to purchase 13,736 shares. The consideration
received by Wexford, Acor S.A. and Firlane was $2,339,998, $435,004 and
$224,995, respectively. No consideration was received by TSG.

Fiscal 1997 Facilities Consolidation. During the year ended March 28, 1997,
TSG closed its Kentucky facility and consolidated service operations into its
Virginia manufacturing facility. Also, during the year ended

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March 28, 1997, TSG assigned the capital lease obligation related to the
closed facility to an unaffiliated third party, and recorded the retirement of
the outstanding capital lease obligation and the disposition of the property.
See "TSG Management's Discussion and Analysis of TSG's Financial Condition and
Results of Operations" and "Consolidated Financial Statements of Technology
Service Group, Inc." included as Appendix C.

In November 1996, TSG executed a lease agreement with respect to a 39,200
square foot facility located in Alpharetta, Georgia that commenced on April 1,
1997. TSG originally planned to close its present corporate office facility
and to consolidate its product assembly operations and corporate activities
into the new facility. The lease has an initial term of five years and is
renewable for an additional five-year term. However, in view of the potential
business combination with Elcotel, TSG delayed the start-up of the new Georgia
facility. Elcotel and TSG have agreed, as part of their integration and
consolidation plan, to dispose of the facility and relocate certain TSG
assembly operations into Elcotel's facilities. On September 30, 1997, TSG
assigned the lease agreement to an unaffiliated third party. In contemplation
of an assignment of the lease and the Merger, TSG entered into an agreement
with Elcotel dated September 26, 1997 that provides for the assembly of
certain of TSG products by Elcotel at prices equal to TSG's cost. In the event
the Merger is not consummated, Elcotel has agreed, subject to certain
exceptions, to continue to assemble such products at prices equal to TSG's
cost until the first anniversary of the date Elcotel becomes obligated to
provide manufacturing services under the agreement, and has agreed to
reimburse TSG for certain costs in establishing a new manufacturing facility
to replace the Alpharetta facility not to exceed $100,000.

Sales Agreements. In November 1996, TSG entered into a new non-exclusive
supply agreement, effective July 1, 1996, to provide its Gemini(TM) smart
payphones and processors, CoinNet payphone management system and other
payphone components to Telesector Resources Group, Inc., an affiliate of NYNEX
("NYNEX") for a period of five years. See "Sales and Markets--Domestic."

In June 1997, TSG entered into an agreement with Southwestern Bell Telephone
Company ("SWB") that supersedes and terminates a December 1994 agreement
between the parties. Under the new agreement, TSG agreed (i) to reduce SWB's
remaining purchase commitment of GemStar(TM) processors and electronic locks
to approximately $3 million from approximately $8 million under the former
agreement and (ii) among other things, to upgrade SWB's payphone management
system. In return, SWB made a $250,000 cash payment to TSG, terminated TSG's
obligation to pay royalties on sales of GemStar processors to other customers
and terminated TSG's obligation to repay $375,000 received from the sale of
product software under the December 1994 agreement. SWB also agreed to make
additional cash payments to TSG aggregating up to $750,000 between July 2,
1997 and March 31, 1998, subject to TSG's compliance with the terms and
conditions contained in the agreement. See "Sales and Markets--Domestic." "TSG
Management's Discussion and Analysis of TSG's Financial Condition and Results
of Operations" and "Consolidated Financial Statements of Technology Service
Group, Inc." included as Appendix C.

HISTORY

General. TSG was incorporated in the State of Delaware in 1975. Between 1975
and 1986, TSG was engaged in the high-speed dot matrix printer business. In
1986, TSG acquired International Teleservice Corporation, Inc., a company
engaged in the repair and refurbishment of telecommunication products
consisting of residential telephones and payphones. During 1987 and 1988, TSG
discontinued its high-speed dot-matrix printer business, sold the assets of
its residential telephone repair and refurbishment business, and began to
focus its business on the public communications industry. TSG established
International Service Technologies, Inc. ("IST"), which established a foreign
division in Taiwan, and Technology Service Enterprises, Inc., and expanded its
public communications business to include the manufacture and marketing of
payphones and payphone components and the provision of services to convert and
upgrade payphones with components designed and manufactured by TSG and its
subsidiaries. In 1991, Technology Service Enterprises, Inc. acquired the
assets of the Public Communication Systems Division of Executone Information
Systems, Inc. ("PCS"), including its microprocessor-based technology. In
fiscal 1993, TSG established Wireless Technologies, Inc. and began to develop
microprocessor-based wireless payphone products for international
applications. In April 1993,

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International Teleservice Corporation, Inc., Technology Service Enterprises,
Inc. and Wireless Technologies, Inc. were merged into TSG.

Acquisition. On October 31, 1994, TSG Acquisition Corp., a wholly-owned
subsidiary of Wexford, acquired all of the outstanding capital stock of TSG.
The consideration paid by TSG Acquisition Corp. aggregated $3.5 million. In
connection with this transaction, TSG entered into an Investment Agreement
with Wexford, Acor S.A. and Firlane. TSG issued an aggregate of 3.5 million
shares of TSG Common Stock at a price of $1.00 per share to Wexford. Wexford,
in turn, sold to Acor S.A. and Firlane 507,500 and 262,500 shares,
respectively, of TSG Common Stock. The consideration paid by Wexford, Acor
S.A. and Firlane for their shares of TSG Common Stock was $2,730,000, $507,500
and $262,500, respectively. Also, TSG borrowed $2.8 million from Wexford and
Acor S.A. and issued subordinated promissory notes due November 1, 1999 with
interest at a rate of 10% per annum (the "Affiliate Notes"). The Affiliate
Notes were repaid during the fiscal year ended March 28, 1997 with a portion
of the proceeds from the TSG IPO.

Fiscal 1994 Restructuring. During the three years ended April 1, 1994, TSG
generated net losses due to poor operating performance caused in large part by
the termination of a sales agreement between TSG and one of its then
significant RBOC customers with respect to a first generation microprocessor-
based payphone product as a result of technical and delivery problems (which
were subsequently remedied) and the non-renewal of a refurbishment sales
agreement with that RBOC. In the fourth quarter of fiscal 1994, TSG initiated
a plan (the "fiscal 1994 Restructuring") to change certain senior management,
restructure its operations, refocus its development activities, increase sales
and attain profitable operations. Although TSG reduced its operating costs and
expenses, TSG continued to operate at a loss during the seven months ended
October 31, 1994 and five months ended March 31, 1995. However, during fiscal
1996 and fiscal 1997, TSG's sales performance improved and TSG returned to
profitability.

THE PUBLIC PAYPHONE INDUSTRY

Domestic Market. Public telecommunication services, including "coin" or
"pay" telephone service, in the United States are provided by telcos (which
are regulated telephone operating companies), including those owned by the
RBOCs, AT&T and other long distance (or "inter-exchange") carriers ("IXCs")
and independent payphone providers. The operations of long distance and local
exchange carriers are subject to extensive regulation by the FCC and state
regulatory agencies (see "Government Regulation"). Virtually all services
offered by telcos and IXCs, including payphone services, are provided in
accordance with tariffs filed with appropriate regulatory agencies, including
the FCC. Independent payphone providers are subject to regulations of state
regulatory agencies.

TSG believes that the RBOCs control approximately 60% (approximately 1.2
million units) of the payphones in service in the United States. The remaining
installed base of payphones are owned and operated by the large independent
telephone operating companies (such as GTE), other telcos and independent
payphone providers.

The majority of payphones deployed by the RBOCs are essentially mechanical
devices that perform the functions of normal residential telephones, with the
additional ability to hold and collect or refund coins. In these conventional
payphone systems, all of the intelligence required to provide service is
located at central offices or other network locations of long distance
carriers or telcos and is supplied to the payphone via a "coin line." In June
1984, the FCC approved the operation of independently owned payphones, which
permitted independent payphone providers to enter the industry. However,
barriers to entry into the industry by independent payphone providers were
substantial. The RBOCs had in place and available the services of the central
offices to provide payphone service, including call rating and routing
information, the "bong" tone that signals callers to input calling card
numbers, and collection/return signaling for the payphone to collect or return
coins. These services were not required to be made available to independent
payphone providers and placed them at a disadvantage. Regulatory actions,
together with the development of technologically advanced microprocessor-based
payphones that perform the functions of the central office within the
telephone (referred to in the industry as "smart

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payphones"), have enabled independent payphone operators to enter the industry
and compete effectively with the telcas. Microprocessor-based technology
provided independent payphone providers with the capability to route and
determine the proper charges ("rate") for calls and to deploy payphones
containing maintenance diagnostics and reporting features, coin administration
and credit card features, and station message detail recording and reporting
features. These features enable independent payphone providers to either route
calls to Alternate Operator Services or to store and retrieve call data and
billing information, thereby allowing the owner to share in the long-distance
revenues generated by the phone, reduce the cost of maintenance and
collection, and monitor coin pilferage, among other things.

On February 8, 1996, the President of the United States signed into law the
Telecommunications Reform Act of 1996 (the "Telecommunications Act"), the most
comprehensive reform of communications law since the enactment of the
Communications Act of 1934. The Telecommunications Act eliminates long-
standing legal barriers separating telcos, long distance carriers, and cable
television companies and preempts conflicting state laws in an effort to
foster greater competition in all telecommunications market sectors, improve
the quality of services, and lower prices.

The Telecommunications Act expressly supersedes the consent decree which led
to the break-up of AT&T, the formation of the RBOCs, and the line-of-business
restrictions that prohibited the RBOCs from providing long distance services
and from manufacturing telecommunications equipment. The RBOCs are now
permitted to provide long distance service outside their local service areas
and to seek approval from the FCC to provide long-distance service within
their local service areas based upon a showing that they have opened their
local exchange markets to competition. After the FCC has given its approval to
a request to provide in-region long distance service, an RBOC may also engage
in the manufacture and provision of telecommunications equipment and the
manufacture of customer premises equipment, including pay telephones. Such
manufacturing enterprises must be conducted through separate affiliates for at
least three years after the date of enactment of the Telecommunications Act.
In addition, a RBOC may not discriminate in favor of equipment produced or
supplied by an affiliate, but rather must make procurement decisions based on
an objective assessment of price, quality, delivery and other commercial
factors.

TSG believes that as a result of the reform legislation, the public
communications industry will undergo fundamental changes, many of which may
affect TSG's business. The legislation is likely to increase the number of
providers of telecommunications services, including perhaps providers of
payphone services. This increase in the number of providers is likely to
stimulate demand for new payphone equipment. In that event, TSG believes that
existing payphone service providers, including the RBOCs, could seek to
enhance their technology base in order to compete more effectively with each
other and with new entrants. In addition, as the local exchange and intrastate
long distance markets are opened to competition, inter-exchange carriers
seeking to serve these markets may deploy greater numbers of payphones to
capture local and intrastate traffic. 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 payphone market generally or on TSG's business in
particular. See "Government Regulation."

Over the past couple of years, in response to the competitive pressures from
independent payphone providers and in anticipation of passage of the
Telecommunications Act, several of the RBOCs and other telcos began to upgrade
their payphone base with microprocessor-based "smart" payphone technology. TSG
believes that approximately 15% to 20% of the installed base of payphones
operated by the RBOCs have been upgraded with smart payphone systems,
including those provided by TSG. TSG's prospects for future and continued
profitability are largely dependent on such trend continuing. See "Sales and
Markets--Domestic."

International Market. Internationally, it is estimated that there are
several million payphones in the installed base. Public communication 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 carriers. TSG believes that a trend toward
privatization and liberalization of the international telecommunication
industry is opening the international markets, previously dominated by
monopoly and government infrastructure, to increased

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competition. In addition, many countries are allowing private firms to
construct cellular networks and compete with national telecommunication
authorities. TSG believes that some of the large United States based
telecommunications companies, including certain RBOCs, have invested in
telecommunication opportunities abroad including the acquisition of interests
in the privatized PTTs and consortiums for the acquisition of licenses and
construction of cellular networks to provide cellular communication services.
On February 15, 1997, over 60 countries signed a World Trade Organization pact
aimed at opening the global telecommunications industry to competition. This
agreement provides for most of the countries to end their telephone monopolies
by the year 2000. However, the agreement, which must be ratified by the
individual countries, will likely encounter substantial opposition.
Accordingly, there is no assurance that the agreement will be ratified or
facilitate free market conditions within the global telecommunications market.

Presently, the density of payphone installations in many foreign countries
on a per capita basis is far less than that in the United States. TSG 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 expansion programs include the construction of
wireless networks, and TSG believes that wireless payphone service will become
one of the primary avenues of providing communication services to the public
in certain foreign markets. TSG 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 and expansion of both wireline and wireless networks
progresses.

Although foreign markets are believed to be a potential source of
significant demand for TSG's products, there are impediments to TSG's ability
to penetrate such markets, including resource limitations, regulations and the
normal difficulties attendant on conducting international business.

PRODUCTS AND SERVICES

TSG manufactures and markets "coin" and "coinless" "payphone" systems and
products that connect to and operate as integral parts of domestic and foreign
telecommunication networks. TSG also markets payphone and payphone component
repair, refurbishment and conversion upgrade services to local exchange
carriers in the United States. TSG's products include payphones equipped with
non-smart payphone electronics (for coin line installations) and payphones
equipped with microprocessor-based smart payphone processors (for coin line
and/or non-coin line installations) that connect to wireline telecommunication
networks ("wireline payphones") and payphones equipped with a specially
designed smart cellular processor that connect to cellular telecommunication
networks ("wireless payphones"). Smart payphone processors (and non-smart
electronics) are the primary electronic assemblies or "engines" of payphones.
TSG also supplies smart payphone retrofit kits and a wide range of payphone
components (including, among other things, dials, handsets, chrome doors,
credit card readers and volume amplification modules) required to manufacture
payphones and to repair and/or upgrade deployed payphones with enhanced
technology. TSG's smart payphone systems are provided with CoinNet payphone
management software. This management system is used by customers to remotely
manage networks of TSG's smart payphone products interactively. A significant
portion of TSG's revenues is derived from the sale of smart payphone
processors and payphone retrofit kits to certain RBOCs that are upgrading
their installed base of payphones with technologically advanced processors.

TSG's wireline payphone products were developed specifically for the
regulated telephone operating companies in the United States. The design of
TSG's wireline coin payphones is based upon the Western Electric configuration
developed for use in the Bell system versus the GTE configuration developed
for the independent telephone companies and also used by most of the
independent payphone providers. TSG's coinless wireless ("cellular") payphone
products were developed for use in foreign markets, and are manufactured in
several different configurations, including the Western Electric
configuration, depending on the application.

The majority of foreign countries follow the network standards of the
Consultative Committee for International Telephone and Telegraph ("CCITT").
One of the primary technical network differences in the

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payphone industry between the countries following the CCITT network standards
and those following the U.S. network standards relates to call rating. TSG has
not to date offered a wireline product that operates with networks following
the CCITT standards. TSG is presently developing a new smart payphone
processor that it believes will be capable of operating with networks
following either standard. TSG believes that this technology will enable TSG
to compete in the independent market in the United States and in foreign
countries that follow the CCITT standard. TSG's new smart payphone processor
is currently undergoing limited field trial testing and evaluation in coin
line and in non-coin line installations domestically. TSG believes that its
new smart payphone processor will be available to market during the latter
part of its 1998 fiscal year, although there can be no assurance in that
regard. See "Design and Product Development."

The following table outlines products currently offered by TSG:

PRODUCT DESCRIPTION

GEMINI SYSTEM II(TM) The Gemini System II(TM) ("Gemini") product is a
sophisticated microprocessor-based smart payphone
processor which is programmable to operate in
either a coin line mode or a non-coin line mode.
The coin line mode uses the rating and answer
supervision services provided by the central office
("CO") and associated network. In contrast, rating
and answer supervision services are performed
within the processor when programmed to operate in
the non-coin line mode. Programmable billing,
reporting and operating cost reduction features
offered with the Gemini product include: (i)
station message detail recording, which provides
for the storage of all call data within the phone;
(ii) maintenance reporting and diagnostics, which
provides for remote diagnosis of payphone and
component operating status via telemetry; (iii)
coin administration, which provides coin accounting
capability and reporting of coin box status; (iv)
call routing, which provides for the routing of
calls to the programmed carrier; and (v) credit
card billing and auditing, which provides the
ability to bill credit card calls and to identify
invalid cards or card numbers. The Gemini product
is also designed to interface with an electronic
lock to control and to permit remote monitoring of
collection activities. Programmable revenue
enhancement features offered with the Gemini
product include: (i) voice messaging, which enables
the user to record a message to the called party
rather than allow the call to go uncompleted; and
(ii) usage based pricing, which administrates local
call costing on the basis of time. The features
available with the Gemini product are designed to
enable customers to enhance revenues and to reduce
costs of operation and maintenance through accurate
scheduling of maintenance and collection
activities. All programming, retrieval, reporting
and telemetry features are performed remotely using
TSG's payphone software management system.

GEMSTAR(TM) The GemStar product is a microprocessor-based smart
payphone processor designed for coin line
applications which require the rating and answer
supervision functions performed by the CO network.
The GemStar product offers the primary cost
reduction and reporting features of the Gemini
product, including maintenance reporting and
diagnostics and coin administration. With added
memory, the GemStar product also provides station
message detail recording. The GemStar product is
also designed to interface with an electronic lock
to control and to permit remote monitoring of
collection activities.

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INMATE(TM) The InMate product is a microprocessor-based smart
payphone processor designed for prisons where cost
reduction and revenue enhancement features as well
as other specialized features are required. The
InMate product offers station message detail
recording, maintenance reporting and diagnostics,
voice messaging, usage based pricing and call
routing. In addition, specialized features include:
(i) outgoing call restriction, which can restrict
calls to specified numbers; (ii) call duration,
which limits the time duration of calls; and (iii)
personal identification numbers, which permit valid
user access only. Coin administration features are
not provided in this coinless environment.

GEMCELL(TM) The GemCell product is a microprocessor-based
cellular payphone processor that interfaces to a
cellular transceiver for use in domestic and
international wireless networks. The GemCell
product was designed to have the primary features
available with the Gemini product except coin
administration. Instead, the GemCell product was
designed to accept debit ("prepay") cards, smart
("chip") cards or credit cards as the form of
payment. The GemCell product is not currently
marketed in the U.S.

COINNET(TM) The CoinNet product is a remote payphone software
management system which operates on personal
computers in a multi-tasking environment. This
proprietary software product provides TSG's
customers with the ability to manage networks of
installed payphones interactively. Downloading
software changes, retrieving station message detail
recording data, maintenance and diagnostics data
and coin box data are a few of the functions of
this Unix or MS--DOS-based software system.

PAYPHONES TSG offers its payphones in a wide range of
electronic and smart configurations depending upon
the application requirements of its customers.
TSG's wireline payphones include coin (or token)
payphones and/or coinless payphones, including
credit card applications. TSG's wireless, coinless
payphones include debit ("prepay") and smart
(chip") card payphones which are offered in fixed
configurations as well as configurations for mobile
deployment, such as taxis, trains and buses. TSG's
smart wireline payphone technology derives power
from the telephone line, eliminating the need for
external power sources. TSG's wireless payphones
are powered by commercial electric line power or by
a solar powered platform so that they can be
deployed without network wiring and cabling.

CELLULAR ASSISTANCE TSG also offers a specialized Cellular Assistance
PHONE Phone designed to provide emergency phone service
in specific applications, such as along highways
and in remote areas. The Cellular Assistance Phone
is provided with a cellular transceiver and is
powered by commercial electric line power or by a
solar powered platform so that it can be deployed
without network wiring and cabling. The features of
the Cellular Assistance Phone are limited to those
required for emergency situations and permit the
user to automatically dial a preset emergency
assistance number. The Cellular Assistance Phone is
not currently marketed in the United States.

PAYPHONE COMPONENTS Payphone components supplied by TSG include, among
others, non-smart payphone electronics, touchtone
dials, handsets, coin relays, and volume
amplification assemblies. These components are
manufactured at TSG's facilities to Bellcore
specifications.

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SERVICES TSG provides payphone and payphone component
repair, refurbishment and upgrade conversion
services for its customers. Refurbishment services
involve the rebuilding of payphone components and
sets to "like new" condition. Upgrade conversion
services include the modification of payphone
components and sets to an updated or enhanced
technology.

SALES AND MARKETS

Domestic. TSG markets its payphone products and services predominately to
the RBOCs. In fiscal years 1995, 1996 and 1997, sales to RBOCs accounting for
greater than 10% of TSG's sales aggregated 72%, 88% and 90%, respectively, of
TSG's sales revenues. During fiscal 1995, Ameritech Services, Inc.
("Ameritech"), Bell Atlantic Corp. ("Bell Atlantic"), SWB and NYNEX accounted
for approximately $2.8 million, $5.8 million, $3.8 million and $2.2 million,
respectively, of TSG's sales. During fiscal 1996, Bell Atlantic, NYNEX and SWB
accounted for approximately $5.6 million, $7.9 million and $15.5 million,
respectively, of TSG's sales. During fiscal 1997, Ameritech, Bell Atlantic and
NYNEX accounted for approximately $4.6 million, $5.2 million and $20.2
million, respectively, of TSG's sales. TSG anticipates that it will continue
to derive most of its revenues from these customers, and other RBOCs, for the
foreseeable future. During the last year, mergers between Pacific Telesis Inc.
and SBC Communications, Inc. (the parent of SWB), and between Bell Atlantic
and NYNEX were announced and/or consummated. TSG cannot predict the impact
that these mergers will or may have on TSG's business.

TSG competes for and enters into non-exclusive supply contracts to provide
products, components and services to the RBOCs. TSG has entered into sales
agreements to provide payphone components to Bell Atlantic, NYNEX and SWB. TSG
has entered into sales agreements to provide repair, refurbishment and
conversion services to Ameritech Services, Inc., Bell Atlantic, NYNEX and SWB.
These agreements have terms ranging from two to three years, are renewable at
the option of and subject to the procurement process of the particular RBOC,
contain fixed sales prices for TSG's products and services with limited
provisions for price increases, and expire at various dates from June 1997 to
March 1999. These sales agreements are frameworks for dealing on open account
and do not specify or commit TSG's customers to purchase a specific volume of
products or services. If orders are made, however, TSG has agreed to fill such
orders in accordance with the contract specifications. The agreements are
generally subject to termination at the option of the customer upon 30 days'
notice to TSG, or if TSG defaults under any material provision of the
agreement, including provisions with respect to performance.

In November 1996, TSG entered into a non-exclusive sales agreement,
effective July 1, 1996, to provide its Gemini smart payphones and processors,
CoinNet payphone management system and other payphone components to NYNEX for
a period of five years. This agreement superseded a December 1995 smart
product sales agreement between TSG and NYNEX. The November 1996 agreement
sets forth the terms and conditions relating to the sale of products to NYNEX,
and does not specify or commit NYNEX to purchase a specific volume of products
from TSG. If orders are made, however, TSG has agreed to fill such orders in
accordance with NYNEX's specifications and at fixed prices set forth in the
agreement. TSG has agreed not to increase its prices during the term of the
agreement and has agreed to implement a continuous improvement program to
improve productivity and quality and to reduce product costs during the term
of the agreement. The agreement includes provisions for reductions in sales
prices to NYNEX based on product cost reductions achieved from the continuous
improvement program and based on NYNEX's purchase volume. The agreement
contains a "most favored customer" clause pursuant to which TSG has agreed to
provide price and other terms at least as favorable as those extended by TSG
to other customers for similar purchase volumes of products covered by the
agreement. TSG has agreed to indemnify NYNEX against expenses, liabilities,
claims and demands resulting from products covered by the agreement, including
those related to patent infringement and performance specifications. The
agreement may be terminated by either party upon default by the other party
upon 30 days' written notice, provided the default is not cured within 30 days
from the receipt of notice of default. Further, NYNEX may terminate the
agreement upon 120 days' written notice to TSG. However, upon such a
termination,

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NYNEX has agreed to purchase TSG's inventories related to the products covered
by the agreement, provided that such obligation will not exceed the value of
NYNEX's purchases for a 120-day period, determined based upon the average
monthly volume for the previous six-month period, less the value of
outstanding orders to be shipped, the value of products which may be sold to
other customers, and the value of inventory that may be returned to TSG's
suppliers. The agreement expires on July 1, 2001.

In June 1997, TSG entered into an agreement with SWB that supersedes and
terminates a December 1994 agreement between the parties. Under the new
agreement, TSG agreed to reduce SWB's remaining purchase commitment of GemStar
processors and electronic locks to approximately $3 million from approximately
$8 million under the former agreement and, among other things, upgrade SWB's
payphone management system. In return, SWB made a cash payment of $250,000 to
TSG, terminated TSG's obligation to pay royalties on sales of GemStar
processors to other customers and terminated TSG's obligation to repay
$375,000 received from the sale of product software under the December 1994
agreement. SWB also agreed to make additional cash payments of $250,000 on
July 2, 1997, $100,000 on September 1, 1997, $150,000 on December 31, 1997 and
$250,000 on March 31, 1998 to TSG subject to TSG's compliance with the terms
and conditions of the agreement, including conditions with respect to product
quality and performance, service and repair. As of the date hereof, TSG had
received scheduled payments from SWB in accordance with the terms of the
contract. SWB has the right to cancel the agreement without further obligation
to TSG, including any obligation to make additional payments or to purchase
additional products, upon a default by TSG of any of the terms and conditions
contained in the agreement. Further, SWB may terminate the agreement by giving
TSG 30 days' prior written notice, in which case, SWB is obligated to purchase
the products and make the payments set forth in the agreement. See "TSG
Management's Discussion and Analysis of TSG's Financial Condition and Results
of Operations" and "Consolidated Financial Statements of Technology Service
Group, Inc." included as Appendix C.

TSG sells its products and services directly to its customers. TSG involves
a wide range of personnel in its sales and marketing activities, including its
Vice President of Sales and Marketing, two experienced sales directors, three
service technicians, its engineering staff, its quality managers, and its
President and CEO. TSG's engineering staff and service technicians provide
support and technical services via telephone without charge, and TSG provides
field engineering support services during the initial deployment of products
and when customers encounter unusual or technical problems. TSG's commitment
to service and support throughout its organization is directed at maintaining
strong relationships with customers' operating, technical and administrative
personnel. TSG also conducts training seminars and provides assistance to
customers in the installation and set-up of TSG's payphone software management
system.

International. TSG markets its smart wireless payphones in Korea, Mexico,
Ecuador, Venezuela and other South American countries, primarily under
distributor and reseller relationships. TSG presently has distributor
relationships in Venezuela, for the South American markets, and in Korea. TSG
also markets its products in Central American markets directly and through an
independent sales representative.

TSG's export sales during fiscal 1995, 1996 and 1997 approximated $1.4
million, $856,000 and $461,000, respectively. TSG's export sales during the
three months ended June 27, 1997 approximated $601,000. TSG believes that the
international public communications market represents a growth opportunity.
TSG, however, has limited experience exporting products and operating outside
the United States and there can be no assurance that TSG will be able to
generate significant revenues from international business. Conducting business
internationally is subject to a number of risks, including political
instability, foreign currency fluctuations, adverse movements in exchange
rates, economic instability, the imposition of tariffs and import and export
controls, changes in governmental policies (including U.S. policy toward
foreign countries), general credit and business risks and other factors, one
or more of which, if they occur, could have an adverse effect on TSG's ability
to generate international sales or operations. TSG's sales to date have been
denominated in U.S. dollars and as a result, no losses related to currency
fluctuations have been incurred. For the same reason, TSG has not engaged in
currency hedging activities. There is no assurance, however, that TSG will be
able to continue to

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export its products in U.S. dollar denominations or that its business will not
become subject to significant exposure to foreign currency risks. In addition,
TSG intends to complete the development and begin marketing wireline payphone
products for international CCITT applications during fiscal 1998, and there is
no assurance that TSG will be able to successfully complete the development of
such products or that it will be able to successfully market such products.
Finally, many of TSG's known and potential international competitors have
substantially greater financial and other resources than TSG and, therefore,
are formidable competitors. See "Competition."

TSG believes that wireless payphone services will become one of the primary
avenues of providing communication services to the public in many of the
developing nations in South America and Central America and that these markets
represent a significant growth opportunity. Many of the cellular licenses
awarded to companies in foreign markets to provide services in competition
with national communication authorities have been awarded to consortiums and
companies in which the RBOCs have invested. TSG believes that an opportunity
exists to expand its market channel within the RBOC arena by deployment of its
wireless payphone technology to international wireless concerns affiliated
with the RBOCs. TSG intends to continue to invest in the development of
wireless products and hardware for non-coin technologies including prepay and
debit cards, including smart ("chip") cards.

COMPETITION

TSG believes that it is a significant provider of payphone products and
payphone repair services to the RBOCs. TSG operates in a highly competitive
environment and competes against numerous domestic and foreign providers of
payphones and payphone repair services that have financial, management and
technical resources substantially greater than those of TSG. In addition,
there are many other firms which have the resources and ability to develop and
market products which could compete with TSG's products. TSG 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 TSG
and its competitors, performance, price, reliability and customer service and
support.

The Telecommunications Act lifts 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 payphones. As a
result of the legislation, TSG could face new competitors in the manufacture
of payphones and payphone components from one or more of the RBOCs or their
affiliates. The RBOCs have financial, management and technical resources
substantially greater than TSG. However, the legislation does not permit RBOCs
to create joint manufacturing operations with each other. In addition, the
legislation provides that as long as Bellcore is an affiliate of more than one
RBOC, Bellcore may not engage in manufacturing telecommunications equipment or
customer premises equipment. The Telecommunications Act also incorporates
numerous safeguards to ensure that standards-setting organizations conduct
themselves fairly, and requires the FCC to establish a dispute resolution
process for equipment manufacturers involved in conflicts over standards
setting.

TSG believes that the primary competitive factors affecting its business
with the RBOCs are quality, price, service and delivery performance. TSG
competes aggressively with respect to the pricing of its products and
services, and because TSG's contractual agreements with the RBOCs generally
provide TSG with limited ability to increase prices if manufacturing costs
increase, TSG attempts to reduce its manufacturing costs rather than increase
its prices. TSG also attempts to maintain inventory at levels which enable TSG
to provide immediate service and to fulfill the delivery requirements of its
customers.

TSG believes that its principal competitors in the United States include
Protel Inc., Elcotel, Intellicall, Inc., Lucent Technologies and International
Totalizing Systems, Inc., and with respect to repair and refurbishment
services, Restor Industries, Inc. TSG also competes with numerous foreign
companies marketing products in the United States, including Northern Telecom,
Inc. However, TSG does not believe that foreign competitors have

56
<PAGE>

yet been able to successfully penetrate the payphone industry in the United
States. Some of TSG's competitors, including Protel Inc., Intellicall, Inc.
and Elcotel, supply payphone products to independent payphone providers which
compete with the RBOCs. During fiscal 1997, TSG did not actively market its
products to independent payphone providers.

Many of TSG's competitors are substantially larger than TSG and have
significantly greater financial, technical and marketing resources. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than TSG.
It is also possible that new competitors may emerge and acquire significant
market share. Possible new competitors include large foreign corporations,
TSG's RBOC customers and other entities with substantial resources. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on
TSG's business, results of operations and financial condition. There can be no
assurance that TSG will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on TSG's business, results of operations and financial
condition. In addition, it is unlikely that TSG will become a significant
supplier of smart payphone products to all of the RBOCs since competition for
business with the RBOCs is intense.

Internationally, TSG competes with numerous foreign competitors, all of
which have financial, management and technical resources substantially greater
than TSG. These foreign competitors market payphone products predominately to
the PTT's and thereby dominate the international payphone market. TSG 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.

TSG expects that a number of personal communications technologies will
become increasingly competitive with payphone services provided by the
telephone companies and independent payphone providers. Such technologies
include radio-based paging services, cellular mobile telephone services and
personal communication services. However, TSG believes, but cannot assure,
that the payphone industry will continue to be a major provider of
telecommunications access.

Prior to 1984, the regulated telephone companies held a monopoly in the
United States payphone market, and they continue to have a dominant share of
the payphone market. The regulated telephone companies have financial,
marketing, management and technical resources substantially greater than those
of private payphone providers. TSG believes that the regulated telephone
companies will continue to experience increasing competition from independent
payphone providers. Accordingly, TSG believes, but cannot ensure, that the
telephone operating companies can be expected to upgrade their technology base
and protect their market share.

MANUFACTURING, ASSEMBLY AND SOURCES OF SUPPLY

TSG performs repair, refurbishment and conversion services and most of its
product assembly operations at its facilities. In addition, certain
components, including low-density electronic circuit board assemblies, dials
and handsets, are assembled at TSG's facilities. Other components are
purchased from various distributors and manufacturers, including contract
manufacturers engaged by TSG. TSG generally assembles its smart payphone
products from assemblies produced by manufacturers under contractual
arrangements.

On October 21, 1994, TSG entered into a manufacturing agreement with Avex
Electronics, Inc. ("Avex"), a large contract manufacturer, that provided for
the production of TSG's GemStar circuit board assemblies and payphone
processor. TSG committed to purchase $12.2 million of GemStar assemblies. At
March 28, 1997, TSG had purchased the majority of its initial commitment. TSG
has also engaged Avex to manufacture the printed circuit board assemblies for
its Gemini processors, its new smart payphone processor presently under
development and other products, and has committed to purchase approximately
$5.5 million of assemblies for its new smart payphone processor during the
first year of production. The manufacturing agreement may be terminated by
either party for default upon a material breach of the terms of the agreement
by the other party,

57
<PAGE>

provided such breach is not cured within a 30-day notice period. Further, TSG
may terminate the agreement at any time. However, upon a termination of the
agreement by TSG, TSG is obligated to purchase inventories held by the
manufacturer and pay vendor cancellation and restocking charges, and a
reasonable profit thereon. In addition, upon a cancellation by TSG of its
purchase obligation, or a substantial portion thereof, related to its new
smart payphone processor, TSG is obligated to pay a cancellation penalty of up
to $500,000. This cancellation obligation varies depending upon quantities
purchased by TSG and expires when TSG has substantially met its purchase
commitment. TSG is dependent upon Avex to manufacture and supply products
required to meet sales commitments under the terms of its smart product sales
agreements.

On November 18, 1994, TSG entered into an exclusive dealer agreement with
Control Module, Inc. that provided TSG with the rights to purchase and supply
electronic lock devices to SWB in accordance with the terms of a December 1994
sales agreement between TSG and SWB. TSG committed to purchase approximately
$3.5 million of the electronic lock devices at specified prices over a two-
year period. At March 28, 1997, TSG had satisfied its purchase commitment, and
had an adequate inventory of electronic lock devices to meet its remaining
sales commitment to SWB. The dealer agreement expired upon TSG's purchase of
the committed volume.

On September 16, 1991, TSG entered into a Manufacturing Rights Agreement
(the "Manufacturing Agreement") with Commtek Industries, Inc., an unaffiliated
Taiwan corporation. TSG granted Commtek the exclusive right to utilize the
assets owned by TSG's foreign division for a period of five years to
manufacture many of the non-electronic components and assemblies for TSG's
products. TSG agreed to purchase a minimum aggregate annual volume of $2.5
million during the first year of the agreement and $3 million for each year
thereafter. The Manufacturing Agreement expired on September 15, 1996.
However, the parties have continued the supply relationship under standard
purchase arrangements. TSG believes that there are alternative sources of
supply for the components and assemblies currently purchased from Commtek.
However, if a shortage or termination of the supply of any one or more of such
components or assemblies were to occur, TSG's business could be materially and
adversely affected.

WARRANTY AND SERVICE

TSG provides warranties of 90 days with respect to repair, refurbishment and
conversion services and from one to three years on its products. Under TSG's
warranty program, TSG repairs or replaces defective parts and components at no
charge to its customers. TSG's contract manufacturers provide warranties on
the electronic circuit board assemblies ranging from 90 days to 120 days,
pursuant to which defective electronic circuit board assemblies are replaced
or repaired at no charge to TSG.

TSG generally enters into repair agreements with respect to its smart
products under which TSG agrees to perform non-warranty repair services at
specified prices. TSG also provides repair, refurbishment and conversion
services under agreements with its customers. See "Sales and Markets."

LICENSES, PATENTS AND TRADEMARKS

The engineering designs on which TSG's electronic products and components
are based were internally developed by TSG's engineering staff. TSG owns eight
United States patents relating to payphone components, its smart payphone
platform and other technology which expire between April 2010 and May 2014.
TSG has one patent application outstanding. Although TSG 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. TSG does not believe that it is infringing on the patents of
others and would defend itself against any allegations to that effect. There
can be no assurance, however, 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 affect on TSG's business.

TSG regards its manufacturing processes and circuit designs as proprietary
trade secrets and confidential information. To protect this information, TSG
relies largely upon a combination of agreements with its contract

58
<PAGE>

manufacturers, confidentiality procedures, and employee agreements. However,
there can be no assurance that TSG's trade secrets will not be disclosed or
misappropriated.

TSG licenses certain technologies from third parties under agreements
providing for the payment of royalties. Royalty expense during the year ended
March 28, 1997 approximated $196,100. See "Consolidated Financial Statements
of Technology Service Group, Inc." included as Appendix C.

DESIGN AND PRODUCT DEVELOPMENT

TSG's engineering department is staffed with software, electrical and
mechanical engineering professionals. Their activities are dedicated to the
development of new products, enhancements of TSG's deployed product line,
including the CoinNet management system, and enhancements to improve product
reliability. Their efforts are also directed to reducing product costs through
new manufacturing methods. During fiscal 1995 and 1996, TSG expended
approximately $938,000 and $1.2 million, respectively, on engineering,
research and development activities consisting primarily of the design and
development of GemStar, Gemini and GemCell products. During fiscal 1997, TSG
expanded its research and development activities for the purpose of designing
and developing a new smart payphone processor capable of operating in domestic
coin line installations, domestic non-coin line installations and in foreign
CCITT network installations. During the year ended March 28, 1997, TSG
expended approximately $1.8 million on engineering, research and development
activities, and in addition thereto, capitalized software development expenses
of $421,693.

TSG believes that new products and product enhancements have the potential
to increase its market opportunities and are essential to its long-term
growth, particularly in international wireline markets, and TSG's ability to
fund future research and development activities, in turn, will be dependent
upon its ability to generate cash in excess of its operating needs. See "TSG
Management's Discussion and Analysis of TSG's Financial Condition and Results
of Operations."

EMPLOYEES

At September 26, 1997, TSG had 148 full-time employees and 61 temporary
contract employees, consisting of 140 persons engaged in direct labor
activities, 32 persons engaged in manufacturing support activities, 16 persons
engaged in administrative, sales and finance activities and 21 persons engaged
in engineering and engineering support activities. In addition, TSG has three
independent contractors engaged in product development activities. TSG
considers its relations with its employees to be satisfactory.

At September 26, 1997, none of TSG's employees were represented by a
collective bargaining unit.

BACKLOG

The amount of TSG's backlog is subject to large fluctuations because TSG's
business depends upon a small number of customers and large orders. TSG
calculates its backlog by including only items for which there are purchase
orders with firm delivery schedules. Contractual commitments are not included
in backlog until purchase orders are received by TSG. At September 26, 1997,
the backlog of all products and services was approximately $3.8 million as
compared to approximately $5.3 million at September 27, 1996. TSG's objective
is to ship orders within 30 days of receipt and, therefore, TSG does not
expect its backlog, other than orders with scheduled deliveries under
contractual commitments, to exceed monthly sales levels. Accordingly, TSG's
backlog at any given date is not indicative of future revenues.

SEASONALITY

TSG's sales are generally stronger during periods when weather does not
interfere with the maintenance and installation of payphone equipment by TSG's
customers. Accordingly, TSG's sales could be adversely affected during certain
periods of the year. TSG's sales may also be adversely impacted near the end
of the calendar year by the budget shortfalls of customers. As a result, TSG's
sales during its third quarter may decline significantly in relation to other
quarters.

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<PAGE>

POTENTIAL ENVIRONMENTAL LIABILITIES

During the year ended March 28, 1997, TSG completed the evaluation,
assessment and monitoring of soil and groundwater contamination at one of
TSG's former facilities in Florida in accordance with requirements stipulated
by the Florida Department of Environmental Protection (the "FDEP"), and in
April 1997 received a formal "no further action status" notification for the
site from the FDEP. Accordingly, TSG has not accrued any additional costs with
respect to this site. It is possible, however, that the FDEP could reopen the
investigation in the future and require TSG to take further actions at the
site. TSG 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.

GOVERNMENT REGULATION

TSG's operations are subject to certain federal, state and local regulatory
requirements relating to environmental, health and safety matters. Management
believes that TSG's business is operated in compliance with applicable
regulations promulgated by the Occupational Safety and Health Administration
and the Environmental Protection Agency and corresponding state agencies which
pertain to health and safety in the work place and the use, discharge and
storage of chemicals employed in its operations, respectively. Current costs
of compliance with such regulations are not material to TSG. However, the
adoption of new or modified requirements not presently anticipated could
create additional expense for TSG.

The FCC regulates under Part 15 of its rules the operation and marketing of
devices which emit radio-frequency energy, whether intentionally or
unintentionally, and which do not require an individual license. The marketing
of such devices is also regulated under Part 2 of the FCC's rules. The FCC
regulates the direct connection of terminal equipment to the public switched
telephone network and the marketing of such equipment under Part 68 of its
rules. Parts 15 and 68 establish technical standards and procedural and
labeling requirements for equipment subject to these rules. Certain
modifications to equipment subject to these rules must also comply with these
technical standards and procedural and labeling requirements. Manufacturers of
products subject to Part 68 also must implement a continuing compliance
program under which products currently in production must be tested every six
months to ensure continued compliance with the applicable technical standards.
Certain types of devices sold as components or subassemblies are exempt from
the technical standards and procedural and labeling requirements of Parts 15
and 68. If such components or subassemblies are incorporated into and marketed
as part of systems or sets subject to Part 15 or Part 68, however, such
systems or sets must comply with the applicable rules. TSG believes that it
was in compliance with Parts 15 and 68 of the FCC's rules and regulations at
March 28, 1997.

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<PAGE>

TSG believes that the regulatory climate in the United States over recent
years has begun to influence the RBOCs' deployment of public communication
products. TSG also believes that the RBOCs have begun to upgrade their
payphone base with smart products that reduce their cost of management,
maintenance and coin administration and that include revenue enhancement
features. The deployment and business strategies of the public communication
divisions of the RBOCs have affected and will continue to affect TSG's
business. To the extent that these business strategies were to change, for
regulatory reasons or otherwise, TSG's prospects would be materially and
adversely affected.

On September 20, 1996, the FCC released its order (the "Order") adopting
regulations to implement the section of the Telecommunications Act which
mandated fair compensation for all payphone 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 payphones. Among other matters, the Order
addressed compensation for non-coin calls, local coin calling rates, and
removal of subsidies and discrimination favoring payphones operated by telcos,
and authorized RBOCs and other providers to select service providers.

In the Order, the FCC decided that the dial-around compensation rate for
access code calls and subscriber 800 and other 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 subscriber 800
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 (based on $.35 per
call multiplied by 131, the average number of 800 and access code calls per
payphone per month), as compared to the previous compensation of $6.00 per
month. This interim rate expired on September 1, 1997, and replaced 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. Payphones owned by
the RBOCs and other telcos would be eligible for interim compensation when
they removed their payphones from their regulated accounts, which was to be
completed by April 15, 1997. By October 1, 1997, the inter-exchange carriers
were required to have per-call tracking instituted. At that point, under the
second phase of the interim compensation plan, all payphones would switch to a
per-call compensation rate set at $.35 per 800 or access code call. Under this
system, compensation would be paid on every completed 800-subscriber and
access code call. The carrier which is the primary beneficiary of the call
would pay the per-call compensation. After one year of deregulation of coin
rates (October 1, 1998), the compensation rate would be adjusted to equal the
local coin rate charge in 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 remanded to the FCC for further consideration the issues of compensation
for 800 and access code calls both on a permanent and an interim basis. On
September 16, 1997, the Court clarified its earlier ruling by vacating the
compensation of $.35 per call on both an interim and default basis. The Court
ordered that interim compensation for 0+ calls be included in the new interim
compensation plan.

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 800 and access code calls.

On October 9, 1997 the FCC issued an order addressing certain issues with
respect to payphone compensation previously remanded to it by the Court of
Appeals. The FCC set the per call compensation rate at $.284 per call during
the period October 7, 1997 through October 6, 1999. After that period, the
compensation rate would be whatever is charged at the phone for a local call,
less $.066, the amount the FCC determined to be the avoided cost in completing
a non-coin call. The FCC must still determine the compensation rate for the
period November 6, 1996 through October 6, 1997 and which carriers must pay
compensation for that period. It is likely that the FCC's latest action may
also be challenged in court. The ultimate outcome with respect to per call

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<PAGE>

compensation will have a significant impact on the business and operations of
payphone customers. Elimination or significant reductions in the amount, or
delay in the payment, of per call compensation may reduce demand for
payphones.

The Order required telco payphones to be removed from regulation, separating
payphone costs from regulated accounts by April 15, 1997. This requirement is
intended to eliminate all subsidies that favor telco payphones. Telcos were
also required to reduce interstate access charges to reflect separation of
payphones from regulated accounts. In order to eliminate discrimination,
telcos are also required to offer coin line services to independent providers
if telcos 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 authorizes RBOCs to select the operator service provider serving
their payphones and for independent payphone providers to select the operator
service provider serving theirs. This provision preempts state regulations
that require independent providers to route intralata calls to the telcos. The
FCC, however, did not establish conditions that require operator service
providers to pay independent payphone providers the same commission levels as
the RBOCs demand.

Although dramatic regulatory changes, particularly those created by recent
legislative actions, have occurred and may continue to occur, TSG believes
that the telecommunications industry will continue to be regulated in some
form by Federal and/or state authorities. There can be no assurance that
changes in regulations affecting the telecommunications industry would not
have an adverse impact on the operations of TSG's customers and, therefore, on
the operations of TSG.

PROPERTIES

TSG's administration, sales, marketing and engineering activities have
historically been located at its headquarters in approximately 11,800 square
feet of leased office space located at 20 Mansell Court East, Suite 200,
Roswell, Georgia. The lease expires on December 31, 1997.

In November 1996, TSG executed a lease agreement with respect to a 39,200
square foot facility located in Alpharetta, Georgia that commenced on April 1,
1997. TSG originally planned to close its present corporate office facility
and to consolidate its product assembly operations and corporate activities
into the new facility. The lease has an initial term of five years and is
renewable for an additional five-year term. However, in view of the potential
business combination with Elcotel, TSG delayed the start-up of the new Georgia
facility. Elcotel and TSG have agreed, as part of their integration and
consolidation plan, to dispose of the facility and relocate certain TSG
assembly operations into Elcotel's facilities. On September 23, 1997, TSG
assigned the lease agreement to an unaffiliated third party. In contemplation
of the assignment of the lease and the Merger, TSG entered into an agreement
with Elcotel dated September 26, 1997 that provides for the assembly of
certain of TSG products by Elcotel at prices equal to TSG's cost. In the event
the Merger is not consummated, Elcotel has agreed, subject to certain
exceptions, to continue to assemble such products at prices equal to TSG's
cost until the first anniversary of the date Elcotel becomes obligated to
provide manufacturing services under the agreement, and has agreed to
reimburse TSG for its costs in establishing a manufacturing facility to
replace the Alpharetta facility, not to exceed $100,000.

TSG performs payphone assembly operations and repair, refurbishment and
conversion service operations in a 53,400 square-foot leased facility located
in Orange, Virginia. The Orange, Virginia facility is leased pursuant to the
terms of an operating lease agreement that expires on July 31, 1998, with the
right to renew the lease for four additional terms of one year each.

During the third quarter of fiscal 1997, TSG closed a one hundred thousand
square-foot facility located in Paducah, Kentucky and consolidated service
operations into its Orange, Virginia facility.

TSG believes its facilities are adequate for its business.

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MARKET FOR TSG COMMON STOCK AND RELATED STOCKHOLDER MATTERS

TSG Common Stock was listed on the Nasdaq SmallCap Market of The Nasdaq
Market under the symbol "TSGI" from May 10, 1996 to October 7, 1996. On
October 7, 1996, TSG Common Stock was listed on the Nasdaq National Market
tier of The Nasdaq Market under the symbol "TSGI." Prior to May 10, 1996,
there was no public trading market for TSG's Common Stock.

The high and low sales prices of TSG Common Stock for the quarterly periods
during the period May 10, 1996 to September 27, 1997 were as follows:

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Fiscal 1997
First Quarter
(May 10, 1996 through June 28, 1996)............................ 12 3/4 9 3/8
Second Quarter (ended September 27, 1996)....................... 11 1/2 8 1/4
Third Quarter (ended December 27, 1996)......................... 11 6 7/8
Fourth Quarter (ended March 28, 1997)........................... 7 7/8 4 1/4
Fiscal 1998
First Quarter (ended June 27, 1997)............................. 6 1/32 4 1/2
Second Quarter (ended September 27, 1997)....................... 7 5/8 4 1/4
</TABLE>

At September 30, 1997, TSG had 17 common stockholders of record. However,
TSG believes that there were over 400 beneficial owners of TSG Common Stock at
September 30, 1997.

TSG has never paid any cash dividends on TSG Common Stock and does not
currently intend to pay cash dividends in the foreseeable future. TSG
currently intends to retain its earnings, if any, for the continued growth of
its business. Under the terms of a Loan and Security Agreement between TSG and
its bank, TSG is prohibited from paying cash dividends or other distributions
on capital stock, except stock distributions.

----------------

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<PAGE>

SELECTED TSG FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------- ------------------------------------------------
SEVEN FIVE THREE THREE
YEAR YEAR MONTHS MONTHS YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
APRIL 2, APRIL 1, OCTOBER 30, MARCH 31, MARCH 29, MARCH 28, JUNE 28, JUNE 27,
1993 1994 1994 1995 1996 1997 1996 1997
-------- -------- ----------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales............... $ 30,536 $ 31,049 $ 11,109 $ 9,161 $33,201 $33,472 $12,078 $ 6,217
Cost of goods sold...... 24,083 25,762 9,176 8,226 26,082 26,639 9,840 5,123
General and
administrative
expenses............... 3,334 3,477 1,742 850 2,205 2,391 645 554
Marketing and selling
expenses............... 1,865 1,749 366 372 1,290 881 361 164
Engineering, research
and development
expenses............... 2,241 2,009 458 480 1,197 1,777 409 292
Restructuring charges
(credits).............. -- 2,571 (534) -- -- 63 -- --
Litigation settlement... -- -- (261) -- -- (105) (105) --
Interest expense........ 810 912 599 356 941 400 142 72
Other (income) expense.. 201 54 (14) (58) (17) (117) (16) (14)
Income (loss) before
taxes.................. (1,998) (5,485) (423) (1,065) 1,503 1,543 802 26
Income tax (provision)
benefit................ -- -- -- -- (326) (533) (217) 12
Net income (loss)....... $ (1,998) $ (5,485) $ (423) $(1,065) $ 1,177 $ 1,010 $ 585 $ 38
Income (loss) per common
and common equivalent
share(1)(2)
Primary................ $ (0.30) $ 0.30 $ 0.22 $ .13 $ .02
Assuming full
dilution.............. $ (0.30) $ 0.30 $ 0.22 $ .13 $ .02
Weighted average number
of common and common
equivalent shares
outstanding
Primary................ 3,542 3,871 4,780 4,502 5,025
Assuming full
dilution.............. 3,542 3,871 4,780 4,502 5,025
FINANCIAL POSITION
Current assets.......... $ 14,213 $ 9,742 $ 7,580 $ 8,551 $12,741 $14,866 $16,873 $13,807
Total assets............ 18,869 13,421 10,397 15,670 19,634 19,772 22,977 18,568
Borrowings under
revolving credit
agreement.............. 6,728 5,352 1,661 970 -- 3,811 193 2,400
Current maturities under
long-term debt and
capital lease
obligations(3)......... 827 1,284 878 814 118 -- 66 --
Current liabilities..... 12,943 13,007 8,191 6,857 8,347 6,645 9,058 5,404
Working capital
(deficit).............. 1,270 (3,264) (611) 1,695 4,394 8,221 7,815 8,403
Long-term debt and
capital lease
obligations(4)......... 2,068 957 3,628 3,533 3,415 -- 888 --
Long-term borrowings
under revolving credit
agreement (5).......... -- -- -- -- 1,094 -- -- --
Notes payable to
stockholders (3)(4).... -- -- 400 2,800 2,800 -- -- --
Other liabilities....... -- 863 -- 375 378 -- 378 --
Total liabilities....... 15,011 14,826 12,219 13,565 16,034 6,645 10,324 5,404
Retained earnings
(deficit).............. (18,965) (24,450) (24,873) (1,065) 112 1,122 697 1,160
Stockholders' equity
(deficit).............. $ 3,858 $ (1,405) $ (1,821) $ 2,105 $ 3,600 $13,127 $12,653 $13,164
</TABLE>
- --------
(1) Assuming the Acquisition had occurred on April 2, 1994, TSG's and the
Predecessor's net loss for the year ended March 31, 1995 would have
approximated $1,599 and the net loss per common and common equivalent
share outstanding (primary and assuming full dilution) would have been
($.45).
(2) Income (loss) per common and common equivalent share and the weighted
average number of common and common equivalent shares outstanding are not
presented for periods prior to the five months ended March 31, 1995 since
such data is not meaningful for periods prior to the Acquisition on
October 31, 1994.
(3) Subordinated notes payable to stockholders of $400 were retired in
connection with the Acquisition. These notes were classified as current
maturities under long-term debt and capital lease obligations at April 1,
1994.
(4) Indebtedness under a bank term note in the amount of $2,200, a bank term
note in the amount of $310 and notes payable to stockholders of $2,800
were repaid from the proceeds from TSG's initial public offering of
securities in May 1996.
(5) Indebtedness under the revolving credit agreement was repaid from the
proceeds from TSG's initial public offering of securities in May 1996.
Accordingly, such indebtedness is classified as a long-term obligation at
March 29, 1996.

The selected financial data and related footnotes set forth above should be
read in connection with "TSG Management's Discussion and Analysis of TSG's
Financial Condition and Results of Operations" set forth below and
"Consolidated Financial Statements of Technology Service Group, Inc." included
as Appendix C hereto.

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<PAGE>

TSG MANAGEMENT'S DISCUSSION AND ANALYSIS OF TSG'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)

OVERVIEW

TSG's operating performance subsequent to the fiscal year ended March 31,
1995 reflects the outcome of initiatives and plans begun during the later part
of fiscal 1994 and throughout fiscal 1995 to turn around the business, to
return to profitability, and to improve TSG's financial condition and
liquidity. These initiatives included a change in senior management, a
restructuring of the organization, and raising additional capital and
financing. The restructuring was also directed at reducing operating costs and
expenses and increasing sales and gross profit margins. In addition, TSG
refocused its engineering and product development activities to resolve
certain technical product problems experienced prior to the restructuring and
to develop new smart payphone products that would position TSG to capture a
significant share of the market for the technological upgrade of the installed
base of payphones owned by the RBOCs.

This discussion contains certain forward looking statements concerning TSG's
operations, economic performance and financial condition. Such statements are
subject to various risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified herein. See "Summary."

All dollar amounts, other than per share data, stated in this TSG
Management's Discussion and Analysis of TSG's Financial Condition and Results
of Operations are stated in thousands.

BACKGROUND--THE ACQUISITION

On October 31, 1994, TSG Acquisition Corp., a wholly-owned subsidiary of
Wexford, acquired all of the outstanding Capital Stock pursuant to an
Agreement and Plan of Merger dated October 11, 1994 between Wexford, TSG
Acquisition Corp., TSG and the majority holders of TSG's capital stock (the
"Acquisition"). The consideration paid by TSG Acquisition Corp. aggregated
$3,500 including contingent consideration of $330 consisting of cash of $230
and a subordinated note of TSG in the principal amount of $100, placed in
escrow and distributed to former stockholders in September 1995. The aggregate
consideration consisted of $3,004 to acquire the outstanding Capital Stock and
$496 to retire a $400 subordinated master promissory note payable to former
stockholders and related accrued interest and preference fees of $96.
Aggregate cash payments to former stockholders, including the contingent
consideration and the retirement of the subordinated master promissory note,
accrued interest and preference fees of $496, amounted to $3,222.
Consideration of $278 was withheld from amounts paid to former stockholders to
pay certain liabilities of TSG.

The Acquisition was accounted for using the purchase method of accounting.
Accordingly, the aggregate purchase price of $3,170, exclusive of contingent
consideration, was pushed down and allocated to the net assets acquired based
upon their fair values. The excess of the purchase price over the estimated
fair value of the net assets acquired of $3,854 was recorded as goodwill. Upon
distribution of the escrow consideration in September 1995, the aggregate
purchase price was increased to $3,500 which increased the excess purchase
price over the estimated fair value of net assets acquired and recorded as
goodwill by $330. Prior to the Acquisition, TSG is sometimes referred to as
the "Predecessor."

In conjunction with the Acquisition, TSG Acquisition Corp. was merged into
TSG. The outstanding shares of TSG Common Stock and TSG's preferred stock were
canceled and the outstanding shares of capital stock of TSG Acquisition Corp.
were exchanged for one share of TSG Common Stock, $.05 par value (the "merger
share"). In addition, on October 31, 1994, TSG amended its Certificate of
Incorporation to reflect authorized capital consisting of 10 million shares of
Common Stock, and 100,000 shares of preferred stock, $100 par value. Further,
TSG entered into an investment agreement with Wexford, Acor S.A. and Firlane,
referred to herein collectively as the "investors." Pursuant to that
investment agreement, TSG issued 3.5 million shares of TSG Common Stock in
exchange for the merger share. Also, TSG borrowed $2,800 from Wexford and Acor
S.A. and

65
<PAGE>

issued 10% interest-bearing subordinated promissory notes in respect thereof
due November 1, 1999 (the "Affiliate Notes") to such persons.

The accompanying analysis compares the results of operations of TSG for the
three months ended June 27, 1997 and June 28, 1996 and for the years ended
March 28, 1997 and March 29, 1996 and the results of operations of TSG for the
fiscal year ended March 29, 1996 and the combined results of operations of the
Predecessor and TSG for the fiscal year ended March 31, 1995.

Because of the Acquisition, certain financial information described below is
not comparable in all respects. In addition, comparability is affected because
of the following purchase accounting adjustments made by TSG on October 31,
1994: (i) a net decrease in inventories of $45 consisting of a reduction of
$491 attributable to a change in the method used to estimate the amount of
manufacturing overhead included in inventories to a method based on labor
factors, not on a combination of labor and material factors, offset by an
increase in the basis of inventories of $446 to reflect their estimated net
realizable value; (ii) an increase in the basis of property and equipment of
$382 to reflect their estimated fair value; (iii) an increase in debt
obligations of $107 to reflect present values of amounts to be paid determined
at current interest rates; (iv) a net increase in accrued liabilities of $125
to reflect the acquisition expenses of TSG Acquisition Corp. to be paid by
TSG, offset by a reduction of accrued interest and preference fees of $96
retired in connection with the Acquisition; (v) a reduction in accrued
restructuring charges of $203 retired in connection with the Acquisition; (vi)
a reduction of notes payable to stockholders of $400 retired in connection
with the Acquisition; (vii) a net increase in other assets of $429 consisting
of an increase in identifiable intangible assets (consisting of product
software, patents, customer contracts, and unpatented technology) of $584 to
reflect their estimated fair values, offset by a reduction in goodwill and
deferred debt issuance expenses of $155 recorded by the Predecessor; and
(viii) an increase in goodwill related to the Acquisition of $3,854. The
principal impacts of the purchase accounting adjustments on TSG's results of
operations for the five months ended March 31, 1995 consisted of a slight
increase in depreciation due to the increase in the basis of property and
equipment and their estimated useful lives, an increase in amortization
expense of approximately $100 due to the net increase in the basis of
intangible assets, including goodwill, and their estimated useful lives, and
an increase in cost of goods sold of approximately $235 due to the revaluation
of inventories. The change in the method used to estimate the amount of
manufacturing overhead included in inventories did not have a significant
effect on TSG's results of operations for the five months ended March 31,
1995.

During the fiscal years ended March 29, 1996 and March 28, 1997, TSG reduced
goodwill by approximately $653 in the aggregate with respect to the
realization of acquired deferred tax assets. During the three months ended
June 27, 1997, TSG reduced goodwill by approximately $82 with respect to the
realization of acquired deferred tax assets.

RESULTS OF OPERATIONS

Three Months Ended June 27, 1997 Compared to Three Months Ended June 28, 1996

The following table shows certain line items in TSG's consolidated
statements of operations for the three months ended June 27, 1997 and June 28,
1996 that are discussed below, together with the change expressed as a
percentage.

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS PERCENTAGE
ENDED ENDED INCREASE
JUNE 27, 1997 JUNE 28, 1996 (DECREASE)
------------- ------------- ----------
<S> <C> <C> <C>
Sales............................... $6,217 $12,078 (49%)
Cost of goods sold.................. 5,123 9,840 (48%)
General and administrative ex-
penses............................. 554 645 (14%)
Marketing and selling expenses...... 164 361 (55%)
Engineering, research and develop-
ment expenses...................... 292 409 (29%)
Litigation settlement............... -- (105) (100%)
Interest expense.................... 72 142 (49%)
Income tax expense (benefit)........ (12) 217 (106%)
</TABLE>

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<PAGE>

Sales. The decrease in sales is primarily attributable to (i) a decrease in
sales volume of smart payphone systems and processors and (ii) a 25% reduction
in the sales price of Gemini(TM) processors under the terms of a sales
agreement between TSG and NYNEX entered into during the year ended March 28,
1997, offset by (i) an increase in exported wireless payphone systems of
approximately $600 and (ii) sales revenue of $625 under the terms of a new
sales agreement between TSG and SWB entered into in June 1997. Sales of smart
payphone products decreased by approximately $6,700 and accounted for
approximately 25% of sales during the three months ended June 27, 1997 as
compared to 69% of sales during the three months ended June 28, 1996.
Refurbishment and repair services and related product sales for the three
months ended June 27, 1997 decreased by approximately 10% as compared to the
same period in the prior year, and accounted for 55% of sales as compared to
31% in the prior year. No export sales were made during the three months ended
June 28, 1996.

TSG believes that the uncertainty in the marketplace caused by the passage
of the Telecommunications Act adversely affected its sales. In addition,
following a high level of demand at the start of the program last year, NYNEX
stabilized its deployment of TSG's smart payphone systems and processors under
the five-year agreement entered into last year.

In June 1997, TSG entered into an agreement with SWB that supersedes and
terminates a December 1994 agreement. Under the new agreement, TSG agreed to
reduce SWB's remaining purchase commitment of GemStar(TM) processor kits to
approximately $3,000 from approximately $8,000 under the former agreement. In
addition, TSG provided an upgraded electronic key product and, among other
things, agreed to provide equipment and software to upgrade SWB's payphone
management system. SWB made a $250 cash payment to TSG, terminated TSG's
obligation to pay royalties on sales of GemStar processors to other customers,
terminated a contingent obligation of TSG to repay revenue of $375 from the
sale of product software under the former agreement, and agreed to make
additional cash payments to TSG of $250 on July 2, 1997, $100 on September 1,
1997, $150 on December 31, 1997 and $250 on March 31, 1998, subject to TSG's
compliance with its obligations under the new agreement, including conditions
with respect to performance, service and repair.

Cost of Goods Sold. Cost of goods sold as a percentage of sales increased to
82% for the three months ended June 27, 1997 as compared to 81% for the three
months ended June 28, 1996. This increase resulted principally from the
decrease in sales volume and sales prices referred to above and an increase in
manufacturing costs of printed circuit board assemblies shifted to contract
manufacturers, offset by the impact of the initial sales revenues recognized
under the terms of the new agreement between TSG and SWB.

General and Administrative Expenses. The decline in general and
administrative expenses is primarily attributable to a reduction in expenses
of $50 from the closure of one of TSG's manufacturing facilities during the
year ended March 28, 1997, a decrease in accrued performance-based
compensation of $18 and a reduction in the provision for doubtful accounts
receivable of $31.

Marketing and Selling Expenses. The decrease in marketing and selling
expenses during the three months ended June 27, 1997 as compared to the same
period in the prior year is primarily attributable to the expiration of a
royalty agreement and the resulting decrease in royalty expense associated
with sales of smart payphone products.

Engineering, Research and Development Expenses. TSG began to expand its
engineering resources during the three months ended June 28, 1996 in order to
facilitate the development of a new smart payphone processor and the
implementation of lower-cost manufacturing methodologies. During the three
months ended June 27, 1997, the requirement for contract engineering services
diminished and the related expense decreased accordingly. Also, TSG
capitalized approximately $130 of software development costs in connection
with the development of its new smart payphone processor during the three
months ended June 27, 1997. Software development costs during the three months
ended June 28, 1996 were not significant.

Litigation Settlement. Pursuant to the terms of a settlement agreement and
mutual release dated July 3, 1996, a suit filed against TSG by a former
supplier to collect approximately $400 of unpaid obligations was

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<PAGE>

dismissed with prejudice. As a result of the settlement agreement, TSG
realized a gain of $105 representing the difference between unpaid obligations
recorded in TSG's accounts and aggregate settlement payments set forth in the
settlement agreement.

Interest Expense. The decrease in interest expense during the three months
ended June 27, 1997 as compared to the same period in the prior year is
primarily due to the repayment of outstanding bank and stockholder debt
obligations during May 1996 from proceeds of TSG's initial public offering.
See "Liquidity and Capital Resources--Cash Flows From Financing Activities."

Income Taxes. During the three months ended June 27, 1997, TSG recorded an
income tax benefit of $12 on pre-tax income of $26 as compared to an income
tax provision of $217 on pre-tax income of $802 for the three months ended
June 28, 1996. Current tax benefits for the three months ended June 27, 1997
amounted to $287 as compared to current tax expense of $262 for the three
months ended June 28, 1996. Deferred tax expense for the three months ended
June 27, 1997 amounted to $275 as compared to deferred tax benefits of $45 for
the three months ended June 28, 1996.

Year Ended March 28, 1997 Compared to Year Ended March 29, 1996

The following table shows certain line items in TSG's consolidated
statements of operations for the years ended March 28, 1997 and March 29, 1996
that are discussed below, together with the change expressed as a percentage.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERCENTAGE
MARCH 28, MARCH 29, INCREASE
1997 1996 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Sales........................................ $33,472 $33,201 1%
Cost of goods sold........................... 26,639 26,082 2%
General and administrative expenses.......... 2,391 2,205 8%
Marketing and selling expenses............... 881 1,290 (32)%
Engineering, research and development ex-
penses...................................... 1,777 1,197 48%
Restructuring charges........................ 63 -- --
Litigation settlement........................ (105) -- --
Interest expense............................. 400 941 (57)%
Other income................................. (117) (17) 588%
Income tax expense........................... 533 326 63%
</TABLE>

Overview. TSG's operations for the year ended March 28, 1997 reflect a
slowdown in sales during the last six months of the year which TSG attributes
to several factors as explained below, an increase in engineering, research
and development spending of $580 directed at the development of a new wireline
smart payphone product for the RBOC, independent and international markets, a
gain on the settlement of litigation of $105, restructuring charges of $63,
lower interest expense as a result of debt repayments from proceeds of an
initial public offering, and higher income taxes due to limitations on
utilization of net operating loss carryforwards.

Sales. The increase in sales during fiscal 1997 as compared to fiscal 1996
is primarily related to volume fluctuations. Sales of smart payphone products
and components decreased by approximately $600 (3%) to $21,200 in fiscal 1997
as compared to $21,800 in fiscal 1996, and accounted for approximately 63% of
sales during fiscal 1997 as compared to 66% of sales during fiscal 1996. Sales
related to refurbishment, repair and conversion services and related products
during fiscal 1997 increased by approximately $1,200 (11%) to $11,800 as
compared to $10,600 in fiscal 1996, and accounted for 35% of sales as compared
to 32% in fiscal 1996. Export sales consisting primarily of wireless products
during fiscal 1997 approximated $461 as compared to approximately $856 during
fiscal 1996.

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<PAGE>

TSG believes that the reduction in smart product sales volume was
attributable to several key factors, including the uncertainties created by
merger activities among TSG's RBOC customers, the efforts of the RBOCs to
comply with the requirements of the Telecommunications Act during the last six
months of TSG's fiscal year, and related budget implications. Notwithstanding,
sales from refurbishment, repair and conversion services and related products
increased as a result of additional volume from one of TSG's customers that
has not begun a smart product upgrade conversion program. Export sales
activities during fiscal 1997 did not generate volume comparable to fiscal
1996, a trend TSG expects to reverse during the 1998 fiscal year.

TSG believes, but cannot assure, that the decline in smart product sales
volume during the last six months of fiscal 1997, which is believed to be
attributable to efforts of the RBOCs to comply with the Telecommunications
Act, represents a short-term trend, and that its sales will be favorably
affected by the implications of the new law during fiscal 1998 and beyond.

During fiscal 1997, TSG entered into a non-exclusive sales agreement,
effective July 1, 1996, to provide its Gemini smart payphones and processors,
CoinNet payphone management system and other payphone components to NYNEX for
a period of five years. Sales of smart payphone products during the year ended
March 28, 1997 were primarily attributable to shipments under a former sales
agreement between TSG and NYNEX executed in December 1995. This sales
agreement expired during the third quarter of fiscal 1997, and although TSG
entered into the new contract, no significant orders were received until
February 1997, which TSG believes was due to the factors enumerated above.
During the year ended March 29, 1996, a significant portion of TSG's sales
were attributable to shipments under the former NYNEX agreement as well as a
sales agreement between TSG and SWB executed in December 1994. SWB had
purchased approximately 65% of the committed volume under the agreement as of
March 29, 1996. However, sales to SWB under the 1994 contract were not
significant during TSG's 1997 fiscal year, a condition TSG believes is
attributable to a change in deployment strategies of SWB. In June 1997, TSG
entered into an agreement with SWB that supersedes and terminates the December
1994 agreement. Under the new agreement, TSG agreed to reduce SWB's remaining
purchase commitment to approximately $3,000 from approximately $8,000 under
the former agreement and, among other things, upgrade SWB's payphone
management system. In return, SWB made a $250 cash payment to TSG, terminated
TSG's obligation to pay royalties on sales of GemStar processors to other
customers, and terminated TSG's obligation to repay $375 received from the
sale of product software under the December 1994 agreement. SWB also agreed to
make additional cash payments to TSG of $250 on July 2, 1997, $100 on
September 1, 1997, $150 on December 31, 1997, and $250 on March 31, 1998,
subject to TSG's compliance with the terms and conditions of the agreement,
including conditions with respect to performance, service and repair. See
"Business--Sales and Markets" for a discussion of TSG's dependence on
significant customers and contractual relationships. Also, see "Liquidity and
Capital Resources--Operating Trends and Uncertainties."

Cost of Goods Sold. The 2% increase in cost of goods sold is primarily
attributable to the increase in sales, the increase in the percentage of sales
related to refurbishment, repair and conversion services and related products,
and certain sales price reductions. Incremental costs of approximately $350
incurred in connection with the closure of one of TSG's manufacturing
facilities and the consolidation of service operations were offset
substantially by gains of approximately $273 from changes in estimates of
contingent liability obligations recorded in connection with the Acquisition.
Production costs as a percentage of sales increased to approximately 80%
during the year ended March 28, 1997 as compared to 79% during the year ended
March 29, 1996 due to these factors.

General and Administrative Expenses. The 8% increase in general and
administrative expenses is primarily related to incremental costs and expenses
incurred as a public reporting entity after the consummation of TSG's initial
public offering in May 1996.

Marketing and Selling Expenses. The 32% decrease in marketing and selling
expenses is primarily attributable to the expiration of a smart product
royalty agreement on June30, 1996 and the related decrease in royalty expense.

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<PAGE>

Engineering, Research and Development Expenses. Engineering, research and
development expenses increased by 48%, primarily due to an expansion of
engineering resources and product development activities. TSG began to expand
its engineering resources during the first quarter of fiscal 1997 in order to
facilitate smart product development activities and the implementation of
lower-cost manufacturing methodologies. During the year ended March 28, 1997,
TSG capitalized approximately $422 of software development costs in connection
with the development of its new smart payphone processor.

Litigation Settlement. Pursuant to the terms of a settlement agreement dated
July 3, 1996, a suit filed against TSG by a former supplier to collect
approximately $400 of unpaid obligations was dismissed with prejudice. As a
result of the settlement agreement, TSG realized a gain of $105 representing
the difference between the unpaid obligations recorded in TSG's accounts and
the aggregate settlement payments.

Interest Expense. The 57% decrease in interest expense is primarily due to
the repayment of outstanding bank and stockholder debt obligations during May
1996 from proceeds of the TSG IPO. See "Liquidity and Capital Resources--Cash
Flows From Financing Activities."

Restructuring Charges. During August 1996, TSG initiated a facilities
consolidation plan intended to augment its ongoing productivity and quality
improvement programs. The consolidation plan provided for the closure of TSG's
Kentucky manufacturing facility, the closure of TSG's Georgia corporate office
facility, the consolidation of repair, refurbishment and conversion service
operations into TSG's Virginia facility, and the consolidation of corporate
activities and product assembly operations into a new Georgia facility. In
connection with this plan, TSG recorded restructuring charges of $63 during
the year ended March 28, 1997. These restructuring charges consisted of
severance obligations and estimated losses related to the abandonment of
assets in connection with the closure of facilities.

Other Income. TSG assigned the capital lease obligation related to its
former Kentucky facility to an unaffiliated third party, and recorded the
retirement of the outstanding capital lease obligation and the disposition of
the property during the fiscal year ended March 28, 1997. In connection with
this transaction, TSG realized a gain of $44 representing the difference
between the outstanding lease obligation ($933) plus the proceeds received
($50) and the net book value of the property ($939). The increase in other
income during the year ended March 28, 1997 as compared to the year ended
March 29, 1996 is primarily attributable to the gain from the disposition of
the facility and an increase in income related to the sublease of a portion of
property leased by TSG.

Income Tax Expense. The 63% increase in income tax expense is primarily due
to a reduction in tax benefits from utilization of net operating loss
carryforwards. Benefits of net operating loss carryforwards used to offset
current tax expense amounted to $72 during fiscal 1997 as compared to $335
during fiscal 1996. Deferred tax benefits of $493 were recognized during the
year ended March 28, 1997 as compared to $50 during the year ended March 29,
1996. However, deferred tax benefits related to acquired deferred tax assets
aggregating $442 were applied to goodwill during fiscal 1997 as compared to
$211 during fiscal 1996.

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<PAGE>

Year Ended March 29, 1996 Compared to Year Ended March 31, 1995

The following table shows certain line items in TSG's consolidated statement
of operations for the year ended March 29, 1996 and in TSG's and Predecessor's
consolidated statement of operations for the year ended March 31, 1995 that
are discussed below and that changed significantly between the two periods
indicated, together with the change expressed as a percentage.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERCENTAGE
MARCH 29, MARCH 31, INCREASE
1996 1995 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Sales........................................ $33,201 $20,270 64 %
Cost of goods sold........................... 26,082 17,402 50 %
General and administrative expenses.......... 2,205 2,592 (15)%
Marketing and selling expenses............... 1,290 738 75 %
Engineering, research and development ex-
penses...................................... 1,197 938 28 %
Restructuring credits........................ -- 534 (100)%
Litigation settlement........................ -- 261 (100)%
Income tax expense........................... 326 -- --
</TABLE>

Overview. TSG's results for the year ended March 29, 1996 reflect a
significant increase in sales volume, an increase in operating expenses, and
an income tax provision of $326 on pre-tax profits of $1,503, as compared to
the previous year during which TSG reported a loss of $1,488. The results of
the Predecessor during the seven months ended October 30, 1994 includes a gain
from the recognition of a litigation settlement of $261, restructuring credits
of $534, and acquisition expenses of $166. The results of operations of TSG
for the five months ended March 31, 1995 include the effects of the
Acquisition, consisting primarily of amortization of intangible assets of
approximately $100 and an increase in cost of goods sold of approximately
$226. The results of TSG during fiscal 1996 include the effects of the
Acquisition, consisting primarily of amortization of intangible assets,
including goodwill, of $253 and an increase in cost of goods sold of
approximately $221.

Sales. Sales of smart payphone products and components during fiscal 1996
approximated $21,800 as compared to approximately $6,600 during fiscal 1995.
Sales attributable to refurbishment and conversion services and related
payphone components approximated $10,600 during fiscal 1996 as compared to
approximately $12,300 during fiscal 1995. Sales of wireless payphone products
and components consisting primarily of export sales approximated $856 during
fiscal 1996 as compared to approximately $1,400 during fiscal 1995. The
$15,200 increase in sales of smart payphone products and components during
fiscal 1996 as compared to fiscal 1995 was primarily attributable to an
increase in sales volume of GemStar products, Gemini products and electronic
locks under sales agreements entered into in December 1994 and December 1995.
Sales increases attributable to GemStar, Gemini and electronic lock products
were offset by a reduction in sales volume of InMate products, which TSG
believes is primarily attributable to the saturation of the InMate institution
market. The 14% decline in sales from repair, refurbishment and conversion
services and related payphone components during fiscal 1996 as compared to
fiscal 1995 was primarily due to a reduction in volume that TSG believes was
attributable to implementation of smart product conversion programs by certain
customers, as well as competition. The decline in TSG's wireless product sales
during fiscal 1996 as compared to fiscal 1995 was primarily due to a decrease
in export volume to Mexico, which TSG believes was attributable to the
devaluation of the Mexican peso during fiscal 1995.

Cost of Goods Sold. The increase in cost of goods sold is primarily
attributable to the 64% increase in sales during fiscal 1996 as compared to
fiscal 1995. Production costs as a percentage of sales declined to 79% during
fiscal 1996 as compared to 86% during fiscal 1995 as a result of the increase
in volume. In addition, during the five months ended March 31, 1995, TSG
accrued damages of $200 attributable to a product recall initiated in April
1995 (see "Operating Trends and Uncertainties"). Purchase adjustments from the
revaluation of inventories in connection with the Acquisition had the impact
of increasing cost of goods sold by $226 and $221 during the five months ended
March 31, 1995 and year ended March 29, 1996, respectively.

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<PAGE>

General and Administrative Expenses. The decline in general and
administrative expenses is primarily related to cost reductions associated
with a restructuring initiated during the latter part of fiscal 1994 and
expenses of $166 incurred by the Predecessor during the seven months ended
October 30, 1994 in connection with the Acquisition. Amortization of goodwill
and other intangible assets recorded in connection with the Acquisition
approximated $253 during fiscal 1996 as compared to approximately $100 during
the five months ended March 31, 1995.

Marketing and Selling Expenses. The increase in marketing and selling
expenses is primarily due to royalties on sales of GemStar and Gemini products
incurred under an asset purchase agreement dated January 11, 1991, and an
elimination of royalties during the first six months of fiscal 1995 pursuant
to a November 9, 1994 amendment to the royalty provisions of that agreement.

Engineering, Research and Development Expenses. Engineering, research and
development expenses increased primarily due to an expansion of engineering
resources and product development activities, which had been reduced during
fiscal 1995 as a result of the restructuring initiated during the later part
of fiscal 1994.

Restructuring Credits. During the five months ended March 31, 1995, TSG
settled severance obligations under employment contracts terminated in fiscal
1994 and negotiated the termination of certain non-cancelable lease
obligations with respect to facilities closed in connection with the
restructuring initiated at the end of fiscal 1994. The severance and lease
obligations were settled on terms more favorable than estimated during the
year ended April 1, 1994, which resulted in the recognition of restructuring
credits of $249 and $274, respectively, during the seven months ended October
30, 1994. Restructuring credits recognized during the seven months ended
October 30, 1994 aggregated $534.

Litigation Settlement. During the seven months ended October 30, 1994, TSG
settled litigation against a supplier to recover costs and damages
attributable to defective components supplied to TSG, and realized a gain of
approximately $261, net of legal fees of $56.

Income Tax Expense. During the year ended March 29, 1996, TSG generated a
taxable profit as compared to a net loss during the year ended March 31, 1995.
Benefits of net operating loss carryforwards used to offset current tax
expense during fiscal 1996 aggregated $335. Deferred tax benefits recognized
during fiscal 1996 of $50 were offset by benefits of acquired deferred tax
assets aggregating $211 that were used to reduce goodwill. There was no tax
provision during fiscal 1995 as a result of the reported net loss.

LIQUIDITY AND CAPITAL RESOURCES

Initial Public Offering

During May 1996, TSG completed the TSG IPO, an initial public offering of
1,150,000 Units, each Unit consisting of one share of TSG Common Stock and a
redeemable warrant, at a price of $9.00 per Unit for gross proceeds of
$10,350. In connection with the offering, TSG issued, for nominal
consideration, warrants to the underwriter to purchase 100,000 shares of TSG
Common Stock (the "Underwriter Warrants"). Net proceeds received by TSG as of
June 28, 1996 and March 28, 1997, after underwriting discounts and expenses of
$1,232 and other expenses of $808 and $824, respectively, aggregated $8,310
and $8,294, respectively. At March 29, 1996, TSG had incurred and deferred
offering expenses of $338. Accordingly, net proceeds from TSG's initial public
offering during the three months ended June 28, 1996 and year ended March 28,
1997 aggregated $8,648 and $8,632, respectively.

The proceeds of the offering, net of underwriting discounts and expenses,
were initially used to repay then outstanding indebtedness consisting of
subordinated notes payable to stockholders of $2,800 and indebtedness under a
Loan and Security Agreement (the "Loan Agreement") between TSG and its bank
aggregating $6,318 (see "The Loan Agreement" and "Cash Flows From Financing
Activities"). Indebtedness outstanding under the Loan Agreement repaid with
the net proceeds consisted of a $2,200 term note due November 30, 1997, $310
outstanding under a $650 term note due November 30, 1997 and indebtedness
under a revolving credit line of $3,808.

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<PAGE>

The Loan Agreement

TSG is able to borrow up to a maximum of $9,000 under the terms of the Loan
Agreement between TSG and its bank. The Loan Agreement provides for revolving
credit indebtedness up to a maximum amount based on specified percentages
applied to the value of eligible collateral consisting of accounts receivable
and inventory less indebtedness, if any, under the $2,200 term note due
November 30, 1997. In addition, the Loan Agreement contains provisions for
certain term and installment indebtedness that was repaid with the proceeds of
TSG's initial public offering in May 1996. At March 29, 1996, March 28, 1997
and June 27, 1997, outstanding indebtedness under the Loan Agreement bore
interest at a variable rate per annum equal to 1.5% above a base rate quoted
by Citibank, N.A. The interest rate was reduced from 2% above a base rate
quoted by Citibank, N.A. on March 1, 1996. The base rate at March 29, 1996,
March 28, 1997 and June 27, 1997 was 8.25%, 8.5% and 8.5% per annum,
respectively. Amounts borrowed under the Loan Agreement are secured by
substantially all assets of TSG, including accounts receivable, inventories
and property and equipment. The Loan Agreement expires on November 30, 1997,
and is renewable annually for one-year periods unless terminated by the bank
upon the occurrence of an event of default or by TSG upon at least 90 days'
notice.

Indebtedness under the Loan Agreement at March 29, 1996 consisted of $2,525
outstanding under term and installment notes, including the $2,200 term note
due November 30, 1997 and $325 outstanding under a $650 term note due November
30, 1997, and $1,094 outstanding under the revolving credit line. Indebtedness
under the Loan Agreement at March 28, 1997 and June 27, 1997 consisted of
$3,811 and $2,400, respectively, outstanding under the revolving credit line.

The Loan Agreement contains conditions and covenants that prevent TSG from
engaging in certain transactions without the consent of the bank, including
merging or consolidating, payment of subordinated stockholder debt
obligations, declaration or payment of dividends, and disposition of assets,
among others. Additionally, the Loan Agreement requires TSG to comply with
specific financial covenants, including covenants with respect to cash flow,
working capital and net worth. 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. Although TSG was in compliance with the covenants set
forth in the Loan Agreement at June 27, 1997, there is no assurance that TSG
will be able to remain in compliance with such covenants in the future.

TSG uses the financing available under the Loan Agreement to finance its
working capital requirements. If an event of default were to occur, however,
TSG's ability in this regard could be curtailed. In such event, TSG would seek
alternative financing sources, but there is no assurance that alternative
financing sources would be available on commercially reasonable terms, or at
all. Further, the Loan Agreement expires on November 30, 1997 unless it is
renewed in accordance with its terms. Elcotel intends to refinance with one
bank this indebtedness as Elcotel's indebtedness with its bank in connection
with consummation of the Merger. Although TSG believes that it will negotiate
an acceptable renewal or refinancing agreement if the Merger is not
consummated, there is no assurance that its efforts will be successful. TSG's
liquidity would be materially and adversely affected if it is unable to renew
or refinance its present credit facility.

TSG borrows funds to finance increases in accounts receivable and
inventories and decreases in bank overdrafts, accounts payable and accrued
liability obligations to the extent that such requirements exceed cash
provided by operations, if any. TSG also uses the financing available under
the revolving credit line to fund operations, investing activities and
payments on long-term debt when necessary. TSG repays borrowed funds with
cash, if any, provided by operating activities. TSG measures its liquidity
based upon the amount of funds that TSG is able to borrow under the Loan
Agreement, which varies based upon operating performance and the value of
current assets and liabilities. At June 27, 1997, TSG had unused borrowing
availability of approximately $5,400 under the revolving credit facility based
on the value of eligible collateral.

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<PAGE>

Cash Flows From Financing Activities

Pursuant to the October 31, 1994 Investment Agreement entered into in
connection with the Acquisition, TSG borrowed $2,800 from Wexford and Acor
S.A. and issued 10% interest bearing subordinated promissory notes due
November 1, 1999. TSG issued a 10% interest bearing subordinated note to
Wexford in the principal amount of $2,361 dated October 31, 1994. TSG issued
10% interest bearing subordinated promissory notes to Acor S.A. in the
principal amount of $208 dated October 31, 1994, $100 dated October 31, 1994,
$83 dated November 10, 1994 and $48 dated December 23, 1994. During the year
ended March 28, 1997, TSG repaid these subordinated promissory notes from the
proceeds of its initial public offering.

Concurrently with the Acquisition, the Loan Agreement was amended, and
$2,200 of debt outstanding under the revolving credit line was converted into
a term note payable on November 30, 1997. However, proceeds of $2,569 from the
subordinated promissory notes dated October 31, 1994 issued to Wexford and
Acor S.A. were used to retire debt outstanding under the revolving credit
line, and after such repayment, the initial principal balance outstanding
under the $2,200 term note on October 31, 1994 amounted to $1,292. Between
October 31, 1994 and March 31, 1995, TSG borrowed the balance available under
the $2,200 term note of $908, and also re-borrowed $970 under the revolving
credit line. During the year ended March 28, 1997, TSG repaid the $2,200 term
note from the proceeds of its initial public offering.

Net payments of indebtedness under TSG's revolving credit line during the
seven months ended October 31, 1994 and five months ended March 31, 1995
amounted to $1,491 and $1,599, respectively. Net proceeds under the revolving
credit line during the year ended March 29, 1996 amounted to $124. Net
proceeds under TSG's revolving credit line during the year ended March 28,
1997 amounted to $2,717, net of the repayment of $3,808 from the proceeds of
TSG's initial public offering. Net payments under TSG's revolving credit line
during the three months ended June 27, 1997 and June 28, 1996 amounted to
$1,411 and $901, respectively.

Principal payments on other long-term debt and capital lease obligations
during the seven months ended October 30, 1994, five months ended March 31,
1995 and year ended March 29, 1996 amounted to $459, $482 and $814,
respectively. Principal payments on other long-term debt and capital lease
obligations during the three months ended June 28, 1996 and year ended March
28, 1997 aggregated $2,578 and $2,600, including repayment of the $2,200 term
note due November 30, 1997 and repayment of $310 outstanding under the $650
term note due November 30, 1997 from the proceeds of TSG's initial public
offering. Principal payments on other long-term debt and capital lease
obligations during the year ended March 28, 1997, excluding the repayments of
term note indebtedness from the proceeds of the offering, amounted to $90. The
decrease in principal payments (exclusive of repayments made from proceeds of
the offering) for the year ended March 28, 1997 as compared to the year ended
March 29, 1996 is attributable to debt maturing during fiscal 1997, the
repayments made from the proceeds of the offering and the assignment of the
capital lease obligation related to TSG's Kentucky facility to an unrelated
third party in November 1996.

TSG has also established a cash management program with its bank under which
TSG funds drafts as they clear the bank. Accordingly, TSG maintains bank
overdrafts representing outstanding drafts and utilizes the cash management
account as a source of funding. Bank overdrafts vary according to many
factors, including the volume of business, and the timing of purchases and
disbursements. During the seven months ended October 30, 1994, five months
ended March 31, 1995, year ended March 29, 1996 and three months ended June
28, 1996 and June 27, 1997, TSG's bank overdrafts increased by $324, $121,
$502, $760 and $82, respectively. During the year ended March 28, 1997, TSG's
bank overdrafts decreased by $760.

In June 1996, TSG issued 40,000 shares of common stock for aggregate
proceeds of $160 upon the exercise of outstanding common stock purchase
warrants issued in May 1995. During the year ended March 28, 1997, TSG issued
5,000 shares of common stock upon the exercise of incentive stock options at
an aggregate exercise price of $5, and issued 6,760 shares of common stock
upon the exercise of rights granted under TSG's 1995 Employee Stock Purchase
Plan for an aggregate purchase price of $52.

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<PAGE>

Cash Flows From Operating Activities

During the seven months ended October 30, 1994, TSG generated $915 of cash
from operating activities. TSG used $99 of cash, net of non-cash charges and
credits of $324, to fund operating losses during the seven months ended
October 30, 1994. Because of recurring losses, TSG's cash resources during the
seven months ended October 30, 1994 were not sufficient to fund working
capital, capital expenditure and debt service requirements, and TSG was unable
to meet all of its accrued liability and supplier obligations as they became
due. However, TSG was able to generate cash from reductions in accounts
receivable and inventories of $578 and $1,388, respectively, and prepaid
expenses of $67 during the seven months ended October 30, 1994. The cash
provided from these asset reductions enabled TSG to begin efforts to decrease
its past due obligations, and during the seven months ended October 30, 1994,
$966 of cash was used to reduce accounts payable, accrued liabilities and
accrued restructuring charges.

During the five months ended March 31, 1995, TSG used $1,598 of cash to fund
operating activities. Cash used to fund operating losses during the five
months ended March 31, 1995 amounted to $358, net of non-cash charges and
credits of $707. Also, because of an increase in the volume of business, TSG
used $330 and $764 of cash to fund increases in accounts receivable and
inventories, respectively, during the five months ended March 31, 1995. As a
result of the investor financing received in connection the Acquisition and an
increase in deferred revenue which provided $375 in cash (see "Capital
Commitments and Liquidity"), TSG was able to further pay down its past due
liability obligations, and used $618 of cash to reduce its accounts payable,
accrued liabilities and accrued restructuring charges during the five months
ended March 31, 1995.

During the year ended March 29, 1996, TSG generated cash of $194 from
operating activities. Cash provided by operations, after adjustments related
to non-cash charges of $1,584, during the year ended March 29, 1996, amounted
to $2,761. Also, although TSG paid remaining undisputed past due liability
obligations, a net increase in TSG's supplier and accrued liability
obligations, income taxes payable, deferred revenue and accrued restructuring
charges provided cash of $2,599 during fiscal 1996. TSG used $4,634 in cash to
fund increases in accounts receivable and inventories of $1,206 and $3,428,
respectively. In addition, TSG expended $474 of cash to fund increases in
other assets including the acquisition of a patent license and the expenses of
TSG's initial public offering during the year ended March 29, 1996. The
increases in accounts receivable, inventories and current liability
obligations during the year ended March 29, 1996 were primarily related to the
increase in the volume of business as compared to fiscal 1995.

Cash used to fund operating activities during the year ended March 28, 1997
amounted to $4,995. During the year ended March 28, 1997, TSG's operations
generated $2,613 in cash, after adjustments related to non-cash charges and
credits of $1,603. In addition, a decrease in accounts receivable caused by
sales fluctuations provided cash of $632 during the year ended March 28, 1997.
TSG used $2,485 in cash to fund an increase in inventories during the year
ended March 28, 1997. This inventory increase was related to the production of
electronic locks and GemStar products under contractual commitments, the
anticipated final production run of Gemini printed circuit board assemblies to
meet estimated sales requirements until the planned release of TSG's new smart
payphone processor and a slow-down of orders during the latter part of the
year (see "Results of Operations"). TSG used $419 of cash to fund changes in
prepaid expenses and other assets consisting primarily of capitalized software
development expenses. In addition, cash used for decreases in accounts payable
of $3,984, income taxes payable of $39, deferred revenue of $541 and accrued
liabilities, including accrued restructuring charges, of $771 aggregated
$5,335 during the year ended March 28, 1997. The decrease in accounts payable
is related to the slow-down in sales and TSG's efforts to reduce contracted
manufacturing volume and inventory balances during the latter part of fiscal
1997. During fiscal 1997, TSG satisfied its delivery requirements with respect
to revenues deferred at March 29, 1996 and deferred revenue decreased
accordingly. The decrease in accrued liability obligations is primarily
attributable to the expiration of a smart product royalty agreement and the
payment of remaining royalty obligations during fiscal 1997 and a decrease in
accrued interest due to the repayment of debt obligations.

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<PAGE>

Cash provided by operating activities during the three months ended June 27,
1997 amounted to $1,398. During the three months ended June 27, 1997, TSG's
operations generated $600 in cash, after adjustments related to non-cash
charges and credits of $562. Changes in operating assets and liabilities
provided $798 of cash during the three months ended June 27, 1997. Inventories
decreased by $1,070 primarily as a result of shipments of smart payphone
products manufactured during the year ended March 28, 1997. Accounts payable
increased by $891 primarily as a result of fluctuations in inventory
purchases. The decrease in accrued liabilities of $306 and deferred revenue of
$375 is primarily attributable to satisfaction of obligations under the new
sales agreement between TSG and SWB, and the payment of performance based
compensation accrued at March 28, 1997. The increase in other assets is
attributable to the capitalization of software development costs of
approximately $130. The increase in refundable income taxes of $301 is
primarily attributable to current tax benefits recognized during the three
months ended June 27, 1997. Income taxes payable declined by $126 due to
payments made during the three months ended June 27, 1997.

Cash used to fund operating activities during the three months ended June
28, 1996 amounted to $3,089. During the three months ended June 28, 1996,
TSG's operations generated $1,032 in cash, after adjustments related to non-
cash charges and credits of $447. Changes in operating assets and liabilities
used $4,121 of cash during the three months ended June 28, 1996. Accounts
receivable increased by $2,795 as a result of an increase in the volume of
business during the period. The increase in inventory of $1,203 and accounts
payable of $515, although partially related to the increase in the volume of
business, was primarily attributable to an excess of inventory purchases under
purchase commitments over sales requirements as a result of a change in the
delivery requirements of one of TSG's customers. During the three months ended
June 28, 1996, TSG satisfied the majority of its delivery requirements with
respect to prepayments from customers and deferred revenue decreased by $486.
The decrease in accrued liabilities of $341 was primarily attributable to the
payment of interest accrued under the terms of the subordinated notes payable
to stockholders that were retired during the period, and the payment of
performance based compensation accrued at the beginning of the period. Current
tax expense for the period exceeded estimated tax payments and income taxes
payable increased by $114.

Cash Flows From Investing Activities

Cash used to fund investing activities during the seven months ended October
30, 1994, five months ended March 31, 1995, years ended March 29, 1996 and
March 28, 1997 and three months ended June 27, 1997 and June 28, 1996 amounted
to $9, $60, $252, $363, $37 and $59, respectively. TSG's capital expenditures
during these periods consisted primarily of investments in manufacturing
tooling and equipment and automated test equipment. TSG expects that its
capital expenditures over the next several quarters will increase as TSG
continues to invest in manufacturing and test equipment required to improve
its in-house prototype and manufacturing capabilities and moves forward to
select and begin the implementation of new management information systems (see
"Capital Commitments and Liquidity").

Capital Commitments and Liquidity

TSG has not entered into any significant commitments for the purchase of
capital assets. However, TSG intends to purchase and install information
systems and capital equipment, including printed circuit board assembly
equipment and other manufacturing equipment, to advance its prototype
manufacturing and product testing capabilities during the next year. In
addition, TSG intends to expand its manufacturing capabilities through the
purchase of capital equipment in the future as required to meet the needs of
its business. However, there can be no assurance that capital expenditures
will be made as planned or that additional capital expenditures will not be
required. TSG believes, based on its current plans and assumptions relating to
its operations, that its sources of capital, including capital available under
the revolving credit line and cash flow from operations will be adequate to
satisfy its anticipated cash needs, including anticipated capital
expenditures, for at least the next year. However, in the event that TSG's
plans or the basis for its assumptions change or prove to be inaccurate, or
cash flow and sources of capital prove to be insufficient to provide for TSG's
cash requirements (due to unanticipated expenses, loss of sales revenues, a
significant increase in inventories, operating difficulties or otherwise), TSG
would be required to seek additional financing. In such an event, there can be
no assurance that additional financing would be available to TSG on
commercially reasonable terms, or at all.

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<PAGE>

Extension of credit to customers and inventory purchases represent the
principal working capital requirements of TSG. Significant increases in
accounts receivable and inventory balances could have an adverse effect on
TSG's liquidity. TSG's accounts receivable, less allowances for doubtful
accounts, at March 29, 1996, March 28, 1997 and June 27, 1997 amounted to
$3,866, $3,235 and $3,162, respectively. Accounts receivable at March 29,
1996, March 28, 1997 and June 27, 1997 consists primarily of amounts due from
the RBOCs. TSG's inventories, less allowances for potential losses due to
obsolescence and excess quantities, amounted to $8,659, $10,879 and $9,781 at
March 29, 1996, March 28, 1997 and June 27, 1997, respectively. The level of
inventory maintained by TSG is dependent on a number of factors, including
delivery requirements of customers, availability and lead-time of components
and the ability of TSG to estimate and plan the volume of its business. TSG
markets a wide range of services and products and the requirements of its
customers vary significantly from period to period. Accordingly, inventory
balances may vary significantly.

The Loan Agreement between TSG and its bank limits outstanding revolving
credit indebtedness secured by eligible inventory to $3,100. Accordingly,
increases in inventory together with decreases in sales during the last nine
months has adversely affected TSG's liquidity under the revolving credit
agreement. The ability of TSG to improve its liquidity during the next year is
dependent on the level of smart payphone product orders and the extent of the
related inventory reduction, if any.

In October 1994, TSG entered into a contract manufacturing agreement for the
production of its GemStar smart payphone processors. TSG committed to purchase
$12,200 of product over an eighteen-month period beginning in December 1994.
In addition, in November 1994, TSG entered into a dealer agreement that
committed TSG to purchase approximately $3,500 of electronic lock devices over
a two-year period. TSG initially scheduled purchases under these agreements
based on anticipated quantities required to meet its sales commitments. At
March 28, 1997 and June 27, 1997, TSG had acquired the majority of committed
purchase volume under these purchase agreements. However, as a result of a
decline in sales to SWB, TSG's inventories related to these agreements
increased by approximately $2,000 during the year ended March 28, 1997.

During the three months ended June 27, 1997, TSG released orders under the
terms of the manufacturing agreement entered into in October 1994 to purchase
approximately $5,500 of assemblies for its new smart payphone processor. Upon
a termination of the agreement by TSG, TSG is obligated to purchase
inventories held by the manufacturer and pay vendor cancellation and
restocking charges, and a reasonable profit thereon. In addition, TSG is
obligated to pay a cancellation penalty of up to $500 if it cancels the $5,500
purchase obligation or a substantial portion thereof. The amount of the
cancellation penalty, if any, will vary depending upon quantities purchased by
TSG.

In December 1994, TSG entered into a sales agreement with SWB under which
SWB committed to purchase $21,300 of GemStar smart processors, electronic
locks and other components over a three-year period. In connection with this
agreement, TSG sold the rights to certain product software for an aggregate
purchase price of $500. TSG received back an exclusive irrevocable perpetual
right to sub-license the software in connection with the sale of related
products. In return, TSG agreed to pay royalties on sales of licensed products
to other customers. At March 28, 1997, TSG was not obligated and had not paid
any royalties under the agreement. TSG was obligated to repay, three years
from the date of sale, a portion of the purchase price up to a maximum amount
of $375, which is reflected as deferred revenue in TSG's consolidated
financial statements at March 29, 1996 and March 28, 1997. However, in June
1997, TSG entered into an agreement with SWB that superseded and terminated
the December 1994 agreement. Under the new agreement, TSG agreed to reduce
SWB's remaining purchase commitment to approximately $3,000 from approximately
$8,000 under the former agreement and, among other things, upgrade SWB's
payphone management system. In return, SWB made a $250 cash payment to TSG,
terminated TSG's obligation to pay royalties on sales of licensed products to
other customers and terminated TSG's contingent obligation to repay revenue of
$375 received from the sale of product software under the December 1994
agreement. SWB also agreed to make additional cash payments to TSG of $250 on
July 2, 1997, $100 on September 1, 1997, $150 on December 31, 1997 and $250 on
March 31, 1998, subject to TSG's compliance with the terms and conditions of
the agreement, including conditions with respect to

77
<PAGE>

performance, service and repair. SWB has the right to cancel the agreement
upon default by TSG. Therefore, there is no assurance that TSG will receive
the additional payments or that it will ship the products set forth in the
agreement. TSG has received all scheduled payments under the new agreement
which were due as of the date hereof.

Operating Trends and Uncertainties

Dependence on Customers and Contractual Relationships. During TSG's last
three fiscal years, four of the RBOCs have accounted for the majority of TSG's
sales. TSG anticipates that it will continue to derive most of its revenues
from such customers, and other telcos, for the foreseeable future. Significant
reductions and/or fluctuations in sales volume from these customers can have a
material adverse effect on TSG's business. In addition, the loss of a
significant customer could have a material adverse effect on TSG's business.

TSG's prospects for continued profitability are largely dependent upon the
RBOCs upgrading the technological capabilities of their installed base of
payphones, and utilizing TSG's products and services for such upgrade
conversion programs. Also, TSG's prospects and the ability of TSG to maintain
a profitable level of operations are dependent upon its ability to continue to
secure contract awards from the RBOCs. In addition, TSG's prospects for growth
are dependent upon the market acceptance and success of its smart payphone
products, as well as development of smart products containing additional
advanced features. If TSG is unable to attract the interest of the RBOCs to
deploy TSG's smart payphone products, TSG's sales revenues, business and
prospects for growth would be adversely affected. Further, TSG's ability to
maintain and/or increase its sales is dependent upon its ability to compete
for and maintain satisfactory relationships with the RBOCs, particularly those
RBOCs that are presently significant customers of TSG.

Prior to a restructuring instituted in 1994, TSG experienced difficulties
with a first generation smart payphone product, which difficulties
subsequently were remedied. Such difficulties, however, resulted in the
termination of a contract for such product with one of TSG's then significant
RBOC customers. There can be no assurances that similar difficulties will not
occur in the future.

The assessment of penalties and/or damages under TSG's sales contracts could
have a material adverse effect on TSG's operating results and liquidity. In
April 1995, TSG initiated a recall of products due to contamination introduced
into the manufacturing process by TSG's contract manufacturer. Although TSG's
contract manufacturer was responsible for the repair or replacement of the
recalled product, TSG incurred liquidated damages under the terms of the sales
agreement with its customer in the amount of $200.

Sales Prices. TSG's agreements with its contract manufacturers generally
provide that TSG will bear certain cost increases incurred by the
manufacturer. Accordingly, TSG's manufacturing costs may fluctuate based on
costs incurred by its contract manufacturers and such fluctuations could have
a material and adverse impact on earnings. TSG's sales agreements with
customers generally have fixed product prices with limited price escalation
provisions. Consequently, there is a risk that TSG may not be able to increase
sales prices when product costs increase. In the event TSG's costs increase
without a corresponding price increase or orders are lost due to price
increases, TSG's profitability would be adversely affected. TSG encounters
substantial competition with respect to smart payphone contract awards from
the RBOCs. Pending the release of TSG's new smart payphone processor later
this year, market pressures have eroded margins on the product version
currently being shipped. Until TSG releases its new smart payphone processor,
TSG will realize little to no gross profit with respect to smart product sales
to NYNEX. Any other price reductions in response to competition will also
result in reduced gross profit margins unless TSG is able to achieve
reductions in product costs.

Seasonality. TSG's sales are generally stronger during periods when weather
does not interfere with the maintenance and installation of payphone equipment
by TSG's customers, and may be adversely impacted near the end of the calendar
year by the budget shortfalls of customers. However, TSG may also receive
large year-end orders from its customers for shipment in December depending
upon their budget positions. In the event TSG does not receive any significant
end of year orders for its smart payphone products, its third quarter sales
may decline significantly in relation to other quarters.

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<PAGE>

Sources of Supply and Dependence on Contract Manufacturers. TSG generally
assembles its smart payphone products from assemblies produced by certain
manufacturers under contractual arrangements. To the extent that such
manufacturers encounter difficulties in their production processes that delay
shipment to TSG or that affect the quality of items supplied to TSG, TSG's
ability to perform its sales agreements or otherwise to meet supply schedules
with its customers can be adversely affected. In the event that contract
manufacturers delay shipments or supply defective materials to TSG, and such
delays or defects are material, TSG's customer relations could deteriorate and
its sales and operating results could be materially and adversely affected.

As a percentage of revenues, the majority of TSG's products contain
components or assemblies that are purchased from single sources. TSG believes
that there are alternative sources of supply for most of the components and
assemblies currently purchased from those sources. Most of the components and
assemblies used by TSG for which there are not immediately available
alternative sources of supply are provided to TSG under standard purchase
arrangements. In addition, suppliers of certain electronic parts and
components to TSG and its contract manufacturers occasionally place their
customers on allocation for those parts. If a shortage or termination of the
supply of any one or more of such components or assemblies were to occur,
TSG's business could be materially and adversely affected. In such event, TSG
would be required to incur the costs associated with redesigning its products
to include available components or assemblies or otherwise obtain adequate
substitutes, and those costs could be material. Also, any delays in
redesigning products or obtaining substitute components could adversely affect
TSG's business.

Telecommunications Act. As a result of the Telecommunications Act, the RBOCs
will be permitted to manufacture and provide telecommunications equipment and
to manufacture customer premises equipment when certain competitive conditions
have been met. It is possible that one or more RBOCs will decide to
manufacture payphone products, which would increase the competition faced by
TSG and could decrease demand for TSG's products by such RBOCs.
Notwithstanding, TSG believes that deregulation generally will benefit TSG.
However, there can be no assurance that TSG will benefit from deregulation or
that it will not be adversely affected by deregulation.

Net Operating Loss Carryforwards. As of June 27, 1997, TSG had net operating
loss carryforwards for income tax purposes of approximately $11,000 to offset
future taxable income. Under Section 382 of the Internal Revenue Code of 1986,
as amended, the utilization of net operating loss carryforwards is limited
after an ownership change, as defined in such Section 382, to an annual amount
equal to the value of the loss corporation's outstanding stock immediately
before the date of the ownership change multiplied by the federal long-term
tax-exempt rate in effect during the month the ownership change occurred. Such
an ownership change occurred on October 31, 1994 and could occur in the
future. As a result, TSG will be subject to an annual limitation on the use of
its net operating losses of approximately $210. This limitation only affects
net operating losses incurred up to the ownership change and does not reduce
the total amount of net operating losses which may be taken, but limits the
amount which may be used in a particular year. Therefore, in the event TSG
maintains profitable operations, such limitation would have the effect of
increasing TSG's tax liability and reducing net income and available cash
resources if the taxable income during a year exceeded the allowable loss
carried forward to that year. In addition, because of such limitations, TSG
will be unable to use a significant portion of its net operating loss
carryforwards.

SELECTED QUARTERLY DATA

The following sets forth a summary of selected statements of operations data
(unaudited) of TSG for the quarters ended June 30, 1995, September 29, 1995,
December 29, 1995 and March 29, 1996:

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
JUNE 30, SEPTEMBER 29, DECEMBER 29, MARCH 29,
1995 1995 1995 1996
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales.................... $6,354 $7,738 $9,585 $9,524
Net income (loss)............ $ (231) $ 236 $ 655 $ 517
</TABLE>

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<PAGE>

The following sets forth a summary of selected statements of operations data
(unaudited) of TSG for the quarters ended June 28, 1996, September 27, 1996,
December 27, 1996 and March 28, 1997:

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28,
1996 1996 1996 1997
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales.................... $12,078 $10,062 $5,652 $5,680
Net income (loss)............ $ 585 $ 385 $ 27 $ 13
</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 requires disclosure of basic earnings per share based on income
available to common stockholders and the weighted average number of common
shares outstanding during the period, and diluted earnings per share based on
income available to common stockholders and the weighted average number of
common and dilutive potential common shares outstanding during the period. The
adoption of SFAS 128 is required for fiscal years ending after December 15,
1997, and earlier adoption is not permitted. Had TSG adopted SFAS 128 during
the years ended March 29, 1996 and March 28, 1997, basic earnings per share on
a pro forma basis would have been $.34 and $.22 per share, respectively and
diluted earnings per share on a pro forma basis would have been $.30 and $.21
per share, respectively.

Also in February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). SFAS 129 requires a company to explain
the privileges and rights of its various outstanding securities, the number of
shares issued upon conversion, exercise or satisfaction of required conditions
during the most recent annual fiscal period, liquidation preferences of
preferred stock and other matters with respect to preferred stock. Although
the statement is effective for periods ending after December 15, 1997, TSG's
financial statement disclosures are in compliance with SFAS 129.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity
of a business during a period from transactions and events and circumstances
from non-owner sources, and includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
SFAS 130 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 will not have a material effect on TSG's results of
operations or financial position.

Also in June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 requires public
entities to report certain information about operating segments, their
products and services, the geographic areas in which they operate, and their
major customers, in complete financial statements and in condensed interim
financial statements issued to stockholders. SFAS 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS 131 will not
have a material effect on TSG's results of operations or financial position.

80
<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS OF TSG

The following sets forth the name and age of each director and executive
officer of TSG, his positions and offices with TSG, his period of service with
TSG, and his business experience for at least the past five years, and with
respect to directors, their present 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. The Bylaws of TSG provide that the
number of directors will be determined from time to time by the Board of
Directors or the stockholders of TSG, but that there will be at least one
director. Directors of TSG are as follows:

<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
---- --- --------------
<S> <C> <C>
David R. A. Steadman, Chairman........................ 60 1994
D. Thomas Abbott...................................... 43 1996
Vincent C. Bisceglia.................................. 42 1994
Charles E. Davidson................................... 44 1994
Mark L. Plaumann...................................... 42 1997
Olivier Roussel....................................... 50 1986
</TABLE>

David R. A. Steadman. Mr. Steadman has been President of Atlantic Management
Associates, Inc., a management services firm, since 1988. 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 Chairman of the Board of Directors of Wahlco
Environmental Systems, Inc., a manufacturer of environmental conditioning
systems. He is also a director of Aavid Thermal Technologies, Inc., which
manufactures thermal management products and produces computational fluid
dynamics software; Kurzweil Applied Intelligence, Inc., a voice recognition
software company; and Vitronics Corporation, a manufacturer of reflow
soldering ovens. Mr. Steadman was elected Chairman of the TSG Board in 1994
pursuant to an employment agreement described under the heading "Employment
Contracts and Termination of Employment and Change-in-Control Arrangements" in
"TSG Executive Compensation."

D. Thomas Abbott. Mr. Abbott has been Chairman of MeesPierson Holdings Inc.,
the United States operation of a Dutch merchant bank, since 1995. From 1993 to
1995, Mr. Abbott was Chairman and Chief Executive Officer of Savin
Corporation, an office products Company, and from 1989 to 1993, he was
President of Harvest Group, Inc., a private investment firm. From 1976 to
1988, Mr. Abbott held various executive positions with Bankers Trust Company.
Mr. Abbott is a director of International Mezzanine Investment N.V., Precise
Holdings Inc., and Coffee Tree Limited.

Vincent C. Bisceglia. Mr. Bisceglia has served as a director and as
President and Chief Executive Officer of TSG since February 1994. From 1986 to
February 1994, he served TSG as a consultant and in various management
positions including Vice President of Sales and Executive Vice President. From
1982 to 1986, Mr. Bisceglia was Executive Vice President of Transaction
Management, Inc., a manufacturer of point-of-sale systems, and from 1978 to
1982, he held senior marketing positions with National Semiconductor-DTS and
Siemens-Nixdorf Computer Corporation.

Charles E. Davidson. Since January 1, 1995, Mr. Davidson has served as
Chairman of Wexford Management LLC, a private investment management company,
which serves as the investment manager to several private investment funds,
including Wexford, the majority stockholder of TSG. During 1994, Mr. Davidson
served as the Chairman of the Board of Wexford Capital Corporation, which
served as the investment manager to several private investment funds,
including Wexford. From 1984 to 1994, Mr. Davidson was a

81
<PAGE>

partner of Steinhardt Partners, L.P., a private investment firm, and from 1977
to 1984, Mr. Davidson was employed by Goldman, Sachs & Co., serving as Vice
President of corporate bond trading. Mr. Davidson is Chairman of the Board of
DLB Oil & Gas and Resurgence Properties Inc.

Mark L. Plaumann. Mr. Plaumann has been a Senior Vice President of Wexford
Management since January 1996, and since March 1995 has been a director and/or
Vice President of the general partner of various public partnerships managed
by Wexford Management. Mr. Plaumann joined the predecessor entities of Wexford
Management in February 1995. Prior to joining Wexford Management, Mr. Plaumann
was a Managing Director of Alvarez & Marsal, Inc., a crisis management
consulting firm, from 1990 to 1995, and from 1985 to 1990 he was with American
Healthcare Management, Inc., an owner and operator of hospitals, where he
served in a variety of capacities, most recently as its President. Prior to
that he was with Ernst & Young LLP in its auditing and consulting divisions
for eleven years. Mr. Plaumann is a director of Wahlco Environmental Systems,
Inc., a manufacturer of environmental conditioning systems, and BCAM
International, Inc., an ergonomics technology company.

Olivier Roussel. Mr. Roussel has been Chairman and President of Acor, a
private investment company, since 1975. From 1974 to 1977, he was a Vice
President of Nobel-Bozel and from 1977 to 1982 he was an Assistant General
Manager of Heli-Union. Mr. Roussel was a Director of Roussel-Uclaf from 1975
to 1982 and Chairman of Eminence S.A. from 1987 to 1990. He is Chief Operating
Officer and a Director of Vacsyn S.A., a biotechnology company, and a director
of Bollore Technologies, a public company listed on the Paris Stock Exchange.

EXECUTIVE OFFICERS

Executive officers are elected by the TSG Board and serve until they resign
or are removed by the TSG Board. TSG's executive officers are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
<C> <C> <S>
David R. A. Steadman........ 60 Chairman of the Board of Directors
Vincent C. Bisceglia........ 42 President and Chief Executive Officer,
Director
M. Winton Schriner.......... 50 Executive Vice President, Operations
Darold R. Bartusek.......... 51 Senior Vice President, Sales and
Marketing
William H. Thompson......... 45 Vice President of Finance, Chief
Financial Officer and Secretary
Allen W. Vogl............... 49 Vice President, Engineering
</TABLE>

The business experience of Messrs. Steadman and Bisceglia is set forth above
under the listing of directors of TSG.

M. Winton Schriner. Mr. Schriner has served as Executive Vice President of
Operations of TSG since July 1996. From August 1994 to April 1996, he served
as Director of Contract Manufacturing of TSG. From 1991 to 1993, Mr. Schriner
served TSG in various capacities including Vice President of Operations,
Director of Marketing and Director of Engineering. Prior to joining TSG in
1991, he was at BellSouth Telecommunications Company for a period of 12 years
in various management capacities with duties ranging from public
communications to strategic planning and executive support. He holds a B.S.
degree in Industrial Education and an M.S. degree in Vocational Rehabilitation
from the University of Wisconsin.

Darold R. Bartusek. Mr. Bartusek has served as Senior Vice President of
Sales and Marketing of TSG since November 1996, and from February 1994 to
April 1996 he was Vice President of Sales and Marketing of TSG. From 1991 to
February 1994, Mr. Bartusek served TSG in various capacities including Vice
President of Worldwide Sales and Vice President and General Manager of TSG's
Smart Product Business. From August 1989 to January 1991, Mr. Bartusek served
as Vice President of Marketing of the Public Communication Systems Division of
Executone Information Systems, Inc., a supplier of smart payphone systems.
From 1973 to 1988,

82
<PAGE>

Mr. Bartusek served GTE Communication Systems Corporation in various
capacities including Director of Public Communications and Director of
Advertising and Sales Promotion. Mr. Bartusek holds a B.B.A. degree from
Mankato State University.

William H. Thompson. Mr. Thompson has served as Vice President of Finance,
Chief Financial Officer and Secretary of TSG since February 1994. From 1990 to
1994, he was Vice President of Finance of TSG. Prior to joining TSG, Mr.
Thompson was Controller and Vice President of Finance of Cardiac Control
Systems, Inc., a publicly-held medical device manufacturer, from May 1983 to
May 1988 and Executive Vice President of Operations and Finance from May 1988
to June 1990. From June 1974 to May 1983, he held various positions, most
recently as Audit Manager, with Price Waterhouse LLP, certified public
accountants. Mr. Thompson is a certified public accountant in the state of
Florida and holds a B.S. degree in accountancy from Florida State University.

Allen W. Vogl. Mr. Vogl has served as Vice President of Engineering of TSG
since February 1994 and before that, he served TSG in various capacities since
1981, including Vice President of Engineering, Executive Vice President and
Chief Scientist. From 1972 to 1981, he was employed in various engineering and
research and development capacities by Harris Corporation and Storage
Technology Corporation.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires TSG's officers
and directors, and persons who own more than 10% of a registered class of
TSG's equity securities ("Insiders"), to file reports of ownership and certain
changes in ownership with the Commission and to furnish TSG with copies of
those reports. Based solely on a review of Forms 3 and 4 and amendments
thereto during the most recent fiscal year ended March 28, 1997 and Forms 5
and amendments thereto furnished to TSG with respect to the fiscal year ended
March 28, 1997 and any written representations by Insiders that no Form 5 is
required, Messrs. Abbott, Bartusek, Bisceglia, Davidson, Roussel, Schriner,
Steadman, Thompson and Vogl as well as Wexford each filed late his Form 3,
"Initial Statement of Beneficial Ownership of Securities" (required as a
result of TSG's registration statement relating to its initial public offering
becoming effective on May 10, 1996.)

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT

The following tables sets forth certain information regarding beneficial
ownership of the outstanding TSG Common Stock at October 13, 1997 by (i) each
person known by TSG to own beneficially more than 5% of the outstanding TSG
Common Stock; (ii) each of the directors of TSG; (iii) the executive officers
named in the Summary Compensation Table, "Executive Compensation" and (iv) all
directors and executive officers as a group. 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
October 13, 1997, in accordance with Rule 13d-3(d)(1) of the 1934 Act, but not
the exercise of such warrants and stock options owned by any other person.
Except as otherwise indicated in the footnotes, TSG believes that the
beneficial owners of TSG Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect
to the shares of TSG Common Stock shown as beneficially owned by them.

83
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS

<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER OF COMMON STOCK PERCENTAGE OF CLASS
------------------- ---------------- -------------------
<S> <C> <C>
Wexford Partners Fund, L.P............ 2,444,286 51.9%
411 West Putnam Avenue
Greenwich, CT 06830
Acor S.A.............................. 454,386 9.7%
17 Rue du Colisee
Paris, France 75008
Firlane Business Corp. ............... 235,028 5.0%
Box 202
1211 Geneva 12, Switzerland
A.T.T. IV, NV......................... 549,450(1) 11.7%
c/o Applied Communications
Technologies, Inc.
20 William Street
Wellesley, MA 02181
</TABLE>
- --------
(1) Of these shares, 183,150 shares are subject to purchase at $11.00 per
share, (i) 142,857 shares from Wexford; (ii) 26,557 shares from Acor S.A.;
and (iii) 13,736 shares from Firlane. If the options were exercised in
full, Wexford would beneficially own 2,301,429 shares (48.9%); Acor S.A.
would beneficially own 427,829 shares (9.1%); and Firlane would
beneficially own 221,292 shares (4.7%) of TSG Common Stock.

84
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENTAGE OF CLASS
------------------------ ------------------------- -------------------
<S> <C> <C>
D. Thomas Abbott........... 3,000(1) *
Vincent C. Bisceglia....... 152,656(2) 3.1%
Charles E. Davidson........ 2,457,286(3) 52.0%
Mark L. Plaumann........... 2,444,286(4) 51.9%
Olivier Roussel............ 467,386(5) 9.9%
David R. A. Steadman....... 58,613(6) 1.2%
Darold R. Bartusek......... 36,929(7) *
M. Winton Schriner......... 35,000(7) *
William H. Thompson........ 42,971(8) *
Allen W. Vogl.............. 23,012(9) *
All Directors and Executive
Officers as a Group (10
Persons).................. 3,276,854(10) 64.5%
</TABLE>
- --------
* Represents holdings of less than one percent.
(1) These shares are purchasable within 60 days of October 13, 1997 under a
stock option at $10.71 per share.
(2) Of these shares, 150,000 shares are purchasable within 60 days of October
13, 1997 under a stock option at $1.00 per share.
(3) These shares include 10,000 and 3,000 shares that are purchasable within
60 days of October 13, 1997 under stock options at $8.50 and $10.812 per
share, respectively, and 2,444,286 shares that are owned by Wexford, of
which Mr. Davidson is an affiliate. Mr. Davidson disclaims beneficial
ownership of the shares owned by Wexford.
(4) These shares are owned by Wexford, of which Mr. Plaumann is an affiliate.
Mr. Plaumann disclaims beneficial ownership of these shares.
(5) These shares include 10,000 and 3,000 shares that are purchasable within
60 days of October 13, 1997 under stock options at $8.50 and $10.821 per
share, respectively, and 454,386 shares that are owned by Acor S.A., of
which Mr. Roussel is Chairman and President. Mr. Roussel disclaims
beneficial ownership of the shares owned by Acor S.A.
(6) These shares include 57,500 shares that are purchasable within 60 days of
October 13, 1997 under stock options at prices ranging from $1.00 to $5.00
per share.
(7) These shares include 35,000 shares that are purchasable within 60 days of
October 13, 1997 under stock options at prices ranging from $1.00 to $9.50
per share.
(8) These shares include 42,500 shares that are purchasable within 60 days of
October 13, 1997 under stock options at prices ranging from $1.00 to $9.50
per share.
(9) These shares include 22,500 shares that are purchasable within 60 days of
October 13, 1997 under stock options at prices ranging from $1.00 to $5.00
per share, and 50 shares that are purchasable within 60 days of October
13, 1997 under redeemable warrants at a price of $11.00 per share.
(10) These shares include 2,444,286 shares that are owned by Wexford (as to
which Messrs. Davidson and Plaumann disclaim beneficial ownership);
454,386 shares that are owned by Acor S.A. (as to which Mr. Roussel
disclaims beneficial ownership); and 371,500 shares that are purchasable
within 60 days of October 13, 1997 under stock options at prices ranging
from $1.00 to $10.812 per share.

85
<PAGE>

TSG EXECUTIVE COMPENSATION

This section contains information about compensation, stock options grants
and employment arrangements and other information concerning certain of the
executive officers of TSG.

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation TSG paid for services
rendered during the fiscal years ended March 28, 1997, March 29, 1996 and
March 31, 1995 by the Chief Executive Officer and the four other most highly
compensated executive officers of TSG whose compensation exceeded $100,000 in
fiscal 1997 and who were serving at the end of the 1997 fiscal year.

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
FISCAL SALARY* BONUS COMPENSATION(1) OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- --------------------------- ------ ------- ------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Vincent C.
Bisceglia(1)........... 1997 150,055 71,438 30,729 7,760(2)
President & Chief
Executive Officer 1996 147,200 -- 26,915 5,932
1995 121,970 52,500 37,405 150,000 4,088
M. Winton Schriner...... 1997 114,154 -- -- 25,000 6,794(3)
Executive Vice
President, Operations 1996 80,000 -- -- 15,000 5,638
1995 32,000 -- -- 15,000 1,766
Darold R. Bartusek...... 1997 104,000 -- -- 25,000 7,390(4)
Senior Vice President,
Sales & 1996 104,000 -- -- 15,000 6,282
Marketing 1995 99,600 17,500 -- 15,000 5,754
William H. Thompson(1).. 1997 114,567 -- -- 15,000 7,429(5)
Vice President, Finance,
Chief 1996 107,536 -- -- 10,000 6,063
Financial Officer,
Secretary 1995 102,986 35,000 40,147 30,000 6,029
Allen W. Vogl(1)........ 1997 110,455 -- 28,492 -- 7,037(6)
Vice President,
Engineering 1996 108,400 -- 31,824 15,000 6,456
1995 103,814 35,000 38,269 15,000 6,110
</TABLE>
- --------
* Includes commissions.
(1) Other Compensation with respect to Mr. Bisceglia and Mr. Vogl represents
the estimated incremental costs to TSG of reimbursements and payments of
their travel expenses to and from TSG and their respective residences and
temporary living expenses, and with respect to Mr. Thompson, represents
reimbursement of relocation expenses.
(2) Of this amount, $198 represents the taxable portion of group term life
insurance provided by TSG; $3,279 represents premiums paid by TSG for
split-dollar universal life insurance; $2,284 represents premiums paid by
TSG for long-term disability insurance; and $1,999 represents
contributions made by TSG to the 401(k) Profit Sharing Retirement Plan for
the account of the executive.
(3) Of this amount, $403 represents the taxable portion of group term life
insurance provided by TSG; $3,713 represents premiums paid by TSG for
split-dollar universal life insurance; $2,234 represents premiums paid by
TSG for long-term disability insurance; and $444 represents contributions
made by TSG to the 401(k) Profit Sharing Retirement Plan for the account
of the executive.
(4) Of this amount, $311 represents the taxable portion of group term life
insurance provided by TSG; $3,494 represents premiums paid by TSG for
split-dollar universal life insurance; $2,503 represents premiums paid by
TSG for long-term disability insurance; and $1,082 represents
contributions made by TSG to the 401(k) Profit Sharing Retirement Plan for
the account of the executive.
(5) Of this amount, $139 represents the taxable portion of group term life
insurance provided by TSG; $3,725 represents premiums paid by TSG for
split-dollar universal life insurance; $2,418 represents premiums paid by
TSG for long-term disability insurance; and $1,147 represents
contributions made by TSG to the 401(k) Profit Sharing Retirement Plan for
the account of the executive.
(6) Of this amount, $214 represents the taxable portion of group term life
insurance provided by TSG; $3,581 represents premiums paid by TSG for
split-dollar universal life insurance; $2,773 represents premiums paid by
TSG for long-term disability insurance; and $469 represents contributions
made by TSG to the 401(k) Profit Sharing Retirement Plan for the account
of the executive.

86
<PAGE>

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table sets forth certain information with respect to options
to purchase shares of TSG Common Stock that were granted to each of TSG's
executive officers named in the Summary Compensation Table, above, during the
fiscal year ended March 28, 1997.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
NUMBER OF PERCENT OF TOTAL FOR OPTION TERM
SECURITIES OPTIONS GRANTED EXERCISE ---------------------
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME OPTIONS FISCAL YEAR 1997 ($) DATE ($) ($)
---- ---------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Bisceglia.... None -- -- -- -- --
M. Winton Schriner(1)... 25,000 13% 9.50 07/23/06 149,362 378,513
Darold R. Bartusek(1)... 25,000 13% 9.50 07/23/06 149,362 378,513
William H. Thompson(1).. 15,000 8% 9.50 07/23/06 89,617 227,108
Allen W. Vogl........... None -- -- -- -- --
</TABLE>
- --------
(1) These options were granted at an exercise price equal to the per share
market value of TSG Common Stock on the grant date and vest in four equal
annual installments on the grant date and the first three anniversaries of
the grant date. In the event of a change in control of TSG, 50% of the
shares not then exercisable will become fully exercisable. This will occur
if the Merger is consummated.
(2) The potential realizable value is calculated based on the term of the
option (ten 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 TSG's stock price in fact increases over the option price.

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth for each of TSG's executive officers named in
the Summary Compensation Table, certain information regarding exercises of
stock options during the fiscal year ended March 28, 1997 and stock options
held at that date. The "Value of Unexercised In-the-Money Options at Fiscal
Year End" is based on the difference between the market price of the TSG
Common Stock subject to the option on March 28, 1997 ($5.25 per share) and the
option exercise (purchase) price per share. During fiscal 1997, there were no
option exercises by any of the executive officers named in the Summary
Compensation Table.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END(#) OPTIONS AT FISCAL YEAR END($)
----------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Vincent C. Bisceglia.... 12,500 37,500 478,125 159,375
M. Winton Schriner...... 25,000 30,000 49,687 17,812
Darold R. Bartusek...... 25,000 30,000 49,687 17,812
William H. Thompson..... 31,250 23,750 96,875 33,125
Allen W. Vogl........... 18,750 11,250 49,687 17,812
</TABLE>

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

Mr. Bisceglia. On October 31, 1994, TSG and Mr. Bisceglia entered into an
employment agreement that expires on December 31, 1997, subject to certain
early termination provisions and automatic renewal provisions. Pursuant to the
agreement, Mr. Bisceglia serves as the President and Chief Executive Officer
and as a director of TSG and is paid an annual salary of at least $147,200.
His base salary is subject to annual review for merit and other increases at
the discretion of the TSG Board as of January 1, 1996 and each year
thereafter, and as a result of such reviews, Mr. Bisceglia's annual salary was
increased to $160,000 per year on January 1, 1997.

87
<PAGE>

Pursuant to the terms of the agreement, Mr. Bisceglia is entitled to the
same benefits made available to the other senior executives of TSG on the same
terms and conditions as such executives. The agreement provides that TSG will
reimburse and/or pay on Mr. Bisceglia's behalf up to $4,000 per month of
temporary living expenses, including travel to and from TSG and Mr.
Bisceglia's residence, until TSG requires Mr. Bisceglia to relocate, at TSG's
expense. Mr. Bisceglia is also entitled to receive an incentive bonus for each
fiscal year during the term of the agreement equal to 2% of the operating
profits of TSG, defined as net income before taxes, amortization and
depreciation, interest, gains and losses arising from revaluation of assets,
and charges or allocations by a parent or affiliated company except to the
extent that such charges are for expenses that directly relate to the
operations of TSG.

Pursuant to the terms of this agreement, Mr. Bisceglia was granted an option
to purchase 150,000 shares of TSG Common Stock at an exercise price of $1.00
per share under TSG's 1994 Omnibus Stock Plan. The shares subject to the
option become exercisable in four equal annual installments commencing on the
date of grant. In the event TSG's majority shareholder, Wexford, ceases to own
at least 51% of TSG's outstanding voting stock, the option becomes exercisable
in full. Upon consummation of the Merger, the option will become exercisable
in full. The option expires ten years from the date of grant, unless earlier
terminated upon termination of Mr. Bisceglia's employment for cause or upon
Mr. Bisceglia's resignation. The agreement contains provisions that require
TSG, at the option of Mr. Bisceglia, to purchase unexercised option shares at
market value if Mr. Bisceglia's employment is terminated by TSG for reasons
other than cause. Otherwise, the option remains in effect until its expiration
date.

If the agreement is terminated by TSG without cause, Mr. Bisceglia is
entitled to receive the amount of compensation and benefits he would otherwise
have received for the remaining term of the agreement or for six months,
whichever period is longer. The agreement is automatically renewed for
additional one-year periods unless TSG provides Mr. Bisceglia 180 days' notice
of non-renewal or Mr. Bisceglia provides TSG with 120 days' notice of
termination on December 31, 1997, or on any date thereafter.

Pursuant to the agreement, Mr. Bisceglia is indemnified by TSG with respect
to claims made against him as a director, officer, and/or employee of TSG or
any subsidiary of TSG to the fullest extent permitted by TSG's Certificate of
Incorporation, its Bylaws and Delaware Law.

Mr. Steadman. Mr. Steadman is employed by TSG pursuant to an agreement dated
October 31, 1994 at the rate of $5,000 per month plus $500 per day for each
day spent on TSG business outside of the New England area (in which Mr.
Steadman's office is located), but not to exceed $7,500 in any one month.
Pursuant to the agreement, Mr. Steadman is elected Chairman of the TSG Board
and in that capacity renders advice to the Board and management on business,
operational and financial matters. Mr. Steadman is entitled to participate in
employee benefit plans made available to other senior executives of TSG. The
agreement also provided for the grant to Mr. Steadman of an option to purchase
50,000 shares of TSG Common Stock at an exercise price of $1.00 per share. The
option has substantially the same terms as those of Mr. Bisceglia's option
described above.

Other Officers. Effective July 1, 1996, TSG adopted a policy regarding all
officers of TSG, which is described under the heading "Report of the
Compensation Committee on Executive Compensation--Other Executive Officers."

Notwithstanding anything to the contrary set forth in any of TSG's filings
under the 1933 Act or the 1934 Act that might incorporate future filings,
including any Annual Report on Form 10-K in whole or in part, the following
report of the Compensation Committee, and the Performance Graph, will not be
deemed to be incorporated by reference into any such filings.

88
<PAGE>

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

This report has been prepared by the Compensation Committee of the TSG Board
and addresses TSG's compensation policies with respect to the Chief Executive
Officer and executive officers of TSG in general for the fiscal year ended
March 28, 1997. Except for Mr. Steadman, each member of the Committee is a
non-employee director. Mr. Steadman's compensation is based on his employment
agreement, described above, which was approved by the TSG Board in November
1994.

Compensation Policy

The overall intent of the Committee in respect of executive officers is to
establish levels of compensation that provide appropriate incentives in order
to command high levels of individual performance and thereby increase the
value of TSG to its stockholders, and that are sufficiently competitive to
retain and attract the skills required for the success and profitability of
TSG. The principal components of executive compensation are salary, bonus and
stock options.

Chief Executive Officer's Compensation

The Chief Executive Officer's compensation for fiscal 1997 is based on a
written employment agreement that was negotiated and entered into between him
and TSG in October 1994 and is described above under the heading "Employment
Contracts and Termination of Employment and Change-in-Control Arrangements."
The salary in the agreement was determined to be appropriate by the members of
the Committee at the time the agreement was entered into based on the
financial and legal difficulties that TSG had experienced; the expertise and
responsibility that the position requires; the Chief Executive Officer's
experience with TSG in other capacities; and the subjective judgment of
Committee members of a reasonable compensation level. The increase in salary
granted by the Committee in January 1997 was based on Mr. Bisceglia's
performance during fiscal 1997 and that of TSG as a whole and the subjective
judgment of Committee members of a reasonable raise.

Other Executive Officers

Officers' Policy. Effective July 1, 1996, TSG adopted a policy regarding all
officers of TSG to acknowledge that they have extra duties and
responsibilities and that they are held to a higher standard of performance
than employees generally. The policy provides, among other things, for TSG-
paid life insurance for each officer in the amount of two and one-half times
base salary; long-term disability insurance coverage; the establishment of an
annual pool of funds from TSG's operating profits for the payment of bonuses;
severance benefits in the event the officer's employment is terminated without
cause consisting of a minimum of continued payment of two months' salary and a
maximum of four months' salary, plus the continuation of TSG benefits during
the period of continued salary payment; and the acceleration of one-half of
the officer's unvested option shares in the event of a sale of substantially
all of the assets of TSG or a person or entity acquires more than 51% of the
outstanding voting stock of TSG. This acceleration will occur if the Merger is
consummated. The policy also provides the same level of indemnity as for Mr.
Bisceglia, described above.

Salary. During fiscal 1997, the salary of each executive officer other than
the salary of the Chairman and the Chief Executive Officer (described above
under the heading "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements") was based on the level of his prior salary
and on the subjective judgment of members of the Committee as to what
constitutes a compensation level that is fair and calculated to retain the
executive in TSG's employ. In the case of one executive officer, his salary
increase was also based on a promotion to a new position with increased
responsibilities.

Bonuses. In July 1996, pursuant to the Officers' Policy described above, the
Compensation Committee adopted a bonus plan for the 1997 fiscal year covering
officers which also covers key employees of TSG other than those covered under
a sales bonus plan of TSG. Bonuses under the plan are to be paid out of a pool
of funds equal to 15% of the net income of TSG (i) before taxes and before the
payment of any bonuses paid outside

89
<PAGE>

of the plan (such as to the Chief Executive Officer pursuant to his employment
agreement) and (ii) after deducting an amount equal to 15% of stockholders'
equity. The allocation of the fund to individual officers and key employees is
based on the recommendations to the Compensation Committee of the Chairman and
Chief Executive Officer. The decision of the Compensation Committee is final
and is based the recommendations it receives and the subjective judgment of
members of the Committee. The bonus plan was renewed for the year ending April
3, 1998.

Mr. Bartusek's incentive bonus compensation as Senior Vice President of
Sales and Marketing is based on the difference between TSG's quarterly
revenues in fiscal 1996 and the corresponding quarterly revenues in fiscal
1997. If 1997 quarterly revenues meet a minimum target established for each
quarter, he is paid a percentage of the difference. The plan was based on the
budgeted revenues for fiscal 1997 and the subjective judgment of the members
of the Committee as to the appropriate level of incentive payment if the
budgeted minimum quarterly revenues are achieved. Payment of the incentive
compensation is made only after TSG's year-end audit has been completed.

In July 1997, a new incentive bonus compensation plan for Mr. Bartusek was
adopted for TSG's 1998 fiscal year. Mr. Bartusek's incentive bonus
compensation as Senior Vice President of Sales and Marketing will be based on
the difference between (i) TSG's quarterly revenues in fiscal 1998 and 80% of
targeted revenues for fiscal 1998 and (ii) TSG's annual gross profit margin
for fiscal 1998 and 80% of targeted gross profit margin for fiscal 1998. If
quarterly revenues for a quarter exceed 80% of targeted revenues for that
quarter, Mr. Bartusek will receive a bonus based on a percentage of the
excess. If annual gross profit exceeds 80% of targeted gross profit for the
year, Mr. Bartusek will receive a bonus based on a percentage of the excess to
the extent of attainment of quarterly objectives as evaluated by the
Committee. Bonuses based on quarterly revenues will be paid at the end of each
quarter. The bonus based on gross profit will be paid at the end of the fiscal
year.

Stock Options. Stock options are granted by the Stock Plans Committee of the
TSG Board. The Stock Plans Committee believes that stock ownership by
executive officers is important in aligning management's and stockholders'
interests in the enhancement of stockholder value over the long term. For
options granted during fiscal 1997, the exercise price was equal to the market
price of the TSG Common Stock on the date of grant. The stock option grants
made to the executive officers in fiscal 1997 were made based on the
subjective judgment of the Committee members of the appropriate recognition
for their services to TSG during the 1997 fiscal year and prior years.

Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code (enacted in 1993) generally disallows a tax deduction to
public companies for compensation over $1million paid to its chief executive
officer and its four other most highly compensated executives. The
compensation payable by TSG to any one executive officer (including potential
income from outstanding stock options) is currently and for the foreseeable
future unlikely to reach that threshold. Qualifying, performance-based
compensation will not be subject to the deduction limit if certain
requirements are met. The Committee currently intends to structure stock
option grants to executive officers in a manner that complies with the
performance-based requirements of the statute.

<TABLE>
<S> <C>
The Compensation Committee: Charles E. Davidson
Mark L. Plaumann
David R. A. Steadman

Stock Plans Committee: Charles E. Davidson
Mark L. Plaumann
</TABLE>

90
<PAGE>

DIRECTORS' COMPENSATION

Directors who are employees of TSG receive no compensation, as such, for
services as members of the Board. Directors who are not employees of TSG
receive no cash compensation for their services as directors. Mr. Steadman,
who is an employee of TSG, receives compensation as such. See "Compensation
Committee Interlocks and Insider Participation." All directors are reimbursed
for their out-of-pocket business expenses incurred in attending Board meetings
and for performing any other services for TSG.

Non-employee directors of TSG receive "formula" stock option grants under
TSG's 1995 Non-Employee Director Stock Option Plan approved by stockholders on
May 10, 1995. Each non-employee director serving on the date that TSG's
initial registration statement became effective (May 10, 1996) was
automatically granted an option to purchase 10,000 shares of TSG Common Stock
(the "Initial Grants") that became fully exercisable six months after the
grant date. After the Initial Grants, each non-employee director is
automatically granted an additional option to purchase 3,000 shares on each
anniversary of September 1, 1996 so long as he is then serving as a non-
employee director. Each non-employee director first elected to the TSG Board
after May 10, 1996 automatically receives an option to purchase 3,000 shares
of TSG Common Stock on the date of his or her election and, so long as he or
she is then serving as a non-employee director, an additional option to
purchase 3,000 shares of TSG Common Stock on each anniversary of that date.
All options under such Plan are granted at an exercise price per share equal
to the market value of a share of TSG Common Stock on the date of grant.
Except for the Initial Grants, all options vest in full on the first
anniversary of the grant date.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Decisions concerning executive compensation (other than that of the
Chairman) are made by the Compensation Committee of the TSG Board, which
currently consists of Messrs. Davidson, Plaumann and Steadman. Mr. Steadman is
Chairman of the TSG Board and an employee of TSG; Messrs. Davidson and
Plaumann are neither officers nor employees of TSG or any of its subsidiaries.
During fiscal 1997, no executive officer of TSG served as a director or member
of a compensation committee of another entity with which any director of TSG
had any relationship as a director or officer, except that Mr. Steadman is
Chairman of the Board of Directors and a member of the Compensation Committee
of Wahlco Environmental Systems, Inc., of which Mr. Plaumann is a director and
former President.

Mr. Steadman was elected Chairman of the TSG Board and is employed by TSG
pursuant to an employment agreement that is described under the heading
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements." In fiscal 1997, Mr. Steadman received compensation of $69,000,
plus the reimbursement of $11,003 of out-of-pocket expenses incurred in
rendering services to TSG, and was also granted a stock option to purchase
15,000 shares of TSG Common Stock at $5.00 per share.

Pursuant to an acquisition in January 1991 of the assets of the Public
Communication Systems Division of Executive Information Systems, Inc. ("PCS"),
TSG was obligated to pay OAB, Inc. royalties of 3.5% of TSG's sales of
microprocessor-based components through June 30, 1996. Mr. Bartusek and
certain other employees of TSG, who were employees of PCS, are stockholders of
OAB. Royalty payments under this agreement during fiscal 1997 through the June
30, 1996 expiration date were approximately $420,100 (including payments of
accrued royalties at March 29, 1996 and debt payments on notes issued in
respect of accrued royalties), of which Mr. Bartusek received approximately
$80,000.

Wexford and Acor S.A. are parties to an Investment Agreement pursuant to
which they acquired $2,361,082 and $438,918, respectively, of 10% subordinated
notes of TSG in 1994. In May 1996, TSG repaid the principal balances of these
notes in full--$2,361,082 to Wexford and $438,918 to Acor S.A. Interest paid
on the notes to Wexford and Acor S.A. during fiscal 1997 was $128,081 and
$23,810, respectively.

91
<PAGE>

PERFORMANCE GRAPH

The following graph assumes an investment of $100 on May 10, 1996 (the date
the TSG Common Stock was first registered under Section 12 of the 1934 Act)
and compares yearly changes thereafter (through March 28, 1997) in the market
price of the Common Stock with (i) the Nasdaq Market Index for U.S. Companies
(a broad market index) and (ii) the Nasdaq Telecommunications Index, a
published industry index.

The performance of the indices is shown on a total return (dividend
reinvestment) basis; however, TSG paid no dividends during the period shown.
The graph lines merely connect the beginning and end of the measuring periods
and do not reflect fluctuations between those dates.

Stock Performance Chart

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
MAY 10, 1996 MARCH 28, 1997
------------ --------------
<S> <C> <C>
Technology Service Group, Inc. ..................... $ 100.00 $54.70
Nasdaq Market Index for U.S. Companies.............. 100.00 98.20
Nasdaq Telecommunications Index..................... 100.00 84.93
</TABLE>

92
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF TSG

Reference is made to "Compensation of Directors" and "Compensation Committee
Interlocks and Insider Participation" in "Executive Compensation," above.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION IS PRESENTED FOR
INFORMATIONAL PURPOSES ONLY AND IS NOT NECESSARILY INDICATIVE OF THE OPERATING
RESULTS OR FINANCIAL POSITION THAT WOULD HAVE OCCURRED, NOR IS IT NECESSARILY
INDICATIVE OF THE FUTURE OPERATING RESULTS OR FINANCIAL POSITION OF ELCOTEL
FOLLOWING THE MERGER OR THE LUCENT ACQUISITION.

The following tables set forth certain unaudited pro forma consolidated
financial information of Elcotel after giving effect to the Merger and the
Lucent Acquisition. The unaudited pro forma consolidated balance sheet set
forth below was prepared as if the Merger and the Lucent Acquisition had been
consummated on June 30, 1997. The unaudited pro forma consolidated statements
of operations for the year ended March 31, 1997 and three months ended June
30, 1997 set forth below were prepared as if the Merger and the Lucent
Acquisition had been consummated on April 1, 1996.

The unaudited pro forma financial information presented below has been
prepared assuming the Merger and the Lucent Acquisition are accounted for
using the purchase method of accounting. Accordingly, the unaudited pro forma
consolidated balance sheet assumes that (1) the Merger consideration,
consisting of (i) the fair value of securities to be issued by Elcotel to
effect the Merger, (ii) the fair value of outstanding common stock, options
and warrants of TSG to be converted into Elcotel securities, and (iii) the
estimated direct costs and expenses to be incurred by Elcotel in connection
with the transaction, is allocated to the assets and liabilities of TSG based
on their estimated fair values and (2) the aggregate purchase price related to
the Lucent Acquisition is allocated to the assets acquired based on their
estimated fair values.

The unaudited pro forma consolidated financial information presented below
reflects pro forma adjustments that are directly attributable to the Merger
and the Lucent Acquisition and the use of the purchase method of accounting.
The accompanying unaudited pro forma consolidated statements of operations do
not reflect anticipated cost reductions or revenue enhancements expected to be
realized from the Merger or the anticipated revenues, gross profit and
operating expenses from the Lucent Acquisition. Accordingly, the unaudited pro
forma consolidated statements of operations for the year ended March 31, 1997
and three months ended June 30, 1997 are not necessarily indicative of the
consolidated results of operations as they might have been had the Merger and
Lucent Acquisition actually occurred on the dates indicated, nor are they
necessarily indicative of future results.

93
<PAGE>

ELCOTEL AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

JUNE 30, 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
TSG LUCENT
MERGER ACQUISITION
PRO FORMA PRO FORMA PRO
ELCOTEL TSG ADJUSTMENTS ADJUSTMENTS FORMA
------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary
investments............. $ 1 $ 100 $ -- $ -- $ 101
Accounts and notes
receivable.............. 7,297 3,162 -- -- 10,459
Inventories.............. 3,561 9,781 (3,039)(a) 3,999(g) 14,302
Refundable income taxes.. 95 301 -- -- 396
Deferred tax asset....... 692 350 2,246(a) -- 3,288
Prepaid expenses and
other current assets.... 499 113 -- -- 612
------- ------- ------- ------ -------
Total current assets... 12,145 13,807 (793) 3,999 29,158
Property, plant and
equipment............... 3,287 724 116(a) 500(g) 4,627
Notes receivable......... 692 -- -- -- 692
Deferred tax asset....... 799 -- (799)(a) -- --
Intangible assets........ -- 3,999 25,550(a) 1,541(g) 31,090
Other assets............. 281 38 -- 54(h) 373
------- ------- ------- ------ -------
$17,204 $18,568 $24,074 $6,094 $65,940
======= ======= ======= ====== =======
LIABILITIES AND STOCKHOLD-
ERS' EQUITY
Current liabilities:
Bank overdraft........... $ -- $ 324 $ -- $ -- $ 324
Accounts payable and
accrued expenses........ 3,295 2,680 1,385(b) -- 7,360
Notes payable and
borrowings under lines
of credit............... 525 2,400 -- 3,044(i) 5,969
Current portion of long-
term debt............... 199 -- -- 436(j) 635
------- ------- ------- ------ -------
Total current
liabilities........... 4,019 5,404 1,385 3,480 14,288
Long-term debt........... 183 -- -- 2,614(k) 2,797
Deferred tax liability... -- -- 973(a) -- 973
------- ------- ------- ------ -------
Total liabilities...... 4,202 5,404 2,358 6,094 18,058
======= ======= ======= ====== =======
Stockholders' equity:
Common stock............. 82 47 3(c) -- 132
Capital in excess of par
value................... 11,160 11,963 22,867(d) -- 45,990
Retained earnings........ 1,937 1,160 (1,160)(e) -- 1,937
Cumulative translation
adjustment.............. -- (6) 6(f) -- --
Less treasury stock...... (177) -- -- -- (177)
------- ------- ------- ------ -------
13,002 13,164 21,716 -- 47,882
------- ------- ------- ------ -------
$17,204 $18,568 $24,074 $6,094 $65,940
======= ======= ======= ====== =======
</TABLE>

The accompanying notes are an integral part of this unaudited pro forma
consolidated financial information.

94
<PAGE>

ELCOTEL AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
TSG LUCENT
MERGER ACQUISITION
PRO FORMA PRO FORMA PRO
ELCOTEL TSG ADJUSTMENTS ADJUSTMENTS FORMA
------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Net sales............... $26,832 $33,472 $ -- $ -- $60,304
======= ======= ====== ===== =======
Costs and expenses:
Cost of goods sold.... 15,883 26,639 (36)(l) 100 (o) 42,586
Selling, general and
administrative
expenses............. 6,358 3,272 1,231(m) 261 (p) 11,122
Engineering, research
and development
expenses............. 2,623 1,777 -- 4,400
Interest (income)
expense.............. (205) 400 -- 490 (q) 685
Other (income)
charges.............. (331) (159) -- -- (490)
------- ------- ------ ----- -------
24,328 31,929 1,195 851 58,303
------- ------- ------ ----- -------
Income before income tax
(expense) benefit...... 2,504 1,543 (1,195) (851) 2,001
Income tax (expense)
benefit................ (876) (533) 323(n) 298 (r) (788)
------- ------- ------ ----- -------
Net income.............. $ 1,628 $ 1,010 $ (872) $(553) $ 1,213
======= ======= ====== ===== =======
Income per common and
common equivalent
share:
Primary............... $ 0.20 $ .09
======= =======
Assuming full
dilution............. $ 0.20 $ .09
======= =======
Weighted average number
of common and common
equivalent shares
outstanding:
Primary............... 8,316 13,667
======= =======
Assuming full
dilution............. 8,316 13,667
======= =======
</TABLE>

The accompanying notes are an integral part of this unaudited pro forma
consolidated financial information.

95
<PAGE>

ELCOTEL AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
TSG LUCENT
MERGER ACQUISITION
PRO FORMA PRO FORMA PRO
ELCOTEL TSG ADJUSTMENTS ADJUSTMENTS FORMA
------- ------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Net sales................... $6,753 $6,217 $ -- $ -- $12,970
====== ====== ===== ===== =======
Costs and expenses:
Cost of goods sold........ 3,838 5,123 25(l) 25(o) 9,011
Selling, general and
administrative expenses.. 1,695 718 273(m) 65(p) 2,751
Engineering, research and
development expenses..... 708 292 -- -- 1,000
Interest (income)
expense.................. (63) 72 -- 121(q) 130
Other (income)............ -- (14) -- -- (14)
------ ------ ----- ----- -------
6,178 6,191 298 211 12,878
------ ------ ----- ----- -------
Income before income tax
(expense) benefit.......... 575 26 (298) (211) 92
Income tax (expense)
benefit.................... (200) 12 25(n) 74(r) (89)
------ ------ ----- ----- -------
Net income.................. $ 375 $ 38 $(273) $(137) $ 3
====== ====== ===== ===== =======
Income per common and common
equivalent share:
Primary................... $ 0.05 $ .00
====== =======
Assuming full dilution.... $ 0.05 $ .00
====== =======
Weighted average number of
common and common
equivalent shares
outstanding:
Primary................... 8,301 13,635
====== =======
Assuming full dilution.... 8,301 13,635
====== =======
</TABLE>

The accompanying notes are an integral part of this unaudited pro forma
consolidated financial information.

96
<PAGE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

BASIS OF PRESENTATION

The accompanying unaudited pro forma consolidated financial information is
derived from and should be read in conjunction with the historical
consolidated financial statements and the related notes thereto of Elcotel and
TSG appearing elsewhere in this Joint Proxy Statement-Prospectus or
incorporated by reference herein.

The unaudited pro forma consolidated balance sheet was prepared as if the
Merger and the Lucent Acquisition had been consummated on June 30, 1997. The
unaudited pro forma consolidated statements of operations for the year ended
March 31, 1997 and three months ended June 30, 1997 were prepared as if the
Merger and the Lucent Acquisition had been consummated on April 1, 1996.

The unaudited pro forma consolidated financial information has been prepared
assuming the Merger and the Lucent Acquisition are accounted for using the
purchase method of accounting. Accordingly, the accompanying unaudited pro
forma consolidated balance sheet assumes that (1) the Merger consideration,
consisting of (i) the fair value of securities to be issued by Elcotel to
effect the Merger, (ii) the fair value of outstanding common stock, options
and warrants of TSG to be converted into Elcotel securities and (iii) the
estimated direct costs and expenses to be incurred by Elcotel in connection
with the transaction (collectively, the "merger consideration" or the
"purchase price"), is allocated to the assets and liabilities of TSG based on
their estimated fair values and (2) the aggregate purchase price related to
the Lucent Acquisition is allocated to the assets acquired based on their
estimated fair values.

The unaudited pro forma consolidated financial information reflects pro
forma adjustments that are directly attributable to the Merger and the Lucent
Acquisition and the use of the purchase method of accounting. The accompanying
unaudited pro forma consolidated statements of operations do not reflect
anticipated cost reductions or revenue enhancements expected to be realized
from the Merger or the anticipated revenues, gross profit and operating
expenses from the Lucent Acquisition. Accordingly, the unaudited pro forma
consolidated statements of operations for the year ended March 31, 1997 and
three months ended June 30, 1997 are not necessarily indicative of the
consolidated results of operations as they might have been had the Merger and
Lucent Acquisition actually occurred on the dates indicated, nor are they
necessarily indicative of future results.

MERGER CONSIDERATION

The Merger consideration has been estimated based on the terms of the Merger
Agreement and assuming the Merger had been consummated on June 30, 1997. The
estimated merger consideration is summarized as follows:

<TABLE>
<S> <C>
Issuance of 4,936,848 shares of Elcotel Common Stock at a market
price of $6.50 per share in exchange for 4,701,760 issued and
outstanding shares of TSG Common Stock (based on an exchange ratio
of 1.05 to 1)..................................................... $ 32,090
Fair value of outstanding common stock warrants, options and
purchase rights of TSG............................................ 2,535
Estimated costs and expenses of the Merger......................... 855
--------
Total merger consideration....................................... $ 35,480
========
</TABLE>

The average closing market price of Elcotel Common Stock for a period of
four days before and after the terms of the Merger were announced to the
public of $6.50 per share has been used to determine the fair value of the
shares of Elcotel Common Stock to be issued by Elcotel in connection with the
Merger.

97
<PAGE>

At June 30, 1997, there were outstanding warrants to purchase 575,000 shares
of TSG Common Stock at an exercise price of $11 per share (the "Public
Warrants"), warrants to purchase 100,000 shares of TSG Common Stock at a price
of $10.80 per share (the "Underwriter Warrants") and options and rights to
purchase an aggregate of 587,341 shares of TSG Common Stock at exercise prices
ranging from $1.00 per share to $10.812 per share under TSG's 1994 Omnibus
Stock Plan (the "Stock Plan"), 1995 Non-Employee Director Stock Option Plan
(the "Director Plan") and 1995 Employee Stock Purchase Plan (the "Employee
Plan"). Under the terms of the Merger Agreement, Elcotel has agreed to convert
into Elcotel securities outstanding warrants, options and rights to purchase
TSG Common Stock, subject to adjustment pursuant to the terms of the Merger
Agreement. Accordingly, the estimated fair value of outstanding common stock
warrants, options and rights to purchase TSG Common Stock is included as a
component of the merger consideration.

The following table summarizes the number and exercise prices of stock
options and purchase rights outstanding under the Stock Plan, Director Plan
and Employee Plan at June 30, 1997, and as adjusted after giving effect to the
Merger, and their estimated fair values:

<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF OPTIONS EXERCISE
OPTIONS OUTSTANDING EXERCISE PRICE FAIR
OUTSTANDING (AS ADJUSTED) PRICE (AS ADJUSTED) VALUE
----------- ------------- -------- ------------- ------
<S> <C> <C> <C> <C>
337,125 353,981 $ 1.00 $ .95 $1,813
83,000 87,150 5.00 4.76 252
3,000 3,150 5.25 5.00 9
30,000 31,500 8.50 8.10 54
117,625 123,506 9.50 9.05 55
4,250 4,463 10.781 10.27 5
6,000 6,300 10.812 10.30 8
6,341 6,658 6.03 5.74 6
------- ------- ------
587,341 616,708 $2,202
======= ======= ======
</TABLE>

The following table summarizes the number and exercise prices of common
stock purchase warrants outstanding at June 30, 1997, and as adjusted after
giving effect to the Merger, and their estimated fair values:

<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF WARRANTS EXERCISE
WARRANTS OUTSTANDING EXERCISE PRICE FAIR
OUTSTANDING (AS ADJUSTED) PRICE (AS ADJUSTED) VALUE
----------- ------------- -------- ------------- -----
<S> <C> <C> <C> <C>
575,000 603,750 $ 11.00 $10.48 $162
100,000 105,000 10.80 10.29 171
------- ------- ----
675,000 708,750 $333
======= ======= ====
</TABLE>

98
<PAGE>

The estimated fair value of the Public Warrants has been determined based on
the closing market price of the securities on June 30, 1997. The estimated
fair value of the Underwriter Warrants and outstanding common stock options
and purchase rights of TSG has been determined using the Black-Scholes option
pricing model. The significant weighted-average assumptions used to estimate
the fair value of the Underwriter Warrants and common stock options and
purchase rights of TSG outstanding at June 30, 1997 are summarized below:

<TABLE>
<S> <C>
Underwriter Warrants:
Expected volatility.............................................. 54.4%
Expected life.................................................... 3 years
Risk-free interest rate.......................................... 6.25%
Expected dividend yield.......................................... None
Stock Plan:
Expected volatility.............................................. 54.4%
Expected life.................................................... 2.5 years
Risk-free interest rate.......................................... 6.25%
Expected dividend yield.......................................... None
Employee Plan:
Expected volatility.............................................. 54.4%
Expected life.................................................... 1/2 year
Risk-free interest rate.......................................... 5.34%
Expected dividend yield.......................................... None
Director Plan:
Expected volatility.............................................. 54.4%
Expected life.................................................... 2 years
Risk-free interest rate.......................................... 6.08%
Expected dividend yield.......................................... None
</TABLE>

The estimated direct costs and expenses to be incurred by Elcotel in
connection with the Merger and included as a component of the merger
consideration are estimated as follows:

<TABLE>
<S> <C>
Investment banking fees............................................... $ 525
Fairness opinion...................................................... 107
Legal fees............................................................ 65
Accounting and valuation fees......................................... 42
Printing expenses..................................................... 50
Other................................................................. 66
-----
Total............................................................... $ 855
=====
</TABLE>

Under the terms of an agreement dated April 1, 1997, Elcotel retained
Cameron Associates ("Cameron") to provide investment banking services and
render financial and business advice to Elcotel with respect to a strategic
business combination. Elcotel agreed to pay Cameron an aggregate fee of $325,
including expenses, upon consummation of a transaction. The fee is payable
either in cash or in shares of Elcotel Common Stock. Elcotel intends to issue
50,000 shares of its Common Stock upon consummation of the Merger in
satisfaction of the obligation in accordance with the terms of the agreement.

Under the terms of an agreement dated July 17, 1997, TSG retained Wexford
Management, an affiliate of TSG's majority stockholder, Wexford, to provide
assistance and render financial and business advice to TSG in connection with
the Merger. TSG agreed to pay Wexford Management an aggregate fee of $200,
including expenses, upon consummation of the Merger or other transaction
involving the sale or exchange of all or substantially all of TSG's common
stock. The fee is payable in cash or, at the option of Elcotel, in shares of
Elcotel Common Stock. Elcotel intends to issue 30,769 shares of Elcotel Common
Stock upon consummation of the Merger in satisfaction of its obligations under
the terms of the agreement.

99
<PAGE>

LUCENT ACQUISITION PURCHASE PRICE

On September 30, 1997, Elcotel acquired from Lucent certain assets related
to Lucent's payphone manufacturing and component parts business. The purchase
price, including Elcotel's estimated acquisition expenses of $150, was $6,040,
subject to adjustment based on the difference between the book value of
inventories determined pursuant to the acquisition agreement and $3,849.
Assets acquired from Lucent included inventories, machinery, equipment,
tooling and certain other assets related to the payphone manufacturing and
component parts business conducted by Lucent, as well as a license of certain
patent and other intellectual property rights related thereto.

Elcotel borrowed an aggregate of $6,850 under the terms of bank promissory
notes to finance the Lucent Acquisition, including acquisition expenses, debt
issuance expenses of $57 and other general corporate activities, including
acquisition of equipment. These notes consisted of an installment note in the
principal amount of $3,050 payable in eighty four equal monthly installments
of $37, a term note in the principal amount of $2,850 due March 31, 1998 and a
term note in the principal amount of $950 due March 31, 1998. The notes are
collateralized by the assets of Elcotel and bear interest at the Libor rate
plus 2.25 percentage points (7.9% upon issuance). Proceeds from notes from
Elcotel's bank were used to finance the purchase price, including expenses,
and the debt issuance expenses related to the Lucent Acquisition, which
aggregated $6,094. See "Unaudited Pro Forma Balance Sheet Adjustments Related
to the Lucent Acquisition."

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS RELATED TO THE
MERGER

Elcotel has estimated the adjustments to the historical accounts of TSG
required to allocate the Merger consideration to the assets and liabilities of
TSG based on their estimated fair values. The allocations are subject to final
determinations based on independent appraisals and other evaluations of fair
value as of the date of consummation of the Merger. Therefore, the allocations
reflected in the accompanying unaudited consolidated financial information may
differ from the amounts ultimately determined. Unless otherwise indicated,
differences between the amounts included herein and the final allocations are
not expected to have a material effect on the unaudited pro forma consolidated
financial information.

A summary of the allocation of the Merger consideration to the assets and
liabilities of TSG as of June 30, 1997 based on Elcotel's estimates of their
fair value is set forth below.

<TABLE>
<S> <C>
Cash and temporary investments...................................... $ 100
Accounts and notes receivable....................................... 3,162
Inventories......................................................... 6,742
Refundable income taxes............................................. 301
Deferred tax asset, current......................................... 2,596
Prepaid expenses and other current assets........................... 113
Property, plant and equipment....................................... 840
Intangible assets................................................... 7,294
Other assets........................................................ 38
Bank overdraft...................................................... (324)
Accounts payable and accrued expenses............................... (3,465)
Borrowings under lines of credit.................................... (2,400)
Deferred tax liability, non-current................................. (1,772)
-------
Net assets acquired................................................. 13,225
Excess of purchase price over net assets acquired................... 22,255
-------
Total merger consideration.......................................... $35,480
=======
</TABLE>

100
<PAGE>

Upon consummation of the Merger, Elcotel intends to discontinue certain
products manufactured and marketed by TSG and outsource the assembly of
printed circuit boards assembled by TSG. The allocation of merger
consideration to the estimated fair value of inventories has been decreased by
$3,238 to reflect the estimated net realizable value of inventories related to
products to be discontinued and inventories of components related to printed
circuit board assembly operations.

The fair value of TSG's net assets will vary as of the consummation date of
the Merger based on changes in TSG's financial position between June 30, 1997
and consummation of the Merger.

Identifiable intangible assets are comprised of TSG's trade names at an
estimated fair value of $2,869, assembled workforce at an estimated fair value
of $1,372, product software at an estimated fair value of $611, patented
technology at an estimated fair value of $419 and customer contracts at an
estimated fair value of $2,023.

At June 30, 1997, TSG had net operating loss carryforwards of $11,098
available to reduce future taxable income, which expire from 1998 to 2010.
However, the utilization of these net operating loss carryforwards is subject
to an annual limitation of approximately $210 as a result of a previous change
in ownership of TSG. Accordingly, it is more likely than not that the future
tax benefits of net operating loss carryforwards of approximately $2,909 will
not be realized, and a corresponding valuation allowance has been provided in
the purchase price allocation.

The fair value of accrued liabilities includes estimated expenses of $200 to
be incurred by TSG in connection with the Merger. In addition, the fair value
of accrued liabilities includes the estimated costs to terminate the
employment of certain employees of TSG and to relocate certain employees and
property of TSG. These costs have been estimated based on Elcotel's
preliminary integration and consolidation plan. Employee termination costs
reflecting the estimated cost of severance and salary continuation
arrangements and related employee benefits have been estimated at $195. The
costs of relocating employees and property of TSG have been estimated at $390.

Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet consist of
adjustments to the historical basis of the assets and liabilities of TSG to
arrive at their estimated fair values and other adjustments directly related
to the Merger. Pro forma adjustments to the historical basis of the assets and
liabilities of TSG to arrive at their estimated fair values based on the
purchase allocation are set forth in the following table.

(A) PURCHASE ALLOCATION PRO FORMA ADJUSTMENTS

<TABLE>
<S> <C>
Inventories....................................................... $(3,039)
Deferred tax asset, current....................................... 2,246
Property, plant and equipment..................................... 116
Deferred tax asset, non-current................................... (799)
Intangible assets, including goodwill............................. 25,550
Deferred tax liability, non-current............................... 973

Pro forma adjustments to the Unaudited Pro Forma Consolidated Balance Sheet
accounts directly related to the Merger are set forth in the following table.

(B) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Estimated severance and relocation expenses....................... $ 585
Estimated Merger expenses of Elcotel.............................. 330
Estimated Merger expenses of TSG.................................. 200
Estimated expenses to register shares of common stock to be issued
in the Merger.................................................... 270
-------
$ 1,385
=======
</TABLE>

101
<PAGE>

<TABLE>
<S> <C>
Issuance of 4,936,848 shares of Elcotel Common Stock to effect the
Merger................................................................ $ 49
Issuance of 80,769 shares of common stock to Cameron and Wexford....... 1
Elimination of common stock of TSG..................................... (47)
----
$ 3
====
</TABLE>

(D) CAPITAL IN EXCESS OF PAR VALUE

<TABLE>
<S> <C>
Issuance of 4,936,848 shares of Elcotel Common Stock to effect the
Merger............................................................ $ 32,041
Fair value of outstanding common stock warrants, options and
purchase rights of TSG............................................ 2,535
Issuance of 80,769 shares of Elcotel Common Stock to Cameron and
Wexford........................................................... 524
Estimated expenses to register shares of Elcotel Common Stock to be
issued in the Merger.............................................. (270)
Elimination of additional paid in capital of TSG................... (11,963)
--------
$ 22,867
========
</TABLE>

(E) RETAINED EARNINGS

<TABLE>
<S> <C>
Estimated Merger expenses of TSG..................................... $ (200)
Elimination of pro forma retained earnings of TSG.................... (960)
-------
$(1,160)
=======
</TABLE>

(F) CUMULATIVE TRANSLATION ADJUSTMENT

<TABLE>
<S> <C>
Elimination of cumulative translation adjustment of TSG................... $ 6
===
</TABLE>

UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS RELATED TO THE LUCENT
ACQUISITION

Elcotel has estimated the allocation of the Lucent Acquisition purchase
price to the assets acquired based on their estimated fair values. The
purchase price is subject to final determination based on the final valuation
of inventories acquired. Unless otherwise indicated, differences between the
amounts included herein and the final allocation are not expected to have a
material effect on the unaudited pro forma consolidated financial information.

A summary of the allocation of the purchase price to the assets acquired as
of June 30, 1997 based on Elcotel's estimates of their fair value is set forth
below.

(G) PURCHASE ALLOCATION PRO FORMA ADJUSTMENTS

<TABLE>
<S> <C>
Inventories............................................................ $3,999
Equipment and tooling.................................................. 500
Intangible assets...................................................... 1,541
------
Total purchase price................................................... $6,040
======
</TABLE>

The pro forma adjustments to the Unaudited Pro Forma Consolidated Balance
Sheet to reflect the bank indebtedness incurred to finance the Lucent
Acquisition are as follows:

(H) OTHER ASSETS

<TABLE>
<S> <C>
Deferred debt issuance costs (portion related to the acquisition)......... $54
===
</TABLE>

102
<PAGE>

(I) NOTES PAYABLE AND BORROWINGS UNDER CREDIT LINES

<TABLE>
<S> <C>
Portion of term notes used to finance the acquisition, including debt
issuance costs........................................................ $3,044
======
</TABLE>

(J) CURRENT PORTION OF LONG-TERM DEBT

<TABLE>
<S> <C>
Installment note due in eighty-four equal monthly installments of $37.. $436
====
</TABLE>

(K) LONG-TERM DEBT

<TABLE>
<S> <C>
Installment note due in eighty-four equal monthly installments of
$37................................................................... $2,614
======
</TABLE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS RELATED
TO THE MERGER

Adjustments to the Unaudited Pro Forma Consolidated Statements of Operations
related to the Merger are as follows:

<TABLE>
<CAPTION>
THREE
YEAR MONTHS
ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
(L) COST OF GOODS SOLD --------- --------
<S> <C> <C>
Increase (decrease) in depreciation resulting from an
increase in the basis of property, plant and equipment and
their estimated useful lives.............................. $ (36) $ 25
====== =====
(M) GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of the excess of the purchase price over net
assets acquired (goodwill) resulting from the
transaction............................................... $ 636 $ 159
Amortization of identifiable intangible assets resulting
from the transaction...................................... 850 213
Elimination of amortization of intangible assets recorded
in the historical financial statements of TSG............. (168) (40)
Elimination of amortization of goodwill recorded in the
historical financial statements of TSG.................... (109) (27)
Elimination of rent expense related to closure of TSG's
facilities................................................ -- (38)
Additional compensation related to employment contracts
that are to be entered into upon consummation of the
Merger.................................................... 22 6
------ -----
$1,231 $ 273
====== =====
(N) INCOME TAX (EXPENSE) BENEFIT
Increase (decrease) in income tax expense resulting from
allocation to deferred tax assets......................... $ (6) 53
Increase (decrease) in income tax expense to reflect the
pro forma effect on income tax expense resulting from the
Merger.................................................... (317) (78)
------ -----
$ (323) $ (25)
====== =====
</TABLE>

103
<PAGE>

The fair value of intangible assets included in the allocation of the Merger
consideration will be amortized over their estimated useful lives as follows:

<TABLE>
<S> <C>
Goodwill.......................................................... 35 years
Trade names....................................................... 35 years
Assembled workforce............................................... 35 years
Product software.................................................. 5 years
Patented technology............................................... 4.5 years
Customer contracts................................................ 3.94 years
</TABLE>

The pro forma effective tax rate exceeds federal and state statutory tax
rates primarily as a result of non-deductible goodwill amortization expense
arising from the Merger.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS RELATED
TO THE LUCENT ACQUISITION

Adjustments to the Unaudited Pro Forma Consolidated Statements of Operations
related to the Lucent Acquisition are as follows:

<TABLE>
<CAPTION>
THREE
YEAR MONTHS
ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
(O) COST OF GOODS SOLD
Depreciation expense...................................... $ 100 $ 25
===== =====
(P) GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of identifiable intangible assets resulting
from the transaction..................................... $ 261 $ 65
===== =====
(Q) INTEREST EXPENSE
Interest expense on acquisition indebtedness.............. $ 467 $ 120
Amortization of deferred debt issuance expenses........... 23 1
----- -----
$ 490 $ 121
===== =====
(R) INCOME TAX BENEFIT
Decrease in income tax expense to reflect the pro forma
effect on income tax expense resulting from the
acquisition.............................................. $ 298 $ 74
===== =====
</TABLE>

The fair value of intangible assets included in the allocation of the total
consideration will be amortized over their useful lives as follows:

<TABLE>
<S> <C>
Customer relationships and other ................................... 15 years
Non-compete agreement............................................... 2 years
Favorable licensing agreement....................................... 5 years
</TABLE>

UNAUDITED PRO FORMA INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Pro forma unaudited income per common and common equivalent share for the
year ended March 31, 1997 and three months ended June 30, 1997 is computed on
the basis of the weighted average number of common and dilutive common
equivalent shares outstanding during the period and assuming the issuance of
4,936,848 shares of Elcotel Common Stock to effect the Merger, the assumption
and adjustment of outstanding common stock options and warrants of TSG, and
the issuance of shares of Elcotel Common Stock to Wexford Management and
Cameron occurred on April 1, 1996. The weighted average number of dilutive
common equivalent shares outstanding during the period has been computed based
on the treasury stock method in accordance with Accounting Principles Board
Opinion No. 15, Earnings Per Share.

104
<PAGE>

PRELIMINARY INTEGRATION AND CONSOLIDATION PLAN

Elcotel intends to integrate and consolidate certain operations of TSG and
Lucent into those of Elcotel, including relocation of certain manufacturing
and assembly operations. The planned restructuring of the combined entity is
intended to result in significant cost and expense reductions, lower
manufacturing costs and improved gross profit margins. The planned
restructuring is also intended to result in the establishment of
organizational resources capable of absorbing the anticipated growth in the
business in the foreseeable future. Consequently, Elcotel believes, but cannot
assure, that its post-restructuring operating results will adequately absorb
the ongoing financial impact of the Merger and the Lucent Acquisition, which
consist primarily of non-cash charges related to amortization of goodwill and
intangible assets and additional interest expense related to the Lucent
Acquisition as presented in the accompanying unaudited pro forma consolidated
financial information.

FINANCING PLAN

Concurrently with consummation of the Merger, Elcotel intends to secure a
new credit arrangement to refinance existing credit lines of TSG and Elcotel
and to finance working capital requirements of the combined entity. Although
Elcotel believes that it will be able to secure an acceptable financing
agreement, there is no assurance that its efforts will be successful.

DESCRIPTION OF ELCOTEL CAPITAL STOCK

The statements set forth under this heading with respect to the Delaware
Law, Elcotel's Certificate of Incorporation (the "Elcotel Charter") and
Elcotel's Bylaws are brief summaries thereof and do not purport to be
complete. Such statements are subject to the detailed provisions of Delaware
Law, the Elcotel Charter and the Elcotel Bylaws. See "Available Information."

Under the Elcotel Charter, Elcotel's authorized capital stock consists of
20,000,000 shares of Elcotel Common Stock. Elcotel has proposed to increase
the number of authorized shares of Elcotel Common Stock to 30,000,000 pursuant
to the Elcotel Amendment. See "Additional Proposal No. 2."

COMMON STOCK

Dividends and Liquidation Rights. The holders of Elcotel Common Stock are
entitled to receive and share equally in such dividends as may be declared by
the Elcotel Board out of funds legally available therefor. In the event of the
liquidation of Elcotel, holders of Elcotel Common Stock are entitled to share
pro rata in the distribution of Elcotel's assets for such purpose.

Voting Rights. The holders of Elcotel Common Stock elect the Elcotel Board
and act on such other matters as are required to be presented to them under
Delaware Law, the Elcotel Charter or as are otherwise presented to them by the
Elcotel Board. Each holder of Elcotel Common Stock is entitled to one vote per
share. Holders of Elcotel Common Stock are not entitled to cumulate votes in
the election of directors. The directors of Elcotel are elected each year at
the Elcotel Annual Meeting. Directors of Elcotel are elected by a plurality of
votes cast.

Preemptive Rights. Holders of Elcotel Common Stock are not entitled to
preemptive, subscription, redemption or conversion rights with respect to any
shares that may be issued.

The outstanding shares of Elcotel Common Stock are, and the shares of
Elcotel Common Stock issued pursuant to the Merger will be, duly authorized,
validly issued, fully paid and nonassessable.

CHANGE OF CONTROL

Section 203 of Delaware Law prohibits generally a public Delaware
corporation, including Elcotel, from engaging in a Business Combination (as
defined below) with an Interested Stockholder (as defined below) for a

105
<PAGE>

period of three years after the date of the transaction in which an Interested
Stockholder became such, unless: (i) the board of directors of such
corporation approved, prior to the date such Interested Stockholder became
such, either such Business Combination or such transaction; (ii) upon
consummation of such transaction, such Interested Stockholder owns at least
85% of the voting shares of such corporation (excluding specified shares); or
(iii) such Business Combination is approved by the board of directors of such
corporation and authorized by the affirmative vote (at an annual or special
meeting and not by written consent) of at least 66 2/3% of the outstanding
voting shares of such corporation (excluding shares held by such Interested
Stockholder). A "Business Combination" includes (i) mergers, consolidations
and sales or other dispositions of 10% or more of the assets of a corporation
to or with an Interested Stockholder, (ii) certain transactions resulting in
the issuance or transfer to an Interested Stockholder of any stock of such
corporation or its subsidiaries and (iii) certain other transactions resulting
in a financial benefit to an Interested Stockholder. An "Interested
Stockholder" is a person who, together with its affiliates and associates,
owns (or within a three-year period did own) 15% or more of a corporation's
stock entitled to vote generally in the election of directors.

COMPARISON OF STOCKHOLDER RIGHTS

Upon consummation of the Merger, the stockholders of TSG will become
stockholders of Elcotel. Since both Elcotel and TSG are incorporated under the
laws of the State of Delaware, the rights and privileges of stockholders of
Elcotel and TSG, respectively, which rights and privileges are governed by the
Delaware Law, are substantially identical, except to the extent that their
respective Certificates of Incorporation ("Charters") and Bylaws differ. The
provisions in the Elcotel Charter relating to the lack of preemptive,
subscription or redemption rights are substantially similar to the provisions
in the TSG Charter. See "Description of Elcotel Capital Stock--Common Stock."
In addition, as Delaware corporations, both Elcotel and TSG are subject to the
provisions of Section 203 of the Delaware Law. See "Description of Elcotel
Capital Stock--Change of Control." Although it is not practical to compare all
the differences among the Elcotel Charter and Bylaws and the TSG Charter and
Bylaws, the following is a summary of certain material differences that may
significantly affect the rights of TSG stockholders. This summary is qualified
in its entirety by reference to the full text of such documents. The Elcotel
Charter and Bylaws and the TSG Charter and Bylaws are incorporated by
reference in this Joint Proxy Statement-Prospectus.

The TSG Charter permits the issuance of preferred stock, par value $100 per
share. The Elcotel Charter does not provide for the issuance of preferred
stock. Therefore, the Elcotel Board will not be able to issue shares of
preferred stock that will have rights superior to Elcotel Common Stock without
stockholder approval. For a general description of Elcotel's capitalization,
see "The Merger Agreement--Capitalization of Elcotel." For a general
description of TSG's capitalization, see "The Merger Agreement--Capitalization
of TSG."

Under Delaware Law, special meetings of stockholders may be called by the
Board of Directors and by such other person or persons authorized to do so by
the corporation's certificate of incorporation or bylaws. Both the Elcotel
Bylaws and the TSG Bylaws limit the ability to call special meetings to
directors, so that stockholders may not call a special meeting. Elcotel's
Bylaws are more restrictive because the TSG Board can call a special meeting
upon the vote of a majority of directors present, while the Elcotel Board can
do so only upon the vote of a majority of all directors.

106
<PAGE>

ADDITIONAL MATTERS SUBMITTED TO THE
VOTE OF ELCOTEL'S STOCKHOLDERS

ADDITIONAL PROPOSAL NO. 1: ELECTION OF DIRECTORS

In accordance with Elcotel's Bylaws, a board of seven directors will be
elected to serve until the next annual meeting of stockholders of Elcotel or
until successors to the directors have been elected and have qualified. All
directors are elected annually. It is the intention of the persons named in
the proxy, unless otherwise directed, to vote all proxies in favor of the
election to the Elcotel Board for the nominees listed below, all of whom are
presently directors of Elcotel. The Elcotel Board has no reason to believe
that any of the nominees will be unable or unwilling to be a candidate for
election at the time of the Elcotel Annual Meeting. If any nominee of Elcotel
is unable or declines to serve as a director at the time of the Elcotel Annual
Meeting, the proxies will be voted for any nominee designated by the present
Elcotel Board to fill the vacancy.

Notwithstanding the election of directors of Elcotel at the Elcotel Annual
Meeting, if the Merger is approved by the stockholders of Elcotel and TSG and
is consummated, the number of directors comprising the entire board of
directors of Elcotel will be increased to nine and the directors immediately
after the Effective Time will include the Elcotel director nominees named
below, other than Mr. Wiltse and Mr. Suplee who will retire as directors of
Elcotel, and four individuals, three of whom are currently directors of TSG--
David Steadman, Mark Plaumann and Vincent Bisceglia--being appointed by the
remaining Elcotel Directors. See "The Merger Agreement--Appointment of
Directors."

The Elcotel Board has unanimously recommended a slate of nominees for
election as directors at the Elcotel Annual Meeting. The names of the nominees
for directors of Elcotel, their ages and certain other information is set
forth as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C. Shelton James.......... 58 Chief Executive Officer and Chairman of the Board
Tracey L. Gray............ 65 President, Chief Operating Officer and Director
Dwight Jasmann............ 61 Director
Charles H. Moore.......... 68 Director
Thomas E. Patton.......... 56 Director
T. Raymond Suplee......... 50 Director
Thomas R. Wiltse.......... 73 Director
</TABLE>

Mr. James has served as Chief Executive Officer of Elcotel since May 1991
and has been a director of Elcotel since December 1990. Mr. James is currently
an investor in and business advisor to a number of companies. While he has
devoted a substantial amount of time to Elcotel 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, NAI Technologies, 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 has served as President and Chief Operating Officer of Elcotel
since July 1991 and has been a director of Elcotel since August 1991. From
June 1986 until joining Elcotel, Mr. Gray had been a Vice President of the
Government Systems Division, Network Systems Division and Federal Systems
Division, respectively, of Sprint in Washington, D.C. 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 served in various positions with industry
professional associations.

107
<PAGE>

Mr. Jasmann has been a director of Elcotel since December 1993. Since August
1996, Mr. Jasmann has been President and General Manager for COMSAT
International Ventures in Bethesda, Maryland, a business unit of COMSAT
Corporation that manages 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 including COMSAT Corporation and
Fax International, Inc. 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, and Philcom, a Philippines telephone
company. He currently serves as chairman of the board of COMSAT Argentina and
as a director of both COMSAT Max in India and COMSAT Brazil.

Mr. Moore has been a director of Elcotel 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 Turner Corporation and is
Chairman of the Audit Committee of the United States Olympic Committee.

Mr. Patton has been a director of Elcotel 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, 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. Suplee has been a director of Elcotel since September 1986. Since 1982,
Mr. Suplee has been the Senior Partner and President of Suplee & Shea, P.A., a
certified public accounting firm located in Sarasota, Florida. Mr. Suplee is
currently a director of First of America Bank (Florida) and serves on its
audit committee, and is also a director of Plymouth Harbor adult retirement
facility. He formerly was a director of Presidential Bank. Mr. Suplee serves
as a discussion leader for the Florida Institute of Certified Public
Accountants.

Mr. Wiltse has been a director of Elcotel since July 1990. Since 1985, Mr.
Wiltse has been active as a private investor. For more than thirty years,
until his retirement in 1985, Mr. Wiltse served in a variety of managerial and
executive capacities with General Motors Corporation's worldwide foundry
operations.

Directors' Compensation

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

During the fiscal year ended March 31, 1997, options were granted to
Elcotel's non-employee directors (Messrs. Jasmann, Moore, Patton, Suplee and
Wiltse), pursuant to Elcotel's Directors' Stock Option Plan, in the amount of
2,000 shares, 3,000 shares, 2,000 shares, 4,000 shares and 6,000 shares,
respectively, at $6.3125 per share. These options are fully exercisable
commencing on March 31, 1998 and expire on March 31, 2002.

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Elcotel's Board of Directors and Committees Meetings

The Elcotel Board held four meetings during the fiscal year ended March 31,
1997. Each of the then-serving directors attended or participated in at least
75% of the aggregate of all meetings of the Elcotel Board and all committees
of which he was a member during the fiscal year ended March 31, 1997.

Elcotel has a Compensation and Stock Option Committee, presently composed of
Messrs. Jasmann, Moore, Suplee and Wiltse. The Compensation and Stock Option
Committee is authorized to administer and grant options pursuant to Elcotel's
1991 Stock Option Plan. The Compensation and Stock Option Committee held three
meetings during the fiscal year ended March 31, 1997, which were attended by
all of the then-serving committee members.

Elcotel has an Audit Committee composed of Messrs. Moore, Patton, Suplee and
Wiltse, which recommends the independent public accountants for appointment by
the Elcotel Board and reviews reports submitted by the accountants. The Audit
Committee held two meetings during the fiscal year ended March 31, 1997, which
were attended by all of the then-serving Audit Committee members.

Elcotel has a Nominating Committee composed of Messrs. Moore, Patton, Suplee
and Wiltse which recommends a slate of directors for election at the annual
meeting of stockholders. The Nominating Committee held no meetings during the
fiscal year ended March 31, 1997.

Elcotel has a Management Committee composed of Messrs. James, Gray, Jasmann
and Wiltse which works with management to facilitate the establishment and
review of the strategic direction of Elcotel. The Management Committee held
one meeting during the fiscal year ended March 31, 1997, which were attended
by all of the then-serving Management Committee members.

Elcotel's Bylaws provide that the stockholders of Elcotel may make
nominations for election to Elcotel's Board if such nominations are in writing
and delivered to the Secretary of Elcotel not less than 135 days before the
day and month of the previous year's annual meeting. Thus, nominations for
election to the Elcotel Board at the 1998 Annual Meeting must be delivered to
the Secretary by July 23, 1998. The stockholder making the nomination must
provide information about the persons nominated that is required to be
disclosed in a proxy statement for solicitation of proxies with respect to
nominees for election as directors pursuant to the regulations under the 1934
Act. Only those persons nominated by the Elcotel Board and by stockholders of
Elcotel as described above will be voted upon at the annual meeting of
stockholders of Elcotel.

ADDITIONAL PROPOSAL NO. 2: AMENDMENT TO CERTIFICATE OF INCORPORATION

The Elcotel Amendment

At the meeting of the Elcotel Board on September 22, 1997, the Elcotel Board
approved an amendment to the Certificate of Incorporation of Elcotel that
would increase the authorized shares of Elcotel Common Stock from 20,000,000
shares to 30,000,000 shares. At the Elcotel Annual Meeting, the stockholders
of Elcotel will be asked to consider and vote upon a proposal to approve and
adopt the following resolution with respect to such amendment to the
Certificate of Incorporation of Elcotel:

RESOLVED, that Article FOURTH of the Certificate of Incorporation of this
Corporation is hereby amended to read in its entirety as follows:

"FOURTH--The amount of total authorized capital stock of this
corporation is 30,000,000 shares of Common Stock, par value $.01 per
share."

Reasons for the Elcotel Amendment

The number of shares of Elcotel Common Stock issued and reserved for
issuance immediately following the Merger will be approximately 15.5 million
shares. The Elcotel Board believes that it is desirable for Elcotel

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to have additional authorized but unissued shares of Elcotel Common Stock so
as to provide flexibility to act promptly with respect to acquisitions, public
and private financings, stock dividends and other appropriate purposes.
Approval of the increase now will eliminate the delays and expense that
otherwise would be incurred if stockholder approval were required to increase
the authorized number of shares of Elcotel Common Stock for possible future
transactions involving the issuance of additional shares.

Effect of the Elcotel Amendment

Additional shares of Elcotel Common Stock authorized pursuant to the Elcotel
Amendment may be issued, subject to certain exceptions, by the Elcotel Board
at such times, in such amounts and upon such terms as the Elcotel Board may
determine, without further approval of the stockholders of Elcotel. Any such
issuance could reduce the current stockholders' proportionate interests in
Elcotel, depending on the number of shares issued and the purpose, terms and
conditions of the issuance. Elcotel stockholders have no preemptive rights to
subscribe to additional shares when issued.

Required Vote

The affirmative vote of a majority of the outstanding shares of Elcotel
Common Stock is required to approve and adopt the Elcotel Amendment.

THE ELCOTEL BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ELCOTEL
VOTE FOR THE APPROVAL AND ADOPTION OF THE ELCOTEL AMENDMENT.

ADDITIONAL PROPOSAL NO. 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC
ACCOUNTANTS

The Board of Directors has appointed Elcotel's present independent public
accountants, Deloitte & Touche llp, for the fiscal year ending March 31, 1998.
This appointment will be submitted to the stockholders of Elcotel for
ratification at the Elcotel Annual Meeting.

The submission of the appointment of Deloitte & Touche llp for ratification
by the stockholders of Elcotel is not required by law or by the Bylaws of
Elcotel. The Elcotel Board is nevertheless submitting it to its stockholders
to ascertain their views. If the stockholders do not ratify the appointment,
the selection of other independent public accountants will be considered by
the Elcotel Board.

Representatives of Deloitte & Touche llp are expected to be present at the
Meeting to respond to appropriate questions and will have the opportunity to
make a statement if they so desire.

THE ELCOTEL BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ELCOTEL
VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP.

ADDITIONAL PROPOSAL NO. 4: AMENDMENT TO 1991 STOCK OPTION PLAN

The 1991 Stock Option Plan was adopted by the Elcotel Board on July 2, 1991
and approved by the stockholders of Elcotel on October 2, 1991. A total of
1,600,000 shares of Elcotel Common Stock are currently reserved for issuance
under the 1991 Stock Option Plan, as amended (the "1991 Plan").

The 1991 Plan provides for the grant to employees of Elcotel of incentive
stock options within the meaning of Section 422 of the Code and nonqualified
stock options. In recognition of Elcotel's need to attract and retain
qualified employees in a highly competitive environment and in view of the
larger number of key employees that would be eligible for the grant of options
under the 1991 Plan following consummation of the Merger, the Elcotel Board
has approved an amendment to the 1991 Plan, subject to stockholder approval,
to increase the number of shares of Elcotel Common Stock reserved for issuance
pursuant to the 1991 Plan by 500,000 shares. The stockholders of Elcotel are
being requested to approve an increase in the number of shares reserved for
issuance under the 1991 Plan by 500,000 shares, from 1,600,000 currently
authorized shares to 2,100,000 shares.

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The essential features of the 1991 Plan are as follows:

General. At September 30, 1997, 682,066 shares of Elcotel Common Stock had
been issued upon exercise of options granted under the 1991 Plan, options to
purchase 548,838 shares of Elcotel Common Stock were outstanding under the
1991 Plan and 369,096 shares of Elcotel Common Stock remained available for
future grant under the 1991 Plan.

Purpose. The purpose of the 1991 Plan is to enable Elcotel to obtain and
retain the services of key employees and to provide them with increased
motivation and incentive to exert their best efforts on behalf of Elcotel by
enlarging their personal stake in its success.

Administration. The 1991 Plan is administered by the Compensation and Stock
Option Committee of the Elcotel Board (the "Committee") composed of at least
two directors of Elcotel. The Committee has authority, subject to the terms of
the 1991 Plan, to determine the persons to whom options will be granted,
whether the options will be incentive stock options or nonqualified stock
options, the number of shares subject to each option, and the terms and
provisions of each option. Any power granted to the Committee can be exercised
by the Elcotel Board and any determination by the Committee is subject to
review and approval or modification by the Elcotel Board.

Eligibility. Officers and key employees of Elcotel and its subsidiaries are
eligible to receive options. Elcotel estimates that as of September 30, 1997,
there were approximately 48 officers and other key employees of Elcotel who
were eligible to receive options under the 1991 Plan.

Grant. Subject to certain antidilution provisions for stock dividends, stock
splits or other subdivisions or reclassifications of Elcotel Common Stock,
options may be granted under the 1991 Plan to purchase not more than 1,600,000
shares of Elcotel Common Stock, which limit would be increased to 2,100,000
shares pursuant to the proposed amendment. If any option expires or terminates
without being fully exercised and before the 1991 Plan terminates, the
unpurchased shares subject thereto are again available for purposes of the
1991 Plan.

Change in Control. If any proposed transaction may constitute in a change in
control of Elcotel, the Committee, with the approval of the majority of the
members of the Board who are not then holding options, may accelerate the
exercise periods of any options in connection with such transaction.

Nontransferability. Options are not transferable by the optionee except by
will or the laws of descent and distribution. During the lifetime of the
optionee, options are exercisable only by the optionee or to the extent such
exercise would not prevent an option from qualifying as an incentive stock
option, by his or her guardian or legal representative.

Duration and Termination of Options. The maximum term of an option granted
under the 1991 Plan is five years, and an option may be exercised at any time
during its term unless the Committee fixes a specific vesting period or
periods for exercise of any option. The Committee typically grants options
which become exercisable 25 percent each year beginning on the first
anniversary of the date of grant. An optionee's rights under any option
terminate upon the termination of employment for any reason other than death,
disability or retirement, except that the Committee may permit exercise of
such option for a period ending on the earlier of the expiration date of the
option and a date thirty days after the termination of employment as to the
total number of shares purchasable under the option as of the date of
termination. The 1991 Plan provides that in the event of termination of an
optionee's employment by reason of the optionee's death, retirement or
disability, any outstanding option held by such optionee will immediately
become exercisable as to the total number of shares purchasable thereunder and
will remain so exercisable at any time prior to its expiration date or, if
earlier, the first anniversary of termination of the optionee's employment.

Exercise Price. The exercise price per share of Elcotel Common Stock
deliverable upon the exercise of an option is determined by the Committee at
the time of grant. However, the exercise price per share under an option

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may not be less than the greater of 100% (110% in the case of incentive stock
options granted to optionees who own more than ten percent of the voting power
of Elcotel) of the fair market value per share on the date the option is
granted and $0.75. On October 15, 1997, the closing price of Elcotel Common
Stock as reported on the Nasdaq National Market was $8.125. The exercise price
may be paid in cash or by certified or cashier's check or, to the extent
permitted by the Committee, in shares of Elcotel Common Stock.

Plan Duration and Amendment. The 1991 Plan will continue in effect until
July 2, 2001, unless earlier suspended or discontinued. The 1991 Plan may be
modified, terminated or amended at any time by the Elcotel Board except that,
without stockholder approval, the Board may not increase the number of shares
of Elcotel Common Stock which may be issued under the 1991 Plan or modify the
requirements as to eligibility for participation. The modification, amendment
or termination of the 1991 Plan will not affect the rights of an optionee
under any option previously granted to the optionee unless the optionee
consents thereto.

Certain Federal Income Tax Considerations. The following is a brief summary
of the federal income tax consequences of transactions under the 1991 Plan.
This summary is not intended to be exhaustive and does not discuss the tax
consequences of a participant's death or provisions of the income tax laws of
any municipality, state or foreign country in which an optionee may reside. As
stated above, the 1991 Plan permits the grant both of options that qualify as
incentive stock options under Section 422 of the Code and of nonqualified
options. Options which qualify as incentive stock options are entitled to
special tax treatment if shares purchased pursuant to the exercise of such an
option are not disposed of by the optionee within two years from the date of
granting of the incentive stock option and within one year after the issue of
the shares to the optionee upon exercise of the incentive stock option. If
this condition is satisfied neither the grant nor the exercise of incentive
stock options will result in taxable income to the recipient or in a deduction
to Elcotel. If cash is used to exercise, the optionee receives a tax basis in
the stock purchased under an incentive stock option equal to the option price.
The optionee realizes, upon subsequent sale or other disposition of stock
purchased pursuant to an incentive stock option, mid- or long-term capital
gain (or loss) equal to the excess (or deficiency) of the amount realized upon
disposition over such tax basis. For purposes of the alternative minimum tax,
however, the tax treatment of an incentive stock option is similar to the tax
treatment of a nonqualified stock option described below.

An optionee who transfers shares purchased under an incentive stock option
within the one- or two-year holding period, subject to certain exceptions,
will realize, in the year of such disposition, (a) ordinary income equal to
the excess of (i) the fair market value of the shares on the date of exercise
over (ii) the option price and (b) capital gain equal to the excess, if any,
of the amount realized upon disposition over the fair market value of the
shares on the date of exercise. If the amount realized on disposition is less
than the fair market value of the shares on the date of exercise and the
disposition occurs in a sale or exchange with respect to which a loss (if
sustained) would be recognized, then the ordinary income realized by the
optionee will, in most cases, be limited to the excess of the amount realized
over the option price. Upon such a disposition, Elcotel will be entitled to
deduct an amount equal to the ordinary income realized by the optionee.

If an incentive stock option is exercised and the optionee uses previously
owned shares of Elcotel Common Stock to pay the option price, the optionee's
tax basis will carry over to an equal number of shares purchased. The
remaining Elcotel Common Stock received upon exercise of the option will
receive a zero tax basis. The optionee will realize no gain or loss as a
result of the disposition of the previously-owned shares, provided, if the
shares were purchased under an incentive stock option, the holding period
requirement was satisfied.

The grant of nonqualified stock options will not result in any taxable
income to the recipient or in a deduction by Elcotel. However, upon exercise
of a nonqualified option, the optionee will realize ordinary income equal to
the excess of the fair market value of the shares on the date of exercise over
the purchase price, and Elcotel will be entitled to a deduction equal to the
amount the employee is required to treat as ordinary income. If cash is used
to exercise the option, the optionee will receive a tax basis in stock
purchased under a nonqualified option equal to its fair market value at the
time of exercise. On subsequent disposition of the shares, the optionee will
realize capital gain (or loss) equal to the excess (or deficiency) of the
amount realized over such tax basis. The gain or loss will be long-, mid- or
short-term depending on the optionee's holding period for the shares.

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If a nonqualified option is exercised and the optionee uses previously-owned
shares of Elcotel Common Stock to pay the purchase price, the optionee will
realize ordinary income as described above, but will realize no gain or loss
as a result of the disposition of the previously-owned shares, provided, if
the shares were purchased under an incentive stock option, the holding period
requirement was satisfied. The optionee's tax basis will carry over to an
equal number of shares purchased. The remaining shares of Elcotel Common Stock
will take a tax basis equal to their fair market value.

1991 Plan Benefits. Elcotel cannot now determine the number of options to be
granted in the future under the 1991 Plan to the Named Executive Officers, all
current officers as a group or all employees (including current officers who
are not executive officers) as a group. See "Elcotel Executive Compensation--
Stock Option Grants--Stock Option Exercises and Holdings" for the number of
stock options granted to the Named Executive Officers in the fiscal year ended
March 31, 1997. In the fiscal year ended March 31, 1997, options to purchase
90,000 shares of Elcotel Common Stock were granted to all current executive
officers as a group, and options to purchase 97,000 shares of Elcotel Common
Stock were granted to all employees (including current officers who are not
executive officers). However, pursuant to the employment agreement between
Elcotel and Vincent Bisceglia to become effective upon consummation of the
Merger, Mr. Bisceglia, who would become an Executive Vice President and Chief
Operating Officer of Elcotel, will be entitled to receive an option to
purchase 50,000 shares of Elcotel Common Stock pursuant to the 1991 Plan. It
is also expected that other officers of TSG who become officers of Elcotel
after the Merger will be granted options to purchase Elcotel Common Stock
pursuant to the 1991 Plan, in amounts to be determined by the Committee.

Required Vote. The affirmative vote of the holders of a majority of the
outstanding shares of Elcotel Common Stock present in person or by proxy will
be required to approve this amendment to the 1991 Plan.

THE ELCOTEL BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ELCOTEL
VOTE "FOR" THE APPROVAL AND ADOPTION OF THE AMENDMENT TO THE 1991 PLAN.

ADDITIONAL PROPOSAL NO. 5: AMENDMENTS TO DIRECTORS STOCK OPTION PLAN

The Directors Stock Option Plan was adopted by the Elcotel Board on July 2,
1991 and was approved by the stockholders of Elcotel on October 2, 1991. A
total of 175,000 shares of Elcotel Common Stock are currently reserved for
issuance under the Directors Stock Option Plan, as amended (the "Directors
Plan").

The Directors Plan is a formula plan which provides for the automatic and
nondiscretionary grant of a specified number of options to directors of
Elcotel who are not employees of Elcotel. Those grants occur at the end of
each fiscal year of Elcotel to then current non-employee directors based upon
the number of Elcotel Board committees on which such director then serves and
the number of committee chairperson positions then held.

The purpose of the Directors Plan is to enhance Elcotel's ability to obtain
and retain the services of outside directors and to secure the benefits
arising from those directors having or increasing their equity stake in
Elcotel. In view of the three new non-employee directors that would join the
Elcotel Board upon consummation of the Merger (resulting in a total of six
non-employee directors) and the additional options that would be granted to
those new directors upon such election, the Elcotel Board approved an
amendment to the Directors Plan, subject to stockholder approval, to increase
the number of shares of Elcotel Common Stock reserved for issuance pursuant to
the Directors Plan by 50,000 shares so that Elcotel would continue to have
sufficient shares available to grant stock options pursuant to the Directors
Plan. In addition, the Elcotel Board approved an amendment to the Directors
Plan, subject to stockholder approval, to eliminate the stockholder approval
requirement for changes in the Directors Plan that materially increase the
benefits accruing to participants under the Directors Plan. However,
stockholder approval would still be required for increasing the number of
shares issuable or changing the eligibility requirements for participation.
The Board included this change in the amendment to the Directors Plan in order
to afford more flexibility in adapting the Directors Plan as necessary to best
carry out its purposes of increasing the stake of participants in Elcotel's
continued success and progress and attracting and retaining outside directors.

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The stockholders of Elcotel are being requested to approve an increase in
the number of shares reserved for issuance under the Directors Plan by 50,000
shares, from 175,000 shares to 225,000 shares.

The essential features of the Directors Plan are as follows:

General. At September 30, 1997, 37,000 shares of Elcotel Common Stock had
been issued upon exercise of options granted under the Directors Plan, options
to purchase 100,000 shares of Elcotel Common Stock were outstanding under the
Directors Plan and 38,000 shares of Elcotel Common Stock remained available
for future grant under the Directors Plan.

Purpose. The Directors Plan is intended to secure for Elcotel and its
stockholders the benefits arising from share ownership by directors and the
incentives created when directors acquire or increase their equity interest in
Elcotel and to enhance Elcotel's ability to obtain and retain the services of
non-employee directors.

Administration. The Directors Plan is administered by the Compensation and
Stock Option Committee of the Elcotel Board (the "Committee") composed of at
least two directors of Elcotel. The Committee has authority, subject to the
terms of the Directors Plan, to interpret the provisions of the Directors
Plan, to construe the terms of the options granted thereunder and to
prescribe, amend and rescind rules relating to the Directors Plan.

Eligibility. Members of the Elcotel Board who are not employees of Elcotel
are eligible to receive options under the Directors Plan.

Grant. Each new eligible director receives a one-time grant of an option to
purchase 4,000 shares of Elcotel Common Stock. On the last business day of
each fiscal year of Elcotel, each non-employee director receives an option to
purchase 1,000 shares of Elcotel Common Stock for each committee on which such
director is then serving and an option to purchase 1,000 shares of Elcotel
Common Stock for each committee on which such director is then serving as
chairperson. Subject to certain antidilution provisions for stock dividends,
stock splits or other subdivisions or reclassifications of Elcotel Common
Stock, options may be granted under the Directors Plan to purchase not more
than 175,000 shares of Elcotel Common Stock in the aggregate, which limit
would be increased to 225,000 shares pursuant to the proposed amendment. If
any option expires or terminates without being fully exercised and before the
Directors Plan terminates, the unpurchased shares subject thereto are again
available for purposes of the Directors Plan.

Change in Control. If any proposed transaction may constitute a change in
control of Elcotel, the Committee, with the approval of the majority of the
members of the Board who are not then holding options, may accelerate the
exercise periods of any options in connection with such transaction.

Duration and Termination of Options. The maximum term of an option granted
under the Directors Plan is five years, and an option may be exercised at any
time during its term unless the Committee fixes a specific vesting period or
periods for exercise of any option. If a grantee's status as director
terminates for any reason other than death, disability or retirement, each
option held by the director under the Directors Plan will, if not already
exercisable before that time, become immediately exercisable and in any event
remain exercisable until the earlier of its expiration date and the first
anniversary of termination of the grantee's status as director. If the
grantee's status as director terminates for any reason other than death,
disability or retirement, each option held by the director under the Directors
Plan will remain exercisable until the earlier of its expiration date and 30
days after termination of director status.

Exercise Price. The exercise price per share of Elcotel Common Stock
deliverable upon the exercise of an option is the greater of $2.00 or 100% of
the fair market value per share on the date the option is granted. On

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October 15, 1997, the closing price of Elcotel Common Stock as reported on the
Nasdaq National Market was $8.125. The exercise price may be paid in cash or
by certified or cashier's check or, to the extent permitted by the Committee,
in shares of Elcotel Common Stock.

Plan Duration and Amendment. The Directors Plan will continue in effect
until July 2, 2001, unless earlier suspended or discontinued. The Directors
Plan may be modified, terminated or amended at any time by the Elcotel Board
except that, without stockholder approval, the Board may not materially
increase the benefits to optionees (which provision would be deleted pursuant
to the proposed amendment), increase the number of shares which may be issued
under the Directors Plan or modify the requirements as to eligibility for
participation. The modification, amendment or termination of the Directors
Plan will not affect the rights of an optionee under any option previously
granted to the optionee unless the optionee consents thereto.

Certain Federal Income Tax Considerations. The following is a brief summary
of the federal income tax consequences of transactions under the Directors
Plan. This summary is not intended to be exhaustive and does not discuss the
tax consequences of a participant's death or provisions of the income tax laws
of any municipality, state or foreign country in which an optionee may reside.
The Directors Plan permits the grant only of nonqualified options. The grant
of nonqualified stock options will not result in any taxable income to the
recipient or in a deduction by Elcotel. However, upon exercise of a
nonqualified option, the optionee will realize ordinary income equal to the
excess of the fair market value of the shares on the date of exercise over the
purchase price, and Elcotel will be entitled to a deduction equal to the
amount the employee is required to treat as ordinary income. If cash is used
to exercise the option, the optionee will receive a tax basis in stock
purchased under a nonqualified option equal to its fair market value at the
time of exercise. On subsequent disposition of the shares, the optionee will
realize capital gain (or loss) equal to the excess (or deficiency) of the
amount realized over such tax basis. The gain or loss will be long-, mid- or
short-term depending on the optionee's holding period for the shares.

If a nonqualified option is exercised and the optionee uses previously-owned
shares of Elcotel Common Stock to pay the purchase price, the optionee will
realize ordinary income as described above, but will realize no gain or loss
as a result of the disposition of the previously-owned shares. The optionee's
tax basis will carry over to an equal number of shares purchased. The
remaining shares of Elcotel Common Stock will take a tax basis equal to their
fair market value.

Directors Plan Benefits. Elcotel cannot now determine the number of options
to be granted in the future under the Directors Plan to all current directors
who are not executive officers as a group, to each nominee for election as a
director or to each associate of such directors or nominees. In the fiscal
year ended March 31, 1997, options to purchase 17,000 shares of Elcotel Common
Stock were granted to all current directors who were not executive officers as
a group. See "Additional Matters Submitted to the Vote of Elcotel's
Stockholders--Additional Proposal No. 1: Election of Directors--Directors'
Compensation."

Required Vote. The affirmative vote of the holders of a majority of the
outstanding shares of Elcotel Common Stock present in person or by proxy will
be required to approve the amendments to the Directors Plan.

THE ELCOTEL BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ELCOTEL
VOTE "FOR" THE APPROVAL AND ADOPTION OF THE AMENDMENTS TO THE DIRECTORS PLAN.

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OTHER INFORMATION REGARDING ELCOTEL

DIRECTORS AND OFFICERS

In addition to those directors listed above who are executive officers of
Elcotel in the positions indicated, the following persons are also executive
officers of Elcotel:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald M. Tobin......................... 54 Vice President, Finance, Chief
Financial Officer, Secretary and
Treasurer
Hugh H. Durden.......................... 49 Vice President, Domestic Sales
Eduardo Gandarilla...................... 48 Vice President, International Sales
and Marketing
Kenneth W. Noack........................ 60 Vice President, Operations
Henry W. Swanson........................ 61 Vice President, Engineering and
Development
</TABLE>

Mr. Tobin has served as Vice President, Chief Financial Officer, Secretary
and Treasurer of Elcotel since July 1992. Prior to joining Elcotel, he held
various financial positions with SmithKline Beecham Corporation in
Philadelphia since September 1970, and most recently had been Corporate
Controller of SmithKline Beecham Clinical Laboratories in King of Prussia,
Pennsylvania since February 1982.

Mr. Durden rejoined Elcotel in June 1991 as Vice President of Domestic Sales
after having previously served as district sales manager for Elcotel from
March 1987 until August 1989. From August 1989 until rejoining Elcotel, Mr.
Durden founded and served as Chief Executive Officer and President of two
privately-held telecommunications companies. From November 1984 until February
1987, Mr. Durden was President of Communications Central, Inc., a privately-
held operator of payphones.

Mr. Gandarilla has served as Vice President of International Sales and
Marketing of Elcotel since October 1996, having joined Elcotel 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 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. Noack has served as Vice President of Operations of Elcotel since
January 1993, having joined Elcotel in July 1992 as Director of Operations.
Prior to joining Elcotel 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. Swanson has served as Vice President of Engineering and Development of
Elcotel since December 1996. Prior to joining Elcotel, he was a consultant for
Texas Microsystems, Inc., a computer hardware manufacturer, since March 1996.
From April 1994 until November 1995, Mr. Swanson was Vice President of
Engineering for Arrowsmith Technologies, a computer systems developer. From
1989 until April 1994 he was director of PC Systems Development for Dell
Computer Corporation, also in Austin. His previous employment included
engineering management positions with several computer hardware and software
companies.

116
<PAGE>

SECTION 16 COMPLIANCE

Based solely upon a review of certain reports required to be filed by
Elcotel's current or former directors and officers and beneficial owners of
more than 10 percent of the outstanding Elcotel Common Stock pursuant to
Section 16(a) of the 1934 Act, the following person failed to file, on a
timely basis, reports so required to be filed during the fiscal year ended
March 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF
TRANSACTIONS NOT
NUMBER OF REPORTED ON A
NAME TITLE LATE REPORTS TIMELY BASIS
---- ----- ------------ ----------------
<S> <C> <C> <C>
Tracey L. Gray.......... President, Chief Operating Officer and Director 1 1
</TABLE>

117
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, at October 6, 1997, the number and
percentage of shares of Elcotel Common Stock which, according to information
supplied to Elcotel, are beneficially owned by: (i) each person who is the
beneficial owner of more than 5% of the Elcotel Common Stock; (ii) each of the
directors and Named Executive Officers of Elcotel individually; and (iii) all
current directors and executive officers of Elcotel as a group. Under rules
adopted by the Commission, a person is deemed to be a beneficial owner of
Elcotel 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 of October 6, 1997, such as upon the exercise of options
or warrants.

<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES(1) PERCENTAGE
---------------- ------------------- ----------
<S> <C> <C>
C. Shelton James............................... 1,561,093(2) 19.0%
6428 Parkland Drive
Sarasota, Florida 34243
Fundamental Management Corporation............. 1,439,223 17.5%
4000 Hollywood Boulevard
Suite 610N
Hollywood, Florida 33021
Alvaro R. Quiros............................... 473,477(3) 5.8%
6428 Parkland Drive
Sarasota, Florida 34243
Thomas R. Wiltse............................... 406,000(4) 4.9%
6428 Parkland Drive
Sarasota, Florida 34243
Tracey L. Gray................................. 150,284(5) 1.8%
6428 Parkland Drive
Sarasota, Florida 34243
T. Raymond Suplee.............................. 32,300(6) 0.4%
6428 Parkland Drive
Sarasota, Florida 34243
Thomas E. Patton............................... 11,000(7) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Dwight Jasmann................................. 9,890(8) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Charles H. Moore............................... 14,100(9) 0.2%
6428 Parkland Drive
Sarasota, Florida 34243
Ronald M. Tobin................................ 47,732(10) 0.6%
6428 Parkland Drive
Sarasota, Florida 34243
Eduardo Gandarilla............................. 12,500(11) 0.2%
6428 Parkland Drive
Sarasota, Florida 34243
Hugh H. Durden................................. 11,875(12) 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
All directors and executive officers as a group 2,308,961(13) 27.5%
(12 persons)..................................
</TABLE>

118
<PAGE>

- --------
(1) Unless otherwise indicated, each stockholder has sole voting and
investment power with respect to all listed shares.
(2) Includes 1,439,223 shares held by Fundamental Management Corporation, as
to which shares Mr. James disclaims beneficial ownership, and 6,250
shares which may be issued upon exercise of stock options within 60 days.
(3) Includes 17,000 shares which may be issued upon the exercise of stock
options within 60 days.
(4) Includes 30,000 shares which may be issued upon the exercise of stock
options within 60 days.
(5) Includes 21,250 shares which may be issued upon the exercise of stock
options within 60 days.
(6) Includes 7,000 shares held by a revocable trust in which Mr. Suplee has a
pecuniary interest and of which he is a co-trustee. Includes 23,000
shares which may be issued upon exercise of stock options within 60 days.
(7) Includes 500 shares held jointly with Mr. Patton's wife. Includes 10,000
shares which may be issued upon the exercise of stock options within 60
days.
(8) Includes 7,000 shares which may be issued upon the exercise of stock
options within 60 days.
(9) Includes 75 shares held by Mr. Moore's wife and 25 shares held by Mr.
Moore's daughter. Includes 13,000 shares which may be issued upon the
exercise of stock options within 60 days.
(10) Includes 150 shares held by Mr. Tobin's son. Includes 2,250 shares which
may be issued upon the exercise of stock options within 60 days.
(11) Includes 12,500 shares which may be issued upon the exercise of stock
options within 60 days.
(12) Includes 11,875 shares which may be issued upon the exercise of stock
options within 60 days.
(13) Includes a total of 1,439,223 shares held by Fundamental Management
Corporation and shares held by family members as to which shares the
respective officers and directors disclaim beneficial ownership. Also
includes 172,312 shares which may be issued upon exercise of stock
options within 60 days.

119
<PAGE>

ELCOTEL EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information covering the compensation
paid or accrued by Elcotel during the fiscal years indicated to its Chief
Executive Officer and to each of its four most highly compensated executive
officers, other than the Chief Executive Officer, whose salary and bonus
exceeded $100,000 during the fiscal year ended March 31, 1997 and who were
serving as executive officers as of March 31, 1997 and to one additional
executive officer who would have so qualified if he had been an executive
officer on March 31, 1997 ("Named Executive Officers"):

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
(A) (B) (C) (D) (E) (G) (I)
OTHER NUMBER OF
FISCAL YEAR ANNUAL SECURITIES
NAME AND ENDED COMPENSATION UNDERLYING ALL OTHER
PRINCIPAL POSITION MARCH 31, SALARY ($) BONUS ($) ($) OPTIONS(1) COMPENSATION ($)
------------------ ----------- ---------- --------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
C. Shelton James........ 1997 $ 83,338 $33,930 0 $2,030(2)
Chairman of the Board 1996 78,654 0 25,000 1,838(2)
and Chief Executive
Officer 1995 73,004 35,450 40,000 1,555(2)
Tracey L. Gray.......... 1997 148,928 60,450 0 3,656(2)
President and Chief 1996 138,039 0 25,000 3,463(2)
Operating Officer 1995 127,461 60,450 40,000 2,738(2)
Ronald M. Tobin......... 1997 100,063 17,640 0 2,182(2)
Vice President 1996 92,846 0 9,000 2,146(2)
Chief Financial Officer 1995 85,318 14,805 12,000 1,651(2)
Secretary and Treasurer
Alvaro R. Quiros (3).... 1997 123,160 0 0 3,253(2)
Executive Vice
President 1996 104,000 0 7,000 2,761(2)
1995 102,295 0 10,000 2,404(2)
Hugh H. Durden.......... 1997 148,452 9,525 0 2,869(2)
Vice President 1996 184,876 0 7,500 3,173(2)
1995 201,859 8,100 10,000 3,369(2)
Eduardo Gandarilla (4).. 1997 162,123 12,000 $44,617(5) 50,000 1,761(2)
Vice President 1996 0 0 0
1995 0 0 0
</TABLE>
- --------
(1) Represents options granted under Elcotel's 1991 Stock Option Plan. No
options were granted during the fiscal year ended March 31, 1997, except
for Mr. Gandarilla who received options upon joining Elcotel.
(2) Includes taxable portion of Elcotel paid Group Term Life Insurance and
Elcotel's matching contribution to the 401(k) savings plan (see Note P to
Elcotel's financial statements). Such Group Term Life Insurance for
Messrs. James, Gray, Tobin, Quiros, Durden and Gandarilla, respectively,
for Fiscal 1997 is $450, $702, $288, $702, $174 and $174 for Fiscal 1996
is $450, $702, $288, $702 and $174 and for Fiscal 1995 is $450, $702,
$288, $702 and $174. 401(k) savings plan matching contributions for
Messrs. James, Gray, Tobin, Quiros, Durden and Gandarilla, respectively,
for Fiscal 1997 are $1,580, $2,954, $1,894, $2,551, $2,695 and $1,588,
Fiscal 1996 are $1,388, $2,761, $1,858, $2,059 and $2,999 and for Fiscal
1995 are $1,105, $2,036, $1,363, $1,702 and $3,195.
(3) Mr. Quiros retired effective December 31, 1996. Elcotel continued to pay
Mr. Quiros' regular salary through June 30, 1997. $25,846 of his 1997
salary was paid to him pursuant to such arrangement during the quarter
ended March 31, 1997.
(4) Mr. Gandarilla joined Elcotel on April 1, 1996 and was appointed Vice
President on October 15, 1996.
(5) $39,217 of this amount represents reimbursement of relocation expenses to
Mr. Gandarilla during the fiscal year ended March 31, 1997.

120
<PAGE>

STOCK OPTION GRANTS

The following table sets forth the number of securities underlying options,
the exercise price and the expiration date for stock options granted to the
Chief Executive Officer and the Named Executive Officers who received options
during the fiscal year ended March 31, 1997.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-------------------- ----------------------
(A) (B) (C) (D) (E) (F) (G)
% OF TOTAL
OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) (1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Eduardo Gandarilla...... 50,000 51.6% $5.2500 4/01/01 $ 72,524 $ 160,259
</TABLE>
- --------
(1) Options granted upon joining Elcotel which become exercisable one fourth
each year, cumulatively, beginning on April 1,1997, and expire on April 1,
2001. No other options were granted during the fiscal year ended March 31,
1997 to the Named Executive Officers.

STOCK OPTION EXERCISES AND HOLDINGS

The following table sets forth the number of exercisable and unexercisable
options as of March 31, 1997 and the value of such options for the named
executive officers.

AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS VALUE TABLE

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C>
C. Shelton James........ 74,227 $372,542 6,250/43,750 $ 781/$81,105
Tracey L. Gray.......... 35,000 $183,163 6,250/43,750 $ 781/$81,105
Ronald M. Tobin......... -- -- 10,550/14,750 $27,511/$26,723
Alvaro R. Quiros........ -- -- 17,000/0 $ 29,000/$0
Hugh H. Durden.......... -- -- 6,875/13,125 $18,521/$26,021
Eduardo Gandarilla...... -- -- 0/50,000 $ 0/$53,125
</TABLE>

SEVERANCE ARRANGEMENTS

In connection with hiring Mr. Gandarilla, Elcotel agreed to provide Mr.
Gandarilla with one year of salary and benefits in the event of early
discharge due to performance reasons.

Elcotel has agreed with Ronald M. Tobin, currently Chief Financial Officer
of Elcotel, that if, during the first year after the effective date of the
Merger, Mr. Tobin's employment is terminated or he resigns for any reason, he
will receive severance pay consisting of one year of salary continuation and
benefits and his outstanding stock options will vest and remain exercisable
for one year after termination. In addition, Mr. Tobin will receive severance
pay consisting of one year of salary continuation and benefits and his
outstanding stock options will vest and remain exercisable for one year after
termination if Mr. Tobin's employment is terminated for any reason other than
cause after the one year anniversary of the effective date of the Merger.

121
<PAGE>

ELCOTEL COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION

This report, prepared by Elcotel's Compensation and Stock Option Committee
(the "Compensation Committee"), reflects executive compensation policy and
philosophy applicable to fiscal year 1997. All members of the Compensation
Committee are non-employee directors.

Elcotel's executive compensation plans have been structured to attract,
retain and incentivize talented executives capable of executing the strategies
and plans essential to a fast growth, technology-based company in the
traditional and emerging competitive telecommunications markets. The policies
and plans are designed to ensure individual executives receive compensation in
direct relationship to their contribution to key corporate financial and
strategic goals that are focused on short-term and long-term business success
while increasing shareholder values. The plans are designed to be equitable
and to recognize the balance between short-term operating performance and
stock performance.

For fiscal year 1997, the Compensation Committee adopted an incentive
compensation bonus plan for the senior executive officers: C. Shelton James,
CEO and Tracey L. Gray, President/COO, related to overall corporate financial
performance. Discretionary bonuses up to 50% of base salary would be paid
based on Elcotel's performance as measured against key financial factors,
revenues, operating profits and increasing profitability. The Compensation
Committee determined the appropriate level of bonus based on overall
consideration of Elcotel's performance for the fiscal year. The Compensation
Committee awarded a $33,930 bonus to Mr. James and a $60,450 bonus to Mr.
Gray.

For fiscal year 1997, the Compensation Committee adopted a discretionary
incentive compensation bonus plan for corporate officers other than Mr. James
and Mr. Gray. Maximum bonus levels of 20% to 25% of base salary would be paid
based on Elcotel achieving operating performance goals established for
revenues, gross margins, operating profits and personal objectives related to
each officer's area of responsibility. Recommendations regarding the bonus
payment to each officer were presented by Mr. Gray once final results were
available. No bonus is payable under the plan unless Elcotel reports profits.
All bonuses awarded under the plan are paid out in equal annual amounts over
four years. The corporate performance goals and the personal objectives of
each officer are approved at the beginning of each fiscal year following the
fiscal year business plan approval.

In October of 1996, the Compensation Committee authorized adjustments in all
corporate officers' base compensation. This adjustment represented the first
increase in officer base compensation since July of 1995. The adjustments
represented a combination of annual salary review adjustments as well as
structural adjustments to address industry and competitive issues faced by
Elcotel as it attempts to attract a more talented and experienced executive
team. The Compensation Committee was briefed on comparable officer
compensation in the industry from a variety of salary survey reports and
competitors' officer compensation structures and also considered data provided
by Towers Perrin which had been commissioned by the Compensation Committee to
advise on compensation issues.

Mr. James and Mr. Gray's base compensation was adjusted from $80,000 to
$87,000 and from $141,000 to $155,000, respectively, at the recommendation of
the Compensation Committee effective October 1, 1996.

The Compensation Committee recognizes the merits and value of stock
ownership by Elcotel's executives as a basis for retention and aligning the
executive's interests with the stockholders of Elcotel. The use of stock
option grants has become a key element of the equity-based compensation plans
designed to increase the equity interest of Elcotel's executives and combined
with performance-based incentive compensation, ensures a balanced perspective
focused on these two objectives.

The Committee also recognizes that in times of general economic distress, it
may not be economically practical to maintain total compensation, particularly
for senior managers, within the targeted ranges.

122
<PAGE>

To ensure executive compensation is appropriately aligned with performance
and the financial interest of stockholders, and that senior managers share
with those associates subject to layoff and shorter work weeks the financial
impact of difficult economic conditions, it has been the practice of the
Compensation Committee to recommend salary freezes or temporary salary
reduction for senior managers during periods of general economic distress and
poor corporate performance.

Respectfully submitted,

Thomas R. Wiltse, Chairman

Dwight Jasmann

Charles H. Moore

T. Raymond Suplee

123
<PAGE>

ELCOTEL STOCK PERFORMANCE CHART

The following chart compares the yearly percentage change in cumulative
total stockholder return on Elcotel Common Stock during the five years ended
March 31, 1997, with the cumulative total return of (i) the Standard & Poors
500 Composite Index, (ii) the Standard & Poors Telephone Index and (iii) the
Standard & Poors Technology Index. The comparison assumes $100 was invested on
March 31, 1992 in Elcotel Common Stock and in each of the other indices and
assumes reinvestment of dividends. Elcotel paid no dividends during the five
year period.

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
3/31/92 3/31/93 3/31/94 3/31/95 3/31/96 3/31/97
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Elcotel, Inc.................... $100 $338 $938 $1,015 $1,292 $1,538
S&P 500 Index................... 100 115 117 135 177 213
S&P Telephone Index............. 100 136 133 147 186 201
S&P Technology Index............ 100 147 189 243 334 493
</TABLE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ELCOTEL

As of March 31, 1997, Elcotel was owed approximately $325,000 from Aditel, a
Mexican corporation ("Aditel"), arising out of loans and sales of payphones to
Aditel. This amount is represented by a promissory note which matures on
September 30, 1997, payment of which is secured by a security interest in
certain payphones and operating agreements of Aditel. Mr. Alvaro R. Quiros, a
holder of approximately 6.3 percent of the outstanding Elcotel Common Stock as
of June 9, 1997, is the owner of approximately 25 percent of the equity of
Aditel.

124
<PAGE>

LEGAL MATTERS

The validity of the Elcotel Common Stock to be issued pursuant to the Merger
will be passed upon for Elcotel by Schnader Harrison Segal & Lewis llp. It is
a condition precedent to the obligations of TSG to consummate the Merger
Agreement that TSG receive an opinion of Greenberg Traurig Hoffman Lipoff
Rosen & Quentel to the effect that neither TSG nor any of its stockholders
will recognize gain or loss for United States federal income tax purposes as a
result of the Merger (other than in respect of any cash paid in lieu of
fractional shares).

EXPERTS

The consolidated financial statements of Elcotel, Inc. and subsidiaries as
of March 31, 1997 and 1996 and for each of the years in the three-year period
ended March 31, 1997, incorporated by reference herein and in the Registration
Statement, have been audited by Deloitte & Touche llp, independent auditors,
as stated in their report, which is incorporated herein by reference, and have
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

The consolidated financial statements of TSG and subsidiary as of March 28,
1997 and March 29, 1996 and for the years ended March 28, 1997 and March 29,
1996, five months ended March 31, 1995 and seven months ended October 30, 1994
included as Appendix C hereto and in the Registration Statement have been
audited by Deloitte & Touche llp, independent auditors, as stated in their
report and have been included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.

STOCKHOLDER PROPOSALS

Proposals by stockholders of Elcotel intended to be presented at the next
annual meeting of stockholders of Elcotel must be received by Elcotel at its
executive offices at 6428 Parkland Drive, Sarasota, Florida 34243, on or
before May 9, 1998, to be included in Elcotel's proxy statement and form of
proxy for the 1998 annual meeting. Proposals by stockholders of TSG intended
to be presented at the annual meeting of stockholders of TSG, if the Merger is
not consummated before such meeting is held, must be received by TSG at its
executive offices at 20 Mansell Court East, Suite 200, Roswell, Georgia 30076,
on or before May 1, 1998, to be included in TSG's proxy statement and form of
proxy for the 1998 annual meeting.

125
<PAGE>

Appendix A

AGREEMENT AND PLAN OF MERGER

dated as of August 13, 1997

Among

ELCOTEL, INC.,
TECHNOLOGY SERVICE GROUP INC.
and
ELCOTEL HOSPITALITY SERVICE, INC.
<PAGE>

TABLE OF CONTENTS

Page

TABLE OF DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . v

ARTICLE I - THE MERGER . . . . . . . . . . . . . . . . . . . . . 2
Section 1.01 The Merger. . . . . . . . . . . . . . . . . . 2
Section 1.02 Conversion of Shares. . . . . . . . . . . . . 2
Section 1.03 Surrender and Payment. . . . . . . . . . . . 3
Section 1.04 Stock Option Plans. . . . . . . . . . . . . . 5
Section 1.05 TSG Warrants. . . . . . . . . . . . . . . . . 6
Section 1.06 Fractional Shares.. . . . . . . . . . . . . . 7

ARTICLE II - THE SURVIVING CORPORATION . . . . . . . . . . . . . 7
Section 2.01 Certificate of Incorporation. . . . . . . . . 7
Section 2.02 Bylaws. . . . . . . . . . . . . . . . . . . 7
Section 2.03 Directors and Officers. . . . . . . . . . . 8

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF TSG. . . . . . . 8
Section 3.01 Organization and Power. . . . . . . . . . . 8
Section 3.02 Corporate Authorization. . . . . . . . . . . 8
Section 3.03 Governmental Authorization. . . . . . . . . 9
Section 3.04 Non-Contravention. . . . . . . . . . . . . . 9
Section 3.05 Capitalization of TSG. . . . . . . . . . . .10
Section 3.06 Capitalization of Subsidiaries. . . . . . .11
Section 3.07 SEC Filings. . . . . . . . . . . . . . . . .11
Section 3.08 Financial Statements. . . . . . . . . . . .11
Section 3.09 Information Supplied. . . . . . . . . . . .12
Section 3.10 Absence of Certain Changes. . . . . . . . .12
Section 3.11 No Undisclosed Liabilities. . . . . . . . .13
Section 3.12 Litigation. . . . . . . . . . . . . . . . .14
Section 3.13 Taxes. . . . . . . . . . . . . . . . . . . .14
Section 3.14 Employee Benefit Plans; ERISA. . . . . . . .16
Section 3.15 Certain Agreements; Compliance
with Agreements. . . . . . . . . . . . .17
Section 3.16 Compliance with Laws and Orders. . . . . . .19
Section 3.17 Environmental Matters. . . . . . . . . . . .20
Section 3.18 Assets. . . . . . . . . . . . . . . . . . .21
Section 3.19 Intellectual Property Rights. . . . . . . .21
Section 3.20 Labor Matters. . . . . . . . . . . . . . . .22
Section 3.21 Transactions with Affiliates. . . . . . . .22
Section 3.22 Insurance. . . . . . . . . . . . . . . . . .22
Section 3.23 Takeover Statutes. . . . . . . . . . . . . .23
Section 3.24 Finders' Fees . . . . . . . . . . . . . . . .23
<PAGE>

ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF ELCOTEL . . . . .23
Section 4.01 Organization and Power. . . . . . . . . . .23
Section 4.02 Corporate Authorization. . . . . . . . . . .23
Section 4.03 Governmental Authorization. . . . . . . . .24
Section 4.04 Non-Contravention. . . . . . . . . . . . . .24
Section 4.05 Capitalization of Elcotel. . . . . . . . . .25
Section 4.06 Capitalization of Subsidiaries. . . . . . .25
Section 4.07 SEC Filings. . . . . . . . . . . . . . . . .26
Section 4.08 Financial Statements. . . . . . . . . . . .26
Section 4.09 Information Supplied. . . . . . . . . . . .27
Section 4.10 Absence of Certain Changes. . . . . . . . .27
Section 4.11 No Undisclosed Liabilities. . . . . . . . . .28
Section 4.12 Litigation. . . . . . . . . . . . . . . . .28
Section 4.13 Taxes. . . . . . . . . . . . . . . . . . . .29
Section 4.14 Employee Benefits; ERISA. . . . . . . . . .30
Section 4.15 Certain Agreements; Compliance with
Agreements. . . . . . . . . . . . . . . .32
Section 4.16 Compliance with Laws and Orders. . . . . . .34
Section 4.17 Environmental Matters. . . . . . . . . . . .34
Section 4.18 Assets. . . . . . . . . . . . . . . . . . .34
Section 4.19 Intellectual Property Rights. . . . . . . . .35
Section 4.20 Labor Matters. . . . . . . . . . . . . . . .35
Section 4.21 Transactions with Affiliates. . . . . . . . .36
Section 4.22 Insurance. . . . . . . . . . . . . . . . . .36
Section 4.23 Takeover Statutes. . . . . . . . . . . . . .36
Section 4.24 Finders' Fees . . . . . . . . . . . . . . . .37
Section 4.25 Opinion of Financial Advisor. . . . . . . .37

ARTICLE V - COVENANTS. . . . . . . . . . . . . . . . . . . . . .37
Section 5.01 Conduct of TSG. . . . . . . . . . . . . . .37
Section 5.02 Conduct of Elcotel. . . . . . . . . . . . .39
Section 5.03 No Solicitation.. . . . . . . . . . . . . . .42
Section 5.04 Approval of Stockholders. . . . . . . . . .43
Section 5.05 Preparation of Form S-4 and Proxy Statement. 44
Section 5.06 Access to Information. . . . . . . . . . .44
Section 5.07 Notices of Certain Events. . . . . . . . . .45
Section 5.08 Regulatory and Other Approvals. . . . . . . .46
Section 5.09 Public Announcements. . . . . . . . . . . .46
Section 5.10 Further Assurances. . . . . . . . . . . . .46
Section 5.11 TSG Affiliates. . . . . . . . . . . . . . .47
Section 5.12 Obligations of Merger Subsidiary. . . . . .47
Section 5.13 Listing of Stock. . . . . . . . . . . . . . .47
Section 5.14 Antitakeover Statutes. . . . . . . . . . . .47
Section 5.15 Tax Treatment. . . . . . . . . . . . . . . .47
Section 5.16 Appointment of Directors. . . . . . . . . . .47
<PAGE>

ARTICLE VI - GENERAL CONDITIONS PRECEDENT TO THE MERGER. . . . .48
Section 6.01 Stockholder Approval. . . . . . . . . . . .48
Section 6.02 HSR Act. . . . . . . . . . . . . . . . . . .48
Section 6.03 Registration Statement; State Securities
Laws........................................48
Section 6.04 Listing. . . . . . . . . . . . . . . . . . .48
Section 6.05 Suits or Other Proceedings. . . . . . . . . .48
Section 6.06 Employment Agreements . . . . . . . . . . . .48

ARTICLE VII - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
ELCOTEL AND MERGER SUBSIDIARY. . . . . . . . . . . . . . . .49
Section 7.01 Representations and Warranties. . . . . . . .49
Section 7.02 Performance of Obligations. . . . . . . . .49
Section 7.03 No Material Adverse Change. . . . . . . . .49
Section 7.04 Consents. . . . . . . . . . . . . . . . . .49
Section 7.05 Opinion of TSG Counsel. . . . . . . . . . .49
Section 7.06 Stockholders Agreement. . . . . . . . . . .49
Section 7.07 Proceedings. . . . . . . . . . . . . . . . .49

ARTICLE VIII - CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF TSG . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Section 8.01 Representations and Warranties. . . . . . .50
Section 8.02 Performance of Obligations. . . . . . . . .50
Section 8.03 No Material Adverse Change. . . . . . . . .50
Section 8.04 Consents. . . . . . . . . . . . . . . . . .50
Section 8.05 Opinion of Elcotel Counsel. . . . . . . . .50
Section 8.06 Stockholders Agreement. . . . . . . . . . .51
Section 8.07 Proceedings. . . . . . . . . . . . . . . . .51
Section 8.08 Tax Opinion. . . . . . . . . . . . . . . . .51

ARTICLE IX - TERMINATION . . . . . . . . . . . . . . . . . . . .51
Section 9.01 Termination. . . . . . . . . . . . . . . . .51
Section 9.02 Effect of Termination.. . . . . . . . . . . .52
<PAGE>

ARTICLE X - MISCELLANEOUS . . . . . . . . . . . . . . . . . . .54
Section 10.01 Notices. . . . . . . . . . . . . . . . . . .54
Section 10.02 Entire Agreement; Non-Survival of
Representations and Warranties;
Third Party Beneficiaries. . . . . . . . .55
Section 10.03 Amendment. . . . . . . . . . . . . . . . . . 55
Section 10.04 Waiver. . . . . . . . . . . . . . . . . . .55
Section 10.05 Expenses. . . . . . . . . . . . . . . . . .56
Section 10.06 Successors and Assigns. . . . . . . . . . .56
Section 10.07 Governing Law. . . . . . . . . . . . . . . .56
Section 10.08 Jurisdiction. . . . . . . . . . . . . . . .56
Section 10.09 Counterparts; Effectiveness. . . . . . . . .56
Section 10.10 Interpretation. . . . . . . . . . . . . . .56
Section 10.11 Severability. . . . . . . . . . . . . . . .57
Section 10.12 Specific Performance. . . . . . . . . . . .57

EXHIBITS

Voting Agreement . . . . . . . . . . . . . . . . . . . . . . A

Affiliate Letter . . . . . . . . . . . . . . . . . . . . . . B

Opinion of TSG Counsel . . . . . . . . . . . . . . . . . . . C

Stockholders' Agreement. . . . . . . . . . . . . . . . . . . D

Opinion of Elcotel Counsel . . . . . . . . . . . . . . . . . E
<PAGE>

TABLE OF DEFINITIONS

Term Section
- ------ -------
1933 Act 3.03
1934 Act 3.03
Acor preamble
Adjusted Option 1.04(a)
Affiliate Letter 5.11
Alternative Proposal 5.03
Antitrust Division 5.08
Closing 1.01(b)
Closing Date 1.01(b)
Code recitals
Confidentiality Agreement 5.06(a)
Delaware Law 1.01(a)
Elcotel preamble
Elcotel 10-K 4.08
Elcotel Agreement 4.04
Elcotel Balance Sheet 4.08
Elcotel Balance Sheet Date 4.08
Elcotel Common Stock 1.02(a)
Elcotel Disclosure Letter 2.03
Elcotel ERISA Affiliate 4.14(a)
Elcotel Financial Statements 4.08
Elcotel Plans 4.05(a)
Elcotel Benefit Plans 4.14(a)
Elcotel Securities 4.05(a)
Elcotel SEC Documents 4.07(a)
Elcotel Stockholders' Approval 5.03(b)
Elcotel Stockholders' Meeting(s) 5.03(b)
Elcotel Subsidiary Securities 4.06
Elcotel Tax Returns 4.13
Effective Time 1.01(c)
Environmental Laws 3.17(b)
Environmental Liabilities 3.17(b)
ERISA 3.14(a)
Exchange Agent 1.03(a)
Form S-4 4.09
FTC 5.08
GAAP 3.08
Governmental Authorities 3.03
Hazardous Substance 3.17(b)
<PAGE>

Term Section
- ------ -------
HSR Act 3.03
Intellectual Property 3.19(a)
Laws 3.04
Material Adverse Effect 3.01
Merger 1.01(a)
Merger Consideration 1.02(c)
Merger Subsidiary preamble
Notice of Superior Proposal 5.04(a)
Orders 3.04
Person 1.02(d)
Proxy Statement 3.09
Qualified Stock Options 1.04(a)
Takeover Statute 3.23
Taxes 3.13(i)
Taxing Authority 3.13(i)
Tax Return 3.13(i)
TSG preamble
TSG 10-K 3.08
TSG Affiliates 5.11
TSG Agreement 3.04
TSG Balance Sheet 3.08
TSG Balance Sheet Date 3.08
TSG Benefit Plans 3.14(a)
TSG Common Stock 1.02(a)
TSG Disclosure Letter 3.08
TSG ERISA Affiliate 3.14(a)
TSG Financial Statements 3.01
TSG Group 3.13(i)
TSG Option Plans 1.04(a)
TSG Preferred Stock 3.05(a)
TSG Securities 3.05(a)
TSG Subsidiary Securities 3.06
TSG SEC Documents 3.07(a)
TSG Stockholders' Approval 5.03(a)
TSG Stockholders' Meeting 5.04(a)
TSG Stock Option 1.04(a)
TSG Tax Returns 3.13(a)
Service 3.13(h)
Share(s) 1.02(a)
Stockholders recitals
Stockholders' Meetings 5.04(b)
Subsidiary 1.02(d)
Subsidiary of TSG 3.17(b)
Superior Proposal 5.03(a)
Surviving Corporation 1.01(a)
Voting Agreement recitals
Wexford recitals
<PAGE>

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER dated as of August 13, 1997 among ELCOTEL,
INC., a Delaware corporation ("Elcotel"), TECHNOLOGY SERVICE GROUP, INC., a
Delaware corporation ("TSG"), and ELCOTEL HOSPITALITY SERVICE, INC., a Delaware
corporation and a wholly-owned subsidiary of Elcotel ("Merger Subsidiary").

WHEREAS, the respective Boards of Directors of Elcotel and TSG have
approved, and deem it advisable and in the best interests of their respective
stockholders to consummate the acquisition of TSG by Elcotel by means of a
merger of Merger Subsidiary into TSG, as a result of which TSG will become a
wholly owned subsidiary of Elcotel, all on the terms and conditions set forth
herein;

WHEREAS, for United States federal income tax purposes, it is intended
that the Merger contemplated by this Agreement qualify as a "reorganization"
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "Code"); and

WHEREAS, as a condition and inducement to Elcotel entering into this
Agreement and incurring the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, Elcotel is entering into a Voting
Agreement with Wexford Partners Fund, L.P. ("Wexford") and Fundamental
Management Corporation ("Fundamental", together with Wexford, the
"Stockholders"), in the form of Exhibit A hereto (the "Voting Agreement")
pursuant to which, among other things, Wexford has agreed to vote the shares of
TSG Common Stock owned by it in favor of this Agreement and the Merger and other
transactions provided for herein and Fundamental has agreed to vote the shares
of Elcotel Common Stock owned by it in favor of the issuance of shares of
Elcotel Common Stock pursuant to the Merger and the other transactions
contemplated by the Merger.

NOW, THEREFORE, in consideration of the promises and the respective
representations, warranties, covenants, and agreements set forth herein and in
the Voting Agreement, the parties hereto, intending to be legally bound hereby,
agree as follows:
<PAGE>

ARTICLE I
THE MERGER

Section 1.01 The Merger.

(a) Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, Merger Subsidiary shall be merged (the
"Merger") with and into TSG in accordance with the Delaware General Corporation
Law (the "Delaware Law"), whereupon the separate existence of Merger Subsidiary
shall cease, and TSG shall continue as the surviving corporation (the "Surviving
Corporation");

(b) Upon the terms and subject to the conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at 10:00
a.m. on a date to be specified by the parties (the "Closing Date"), which shall
be no later than the fifth business day after satisfaction of the conditions set
forth in Article 6, at the offices of Schnader, Harrison, Segal & Lewis LLP,
14th Floor, 330 Madison Avenue, New York, New York 10017, unless another time,
date or place is agreed to in writing by the parties hereto;

(c) Upon the Closing, TSG and Merger Subsidiary will file a
certificate of merger with the Secretary of State of the State of Delaware and
make all other filings or recordings required by Delaware Law in connection with
the Merger. The Merger shall become effective at such time as the certificate of
merger is duly filed with the Secretary of State of the State of Delaware or at
such later time as is agreed by Elcotel and TSG and specified in the certificate
of merger (the "Effective Time");

(d) The Merger shall have the effects set forth in Section 259 of
the Delaware Law; and

(e) Each party hereto will, either prior to or after the Effective
Time, execute such further documents, instruments, deeds, bills of sale,
assignments and assurances and take such further actions as may reasonably be
requested by one or more of the others to consummate the Merger, to vest the
Surviving Corporation with full title to all assets, properties, privileges,
rights, approvals, immunities and franchises of Merger Subsidiary or TSG, or to
effect the other purposes of this Agreement.

Section 1.02 Conversion of Shares.

(a) At the Effective Time by virtue of the Merger, and without any
action on the part of the holder of any common stock of TSG or Merger
Subsidiary:

(i) each share of Common Stock, par value $0.01 per share, of
TSG (the "TSG Common Stock") held by TSG as treasury stock or owned by
Elcotel or any Subsidiary of Elcotel immediately prior to the Effective Time
shall automatically be canceled and retired without any conversion thereof,
and no Elcotel Common Stock or other consideration shall be delivered in
exchange therefor;

2
<PAGE>

(ii) each share of common stock, par value $0.01 per share,
of Merger Subsidiary outstanding immediately prior to the Effective Time
shall automatically be converted into and become one share of common stock
of the Surviving Corporation and shall constitute the only outstanding
shares of capital stock of the Surviving Corporation; and

(iii) each share (each, a "Share" and collectively, the
"Shares") of TSG Common Stock outstanding immediately prior to the Effective
Time shall, except as otherwise provided in Section 1.02(a)(i),
automatically be converted into the right to receive 1.05 shares of fully
paid and non-assessable Common Stock, par value $0.01 per share of Elcotel
(the "Elcotel Common Stock").

(b) From and after the Effective Time, all Shares converted in
accordance with Section 1.02(a)(iii) shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any such Shares shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration. From
and after the Effective Time, all certificates representing the common stock of
Merger Subsidiary shall be deemed for all purposes to represent the number of
shares of Common Stock of the Surviving Corporation into which they were
converted in accordance with Section 1.02(a)(ii);

(c) The Elcotel Common Stock to be received as consideration
pursuant to the Merger by each holder of Shares (together with cash in lieu of
fractional shares of Elcotel Common Stock) is referred to herein as the "Merger
Consideration"; and

(d) For purposes of this Agreement, the word "Subsidiary" when
used with respect to any Person means any other Person, whether incorporated or
unincorporated, of which at least a majority of the securities or other
interests having by their terms ordinary voting power to elect at least a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such Person or by any one or more of its Subsidiaries.
For purposes of this Agreement, "Person" means an individual, a corporation, a
limited liability company, a partnership, an association, a trust or any other
entity or organization, including a Governmental Authority.

3
<PAGE>

Section 1.03 Surrender and Payment.

(a) Prior to the Effective Time, Elcotel shall appoint an agent
reasonably satisfactory to TSG (the "Exchange Agent") for the purpose of
exchanging certificates representing Shares for the Merger Consideration.
Promptly after the Effective Time (but in any event within five business days
thereafter), Elcotel will send, or will cause the Exchange Agent to send, to
each holder of Shares at the Effective Time (i) a letter of transmittal for use
in such exchange (which shall specify that delivery of the Merger Consideration
shall be effected, and risk of loss and title to the certificates representing
TSG Common Stock shall pass, only upon proper delivery of the certificates
representing Shares to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of the certificates representing Shares in exchange for
the certificates representing Elcotel Common Stock and cash in lieu of
fractional shares of Elcotel Common Stock. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to a holder of
certificates theretofore representing Shares for any amount which may be
required to be paid to a public official pursuant to any applicable abandoned
property, escheat or similar law;

(b) Each holder of Shares that have been converted into a right to
receive the Merger Consideration, upon surrender to the Exchange Agent of a
certificate or certificates representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive the Merger Consideration payable in respect of such Shares and any
dividends payable pursuant to Section 1.03(f). Until so surrendered, each such
certificate shall, after the Effective Time, represent for all purposes only the
right to receive the Merger Consideration and any dividends payable pursuant to
Section 1.03(f) and the holder thereof shall not be entitled to vote the Elcotel
Common Stock until such certificate is surrendered;

(c) If any certificate representing Merger Consideration is to be
delivered to a Person other than the registered holder of the Shares represented
by the certificate or certificates surrendered in exchange therefor, it shall be
a condition to the issuance of such certificate evidencing Elcotel Common Stock
that the certificate or certificates so surrendered shall be properly endorsed
or otherwise be in proper form for transfer and that the Person requesting such
payment shall pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of shares of Elcotel Common Stock to a Person other than
the registered holder of such Shares represented by the certificate or
certificates so surrendered or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable;

(d) After the Effective Time, there shall be no further
registration of transfers of Shares on the stock transfer book of TSG. If, after
the Effective Time, certificates representing Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for the
consideration provided for, and in accordance with the procedures set forth, in
this Article I;

4
<PAGE>

(e) Any portion of the Merger Consideration that remains unclaimed
by the holders of Shares six months after the Effective Time shall be returned
to Elcotel, upon demand, and any such holder who has not exchanged his Shares
for the Merger Consideration in accordance with this Section 1.03 prior to that
time shall thereafter look only to Elcotel for payment of the Merger
Consideration. Notwithstanding the foregoing, Elcotel shall not be liable to any
holder of Shares for any amount paid to a public official pursuant to applicable
abandoned property laws. Any amounts remaining unclaimed by holders of Shares
seven years after the Effective Time (or such earlier date immediately prior to
such time as such amounts would otherwise escheat to or become property of any
Governmental Authority) shall, to the extent permitted by applicable law, become
the property of Elcotel free and clear of any claims or interest of any Person
previously entitled thereto;

(f) No dividends or other distributions with respect to Elcotel
Common Stock issued in the Merger shall be paid to the holder of any
unsurrendered certificates representing Shares until such certificates are
surrendered as provided in this Section 1.03. Subject to the effect of
applicable laws, following the surrender of such certificates, there shall be
paid, without interest, to the record holder of the Elcotel Common Stock issued
in exchange therefor at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time payable prior to
or on the date of such surrender with respect to such whole shares of Elcotel
Common Stock and not previously paid, less the amount of any withholding taxes
which may be required thereon;

(g) In the event any certificate representing Shares shall have
been lost, stolen or destroyed, upon the making of an affidavit of the fact by
the person claiming such certificate to be lost, stolen or destroyed, Elcotel
will, after the Effective Time, issue in exchange for such lost, stolen or
destroyed certificate the certificate evidencing shares of Elcotel Common Stock
deliverable in respect thereof, as determined in accordance with this Article I.
When authorizing such issue of the certificate of shares of Elcotel Common Stock
in exchange therefor, Elcotel may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate to give Elcotel a bond in such sum as it may direct as
indemnity against any claim that may be made against Elcotel with respect to the
certificate alleged to have been lost, stolen or destroyed; and

(h) Approval and adoption of this Agreement by the stockholders of
TSG shall constitute, as an integral part of the Merger, ratification of the
appointment of, and the reappointment of, said Exchange Agent.

Section 1.04 Stock Option Plans.

(a) At or before the Effective Time, Elcotel and TSG shall take
such action as may be required to effect the following: the terms of each
outstanding option granted by TSG to purchase shares of TSG Common Stock (a "TSG
Stock Option") under the TSG 1994 Omnibus Stock Plan (the "Omnibus Plan"), the
TSG 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan") and the

5
<PAGE>

TSG 1995 Non-Employee Director Stock Option Plan (the "Director Plan," together
with the Omnibus Plan and the Stock Purchase Plan, collectively, the "TSG Option
Plans"), whether vested or unvested, shall be adjusted as necessary to provide
that at the Effective Time, each TSG Stock Option outstanding immediately prior
to the Effective Time shall be deemed to constitute and shall become an option
to acquire, on the same terms and conditions as were applicable under such TSG
Stock Option, the same number of shares of Elcotel Common Stock as the holder of
such TSG Stock Option would have been entitled to receive pursuant to the Merger
had such holder exercised such TSG Stock Option in full immediately prior to the
Effective Time, at a price per share of Elcotel Common Stock equal to (i) the
aggregate exercise price for the shares of TSG Common Stock otherwise
purchasable pursuant to such TSG Stock Option divided by (ii) the aggregate
number of shares of Elcotel Common Stock deemed purchasable pursuant to such TSG
Stock Option (each, as so adjusted, an "Adjusted Option"); provided that (after
aggregating all the Shares of a holder subject to TSG Stock Options) any
fractional share of Elcotel Common Stock resulting from such calculation for
such holder shall be rounded up to the nearest whole share and provided,
further, that in the case of any option to which Section 421 of the Code applies
by reason of its qualification under any of Sections 422 through 424 of the Code
("qualified stock options"), the option price, the number of shares purchasable
pursuant to such option and the terms and conditions of exercise of such option
shall be determined in order to comply with Section 424 of the Code;

(b) As soon as practicable after the Effective Time, Elcotel shall
deliver to the holders of TSG Stock Options appropriate notices setting forth
such holders' rights pursuant to the respective TSG Option Plans and the
agreements evidencing the grants of such TSG Stock Options and that such TSG
Stock Options and agreements shall be assumed by Elcotel and shall continue in
effect on the same terms and conditions (subject to the adjustments required by
this Section 1.04 after giving effect to the Merger); and

(c) Elcotel shall take such actions as are reasonably necessary
for the assumption of the TSG Option Plans pursuant to this Section 1.04,
including the reservation, issuance and listing of Elcotel Common Stock as is
necessary to effectuate the transactions contemplated by this Section 1.04.
Elcotel shall prepare and file with the SEC a registration statement on Form S-8
or other appropriate form with respect to shares of Elcotel Common Stock subject
to TSG Stock Options issued under such TSG Option Plans and shall use its
reasonable efforts to have such registration statement declared effective as
soon as practicable following the Effective Time and to maintain the
effectiveness of such registration statement or registration statements covering
such TSG Stock Options (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such TSG Stock Options remain
outstanding.

6
<PAGE>

Section 1.05 TSG Warrants.

(a) At or before the Effective Time, Elcotel and TSG shall take
such action in connection with warrants to purchase 575,000 shares of TSG Common
Stock issued by TSG pursuant to that certain warrant agreement between TSG and
Liberty Bank and Trust Company of Oklahoma City, N.A. dated as of May 10, 1996
as may be required to effect the following: the terms of each outstanding
warrant to purchase shares of TSG Common Stock (a "TSG Public Warrant") issued
pursuant to such warrant agreement shall be adjusted as necessary to provide
that at the Effective Time, each TSG Public Warrant outstanding immediately
prior to the Effective Time shall be deemed to constitute and shall become a
warrant to acquire, on substantially the same terms and conditions as were
applicable under such TSG Public Warrant, the same number of shares of Elcotel
Common Stock as the holder of such TSG Public Warrant would have been entitled
to receive pursuant to the Merger had such holder exercised such TSG Public
Warrant in full immediately prior to the Effective Time.

(b) At or before the Effective Time, Elcotel and TSG shall take
such action in connection with the warrants to purchase 100,000 shares of TSG
Common Stock issued by TSG pursuant to that certain underwriter's warrant
agreement between TSG and Brookehill Equities, Inc. dated as of May 10, 1996 as
may be required to effect the following: the terms of each outstanding warrant
to purchase shares of TSG Common Stock (a "TSG Underwriter Warrant") issued
pursuant to such underwriter's warrant agreement shall be adjusted as necessary
to provide that at the Effective Time, each TSG Underwriter Warrant outstanding
immediately prior to the Effective Time shall be deemed to constitute and shall
become a warrant to acquire, on substantially the same terms and conditions as
were applicable under such TSG Underwriter Warrant, the same number of shares of
Elcotel Common Stock as the holder of such TSG Underwriter Warrant would have
been entitled to receive pursuant to the Merger had such holder exercised such
TSG Underwriter Warrant in full immediately prior to the Effective Time.

Section 1.06 Fractional Shares. Neither certificates nor scrip for
fractional shares of Elcotel Common Stock will be issued in the Merger, but in
lieu thereof each holder of TSG Common Stock otherwise entitled to a fraction of
a share of Elcotel Common Stock (after aggregating all fractional shares of TSG
Common Stock that would otherwise be received by such holder) will be entitled
hereunder to receive a cash payment. The amount of such cash payment shall
equal, in the case of each fractional share, an amount (rounded to the nearest
whole cent), without interest, calculated as the product of (i) such fraction,
multiplied by (ii) the arithmetic mean of the closing sales prices for the
Elcotel Common Stock reported on the NASDAQ National Market System for each of
the five (5) consecutive trading days on which Elcotel Common Stock was traded
immediately preceding the Effective Time as quoted in the Wall Street Journal or
other reliable financial newspaper or publication. For the purposes of the
preceding sentence, a "trading day" means a day on which trading generally takes
place on the NASDAQ National Market System. No such fractional share interest
shall entitle the owner thereof to vote or to any rights of a stockholder of
Elcotel.

7
<PAGE>

ARTICLE II
THE SURVIVING CORPORATION

Section 2.01 Certificate of Incorporation. The certificate of
incorporation of Merger Subsidiary shall be the certificate of incorporation of
the Surviving Corporation, except that, at the Effective Time, the name of the
Surviving Corporation shall be changed to "TSG" or such other name as Elcotel
may designate on or before the Effective Time, until thereafter amended in
accordance with applicable law and such certificate of incorporation.

Section 2.02 Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation, until
thereafter amended in accordance with applicable law, the certificate of
incorporation of the Surviving Corporation and such bylaws.

Section 2.03 Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
the Delaware Law and the certificate of incorporation and bylaws of the
Surviving Corporation, the directors and the officers of the Surviving
Corporation shall be those persons set forth on Schedule 2.03 to the disclosure
letter delivered by Elcotel and Merger Subsidiary to TSG concurrently with the
execution and delivery of this Agreement (the "Elcotel Disclosure Letter").

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TSG

TSG represents and warrants to Elcotel that:

Section 3.01 Organization and Power. Each of TSG and its Subsidiaries
is a corporation, partnership or other entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
organization, and has the requisite corporate or other power and authority and
governmental approvals to own, lease and operate its properties and to carry on
its business as now being conducted. Each of TSG and its Subsidiaries is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect on TSG. For purposes of this Agreement, a "Material Adverse Effect" with
respect to any Person means a material adverse effect (i) on the condition
(financial or otherwise), business, liabilities, properties, assets, results of
operations or prospects of such Person and its Subsidiaries, taken as a whole,
or (ii) on the ability of such Person to perform its obligations under or to
consummate the transactions contemplated by this Agreement. Schedule 3.01 to the
disclosure letter delivered by TSG to Elcotel and Merger Subsidiary concurrently
with the execution and delivery of this Agreement (the "TSG Disclosure Letter")
sets forth (i) the name and jurisdiction of

8
<PAGE>

incorporation of each Subsidiary of TSG, (ii) its authorized capital stock,
(iii) the number of issued and outstanding shares of capital stock, and (iv) the
record and beneficial owners of such shares. Except as set forth on Schedule
3.01 to the TSG Disclosure Letter, TSG does not directly or indirectly own any
equity or similar interest in, or any interest convertible into or exchangeable
or exercisable for, any equity or similar interest in, any Person. TSG has
heretofore delivered to Elcotel true and complete copies of the certificate or
articles of incorporation and bylaws as currently in effect of TSG and its
Subsidiaries.

Section 3.02 Corporate Authorization. The execution, delivery and
performance by TSG of this Agreement and the consummation by TSG of the
transactions contemplated hereby are within TSG's corporate powers and, except
as set forth in the second succeeding sentence of this Section 3.02, have been
duly authorized by all necessary corporate action, including without limitation
its Board of Directors. The Board of Directors of TSG has recommended approval
and adoption of this Agreement by the stockholders of TSG and directed that this
Agreement be submitted to the stockholders of TSG for their approval. The
affirmative vote of a majority of the outstanding Shares is the only vote of any
class or series of TSG's capital stock necessary to approve and adopt this
Agreement and the transactions contemplated by this Agreement. This Agreement
has been duly executed and delivered by TSG and, subject to the receipt of the
approval described in the immediately preceding sentence, constitutes a legal,
valid and binding agreement of TSG, enforceable against TSG in accordance with
its terms (subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity, regardless of whether in a proceeding in equity or at law).

Section 3.03 Governmental Authorization. The execution, delivery and
performance by TSG of this Agreement, and the consummation by TSG of the
transactions contemplated hereby, require no action by or in respect of, or
filing with or notice to, any United States federal, state or local government,
any foreign country, any foreign state or local government or any court,
administrative agency or commission or other governmental or regulatory agency
or authority of any of the foregoing (collectively "Governmental Authorities"
and individually a "Governmental Authority"), other than (a) the filing of a
certificate of merger with respect to the Merger with the Delaware Secretary of
State and appropriate documents with the relevant authorities of other states in
which TSG is qualified to do business; (b) compliance with any applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (c) compliance with any applicable requirements of the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "1933 Act"); (d) compliance with any applicable requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "1934 Act"); (e) compliance with any other
applicable securities laws; and (f) those set forth on Schedule 3.03 to the TSG
Disclosure Letter.

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Section 3.04 Non-Contravention. Except as set forth on Schedule 3.04 to
the TSG Disclosure Letter, the execution, delivery and performance by TSG of
this Agreement do not, and the consummation by TSG of the transactions
contemplated hereby will not require the consent of any other Person, or
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give to any
Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
Lien on any of the assets or properties of TSG or any of its Subsidiaries under,
any of the terms, conditions or provisions of (a) the certificate or articles of
incorporation, bylaws or similar organizational documents of TSG or any of its
Subsidiaries, (b) assuming receipt of the approval of stockholders referred to
in Section 3.02, and compliance with the matters referred to in Section 3.03,
any United States or foreign statute, law, regulation, rule or ordinance
(together "Laws") or any judgment, injunction, order, writ, license, permit or
decree of any Governmental Authority (together "Orders") binding upon or
applicable to TSG, any Subsidiary of TSG or any of their respective assets or
properties, or (c) any note, bond, mortgage, security agreement, indenture,
lease, contract, instrument or other agreement of any kind to which TSG or any
Subsidiary of TSG is a party or by which TSG or any Subsidiary of TSG or any of
their respective assets or properties is bound (a "TSG Agreement") or any
license, franchise, permit or other similar authorization held by TSG or any
Subsidiary of TSG. For purposes of this Agreement, "Lien" means, with respect to
any asset, any mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset, and, in addition with respect to real
property, any easement, right of way or other restriction, limitation or burden
of any kind in respect of such real property.

Section 3.05 Capitalization of TSG.

(a) The authorized capital stock of TSG consists solely of
10,000,000 shares of TSG Common Stock and 100,000 shares of preferred stock, par
value $100.00 per share (the "TSG Preferred Stock"). As of the close of business
on July 31, 1997, (i) 4,708,476 shares of TSG Common Stock are issued and
outstanding, no shares of TSG Common Stock are issued and held in the treasury
of TSG, and 1,491,524 shares of TSG Common Stock are reserved for issuance under
the TSG Option Plans and the TSG Warrants; (ii) options to purchase 579,250
shares of TSG Common Stock were outstanding under the TSG Option Plans
(excluding approximately 9,306 shares subject to a pending offering under the
Stock Purchase Plan) and warrants to purchase 675,000 shares of TSG Common Stock
were outstanding under the TSG Warrants, and (iii) no shares of TSG Preferred
Stock are issued, outstanding or held in the treasury of TSG. All the
outstanding shares of TSG Common Stock are, and all shares reserved for issuance
will be, when issued in accordance with the terms specified in the instruments
or agreements pursuant to which they are issuable, duly authorized, validly
issued, fully paid and non-assessable. Except (i) as set forth in this Section
3.05 and (ii) for Shares that may be issued as provided in Section 5.01(f),
there are outstanding (x) no shares of capital stock or other voting securities
of TSG, (y) no securities of TSG convertible into or exchangeable for shares of
capital stock or voting securities of TSG, and (z) no options, warrants or other
rights to acquire from

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TSG, and no preemptive or similar rights, subscriptions or other rights,
convertible securities, agreements, arrangements or commitments of any
character, obligating TSG to issue, transfer or sell, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of TSG or obligating TSG to grant, extend or enter into any
such option, warrant, subscription or other right, convertible security,
agreement, arrangement or commitment (the items in clauses (x), (y) and (z)
being referred to collectively as the "TSG Securities").

(b) Except as set forth on Schedule 3.05 to the TSG Disclosure
Letter, there are no voting trusts or other agreements or understandings to
which TSG or any Subsidiary of TSG is a party with respect to the voting of the
capital stock of TSG or any Subsidiary of TSG. None of TSG or its Subsidiaries
has any contractual obligation to redeem, repurchase or otherwise acquire any
TSG Securities or any capital stock of any Subsidiary of TSG, including as a
result of the transactions contemplated by this Agreement or to provide funds
to, or make any investment in, any Subsidiary of TSG or any other Person. Except
as permitted by this Agreement, following the Merger, neither TSG nor any of its
Subsidiaries will have any obligation to issue, transfer or sell any shares of
its capital stock pursuant to any employee benefit plan or otherwise.

Section 3.06 Capitalization of Subsidiaries. Except as set forth on
Schedule 3.06 to the TSG Disclosure Letter, all of the outstanding shares of
capital stock of, or other ownership interests in, each Subsidiary of TSG, are
duly authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by TSG, directly or indirectly, free and clear of
any consensual Lien (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There are
no (i) outstanding securities of TSG or any Subsidiary of TSG convertible into
or exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary of TSG, or (ii) options, warrants or other
rights to acquire from TSG or any Subsidiary of TSG, and no other obligation of
TSG or any Subsidiary of TSG to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or exchangeable
for, any capital stock, voting securities or ownership interests in, any
Subsidiary of TSG (the items in clauses (i) and (ii) being referred to
collectively as the "TSG Subsidiary Securities").

Section 3.07 SEC Filings.

(a) TSG has filed all reports, schedules, forms, statements and
other documents with the Securities and Exchange Commission (the "SEC") required
to be filed by TSG since April 1, 1995 (the "TSG SEC Documents");

(b) As of its filing date, each TSG SEC Document filed pursuant to
the 1934 Act complied as to form in all material respects with the requirements
of the 1934 Act and did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and

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(c) Each TSG SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the
date such registration statement or amendment became effective complied as to
form in all material respects with the requirements of the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.

Section 3.08 Financial Statements. The audited consolidated financial
statements included in TSG's Annual Report on Form 10-K for the fiscal year
ended March 28, 1997 (the "TSG 10-K") and the unaudited consolidated interim
financial statements of TSG included in the TSG SEC Documents filed after such
date (collectively the "TSG Financial Statements") complied, or will comply, as
to form in all material respects with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of TSG and its consolidated
Subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended (subject to footnote
disclosures and normal year-end adjustments in the case of any unaudited interim
financial statements). The TSG Financial Statements have been prepared from and
are consistent with the books and records of TSG, which reflect all material
transactions of TSG and its Subsidiaries. For purposes of this Agreement, "TSG
Balance Sheet" means the consolidated balance sheet of TSG as of March 28, 1997
set forth in the TSG 10-K and "TSG Balance Sheet Date" means March 28, 1997.
Each Subsidiary of TSG is treated as a consolidated subsidiary of TSG in the TSG
Financial Statements for all periods covered thereby.

Section 3.09 Information Supplied. None of the information supplied or
to be supplied by TSG for inclusion or incorporation by reference in and none of
the statements based on such information contained in (i) the joint proxy
statement to be filed with the SEC relating to the stockholders' meetings of TSG
and Elcotel to be held in connection with the Merger, as amended or supplemented
from time to time (as so amended or supplemented, the "Proxy Statement"), will,
at the date the Proxy Statement is first mailed to stockholders and at the time
of the meetings of such stockholders in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (ii) the registration statement on Form
S-4 of Elcotel to be filed under the 1933 Act relating to the issuance of
Elcotel Common Stock in the Merger, as amended or supplemented from time to time
(as so amended or supplemented, the "Form S-4"), will, at the time the Form S-4
becomes effective under the 1933 Act and at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.

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Section 3.10 Absence of Certain Changes. Except as disclosed in the TSG
SEC Documents filed prior to the date of this Agreement or as disclosed on
Schedule 3.10 to the TSG Disclosure Letter, since March 28, 1997, TSG and its
Subsidiaries have conducted their respective businesses in the ordinary course
consistent with past practice and there has not been:

(a) any event, occurrence or development which, individually or in
the aggregate, has had or would be reasonably likely to have a Material Adverse
Effect on TSG;

(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of TSG, any
issuance of TSG Common Stock other than upon exercise of TSG Warrants or TSG
Options outstanding on March 28, 1997, or any repurchase, redemption or other
acquisition by TSG or any Subsidiary of TSG of any amount of outstanding shares
of capital stock or other equity securities of, or other ownership interests in,
TSG or any Subsidiary of TSG;

(d) (i) any incurrence or assumption by TSG or any Subsidiary of
TSG of any indebtedness for borrowed money other than under existing credit
facilities in the ordinary course of business consistent with past practices or
(ii) any guarantee, endorsement or other incurrence or assumption of liability
(whether directly, contingently or otherwise) by TSG or any Subsidiary of TSG
for the obligations of any other Person (other than any wholly owned Subsidiary
of TSG);

(e) any creation or assumption by TSG or any Subsidiary of TSG of
any consensual Lien on any material asset of TSG or any Subsidiary of TSG;

(f) any making of any loan, advance or capital contribution to or
investment in any Person by TSG or any Subsidiary of TSG other than (i) loans,
advances or capital contributions to or investments in wholly-owned Subsidiaries
of TSG or (ii) loans or advances to employees of TSG or any Subsidiary of TSG
made in the ordinary course of business consistent with past practice;

(g) (i) any contract or agreement entered into by TSG or any
Subsidiary of TSG on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (ii) any modification,
amendment, assignment, termination or relinquishment by TSG or any Subsidiary of
TSG of any contract, license, or other right (including any insurance policy
naming it as a beneficiary or a loss payable payee) that would be reasonably
likely to have a Material Adverse Effect on TSG, other than those contemplated
by this Agreement;

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(h) any change in any method of accounting or accounting
principles or practices by TSG or any Subsidiary of TSG, except for any such
change required by reason of a change in GAAP; or

(i) any (w) grant of any severance or termination pay to any
director, officer or employee of TSG or any of its Subsidiaries, (x) entering
into of any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or employee
of TSG or any of its Subsidiaries, (y) increase in benefits payable under any
existing severance or termination pay policies or employment agreements or (z)
increase in compensation or bonus in excess of fifteen percent or increase in
other benefits payable to officers or employees of TSG or any of its
Subsidiaries or increase in compensation, bonus or other benefits payable to
directors of TSG or any of its Subsidiaries.

Section 3.11 No Undisclosed Liabilities. Neither TSG nor any Subsidiary
of TSG has any material liabilities or obligations (whether pursuant to
contracts or otherwise) of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, except:

(a) those liabilities and obligations set forth on the TSG Balance
Sheet and not heretofore paid or discharged;

(b) those liabilities and obligations incurred since March 28,
1997 in the ordinary course of business consistent with past practice; and

(c) those liabilities or obligations under this Agreement or
incurred in connection with the transactions contemplated hereby.

Section 3.12 Litigation. Except as disclosed on Schedule 3.12 to the
TSG Disclosure Letter, (i) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of TSG, threatened against, relating to
or affecting, nor are there are any Governmental Authority investigations or
audits pending or, to the knowledge of TSG, threatened against, relating to or
affecting, TSG or any of its Subsidiaries or any of their respective assets or
properties nor, to the knowledge of TSG, is there any valid basis for any such
action, suit, arbitration, proceeding, investigation or audit which, if
adversely determined, would have a Material Adverse Effect on TSG, and (ii)
neither TSG nor any of its Subsidiaries is subject to any order of any
Governmental Authority which adversely affects the ability of TSG to consummate
the transactions contemplated by this Agreement.

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Section 3.13 Taxes.

(a) All Tax Returns required to be filed by TSG, any of its
Subsidiaries, or any corporation that was included in the filing of a return
with TSG or its Subsidiaries on a consolidated, combined or unitary basis have
been filed (the "TSG Tax Returns") and all Taxes required to be shown on the TSG
Tax Returns, or a subsequent assessment with respect thereto, or otherwise due
or payable (to the extent in excess of $50,000 in the aggregate) have been paid
and any penalties and interest relating to such Taxes (to the extent in excess
of $50,000 in the aggregate) have been paid. No other Taxes are payable by the
TSG Group with respect to items or periods covered by such Tax Returns or with
respect to Tax periods prior to the date of this Agreement. None of the TSG Tax
Returns contain, or are required to contain, a disclosure statement under
Section 6662 of the Code, or any similar provision of state, local or foreign
law, with respect to any items that relate to TSG or its Subsidiaries in order
to avoid a penalty for any taxable year. All TSG Tax Returns are true, correct
and complete in all material respects. TSG has made available to Elcotel correct
and complete copies of all TSG Tax Returns for all periods which are not closed
by the statute of limitations.

(b) No adjustment relating to any TSG Tax Returns has been
proposed formally or, to TSG's knowledge, informally by any Governmental
Authority (to the extent in excess of $50,000 in the aggregate), and no basis
exists for any such adjustment that would have a Material Adverse Effect on TSG.
There are no outstanding subpoenas or requests for information with respect to
any TSG Tax Returns or portions thereof. There are no pending or, to TSG's
knowledge, threatened actions or proceedings for the assessment or collection of
Taxes for which TSG or its Subsidiaries may be liable (to the extent in excess
of $50,000 in the aggregate). There are no Tax liens on any assets of TSG or its
Subsidiaries, except with respect to Taxes which are not yet due and payable.

(c) No consent under Section 341(f) of the Code has been filed
with respect to TSG or any of its Subsidiaries. Neither TSG nor any of its
Subsidiaries is or has been subject to the dual consolidated loss provisions of
Section 1503 of the Code.

(d) TSG and its Subsidiaries are members of an affiliated group
(within the meaning of Section 1504 of the Code) that is eligible to file a
consolidated return. No other entity is or has been eligible to file a
consolidated or combined return with TSG and its Subsidiaries, and neither TSG
nor its Subsidiaries have filed or consented to the filing of any Federal or
state consolidated or combined return with any entity not a member of the TSG
Group. Neither TSG nor any of its Subsidiaries has been at any time a member of
any partnership or joint venture or the holder of a beneficial interest in any
trust for any Person for which the statute of limitations for any Tax
potentially applicable as a result of such membership or holding has not
expired.

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(e) TSG and its Subsidiaries have properly accrued all current or
contested Taxes on their books and records, and their books and records reflect
reserves that are adequate for the payment of all Taxes not yet due and payable
that are properly accruable thereon through the date of this Agreement
(including Taxes being contested). Neither TSG nor any of its Subsidiaries have
any material liability for any Taxes in excess of amounts accrued or the
reserves established. All Taxes required to be withheld, collected or deposited
in connection with the operations and activities of TSG or its Subsidiaries have
been timely withheld, collected or deposited and, to the extent required, have
been paid to the relevant taxing authority.

(f) TSG owns one share of Elcotel Common Stock, and has not owned
more than one share of Elcotel Common Stock at any time during the past five
years. At the Effective Time, the fair market value of the assets of TSG will
exceed the sum of its liabilities, plus the amount of other liabilities, if any,
to which the assets are subject.

(g) There are no requests for rulings, determinations or
information currently outstanding that could affect the Taxes of TSG or any of
its Subsidiaries.

(h) The TSG Tax Returns have been audited by the Internal Revenue
Service ("Service") or other governmental agency (or closed by applicable
statutes of limitations) and all Tax liabilities in respect thereof have been
finally determined for all taxable years ending on or before March 31, 1993.
There are no outstanding waivers or agreements extending the statute of
limitations for any period with respect to any Tax to which TSG or any of its
Subsidiaries may be liable.

(i) "Taxes" shall mean any and all taxes, charges, fees, levies or
other assessments, including income, gross receipts, excise, real or personal
property, sales, withholding, social security, retirement, unemployment,
occupation, use, goods and services, service use, license, value added, capital,
net worth, payroll, profits, withholding, franchise, transfer and recording
taxes, fees and charges, and any other taxes, assessment or similar charges
imposed by the Service or any taxing authority (whether domestic or foreign
including any state, county, local or foreign government or any subdivision or
taxing agency thereof (including a United States possession)) (a "Taxing
Authority"), whether computed on a separate, consolidated, unitary, combined or
any other basis and such term shall include any interest whether paid or
received, fines, penalties or additional amounts attributable to, or imposed
upon, or with respect to, any such taxes, charges, fees, levies or other
assessments. "Tax Return" shall mean any report, return, document, declaration
or other information or filing required to be supplied to any taxing authority
or jurisdiction (foreign or domestic) with respect to Taxes, including
information returns, any documents with respect to or accompanying payments of
estimated Taxes, or with respect to or accompanying requests for the extension
of time in which to file any such report, return, document, declaration or other
information. The term "TSG Group" shall mean, individually and collectively, (i)
TSG, (ii) its Subsidiaries, and (iii) any trust, corporation, partnership or any
other entity as to which TSG or its Subsidiaries is liable for Taxes incurred by
such entity either as a transferee, or pursuant to Treasury Regulations Section
1.1502-6, or pursuant to any other provision of federal, state, local or foreign
law or regulations.

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(j) TSG has made available to Elcotel a true and complete copy of
any: (i) elections, letter rulings and determination letters relating to Taxes
with respect to TSG or its Subsidiaries; and (ii) examination reports, closing
agreements and statements of deficiencies for Taxes assessed against or agreed
to by TSG or any of its Subsidiaries.

Section 3.14 Employee Benefit Plans; ERISA.

(a) Except as set forth on Schedule 3.14(a) to the TSG Disclosure
Letter, there are no employee benefit plans (including any plans for the benefit
of directors or former directors), contracts or agreements (including employment
agreements and severance agreements, incentive compensation, bonus, stock
option, stock appreciation rights and stock purchase plans) of any type
(including plans described in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), maintained by TSG, any of its
Subsidiaries or any trade or business, whether or not incorporated (a "TSG ERISA
Affiliate"), that together with TSG would be deemed a "controlled group" within
the meaning of Section 4001(a)(14) of ERISA, or with respect to which TSG, any
of its Subsidiaries, or any TSG ERISA Affiliate, has or may have a liability
(the "TSG Benefit Plans"). Except as disclosed on Schedule 3.14(a) to the TSG
Disclosure Letter (or as otherwise permitted by this Agreement): (i) neither TSG
nor any ERISA Affiliate has any plan or commitment, whether legally binding or
not, to create any additional TSG Benefit Plan or modify or change any existing
TSG Benefit Plan that would affect any employee or terminated employee of TSG or
any ERISA Affiliate; and (ii) since March 28, 1997, there has been no change,
amendment, modification to, or adoption of, any TSG Benefit Plan;

(b) With respect to each TSG Benefit Plan: (i) if intended to
qualify under Section 401(a), 401(k) or 403(a) of the Code, such plan so
qualifies, and its trust is exempt from taxation under Section 501(a) of the
Code; (ii) no failures to administer such plan in accordance with its terms and
applicable law have occurred that have had or would reasonably be expected to
have a Material Adverse Effect on TSG; (iii) no breaches of fiduciary duty have
occurred; (iv) no prohibited transaction within the meaning of Section 406 of
ERISA has occurred; (v) as of the date of this Agreement, no lien imposed under
the Code or ERISA exists; and (vi) all contributions and premiums due (including
any extensions for such contributions and premiums) have been made in full;

(c) None of the TSG Benefit Plans has incurred any "accumulated
funding deficiency", as such term is defined in Section 412 of the Code, whether
or not waived;

(d) Neither TSG nor any ERISA Affiliate has incurred any liability
under Title IV of ERISA (including Sections 4063-4064 and 4069 of ERISA) since
the effective date of ERISA that has not been satisfied in full;

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(e) With respect to each TSG Benefit Plan that is a "welfare plan"
(as defined in Section 3(1) of ERISA), no such plan provides medical or death
benefits with respect to current or former employees of TSG or any of its
Subsidiaries beyond their termination of employment, other than as required by
law or on an employee-pay-all basis;

(f) Except as set forth on Schedule 3.04 to the TSG Disclosure
Letter, the consummation of the Merger pursuant to this Agreement will not (i)
entitle any individual to severance pay or any tax "gross-up" payments with
respect to the imposition of any tax pursuant to Section 4999 of the Code or
accelerate the time of payment or vesting, or increase the amount, of
compensation or benefits due to any individual with respect to any TSG Benefit
Plan, or (ii) constitute or result in a prohibited transaction under Section
4975 of the Code or Section 406 or 407 of ERISA with respect to any TSG Benefit
Plan; and

(g) There is no TSG Benefit Plan that is a "multiemployer plan", as
such term is defined in Section 3(37) of ERISA, or which is covered by Section
4063 or 4064 of ERISA.

Section 3.15 Certain Agreements; Compliance with Agreements.

(a) Except as disclosed on Schedule 3.15 to the TSG Disclosure
Letter or as provided for in this Agreement, neither TSG nor any of its
Subsidiaries is a party to or bound by any oral or written:

(i) consulting agreement not terminable on thirty (30) days'
or less notice;

(ii) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of the transactions contemplated by this
Agreement;

(iii) agreement with respect to any officer providing any term
of employment or compensation guarantee;

(iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, employee stock ownership plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis
of any of the transactions contemplated by this Agreement;

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(v) agreement containing covenants that limit the ability of
TSG or any of its Subsidiaries to compete in any line of business or with
any Person, or that involve any restriction on the geographic area in
which, or method by which, TSG or any of its Subsidiaries may carry on its
business (other than as may be required by law or any regulatory agency);

(vi) agreement, contract or understanding, other than this
Agreement and the certificate of incorporation and by-laws of TSG,
regarding the capital stock of TSG or committing to dispose of some or all
of the capital stock or all or substantially all of the assets of TSG;

(vii) partnership, joint venture or profit sharing agreement of
TSG or any of its Subsidiaries with any Person;

(viii) agreement, contract, commitment, indenture or other
instrument of TSG or any of its Subsidiaries relating to the borrowing of
money, or the direct or indirect guarantee of any obligation for, or an
agreement to service the repayment of, borrowed money, or any other
contingent obligation in respect to indebtedness of any other Person,
including without limitation any agreement or arrangement relating to the
maintenance of compensating balances, any agreement or arrangement with
respect to lines of credit, any agreement or arrangement to purchase or
repurchase obligations of any other Person, any agreement or arrangement to
advance or supply funds to or to invest in any other Person, any agreement
or arrangement to pay for property, products or services of any other
Person even if such property, products or services are not conveyed,
delivered or rendered, or any guarantee with respect to any lease or other
similar periodic payment to be made by any other Person;

(ix) lease of TSG or any of its Subsidiaries with annual
rental payments aggregating $50,000 or more;

(x) agreement, contract or commitment of TSG or any of its
Subsidiaries relating to the disposition or acquisition of any investment
in any Person if such investment has a book value of, or the disposition or
acquisition price of such investment or interest is, $50,000 or more;

(xi) agreement, contract or commitment which involves payment
or potential payment, pursuant to the terms of such agreement, contract or
commitment, by or to TSG or any of its Subsidiaries of $50,000 or more
within any twelve month period commencing after the date hereof; or

(xii) agreement, contract, commitment or arrangement between
TSG or any of its Subsidiaries and any Affiliate of TSG or any of its
Subsidiaries that is not described in or filed as an exhibit to a TSG SEC
Report.

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(b) Neither TSG nor any of its Subsidiaries nor, to the knowledge
of TSG, any other party thereto is in breach or violation of or in default in
the performance or observance of any term or provision of, and no event has
occurred which, with notice or lapse of time or both, is reasonably expected to
result in a default under, (i) the certificates or articles of incorporation,
bylaws or similar organizational documents of TSG or any of its Subsidiaries or
(ii) any contract, agreement, plan or instrument listed on Schedule 3.15 to the
TSG Disclosure Letter, except in the case of clause (ii) for breaches,
violations or defaults which, individually or in the aggregate, are not having
and are not reasonably expected to have a Material Adverse Effect on TSG. Except
as set forth on Schedule 3.04 to the TSG Disclosure Letter, no party to any such
contract, agreement, plan or instrument will have the right to terminate any or
all of the provisions of any such contract, agreement, plan or instrument as a
result of the transactions contemplated by this Agreement.

Section 3.16 Compliance with Laws and Orders. TSG and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Authorities necessary for the lawful conduct of their respective
businesses (the "TSG Permits"), except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which, individually or in
the aggregate, are not having and are not reasonably expected to have a Material
Adverse Effect on TSG. TSG and its Subsidiaries are in compliance with the terms
of the TSG Permits, except failures so to comply which, individually or in the
aggregate, are not having and are not reasonably expected to have a Material
Adverse Effect on TSG. TSG and its Subsidiaries are not in violation of or
default under any Laws or Orders, except for such violations or defaults which,
individually or in the aggregate, are not having and are not reasonably expected
to have a Material Adverse Effect on TSG.

Section 3.17 Environmental Matters.

(a) Except as set forth on Schedule 3.17 to the TSG Disclosure
Letter:

(i) no notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been
filed against, no penalty has been assessed against, and no investigation,
action, claim, suit, proceeding or review is pending or, to the knowledge
of TSG or any Subsidiary of TSG, is threatened by any Person against, TSG
or any Subsidiary of TSG with respect to any matters relating to or arising
out of any Environmental Law;

(ii) no Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released,
in violation of any Environmental Law, at, on, under or adjacent to any
property now or, to the knowledge of TSG, previously owned, leased or
operated by TSG or any Subsidiary of TSG; and

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(iii) there are no Environmental Liabilities.

(b) For purposes of this Section, the following terms shall have
the meanings set forth below:

(i) "TSG" and "Subsidiary of TSG" shall include any entity
which is, in whole or in part, a predecessor of TSG or any of its
Subsidiaries;

(ii) "Environmental Laws" means any and all federal, state,
local and foreign law (including common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit, or
governmental restrictions or any agreement with any governmental authority
or other third party, relating to human health and safety, the physical
condition of any real property now or formerly owned, leased or operated by
TSG of any of its Subsidiaries or of any improvements thereon, the
environment or to pollutants, contaminants, wastes or chemicals or toxic,
radioactive, ignitable, corrosive, reactive or otherwise hazardous
substances, wastes or materials, including without limitation Hazardous
Substances as defined herein;

(iii) "Environmental Liabilities" means any and all liabilities
of or relating to TSG or any Subsidiary of TSG of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or
otherwise, which (A) arise under or relate to matters covered by
Environmental Laws and (B) arise from actions occurring or conditions
existing on or prior to the Effective Time; and

(iv) "Hazardous Substances" means any pollutant, contaminant,
waste or chemical or any toxic, radioactive, corrosive, reactive or
otherwise hazardous substance, waste or material, or any substance having
any constituent elements displaying any of the foregoing characteristics,
including, without limitation, petroleum, its derivatives, by-products and
other hydrocarbons, or any substance, waste or material regulated under any
Environmental Laws.

Section 3.18 Assets. The assets, properties, rights and contracts,
including (as applicable) title or leaseholds thereto, of TSG and its
Subsidiaries, taken as a whole, are sufficient to permit TSG and its
Subsidiaries to conduct their respective businesses as currently being
conducted. Neither TSG nor its Subsidiaries owns any real property.

Section 3.19 Intellectual Property Rights.

(a) TSG and its Subsidiaries own or have the right to use, all
Intellectual Property individually or in the aggregate material to the conduct
of the businesses of TSG and its

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Subsidiaries. To the knowledge of TSG, (i) neither TSG nor any Subsidiary of TSG
is in default (or with the giving of notice or lapse of time or both would be in
default) under any license to use such Intellectual Property, (ii) such
Intellectual Property (other than patents) is not being infringed by any third
party, and (iii) neither TSG nor any Subsidiary of TSG is infringing any
intellectual property of any third party. For purposes of this Agreement,
"Intellectual Property" means patents and patent rights, trademarks and
trademark rights, trade names and trade name rights, copyrights and copyright
rights and other proprietary intellectual property rights and all pending
applications for and registrations of any of the foregoing that TSG or its
Subsidiaries own, license or otherwise have the right to use. An accurate
schedule of all Intellectual Property of TSG or its Subsidiaries consisting of
patents, registered trademarks, registered trade names and registered copyrights
and all pending applications therefor is set forth on Schedule 3.19 to the TSG
Disclosure Letter;

(b) Either TSG or one of its Subsidiaries currently is, or, with
respect to a former Subsidiary of TSG that was merged into TSG, will be as of
the Closing Date, listed in the records of the appropriate United States, state
or foreign agency as the sole owner of record for each application and
registration included in the Intellectual Property, other than Intellectual
Property of which TSG or its Subsidiaries is a licensee;

(c) TSG and its Subsidiaries, with respect to all Intellectual
Property owned thereby, have taken or caused to be taken all reasonable steps in
the exercise of reasonable business judgment to obtain and retain valid and
enforceable Intellectual Property rights therein, including the submission of
all necessary filings in accordance with the legal and administrative
requirements of the appropriate jurisdictions. No application or registration
listed on Schedule 3.19 to the TSG Disclosure Letter is the subject of any
pending, existing or, to TSG's knowledge, threatened, opposition, interference,
cancellation proceeding or other legal or governmental proceeding before any
registration authority in any jurisdiction; and

(d) The consummation of the transactions contemplated hereby will
not result in the loss or impairment of TSG's or any of its Subsidiaries' right
to own or use any of the Intellectual Property nor will it require the consent
of any Governmental Authority or third party.

Section 3.20 Labor Matters. TSG has previously furnished to Elcotel true
and complete copies of all labor and collective bargaining agreements to which
TSG or any of its Subsidiaries is a party and that are currently in effect,
together with all amendments thereto (if any). Since January 1, 1996, there have
been no strikes, slow downs or other work stoppages or lockouts involving any
employees of TSG or any of its Subsidiaries and there are no disputes by any
labor organization in progress or pending or, to the knowledge of TSG,
threatened against TSG or any of its Subsidiaries that would have a Material
Adverse Effect on TSG. TSG and its Subsidiaries are in compliance in all
material respects with all applicable laws and regulations in respect of
employment and employment practices, terms and conditions of employment, wages
and hours, occupational safety, health or

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welfare conditions relating to premises occupied, and civil rights. There are no
charges of unfair labor practices pending before any Governmental Authority
involving or affecting TSG or any of its Subsidiaries. As of the date of this
Agreement, there is no representation claim or petition pending before the
National Labor Relations Board and, to the knowledge of TSG, no question
concerning representation exists with respect to the employees of TSG or any of
its Subsidiaries. TSG has not received notice that any customer or supplier of
TSG or any or its Subsidiaries is involved in or threatened with or affected by
any strike or other labor disturbance or dispute, litigation or administrative
proceeding or judgment, order, injunction, decree or award, the consequences of
which would have a Material Adverse Effect on TSG.

Section 3.21 Transactions with Affiliates. Except to the extent disclosed
in the TSG SEC Documents filed prior to the date of this Agreement, none of the
officers or directors of TSG or any of its Subsidiaries nor any of its
Affiliates, and, to its knowledge, none of its key employees or the key
employees of any of its Subsidiaries, is a party to any transaction with TSG or
any of its Subsidiaries (other than for services as an employee, officer or
director and other than transactions between TSG and one or more of its direct
or indirect wholly owned Subsidiaries or between such Subsidiaries), including,
without limitation, any contract, agreement or other arrangement (i) providing
for the furnishing of services to or by, (ii) providing for rental of real or
personal property to or from, or (iii) otherwise requiring payments to or from,
any such officer, director, Affiliate or key employee, any member of the family
of any such officer, director or key employee or any corporation, partnership,
trust or other entity in which any such officer, director or key employee has
substantial interest (excluding the ownership of not more than two percent (2%)
of the capital stock of a publicly traded corporation) or which is an Affiliate
of such officer, director or key employee.

Section 3.22 Insurance. Schedule 3.22 to the TSG Disclosure Letter sets
forth a complete and accurate list of all primary, excess and umbrella policies,
bonds and other forms of insurance currently owned or held by or on behalf of or
providing insurance coverage to TSG or any of its Subsidiaries and their
respective businesses, properties and assets (or its directors, officers, agents
or employees). All such policies are in full force and effect. Neither TSG nor
any of its Subsidiaries has received notice of default under any such policy, or
has received written notice of any pending or threatened termination or
cancellation, coverage limitation or reduction, or material premium increase
with respect to any such policy the failure of which to maintain, has a Material
Adverse Effect on TSG. Schedule 3.22 to the TSG Disclosure Letter sets forth a
complete and accurate summary of all of the self-insurance coverage provided by
TSG or any of its Subsidiaries and no letters of credit have been posted in
respect thereof.

Section 3.23 Takeover Statutes. The Board of Directors of TSG has duly
and validly approved the Merger, this Agreement and the transactions
contemplated by this Agreement and such approval is sufficient to render
inapplicable to the Merger, this Agreement, and the transactions contemplated by
this Agreement and the Voting Agreement the provisions of Section 203 of the
Delaware Law. No other "fair price", "moratorium", "control share acquisition"
or other similar antitakeover statute or regulation enacted under state or
federal laws in the United States (each, a "Takeover Statute") applicable to TSG
or any of its Subsidiaries is applicable to the Merger or the other transactions
contemplated hereby.

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Section 3.24 Finders' Fees. Except for a fee to Wexford Management LLC, a
copy of whose engagement letter has been provided to Elcotel, no investment
banker, broker, finder, other intermediary or other Person is entitled to any
fee or commission from TSG or any Subsidiary of TSG upon consummation of the
transactions contemplated by this Agreement.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ELCOTEL

Elcotel represents and warrants to TSG that:

Section 4.01 Organization and Power. Each of Elcotel and its Subsidiaries
is a corporation, partnership or other entity duly organized, validly existing
and is in good standing under the laws of the jurisdiction of its incorporation
or organization, and has the requisite corporate or other power and authority
and governmental approvals to own, lease and operate its properties and to carry
on its business as now being conducted. Each of Elcotel and its Subsidiaries is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect on Elcotel. Schedule 4.01 to the Elcotel Disclosure Letter sets forth a
complete list of Elcotel's Subsidiaries, all of which are wholly owned, directly
or indirectly, by Elcotel. Elcotel has heretofore delivered to TSG true and
complete copies of Elcotel's and Merger Subsidiary's certificate of
incorporation and bylaws as currently in effect.

Section 4.02 Corporate Authorization. The execution, delivery and
performance by Elcotel and Merger Subsidiary of this Agreement and the
consummation by Elcotel and Merger Subsidiary of the transactions contemplated
hereby are within the corporate power of Elcotel and Merger Subsidiary and,
except for any required approval by the stockholders of Elcotel of the issuance
of shares of Elcotel Common Stock in connection with the Merger, have been duly
authorized by all necessary corporate action, including the Board of Directors
of Merger Subsidiary and the Board of Directors of Elcotel, in its capacity as
the sole stockholder of Merger Subsidiary. This Agreement has been duly executed
and delivered by each of Elcotel and Merger Subsidiary and, subject to the
approval of the holders of Elcotel Common Stock with respect to the issuance of
shares of Elcotel Common Stock in connection with the Merger (including any
shares contemplated by Sections 1.04 and 1.05), constitutes a legal, valid and
binding agreement of each of Elcotel and Merger Subsidiary, enforceable against
Elcotel or Merger Subsidiary, as applicable, in accordance with its terms
(subject to applicable

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bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws affecting creditors' rights generally from time to time in
effect and to general principles of equity, regardless of whether in a
proceeding in equity or at law). The shares of Elcotel Common Stock issued in
connection with the Merger, when issued in accordance with the terms hereof,
will be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights.

Section 4.03 Governmental Authorization. The execution, delivery and
performance by Elcotel and Merger Subsidiary of this Agreement, and the
consummation by Elcotel and Merger Subsidiary of the transactions contemplated
hereby, require no action by or in respect of, or filing with or notice to, any
Governmental Authority, other than (a) the filing of a certificate of merger
with respect to the Merger with the Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which Merger
Subsidiary is qualified to do business; (b) compliance with any applicable
requirements of the HSR Act; (c) compliance with any applicable requirements of
the 1933 Act; (d) compliance with any applicable requirements of the 1934 Act;
(e) compliance with any other applicable securities laws; and (f) those set
forth on Schedule 4.03 to the Elcotel Disclosure Letter.

Section 4.04 Non-Contravention. Except as set forth on Schedule 4.04 to
the Elcotel Disclosure Letter, the execution, delivery and performance by
Elcotel and Merger Subsidiary of this Agreement do not, and the consummation by
Elcotel and Merger Subsidiary of the transactions contemplated hereby will not
require the consent of any other Person, or conflict with, result in a violation
or breach of, constitute (with or without notice or lapse of time or both) a
default under, result in or give to any Person any right of payment or
reimbursement, termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any Lien on any of the assets or
properties of Elcotel or any of its Subsidiaries under, any of the terms,
conditions or provisions of (a) the certificate or articles of incorporation,
bylaws or similar organizational documents of Elcotel or any of its
Subsidiaries, (b) assuming receipt of the approval of stockholders referred to
in Section 4.02, and compliance with the matters referred to in Section 4.03,
any Laws or Orders binding upon or applicable to Elcotel or any Subsidiary of
Elcotel or any of their respective assets or properties, or (c) any note, bond,
mortgage, security agreement, indenture, lease, contract, instrument or other
agreement of any kind to which Elcotel or any Subsidiary of Elcotel is a party
or by which Elcotel or any Subsidiary of Elcotel or any of their respective
assets or properties is bound (an "Elcotel Agreement") or any license,
franchise, permit or other similar authorization held by Elcotel or any
Subsidiary of Elcotel.

Section 4.05 Capitalization of Elcotel.

(a) The authorized capital stock of Elcotel consists of 20,000,000
shares of Elcotel Common Stock, par value $0.01 per share. As of the close of
business on July 31, 1997,

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<PAGE>

(i) 8,182,217 shares of Elcotel Common Stock are issued and outstanding, 52,000
shares of Elcotel Common Stock are issued and held in the treasury of Elcotel,
and 1,775,000 shares of Elcotel Common Stock are reserved for issuance under
Elcotel's 1991 Stock Option Plan and Elcotel's Directors' Stock Option Plan
(collectively the "Elcotel Plans") and (ii) options to purchase 661,848 shares
of Elcotel Common Stock under the Elcotel Plans ("Elcotel Options") were
outstanding. All the outstanding shares of Elcotel Common Stock are, and all
shares reserved for issuance will be, when issued in accordance with the terms
specified in the instruments or agreements pursuant to which they are issuable,
duly authorized, validly issued, fully paid and non-assessable. Except (i) as
set forth in this Section 4.05, (ii) for Elcotel Common Stock that may be issued
as provided in Section 5.02(e); and (iii) for the transactions contemplated by
this Agreement (including those permitted in Article II), there are outstanding
(x) no shares of capital stock or other voting securities of Elcotel, (y) no
securities of Elcotel convertible into or exchangeable for shares of capital
stock or voting securities of Elcotel, and (z) no options, warrants or other
rights to acquire from Elcotel, and no preemptive or similar rights,
subscriptions or other rights, convertible securities, agreements, arrangements
or commitments of any character, obligating Elcotel to issue, transfer or sell,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of Elcotel or obligating
Elcotel to grant, extend or enter into any such option, warrant, subscription or
other right, convertible security, agreement, arrangement or commitment (the
items in clauses (x), (y) and (z) being referred to collectively as the "Elcotel
Securities").

(b) There are no voting trusts or other agreements or
understandings to which Elcotel or any Subsidiary of Elcotel is a party with
respect to the voting of the capital stock of Elcotel or any Subsidiary of
Elcotel. None of Elcotel or its Subsidiaries has any contractual obligation to
redeem, repurchase or otherwise acquire any Elcotel Securities, including as a
result of the transactions contemplated by this Agreement. Except as permitted
by this Agreement, following the Merger, Elcotel will not have any obligation to
issue, transfer or sell any shares of its capital stock pursuant to any employee
benefit plan or otherwise.

Section 4.06 Capitalization of Subsidiaries. Except as set forth on
Schedule 4.06 to the Elcotel Disclosure Letter, all of the outstanding shares of
capital stock of, or other ownership interests in, each Subsidiary of Elcotel,
are duly authorized, validly issued, fully paid and nonassessable and are owned
beneficially, and of record, by Elcotel, directly or indirectly, free and clear
of any consensual Lien (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There are
no (i) outstanding securities of Elcotel or any Subsidiary of Elcotel
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in any Subsidiary of Elcotel, or (ii) options,
warrants or other rights to acquire from Elcotel or any Subsidiary of Elcotel,
and no other obligation of Elcotel or any Subsidiary of Elcotel to issue, any
capital stock, voting securities or other ownership interests in, or any
securities convertible into or exchangeable for, any capital stock, voting
securities or ownership interests in, any Subsidiary of Elcotel (the items in
clauses (i) and (ii) being referred to collectively as the "Elcotel Subsidiary
Securities").

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Section 4.07 SEC Filings.

(a) Elcotel has filed all reports, schedules, forms, statements and
other documents with the SEC required to be filed by Elcotel since April 1, 1995
(the "Elcotel SEC Documents");

(b) As of its filing date, each Elcotel SEC Document filed pursuant
to the 1934 Act complied as to form in all material respects with the 1934 Act
and did not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and

(c) Each Elcotel SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the
date such registration statement or amendment became effective complied as to
form in all material respects with the requirements of the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.

Section 4.08 Financial Statements. The audited consolidated financial
statements included in Elcotel's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997 (the "Elcotel 10-K") and the unaudited consolidated interim
financial statements of Elcotel included in the Elcotel SEC Documents filed
after such date (collectively the "Elcotel Financial Statements") complied, or
will comply, as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) and fairly present the consolidated
financial position of Elcotel and its consolidated Subsidiaries as of the dates
thereof and their consolidated results of operations and cash flows for the
periods then ended (subject to footnote disclosures and normal year-end
adjustments in the case of any unaudited interim financial statements). The
Elcotel Financial Statements have been prepared from and are consistent with the
books and records of Elcotel, which reflect all material transactions of Elcotel
and its Subsidiaries. For purposes of this Agreement, "Elcotel Balance Sheet"
means the consolidated balance sheet of Elcotel as of March 31, 1997 set forth
in the Elcotel 10-K and "Elcotel Balance Sheet Date" means March 31, 1997.

Section 4.09 Information Supplied. None of the information supplied or to
be supplied by Elcotel for inclusion or incorporation by reference in and none
of the statements based on such information contained in (i) the Proxy Statement
will, at the date the Proxy Statement is first mailed to stockholders and at the
time of the meetings of such stockholders in connection with the Merger, contain
any untrue statement of a material fact or

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omit to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or (ii) the Form S-4 will, at the time the Form S-4 becomes
effective under the 1933 Act or at the Effective Time, contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.

Section 4.10 Absence of Certain Changes. Except as disclosed in the
Elcotel SEC Documents filed prior to the date of this Agreement or as disclosed
on Schedule 4.10 to the Elcotel Disclosure Letter, since March 31, 1997, Elcotel
and its Subsidiaries have conducted their respective businesses as in the
ordinary course consistent with past practice and there has not been:

(a) any event, occurrence or development which, individually or in
the aggregate, has had or would be reasonably likely to have a Material Adverse
Effect on Elcotel;

(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of Elcotel, any
issuance of Elcotel Common Stock other than upon exercise of Elcotel Options
outstanding on March 28, 1997, or any repurchase, redemption or other
acquisition by Elcotel or any Subsidiary of Elcotel of any amount of outstanding
shares of capital stock or other equity securities of, or other ownership
interests in, Elcotel or any Subsidiary of Elcotel;

(d) (i) any incurrence or assumption by Elcotel or any Subsidiary of
Elcotel of any indebtedness for borrowed money other than under existing credit
facilities in the ordinary course of business consistent with past practices or
(ii) any guarantee, endorsement or other incurrence or assumption of liability
(whether directly, contingently or otherwise) by Elcotel or any Subsidiary of
Elcotel for the obligations of any other Person (other than any wholly owned
Subsidiary of Elcotel);

(e) any creation or assumption by Elcotel or any Subsidiary of
Elcotel of any consensual Lien on any material asset of Elcotel or any
Subsidiary of Elcotel;

(f) any making of any loan, advance or capital contribution to or
investment in any Person by Elcotel or any Subsidiary of Elcotel other than (i)
loans, advances or capital contributions to or investments in wholly-owned
Subsidiaries of Elcotel or (ii) loans or advances to employees of Elcotel or any
Subsidiary of Elcotel made in the ordinary course of business consistent with
past practice;

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(g) (i) any contract or agreement entered into by Elcotel or any
Subsidiary of Elcotel on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (ii) any modification,
amendment, assignment, termination or relinquishment by Elcotel or any
Subsidiary of Elcotel of any contract, license or other right (including any
insurance policy naming it as a beneficiary or a loss payable payee) that would
be reasonably likely to have a Material Adverse Effect on Elcotel, other than
those contemplated by this Agreement;

(h) any change in any method of accounting or accounting principles
or practices by Elcotel or any Subsidiary of Elcotel, except for any such change
required by reason of a change in GAAP; or

(i) any (w) grant of any severance or termination pay to any
director, officer or employee of Elcotel or any of its Subsidiaries, (x)
entering into of any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any director,
officer or employee of Elcotel or any of its Subsidiaries, (y) increase in
benefits payable under any existing severance or termination pay policies or
employment agreements or (z) increase in compensation or bonus in excess of
fifteen percent or increase in other benefits payable to officers or employees
of Elcotel or any of its Subsidiaries or increase in compensation, bonus or
other benefits payable to directors of Elcotel or any of its Subsidiaries.

Section 4.11 No Undisclosed Liabilities. Neither Elcotel nor any
Subsidiary of Elcotel has any material liabilities or obligations (whether
pursuant to contracts or otherwise) of any kind whatsoever whether, accrued,
contingent, absolute, determined, determinable or otherwise, except:

(a) those liabilities and obligations set forth on the Elcotel
Balance Sheet and not heretofore paid or discharged;

(b) those liabilities and obligations incurred since April 1, 1997
in the ordinary course of business consistent with past practice; and

(c) those liabilities or obligations under this Agreement or
incurred in connection with the transactions contemplated hereby.

Section 4.12 Litigation. Except as disclosed on Schedule 4.12 to the
Elcotel Disclosure Letter, (i) there are no actions, suits, arbitrations, or
proceedings pending or, to the knowledge of Elcotel, threatened against,
relating to or affecting, nor are there any Governmental Authority
investigations or audits pending or, to the knowledge of Elcotel, threatened
against, relating to or affecting, Elcotel or any of its Subsidiaries or any of
their respective assets or properties nor, to the knowledge of Elcotel, is there
any valid basis for any such action, suit, arbitration, proceeding,
investigation or audit, which if adversely determined would have a Material
Adverse Effect on Elcotel, and (ii) neither Elcotel nor any of its Subsidiaries
is subject to any order of any Governmental Authority which adversely affects
the ability of Elcotel to consummate the transactions contemplated by this
Agreement.

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Section 4.13 Taxes.

(a) All Tax Returns required to be filed by Elcotel, any of its
Subsidiaries, or any corporation that was included in the filing of a return
with Elcotel or its Subsidiaries on a consolidated, combined or unitary basis
have been filed (the "Elcotel Tax Returns") and all Taxes required to be shown
on the Elcotel Tax Returns, or a subsequent assessment with respect thereto, or
otherwise due or payable (to the extent in excess of $50,000 in the aggregate)
have been paid and any penalties and interest relating to such Taxes have been
paid. No other Taxes (to the extent in excess of $50,000 in the aggregate) are
payable by the Elcotel Group with respect to items or periods covered by such
Tax Returns or with respect to Tax periods prior to the date of this Agreement.
None of the Elcotel Tax Returns contain, or are required to contain, a
disclosure statement under Section 6662 of the Code, or any similar provision of
state, local or foreign law, with respect to any items that relate to Elcotel or
its Subsidiaries in order to avoid a penalty for any taxable year. All Elcotel
Tax Returns are true, correct and complete in all material respects. Elcotel has
made available to TSG correct and complete copies of all Elcotel Tax Returns for
all periods which are not closed by the statute of limitations.

(b) No adjustment relating to any Elcotel Tax Returns has been
proposed formally or, to Elcotel's knowledge, informally by any Governmental
Authority (to the extent in excess of $50,000 in the aggregate), and no basis
exists for any such adjustment that would have a Material Adverse Effect on TSG.
There are no outstanding subpoenas or requests for information with respect to
any Elcotel Tax Returns or portions thereof. There are no pending or, to
Elcotel's knowledge, threatened actions or proceedings for the assessment or
collection of Taxes for which Elcotel or its Subsidiaries may be liable (to the
extent in excess of $50,000 in the aggregate). There are no Tax liens on any
assets of Elcotel or its Subsidiaries, except with respect to Taxes which are
not yet due and payable.

(c) No consent under Section 341(f) of the Code has been filed with
respect to Elcotel or any of its Subsidiaries. Neither Elcotel nor any of its
Subsidiaries is or has been subject to the dual consolidated loss provisions of
Section 1503 of the Code.

(d) Elcotel and its Subsidiaries are members of an affiliated group
(within the meaning of Section 1504 of the Code) that is eligible to file a
consolidated return. No other entity is or has been eligible to file a
consolidated or combined return with Elcotel and its Subsidiaries, and neither
Elcotel nor its Subsidiaries have filed or consented to the filing of any
Federal or state consolidated or combined return with any entity not a member of
the Elcotel Group. Neither Elcotel nor any of its Subsidiaries has been at any
time a member of any partnership or joint venture or the holder of a beneficial
interest in any trust

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for any Person for which the statute of limitations for any Tax potentially
applicable as a result of such membership or holding has not expired.

(e) Elcotel and its Subsidiaries have properly accrued all current
or contested Taxes on their books and records, and their books and records
reflect reserves that are adequate for the payment of all Taxes not yet due and
payable that are properly accruable thereon through the date of this Agreement
(including Taxes being contested). Neither Elcotel nor any of its Subsidiaries
have any material liability for any Taxes in excess of amounts accrued or the
reserves established. All Taxes required to be withheld, collected or deposited
in connection with the operations and activities of Elcotel or its Subsidiaries
have been timely withheld, collected or deposited and, to the extent required,
have been paid to the relevant taxing authority.

(f) Elcotel does not own, nor has it owned during the past five
years, any of the capital stock of TSG. At the Effective Time, the fair market
value of the assets of Elcotel will exceed the sum of its liabilities, plus the
amount of other liabilities, if any, to which the assets are subject.

(g) There are no requests for rulings, determinations or
information currently outstanding that could affect the Taxes of Elcotel or any
of its Subsidiaries.

(h) The Elcotel Tax Returns have been audited by the Service or
other governmental agency (or closed by applicable statutes of limitations) and
all Tax liabilities in respect thereof have been finally determined for all
taxable years ending on or before March 31, 1993. There are no outstanding
waivers or agreements extending the statute of limitations for any period with
respect to any Tax to which Elcotel or any of its Subsidiaries may be liable.

(i) The term "Elcotel Group" shall mean, individually and
collectively, (i) Elcotel, (ii) its Subsidiaries, and (iii) any trust,
corporation, partnership or any other entity as to which Elcotel or its
Subsidiaries is liable for Taxes incurred by such entity either as a transferee,
or pursuant to Treasury Regulations Section 1.1502-6, or pursuant to any other
provision of federal, state, local or foreign law or regulations.

(j) Elcotel has made available to TSG a true and complete copy of
any: (i) elections, letter rulings and determination letters relating to Taxes
with respect to Elcotel or its Subsidiaries; and (ii) examination reports,
closing agreements and statements of deficiencies for Taxes assessed against or
agreed to by Elcotel or any of its Subsidiaries.

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Section 4.14 Employee Benefits; ERISA.

(a) Except as set forth on Schedule 4.14(a) to the Elcotel
Disclosure Letter, there are no employee benefit plans (including any plans for
the benefit of directors or former directors), contracts or agreements
(including employment agreements and severance agreements, incentive
compensation, bonus, stock option, stock appreciation rights and stock purchase
plans) of any type (including plans described in Section 3(3) of ERISA),
maintained by Elcotel, any of its Subsidiaries or any trade or business, whether
or not incorporated (an "Elcotel ERISA Affiliate"), that together with Elcotel
would be deemed a "controlled group" within the meaning of Section 4001(a)(14)
of ERISA, or with respect to which Elcotel or any of its Subsidiaries has or may
have a liability (the "Elcotel Benefit Plans"). Except as disclosed on Schedule
4.14 to the Elcotel Disclosure Letter, since March 31, 1997, there has been no
change, amendment, modification to, or adoption of, any Elcotel Benefit Plan;

(b) With respect to each Elcotel Benefit Plan: (i) if intended to
qualify under Section 401(a), 401(k) or 403(a) of the Code, each such plan so
qualifies, and its trust is exempt from taxation under Section 501(a) of the
Code; (ii) no failure to administer such plan in accordance with its terms and
applicable law have occurred that have had or would reasonably be expected to
have a Material Adverse Effect on Elcotel; (iii) no breaches of fiduciary duty
have occurred; (iv) no prohibited transaction within the meaning of Section 406
of ERISA has occurred; (v) as of the date of this Agreement, no lien imposed
under the Code or ERISA exists; and (vi) all contributions and premiums due
(including any extensions for such contributions and premiums) have been made in
full;

(c) None of the Elcotel Benefit Plans has incurred any "accumulated
funding deficiency", as such term is defined in Section 412 of the Code, whether
or not waived;

(d) Neither Elcotel nor any ERISA Affiliate has incurred any
liability under Title IV of ERISA (including Sections 4063-4064 and 4069 of
ERISA) since the effective date of ERISA that has not been satisfied in full;

(e) With respect to each Elcotel Benefit Plan that is a "welfare
plan" (as defined in Section 3(1) of ERISA), no such plan provides medical or
death benefits with respect to current or former employees of Elcotel or any of
its Subsidiaries beyond their termination of employment, other than as required
by law or on an employee-pay-all basis;

(f) The consummation of the Merger pursuant to this Agreement will
not (i) entitle any individual to severance pay or any tax "gross-up" payments
with respect to the imposition of any tax pursuant to Section 4999 of the Code
or accelerate the time of payment or vesting, or increase the amount, of
compensation or benefits due to any individual with respect to any Elcotel
Benefit Plan, or (ii) constitute or result in a prohibited transaction under
Section 4975 of the Code or Section 406 or 407 of ERISA with respect to any
Elcotel Benefit Plan; and

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(g) There is no Elcotel Benefit Plan that is a "multiemployer
plan", as such term is defined in Section 3(37) of ERISA, or which is
covered by Section 4063 or 4064 of ERISA.

Section 4.15 Certain Agreements; Compliance with Agreements.

(a) Except as disclosed on Schedule 4.15 to the Elcotel Disclosure
Letter or as provided for in this Agreement, neither Elcotel nor any of its
Subsidiaries is a party to or bound by any oral or written:

(i) consulting agreement not terminable on thirty (30) days'
or less notice;

(iii) agreement with respect to any officer providing any term
of employment or compensation guarantee;

(v) agreement containing covenants that limit the ability of
Elcotel or any of its Subsidiaries to compete in any line of business or
with any Person, or that involve any restriction on the geographic area in
which, or method by which, Elcotel or any of its Subsidiaries may carry on
its business (other than as may be required by law or any regulatory
agency);

(vi) agreement, contract or understanding, other than this
Agreement and the certificate of incorporation and by-laws of Elcotel,
regarding the capital stock of Elcotel or committing to dispose of some or
all of the capital stock or all or substantially all of the assets of
Elcotel;

(vii) partnership, joint venture or profit sharing agreement of
Elcotel or any of its Subsidiaries with any Person;

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(viii) agreement, contract, commitment, indenture or other
instrument of Elcotel or any of its Subsidiaries relating to the borrowing
of money, or the direct or indirect guarantee of any obligation for, or an
agreement to service the repayment of, borrowed money, or any other
contingent obligation in respect to indebtedness of any other Person,
including without limitation any agreement or arrangement relating to the
maintenance of compensating balances, any agreement or arrangement with
respect to lines of credit, any agreement or arrangement to purchase or
repurchase obligations of any other Person, any agreement or arrangement to
advance or supply funds to or to invest in any other Person, any agreement
or arrangement to pay for property, products or services of any other
Person even if such property, products or services are not conveyed,
delivered or rendered, or any guarantee with respect to any lease or other
similar periodic payment to be made by any other Person;

(ix) lease of Elcotel or any of its Subsidiaries with annual
rental payments aggregating $50,000 or more;

(x) except as set forth on Schedule 5.02 to the Elcotel
Disclosure Letter, agreement, contract or commitment of Elcotel or any of
its Subsidiaries relating to the disposition or acquisition of any
investment in any Person if such investment has a book value of, or the
disposition or acquisition price of such investment or interest is, $50,000
or more;

(xi) agreement, contract or commitment which involves payment
or potential payment, pursuant to the terms of such agreement, contract or
commitment, by or to Elcotel or any of its Subsidiaries of $50,000 or more
within any twelve month period commencing after the date hereof; or

(xii) agreement, contract, commitment or arrangement between
Elcotel or any of its Subsidiaries and any Affiliate of Elcotel or any of
its Subsidiaries that is not described in or filed as an exhibit to an
Elcotel SEC Report.

(b) Neither Elcotel nor any of its Subsidiaries nor, to the
knowledge of Elcotel, any other party thereto is in breach or violation of or in
default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or both, is reasonably
expected to result in a default under, (i) the certificates or articles of
incorporation, bylaws or similar organizational documents of Elcotel or any of
its Subsidiaries or (ii) any contract, agreement, plan or instrument listed on
Schedule 4.15 to the Elcotel Disclosure Letter, except in the case of clause
(ii) for breaches, violations or defaults which, individually or in the
aggregate, are not having and are not reasonably expected to have a Material
Adverse Effect on Elcotel. No party to any such contract, agreement, plan or
instrument will have the right to terminate any or all of the provisions of any
such contract, plan or instrument as a result of the transactions contemplated
by this Agreement.

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Section 4.16 Compliance with Laws and Orders. Elcotel and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Authorities necessary for the lawful conduct of
their respective businesses (the "Elcotel Permits"), except for failures to hold
such permits, licenses, variances, exemptions, orders and approvals which,
individually or in the aggregate, are not having and are not reasonably expected
to have a Material Adverse Effect on Elcotel. Elcotel and its Subsidiaries are
in compliance with the terms of the Elcotel Permits, except failures so to
comply which, individually or in the aggregate, are not having and are not
reasonably expected to have a Material Adverse Effect on Elcotel. TSG and its
Subsidiaries are not in violation of or default under any Laws or Orders, except
for such violations or defaults which, individually or in the aggregate, are not
having and are not reasonably expected to have a Material Adverse Effect on
Elcotel.

Section 4.17 Environmental Matters.

(a) Except as set forth on Schedule 4.17 to the Elcotel Disclosure
Letter:

(i) no notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been
filed against, no penalty has been assessed against, and no investigation,
action, claim, suit, proceeding or review is pending or, to the knowledge
of Elcotel or any Subsidiary of Elcotel, is threatened by any Person,
against Elcotel or any Subsidiary of Elcotel with respect to any matters
relating to or arising out of any Environmental Law;

(ii) no Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released,
in violation of any Environmental Law, at, on, under or adjacent to any
property now or, to the knowledge of Elcotel, previously owned, leased or
operated by Elcotel or any Subsidiary of Elcotel; and

(iii) there are no Environmental Liabilities.

(b) For purposes of this Section 4.17, capitalized terms used shall
have the meanings assigned to them in Section 3.17(b), except that in all cases
the word "Elcotel" shall be substituted for the word "TSG".

Section 4.18 Assets. The assets, properties, rights and contracts,
including (as applicable) title or leaseholds thereto, of Elcotel and its
Subsidiaries, taken as a whole, are sufficient to permit Elcotel and its
Subsidiaries to conduct their respective businesses as currently being
conducted. All real property owned by Elcotel or its Subsidiaries is owned free
and clear of all Liens, except (a) those reflected or reserved against

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in the Elcotel Balance Sheet (or notes thereto), (b) taxes and general and
special assessments not in default and payable without penalty or interest, and
(c) Liens that do not materially adversely interfere with any present use of
such property.

Section 4.19 Intellectual Property Rights.

(a) Elcotel and its Subsidiaries own or have the right to use, all
Intellectual Property individually or in the aggregate material to the conduct
of the businesses of Elcotel and its Subsidiaries. To the knowledge of Elcotel,
(i) neither Elcotel nor any Subsidiary of Elcotel is in default (or with the
giving of notice or lapse of time or both would be in default) under any license
to use such Intellectual Property, (ii) such Intellectual Property (other than
patents) is not being infringed by any third party, and (iii) neither Elcotel
nor any Subsidiary of Elcotel is infringing any intellectual property of any
third party. An accurate schedule of all Intellectual Property of Elcotel or its
Subsidiaries consisting of patents, registered trademarks, registered trade
names and registered copyrights and all pending applications therefor is set
forth on Section 4.19 to the Elcotel Disclosure Letter;

(b) Either Elcotel or one of its Subsidiaries currently is listed
in the records of the appropriate United States, state or foreign agency as the
sole owner of record for each application and registration included in the
Intellectual Property, other than Intellectual Property of which Elcotel or its
Subsidiaries is a licensee;

(c) Elcotel and its Subsidiaries, with respect to all Intellectual
Property owned thereby, have taken or caused to be taken all reasonable steps in
the exercise of reasonable business judgment to obtain and retain valid and
enforceable Intellectual Property rights therein, including the submission of
all necessary filings in accordance with the legal and administrative
requirements of the appropriate jurisdictions. No application or registration
listed on Schedule 4.19 to the Elcotel Disclosure Letter is the subject of any
pending, existing or, to Elcotel's knowledge, threatened, opposition,
interference, cancellation proceeding or other legal or governmental proceeding
before any registration authority in any jurisdiction; and

(d) The consummation of the transactions contemplated hereby will
not result in the loss or impairment of Elcotel's or any of its Subsidiaries'
right to own or use any of the Intellectual Property nor will it require the
consent of any Governmental Authority or third party.

Section 4.20 Labor Matters. Elcotel has previously furnished to TSG true
and complete copies of all labor and collective bargaining agreements to which
Elcotel or any of its Subsidiaries is a party and that are currently in effect,
together with all amendments thereto (if any). Since January 1, 1996, there have
been no strikes, slow downs or other work stoppages or

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<PAGE>

lockouts involving any employees of Elcotel or any of its Subsidiaries and there
are no disputes by any labor organization in progress or pending or, to the
knowledge of Elcotel, threatened against Elcotel or any of its Subsidiaries that
would have a Material Adverse Effect on Elcotel. Elcotel and its Subsidiaries
are in compliance in all material respects with all applicable laws and
regulations in respect of employment and employment practices, terms and
conditions of employment, wages and hours, occupational safety, health or
welfare conditions relating to premises occupied, and civil rights. There are no
charges of unfair labor practices pending before any Governmental Authority
involving or affecting Elcotel or any of its Subsidiaries. As of the date of
this Agreement, there is no representation claim or petition pending before the
National Labor Relations Board and, to the knowledge of Elcotel, no question
concerning representation exists with respect to the employees of Elcotel or any
of its Subsidiaries. Elcotel has not received notice that any customer or
supplier of Elcotel or any or its Subsidiaries is involved in or threatened with
or affected by any strike or other labor disturbance or dispute, litigation or
administrative proceeding or judgment, order, injunction, decree or award, the
consequences of which would have a Material Adverse Effect on Elcotel.

Section 4.21 Transactions with Affiliates. Except to the extent disclosed
in the Elcotel SEC Documents filed prior to the date of this Agreement, none of
the officers or directors of Elcotel or any of its Subsidiaries nor any of its
Affiliates, and, to its knowledge, none of its key employees or the key
employees of any of its Subsidiaries, is a party to any transaction with Elcotel
or any of its Subsidiaries (other than for services as an employee, officer or
director and other than transactions between Elcotel and one or more of its
direct or indirect wholly owned Subsidiaries or between such Subsidiaries),
including, without limitation, any contract, agreement or other arrangement (i)
providing for the furnishing of services to or by, (ii) providing for rental of
real or personal property to or from, or (iii) otherwise requiring payments to
or from, any such officer, director, Affiliate or key employee, any member of
the family of any such officer, director or key employee or any corporation,
partnership, trust or other entity in which any such officer, director or key
employee has substantial interest (excluding the ownership of not more than two
percent (2%) of the capital stock of a publicly traded corporation) or which is
an Affiliate of such officer, director or key employee.

Section 4.22 Insurance. Schedule 4.22 to the Elcotel Disclosure Letter
sets forth a complete and accurate list of all primary, excess and umbrella
policies, bonds and other forms of insurance currently owned or held by or on
behalf of or providing insurance coverage to Elcotel or any of its Subsidiaries
and their respective businesses, properties and assets (or its directors,
officers, agents or employees). All such policies are in full force and effect.
Neither Elcotel nor any of its Subsidiaries has received notice of default under
any such policy, or has received written notice of any pending or threatened
termination or cancellation, coverage limitation or reduction, or material
premium increase with respect to any such policy the failure of which to
maintain, has a Material Adverse Effect on Elcotel. Schedule 4.22 to the Elcotel
Disclosure Letter sets forth a complete and accurate summary of all of the self-
insurance coverage provided by Elcotel or any of its Subsidiaries and no letters
of credit have been posted in respect thereof.

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Section 4.23 Takeover Statutes. The Boards of Directors of Elcotel and
Merger Subsidiary have duly and validly approved the Merger, this Agreement and
the transactions contemplated by this Agreement and such approval is sufficient
to render inapplicable to the Merger, this Agreement, and the transactions
contemplated by this Agreement and the Voting Agreement, the provisions of
Section 203 of the Delaware Law. No other Takeover Statute applicable to Elcotel
or any of its Subsidiaries is applicable to the Merger or the other transactions
contemplated hereby.

Section 4.24 Finders' Fees. Except for a fee payable to Cameron
Associates, a copy of whose engagement agreement has been provided to TSG, no
investment banker, broker, finder, other intermediary or other Person is
entitled to any fee or commission from Elcotel or any Subsidiary of Elcotel upon
consummation of the transactions contemplated by this Agreement.

Section 4.25 Opinion of Financial Advisor. Elcotel has received the
written opinion of Murray, Devine & Co. to the effect that, as of the date
hereof, the Merger Consideration to be received by the holders of Shares in the
Merger is fair to Elcotel from a financial point of view. Elcotel has delivered
to TSG a copy of such opinion.

ARTICLE V
COVENANTS

Section 5.01 Conduct of TSG. From the date hereof until the Effective
Time, except as otherwise expressly required by this Agreement or with the prior
written consent of Elcotel, TSG shall conduct, and shall cause its Subsidiaries
to conduct, their respective businesses in the ordinary course consistent with
past practice and shall use their best efforts to preserve intact their business
organizations and relationships with customers, suppliers, creditors and
business partners and shall use their reasonable efforts to keep available the
services of their present officers and employees. Without limiting the
generality of the foregoing, from the date hereof until the Effective Time,
without the prior written approval of Elcotel (which approval will not be
unreasonably withheld or delayed with respect to (c), (d), (h), (i), (j), (n) or
(o) or (k) as it applies to filing any amended Tax Return):

(a) TSG will not adopt or propose any change in its certificate of
incorporation or any change in its bylaws;

(b) TSG will not, and will not permit any Subsidiary of TSG to,
adopt a plan or agreement of complete or partial liquidation, or resolutions
providing for or authorizing such liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of TSG or
any of its Subsidiaries (other than a liquidation or dissolution of any
Subsidiary or a merger or consolidation between wholly owned Subsidiaries);

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(c) TSG will not, and will not permit any Subsidiary of TSG to,
make any investment in or any acquisition of the business of any Person or any
material amount of assets (other than inventory);

(d) TSG will not, and will not permit any Subsidiary of TSG to,
sell or otherwise dispose of any assets (other than inventory) in an amount that
would be material to TSG and its Subsidiaries, taken as a whole, except in the
ordinary course of business consistent with past practice;

(e) TSG will not, and will not permit any Subsidiary of TSG to,
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock other than dividends paid by
any Subsidiary of TSG to TSG or any other Subsidiary of TSG, or split, combine,
reclassify or take similar action with respect to any of its capital stock or
TSG Securities or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or TSG Securities;

(f) TSG will not, and will not permit any Subsidiary of TSG to,
issue, deliver, sell, transfer, pledge, dispose of or encumber any shares of, or
securities convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of capital stock of any
class or series of TSG or its Subsidiaries, other than the issuance of (i)
options with an exercise price at least equal to the fair market value of the
TSG Common Stock on the date of grant for up to 20,000 shares of TSG Common
Stock under the Omnibus Plan as in effect on the date hereof, (ii) rights to
purchase shares of TSG Common Stock granted pursuant to the Stock Purchase Plan
as in effect on the date hereof during the offering period that commenced on
July 14, 1997 and that will end on January 9, 1998, estimated at 9,306.14 shares
of TSG Common Stock based on a stock price of $5.00 per share on July 14, 1997
and eligible employees with $39,551.11 of estimated aggregate compensation
deductions (based on current compensation levels), (iii) options granted
automatically under the Director Plan as in effect on the date hereof, and (iv)
issuances of TSG Common Stock pursuant to the exercise of options granted
pursuant to the TSG Option Plans and the exercise of TSG Warrants described in
Section 3.05(a) which are outstanding on the date hereof, and TSG will not amend
the terms of any option, warrant, right or other security outstanding under any
of the TSG Plans or commence any new offering under the Stock Purchase Plan;

(g) TSG will not, and will not permit any Subsidiary of TSG to,
redeem, purchase or otherwise acquire directly or indirectly any of TSG's
capital stock or any TSG Securities;

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<PAGE>

(h) TSG will not, and will not permit any Subsidiary of TSG to,
enter into or amend in any material respect any employment contract with any of
its officers, directors or employees earning annual compensation of more than
$50,000, adopt or amend any TSG Benefit Plan in any material respect or make any
payments, awards or distributions under any TSG Benefit Plan or otherwise not
consistent with past practice or custom except (i) as required by a contract in
existence on the date hereof and listed on Schedule 3.15 to the TSG Disclosure
Letter; or (ii) as necessary to make any TSG Benefit Plan listed on Schedule
3.14 to the TSG Disclosure Letter meet the requirements of ERISA to the extent
such amendment is described in such Schedule or is approved by Elcotel;

(i) TSG will not, and will not permit any Subsidiary of TSG to, (i)
enter into (or commit to enter into) any new lease or renew any existing lease
(except pursuant to commitments for such lease or lease renewal entered into as
of the date hereof) or (ii) purchase or acquire or enter into any agreement to
purchase or acquire any real estate;

(j) TSG will not, and will not permit any Subsidiary of TSG to,
make or commit to make any capital expenditures in excess of $150,000 in the
aggregate exclusive of existing commitments with Avex Electronics for capital
expenditures not exceeding $200,000 in the aggregate.

(k) TSG will not, and will not permit any Subsidiary of TSG to,
change any tax election, change any annual tax accounting period, change any
method of tax accounting, file any amended Tax Return, enter into any closing
agreement relating to any Tax, settle any Tax claim or assessment, surrender any
right to claim a Tax refund or consent to any extension or waiver (other than a
reasonable extension or waiver) of the limitations period applicable to any Tax
claim or assessment, if any such action would have the effect of increasing the
aggregate Tax liability or reducing the aggregate tax assets of TSG and its
Subsidiaries, taken as a whole, or, to the knowledge of TSG, Elcotel and its
Subsidiaries, taken as a whole;

(l) TSG will not, and will not permit any Subsidiary of TSG to, (i)
incur any indebtedness for borrowed money or guarantee any such indebtedness
other than in the ordinary course of its business consistent with past practice,
or (ii) voluntarily purchase, cancel, prepay or otherwise provide for a complete
or partial discharge in advance of a scheduled repayment date with respect to,
or waive any right under, any indebtedness for borrowed money;

(m) TSG will not, and will not permit any Subsidiary of TSG to,
enter into any contract or amend or modify any existing contract, or engage in
any new transaction outside the ordinary course of business consistent with past
practice or not on an arm's length basis, with any Affiliate of such party or
any of its Subsidiaries;

(n) TSG will not, and will not permit any Subsidiary of TSG to,
agree or commit to do any of the foregoing; and

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<PAGE>

(o) TSG will not, and will not permit any Subsidiary of TSG to,
take or agree or commit to take any action that would make any representation or
warranty of TSG in this Agreement inaccurate at, or as of any time prior to, the
Effective Time.

Section 5.02 Conduct of Elcotel. From the date hereof until the Effective
Time, except as otherwise expressly required by this Agreement or with the prior
written consent of TSG, Elcotel shall conduct, and shall cause its Subsidiaries
to conduct, their respective businesses in the ordinary course consistent with
past practice and shall use their best efforts to preserve intact their business
organizations and relationships with customers, suppliers, creditors and
business partners and shall use their reasonable efforts to keep available the
services of their present officers and employees. Without limiting the
generality of the foregoing, from the date hereof until the Effective Time,
without the prior written approval of TSG (which approval will not be
unreasonably withheld or delayed with respect to (c), (d), (h), (i), (j), (n) or
(o) or (k) as it applies to filing any amended Tax Return):

(a) Elcotel will not adopt or propose any change in its certificate
of incorporation or any change in its bylaws, except as and to the extent
required to consummate the Merger;

(b) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, adopt a plan or agreement of complete or partial liquidation, or resolutions
providing for or authorizing such liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
Elcotel or any of its Subsidiaries (other than a liquidation or dissolution of
any Subsidiary or a merger or consolidation between wholly owned Subsidiaries);

(c) Except as set forth on Schedule 5.02 to the Elcotel Disclosure
Letter, Elcotel will not, and will not permit any Subsidiary of Elcotel to, make
any investment in or any acquisition of the business of any Person or any
material amount of assets (other than inventory);

(d) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, sell or otherwise dispose of any assets (other than inventory) in an amount
that would be material to Elcotel and its Subsidiaries, taken as a whole, except
in the ordinary course of business consistent with past practice;

(e) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock, other than dividends
paid by any Subsidiary of Elcotel to Elcotel or any other Subsidiary of Elcotel,
or split, combine, reclassify or take similar action with respect to any of its
capital stock or Elcotel Securities or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock of Elcotel Securities;

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(f) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, issue, deliver, sell, transfer, pledge, dispose of or encumber any shares
of, or securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital stock
of any class or series of Elcotel or its Subsidiaries, other than (x) issuances
by any Subsidiary of Elcotel to Elcotel or any other Subsidiary of Elcotel, (y)
issuances pursuant to the exercise of options granted pursuant to the Elcotel
Plans described in Section 4.05(a) which are outstanding on the date hereof or
granted as contemplated in clause (z) below, and (z) any grant of options to
purchase Elcotel Common Stock to new employees of Elcotel or any of its
Subsidiaries pursuant to the Elcotel Plans that could result in the issuance of
not more than 75,000 shares in the aggregate of Elcotel Common Stock;

(g) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, redeem, purchase or otherwise acquire directly or indirectly any of
Elcotel's capital stock or any Elcotel Securities;

(h) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, enter into or amend in any material respect any employment contract with any
of its officers, directors or employees earning annual compensation of more than
$50,000 (other than as contemplated by Section 6.06), adopt or amend any Elcotel
Benefit Plan in any material respect or make any payments, awards or
distributions under any Elcotel Benefit Plan or otherwise not consistent with
past practice or custom except (i) as required by a contract in existence on the
date hereof and listed on Schedule 4.15 to the Elcotel Disclosure Letter; or
(ii) as necessary to make any Elcotel Benefit Plan listed on Schedule 4.14 to
the Elcotel Disclosure Letter meet the requirements of ERISA to the extent such
amendment is described in such Schedule or is approved by TSG;

(i) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, (i) enter into (or commit to enter into) any new lease or renew any existing
lease (except pursuant to commitments for such lease or lease renewal entered
into as of the date hereof) or (ii) purchase or acquire or enter into any
agreement to purchase or acquire any real estate;

(j) Except as set forth on Schedule 5.02 to the Elcotel Disclosure
Letter, Elcotel will not, and will not permit any Subsidiary of Elcotel to, make
or commit to make any capital expenditures in excess of $150,000 in the
aggregate;

(k) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, change any tax election, change any annual tax accounting period, change any
method of tax accounting, file any amended Tax Return, enter into any closing
agreement relating to any Tax, settle any Tax claim or assessment, surrender

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any right to claim a Tax refund or consent to any extension or waiver (other
than a reasonable extension or waiver) of the limitations period applicable to
any Tax claim or assessment, if any such action would have the effect of
increasing the aggregate Tax liability or reducing the aggregate tax assets of
TSG and its Subsidiaries, taken as a whole, or, to the knowledge of Elcotel, TSG
and its Subsidiaries, taken as a whole;

(l) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of its business consistent with
past practice or other than in connection with the transactions contemplated by
this Agreement, or (ii) voluntarily purchase, cancel, prepay or otherwise
provide for a complete or partial discharge in advance of a scheduled repayment
date with respect to, or waive any right under, any indebtedness for borrowed
money;

(m) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, enter into any contract or amend or modify any existing contract, or engage
in any new transaction outside the ordinary course of business consistent with
past practice or not on an arm's length basis, with any Affiliate of such party
or any of its Subsidiaries;

(n) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, agree or commit to do any of the foregoing; and

(o) Elcotel will not, and will not permit any Subsidiary of Elcotel
to, take or agree or commit to take any action that would make any
representation or warranty of Elcotel in this Agreement inaccurate at, or as of
any time prior to, the Effective Time.

Section 5.03 No Solicitation. From the date hereof until the earlier of
the Effective Time and the termination of this Agreement, TSG agrees that (a) it
will not, and will cause its Subsidiaries and the officers, directors,
employees, investment bankers, consultants and other agents of TSG and its
Subsidiaries and the Affiliates of TSG not to, directly or indirectly, initiate,
solicit, encourage (including by way of furnishing information) or facilitate or
take any action to initiate, solicit, encourage or facilitate any inquiries or
the making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a merger,
consolidation or other business combination including TSG or any of its
Subsidiaries or any acquisition or similar transaction (including, without
limitation, a tender or exchange offer) involving the purchase of (x) all or any
significant portion of the assets of TSG and its Subsidiaries taken as a whole,
(y) 5% or more of the outstanding shares of TSG Common Stock or (z) 15% of the
outstanding shares of the capital stock of any Subsidiary of TSG (any such
proposal or offer being hereinafter referred to as an "Alternative Proposal"),
or engage in any discussions or negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person or
group relating to an Alternative Proposal (excluding the transactions
contemplated by this Agreement) or otherwise facilitate any effort or attempt to
make or implement an Alternative Proposal; (b) it will immediately cease and
cause to be terminated and will cause its Subsidiaries and the officers,

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directors, employees, investment bankers, consultants and other agents of TSG
and its Subsidiaries and the Affiliates of TSG to immediately cease and
terminate, any existing activities, discussions or negotiations with any parties
with respect to any of the foregoing, and it will take the necessary steps to
inform such parties of its obligations under this Section; and (c) it will
notify Elcotel immediately (and in no event later than 24 hours after receipt of
any Alternative Proposal) if any such inquiries, proposals or offers are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, it or any of such
Persons; provided, however, that nothing contained in this Section 5.03 shall
prohibit the Board of Directors of TSG from (i) furnishing information to (but
only pursuant to a confidentiality agreement in customary form and having terms
and conditions substantially comparable to the Confidentiality Agreement) or
entering into discussions or negotiations with any person or group that makes an
unsolicited bona fide Alternative Proposal, if, and only to the extent that, (A)
the Board of Directors of TSG, based upon the written opinion of outside counsel
(a copy of which shall be provided promptly to Elcotel), determines in good
faith that such action is required for the Board of Directors to comply with its
fiduciary duties to stockholders imposed by Delaware Law, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such Person or group, TSG provides written notice to Elcotel to the effect
that it is furnishing information to, or entering into discussions or
negotiations with such Person or group, and (C) TSG keeps Elcotel informed
(which notice shall be provided orally and in writing) of the status and
material information including the identity of such Person or group with respect
to any such discussions or negotiations and any Alternative Proposal and the
material terms thereof and gives Elcotel at least 24 hours' advance notice of
any information to be supplied to, and at least 48 hours' advance notice of any
agreement to be entered into with, any Person or group making such Alternative
Proposal; and (ii) to the extent required, complying with Rule 14e-2 promulgated
under the 1934 Act with regard to an Alternative Proposal.

Section 5.04 Approval of Stockholders.

(a) TSG shall, through its Board of Directors, duly call, give
notice of, convene and hold a meeting of its stockholders (the "TSG
Stockholders' Meeting") for the purpose of voting on the approval and adoption
of this Agreement and the Merger (the "TSG Stockholders' Approval") as soon as
reasonably practicable after the date hereof. Except as provided in the next
sentence, the Board of Directors of TSG shall recommend approval and adoption of
this Agreement and the Merger by the holders of TSG Common Stock and shall use
its best efforts to obtain such approval and adoption. The Board of Directors of
TSG shall be permitted to (i) not recommend to the holders of TSG Common Stock
that they give the TSG Stockholders' Approval or (ii) withdraw or modify in a
manner adverse to Elcotel its recommendation to the holders of TSG Common Stock
that they give the TSG Stockholders' Approval, but in each of cases (i) and (ii)
only if and to the extent that TSG has complied with Section 5.03 and a Superior
Proposal is pending at the time the TSG Board of Directors determines to take
any such action or inaction; provided that no

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such failure to recommend, withdrawal or modification shall be made unless TSG
shall have delivered to Elcotel a written notice (a "Notice of Superior
Proposal") advising Elcotel that the Board of Directors of TSG has received a
Superior Proposal and identifying the Person or group making such Superior
Proposal; provided, further that nothing contained in this Agreement shall
prevent the Board of Directors of TSG from complying with Rule 14e-2 under the
1934 Act with regard to an Alternative Proposal. For purposes of this Agreement,
"Superior Proposal" means any bona fide Alternative Proposal for at least a
majority of the outstanding Shares on terms that the Board of Directors of TSG
determines in its good faith judgment (based on the advice of an independent
reputable financial advisor, taking into account all the terms and conditions of
the Alternative Proposal, including any break-up fees, expense reimbursement
provisions and conditions to consummation) are more favorable and provide
greater value to all holders of TSG Common Stock than this Agreement and the
Merger taken as a whole;

(b) Elcotel shall, through its Board of Directors, duly call, give
notice of, convene and hold a meeting of its stockholders (the "Elcotel
Stockholders' Meeting" and, together with the TSG Stockholders' Meeting, the
"Stockholders' Meetings") for the purpose of voting on the issuance of Elcotel
Common Stock in the Merger (the "Elcotel Stockholders' Approval") as soon as
reasonably practicable after the date hereof. The Board of Directors of Elcotel
shall recommend that the stockholders of Elcotel approve such issuances of
Elcotel Common Stock, and shall use its best efforts to obtain such approval;

(c) Elcotel and TSG shall coordinate and cooperate with respect to
the timing of the Stockholders' Meetings and shall use their best efforts to
cause the Stockholders' Meetings to be held on the same day and as soon as
practicable after the date hereof.

Section 5.05 Preparation of Form S-4 and Proxy Statement. TSG and Elcotel
shall prepare and file with the SEC as soon as reasonably practicable after the
date hereof, the Proxy Statement, and Elcotel shall prepare and file with the
SEC as soon as reasonably practicable after such date, the Form S-4 in which the
Proxy Statement will be included within the prospectus. Elcotel and TSG shall
use their best efforts to have the Form S-4 declared effective by the SEC as
promptly as practicable after such filing. Elcotel shall also take any action
(other than qualifying as a foreign corporation or taking any action which would
subject it to service of process in any jurisdiction where Elcotel is not now so
qualified or subject) required to be taken under applicable state blue sky or
securities laws in connection with the issuance of Elcotel Common Stock in
connection with the Merger. If at any time prior to the Effective Time any event
shall occur that should be set forth in an amendment of or a supplement to the
Form S-4, Elcotel shall prepare and file with the SEC such amendment or
supplement as soon thereafter as is reasonably practicable. Elcotel, Merger
Subsidiary and TSG shall cooperate with each other in the preparation of the
Form S-4 and the Proxy Statement and any amendment or supplement thereto, and
each shall notify the other of the receipt of any comments of the SEC with
respect to the Form S-4 and any amendment or supplement thereto or for
additional information, and shall provide to the

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other promptly copies of all correspondence between Elcotel or TSG, as the case
may be, with respect to the Form S-4 or the Proxy Statement. Elcotel shall give
TSG and its counsel the opportunity to review and comment on the Form S-4 and
all responses to requests for additional information by and replies to comments
of the SEC before their being filed with, or sent to, the SEC. Each of TSG,
Elcotel, and Merger Subsidiary agrees to use its best efforts, after
consultation with the other parties hereto, to respond promptly to all such
comments of and requests by the SEC and to cause (x) the Form S-4 to be declared
effective by the SEC at the earliest practicable time and to be kept effective
as long as is necessary to consummate the Merger, and (y) the Proxy Statement to
be mailed to the holders of Elcotel Common Stock and TSG Common Stock entitled
to vote at the meetings of the stockholders of Elcotel and TSG at the earliest
practicable time.

Section 5.06 Access to Information.

(a) To the extent permitted by applicable law, from the date hereof
until the Effective Time, TSG will give Elcotel, its counsel, financial
advisors, auditors and other authorized representatives reasonable access during
normal business hours to the offices, properties, books and records of TSG and
its Subsidiaries, will furnish to Elcotel, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such Persons may reasonably request and will instruct
TSG's employees, auditors, counsel and financial advisors to cooperate with
Elcotel in its investigation of the business of TSG and its Subsidiaries;
provided that no investigation pursuant to this Section shall affect any
representation or warranty given by TSG to Elcotel hereunder. The foregoing
information shall be held in confidence to the extent required by, and in
accordance with, the provisions of the confidentiality agreement dated February
27, 1997 between Elcotel and TSG (the "Confidentiality Agreement").

(b) To the extent permitted by applicable law, from the date hereof
until the Effective Time, Elcotel will give TSG, its counsel, financial
advisors, auditors and other authorized representatives reasonable access during
normal business hours to the offices, properties, books and records of Elcotel
and its Subsidiaries, will furnish to TSG, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such Persons may reasonably request and will instruct
Elcotel's employees, auditors, counsel and financial advisors to cooperate with
TSG in its investigation of the business of Elcotel and its Subsidiaries,
provided that no investigation pursuant to this Section shall affect any
representation or warranty given by Elcotel to TSG hereunder. Such information
shall be held in confidence to the extent required by, and in accordance with,
the Confidentiality Agreement.

Section 5.07 Notices of Certain Events.

(a) TSG and Elcotel shall promptly notify each other of:

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(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement; and

(ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this
Agreement.

(b) TSG shall promptly notify Elcotel of any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting TSG or any Subsidiary
of TSG which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to Section 3.12 or Section 3.17 or which relate
to the consummation of the transactions contemplated by this Agreement.

(c) Elcotel shall promptly notify TSG of any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting Elcotel or any
Subsidiary of Elcotel which, if pending on the date of this Agreement, would
have been required to have been disclosed pursuant to Section 4.12 or which
relate to the consummation of the transactions contemplated by this Agreement.

Section 5.08 Regulatory and Other Approvals. Subject to the terms and
conditions of this Agreement, each of TSG and Elcotel will proceed diligently
and in good faith to, as promptly as practicable, (a) obtain all consents,
approvals or actions of, make all filings with and give all notices to
Governmental Authorities or any other public or private third parties required
of Elcotel, TSG or any of their Subsidiaries to consummate the Merger and the
other transactions contemplated hereby, and (b) provide such other information
and communications to such Governmental Authorities or other public or private
third parties as the other party or such Governmental Authorities or other
public or private third parties may reasonably request in connection therewith.
In addition to and not in limitation of the foregoing, each of the parties will
(x) take promptly all actions necessary to make the filings required of Elcotel
and TSG or their Affiliates under the HSR Act no later than fifteen business
days after the date hereof, (y) comply at the earliest practicable date with any
request for additional information received by such party or its Affiliates from
the Federal Trade Commission (the "FTC") or the Antitrust Division of the
Department of Justice (the "Antitrust Division") pursuant to the HSR Act, and
(z) cooperate with the other party in connection with such party's filings under
the HSR Act and in connection with resolving any investigation or other inquiry
concerning the Merger or the other transactions contemplated by this Agreement
commenced by either the FTC or the Antitrust Division or state attorneys
general. Without limiting the generality of the foregoing, Elcotel and TSG shall
together, or pursuant to an allocation of responsibility to be agreed between
them, coordinate and cooperate in determining whether any action by or in
respect of, or filing with, any Governmental Authorities is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any contracts,

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in connection with the consummation of the transactions contemplated by this
Agreement, and in seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.

Section 5.09 Public Announcements. So long as this Agreement is in
effect, Elcotel and TSG will consult with each other before issuing any press
release or making any SEC filing or other public statement with respect to this
Agreement or the Voting Agreement or the transactions contemplated hereby or
thereby and, except as may be required by applicable law, court process or any
listing agreement with any national securities exchange or with NASDAQ, will not
issue any such press release or make any such SEC filing or other public
statement prior to such consultation and providing the other party with a
reasonable opportunity to comment thereon and approve the same (such approval
not to be unreasonably withheld or delayed).

Section 5.10 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of TSG or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of TSG or Merger Subsidiary, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of TSG acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger.

Section 5.11 TSG Affiliates. At least thirty (30) days prior to the
Effective Time, TSG shall deliver a letter to Elcotel identifying all persons
who, at the time of the TSG Stockholders' Meeting, may, in TSG's reasonable
judgment, be deemed to be "affiliates" (as such term is used in Rule 145 under
the 1933 Act) of TSG ("TSG Affiliates"). TSG shall use its best efforts to cause
each TSG Affiliate to deliver to Elcotel at or prior to the Effective Time a
letter substantially in the form and to the effect of Exhibit B hereto (an
"Affiliate Letter"). Elcotel shall be entitled to issue appropriate stop
transfer instructions to the transfer agent for the Elcotel Common Stock to be
issued to TSG Affiliates pursuant to the Merger, consistent with the terms of
such Affiliate Letters.

Section 5.12 Obligations of Merger Subsidiary. Elcotel will take all
action necessary to cause Merger Subsidiary to perform its obligations under
this Agreement and to consummate the Merger on the terms and conditions set
forth in this Agreement.

Section 5.13 Listing of Stock. Elcotel shall use its best efforts to
cause the shares of Elcotel Common Stock to be issued in connection with the
Merger to be approved for listing on the NASDAQ National Market System at or
prior to the Effective Time, subject to official notice of issuance.

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Section 5.14 Antitakeover Statutes. If any Takeover Statute is or may
become applicable to the Merger, each of Elcotel and TSG shall take such actions
as are necessary so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of any Takeover Statute on
the Merger.

Section 5.15 Tax Treatment. Each of Elcotel and TSG shall not take
any action and shall not fail to take any action which action or failure to act
would cause, or would be reasonably likely to cause, Elcotel, TSG or their
respective stockholders (except to the extent that any stockholder of TSG may
receive cash in lieu of fractional shares) to recognize gain or loss for federal
income tax purposes as a result of the issuance of Elcotel Common Stock in the
Merger, and TSG shall use its reasonable efforts to obtain the opinion of
counsel referred to in Section 8.08.

Section 5.16 Appointment of Directors. Elcotel shall invite David
Steadman, Mark Plaumann, Kenneth Rubin and Vincent Bisceglia to become members
of the Board of Directors of Elcotel immediately following the Effective Time
and shall increase the size of the Board of Directors of Elcotel to nine
members, including those four persons, C. Shelton James, Tracey Gray, Charles
Moore and two independent directors who are currently members of the Board of
Directors of Elcotel, immediately following the Effective Time.

ARTICLE VI
GENERAL CONDITIONS PRECEDENT TO THE MERGER

The obligations of TSG, Elcotel and Merger Subsidiary to consummate the
Merger pursuant to this Agreement and the other transactions required to be
consummated by such date by this Agreement are subject to the satisfaction (or
waiver by the party for whose benefit the applicable condition exists) of each
of the following conditions:

Section 6.01 Stockholder Approval. This Agreement and the
transactions contemplated hereby shall have been approved and adopted by the
stockholders of TSG in accordance with Delaware Law. The stockholders of Elcotel
shall have approved the issuance of Elcotel Common Stock in the Merger by the
requisite vote under applicable law and under the applicable rules of the NASDAQ
National Market System, as the case may be.

Section 6.02 HSR Act. Any applicable waiting period under the HSR Act
relating to the transactions contemplated by this Agreement shall have expired
or been terminated.

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Section 6.03 Registration Statement; State Securities Laws. The Form
S-4 shall have become effective in accordance with the provisions of the 1933
Act, and no stop order suspending such effectiveness shall have been issued and
remain in effect and no proceeding seeking such an order shall be pending or
threatened. Elcotel shall have received all state securities or blue sky permits
and other authorizations necessary to issue the Elcotel Common Stock pursuant to
this Agreement.

Section 6.04 Listing. The shares of Elcotel Common Stock to be issued
in the Merger shall have been approved for listing on the NASDAQ National Market
System, subject to official notice of issuance.

Section 6.05 Suits or Other Proceedings. There shall not be pending
any suit, action or proceeding by any Governmental Authority, (i) seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement, or seeking to obtain from Elcotel
or TSG any damages the amount of which would be reasonably likely to have a
Material Adverse Effect on TSG or Elcotel, or (ii) seeking to prohibit or limit
the ownership or operation by Elcotel, TSG or any of their respective
Subsidiaries of, or to compel Elcotel, TSG or any of their respective
Subsidiaries to dispose of or hold separate, any material portion of the
business or assets of Elcotel, TSG or any of their respective Subsidiaries, as a
result of the Merger or any of the other transactions contemplated by this
Agreement.

Section 6.06 Employment Agreements. Elcotel shall have entered into
an employment agreement with each of Vincent Bisceglia, C. Shelton James and
Tracey Gray.

ARTICLE VII
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF ELCOTEL AND MERGER SUBSIDIARY

The obligations of Elcotel and Merger Subsidiary to consummate the
Merger pursuant to this Agreement and the other transactions required to be
consummated by such date by this Agreement are further subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions (all or any of which may be waived in whole or in part by Elcotel and
Merger Subsidiary in their sole discretion):

Section 7.01 Representations and Warranties. The representations and
warranties made by TSG in this Agreement shall be true and correct as of the
Closing Date as though made on and as of the Closing Date or, in the case of
representations and warranties made as of a specified date earlier than the
Closing Date, on and as of such earlier date, and TSG shall have delivered to
Elcotel a certificate, dated the Closing Date and executed by its President to
such effect.

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Section 7.02 Performance of Obligations. TSG shall have performed and
complied with each agreement, covenant and obligation required by this Agreement
to be so performed or complied with by TSG at or prior to the Closing, and TSG
shall have delivered to Elcotel a certificate, dated the Closing Date and
executed by its President to such effect.

Section 7.03 No Material Adverse Change. There shall not have been
any change in the consolidated business, results of operations, financial
condition or prospects of TSG and its Subsidiaries, taken as a whole, between
March 28, 1997 and the Closing Date which would have a Material Adverse Effect
on TSG.

Section 7.04 Consents. Elcotel shall have received consents or
waivers from such Persons as are necessary for Elcotel to consummate the
transactions contemplated by this Agreement.

Section 7.05 Opinion of TSG Counsel. At the Closing, Elcotel shall
have received from Greenberg Traurig Hoffman Lipoff Rosen & Quentel, counsel to
TSG, a written opinion reasonably satisfactory to Elcotel, dated as of the
Closing Date, substantially to the effect as set forth in Exhibit C hereto.

Section 7.06 Stockholders Agreement. The Stockholders shall have each
entered into the Stockholders Agreement, in the form set forth in Exhibit D
hereto.

Section 7.07 Proceedings. All proceedings to be taken on the part of
TSG in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Elcotel, and Elcotel shall have received copies of all such
documents and other evidences as Elcotel may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.

ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF TSG

The obligations of TSG to consummate the Merger pursuant to this
Agreement and the other transactions required to be consummated by such date by
this Agreement are further subject to the satisfaction, at or prior to the
Effective Time, of each of the following conditions (all or any of which may be
waived in whole or in part by TSG in its sole discretion):

Section 8.01 Representations and Warranties. The representations and
warranties made by Elcotel and Merger Subsidiary in this Agreement shall be true
and correct as of the Closing Date as though made on and as of the Closing Date
or, in the case of representations and warranties made as of a specified date
earlier than the Closing Date, on and as of such earlier date, and Elcotel and
Merger Subsidiary shall each have delivered

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to TSG a certificate, dated the Closing Date and executed by Elcotel's Chairman
of the Board or President and by Merger Subsidiary's Chairman of the Board or
President to such effect.

Section 8.02 Performance of Obligations. Elcotel and Merger
Subsidiary shall each have performed and complied with each agreement, covenant
and obligation required by this Agreement to be so performed or complied with by
Elcotel or Merger Subsidiary at or prior to Closing, and Elcotel and Merger
Subsidiary shall each have delivered to TSG a certificate, dated the Closing
Date and executed by Elcotel's Chairman of the Board or President and by Merger
Subsidiary's Chairman of the Board or President to such effect.

Section 8.03 No Material Adverse Change. There shall not have been
any change in the consolidated business, results of operations, financial
condition or prospects of Elcotel and its Subsidiaries, taken as a whole,
between March 31, 1997 and the Closing Date which would have a Material Adverse
Effect on Elcotel.

Section 8.04 Consents. TSG shall have received consents or waivers
from such Persons as are necessary for TSG to consummate the transactions
contemplated by this Agreement.

Section 8.05 Opinion of Elcotel Counsel. At the Closing, TSG shall
have received from Schnader Harrison Segal & Lewis LLP, counsel to Elcotel, a
written opinion reasonably satisfactory to TSG, dated as of the Closing Date,
substantially to the effect as set forth in Exhibit E hereto.

Section 8.06 Stockholders Agreement. The Stockholders and Elcotel
shall have each entered into the Stockholders Agreement, in the form set forth
in Exhibit D hereto.

Section 8.07 Proceedings. All proceedings to be taken on the part of
Elcotel in connection with the transactions contemplated by this Agreement and
all documents incident thereto shall be reasonably satisfactory in form and
substance to TSG, and TSG shall have received copies of all such documents and
other evidences as TSG may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.

Section 8.08 Tax Opinion. TSG shall have received an opinion of
counsel, in form and substance reasonably satisfactory to TSG, on the basis of
certain facts, representations and assumptions set forth in such opinion which
are consistent with the state of facts existing at the Effective Time, to the
effect that neither TSG nor any of its stockholders shall recognize gain or loss
for U.S. federal income tax purposes as a result of the Merger (other than in
respect of any cash paid in lieu of fractional shares). In rendering the
opinions described in the preceding sentence, such counsel may require and rely
upon representations contained in this Agreement and in certificates of officers
and principal stockholders of TSG, Elcotel and their respective Subsidiaries.

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ARTICLE IX
TERMINATION

Section 9.01 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Effective Time whether prior to or after Stockholders' Approval:

(a) By mutual written agreement of TSG and Elcotel duly
authorized by action taken by or on behalf of their respective Boards of
Directors;

(b) By either TSG or Elcotel upon notification to the non-
terminating party by the terminating party;

(i) at any time after November 30, 1997 if the Merger shall
not have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by or substantially attributable to a
breach of this Agreement by the terminating party;

(ii) if (A) TSG Stockholders' Approval (under Delaware Law)
or (B) Elcotel Stockholders' Approval (under Delaware Law and under the
applicable regulations of NASDAQ National Market System), as the case may
be, shall not be obtained by reason of the failure to obtain the requisite
vote upon a vote held at a meeting of stockholders, or any adjournment
thereof, called therefor;

(iii) if (A) there has been a material breach of any
representation, warranty, covenant or agreement on the part of the non-
terminating party set forth in this Agreement, which breach is not curable
or, if curable, has not been cured within thirty (30) days following receipt
by the non-terminating party of notice of such breach from the terminating
party, or (B) any condition precedent to the terminating party's obligations
set forth in Article VII, with respect to Elcotel, or Article VIII, with
respect to TSG, of this Agreement has not been met or waived by such party
by November 30, 1997; or

(iv) if any court of competent jurisdiction or other
competent Governmental Authority shall have issued an order making illegal
or otherwise restricting, preventing or prohibiting the Merger and such
order shall have become final and nonappealable;

53
<PAGE>

(c) By TSG if (i) the Board of Directors of TSG determines in
good faith, based upon the written opinion of outside counsel (a copy of which
shall be provided promptly to Elcotel), that termination of the Agreement is
required for the Board of Directors to comply with its fiduciary duties to
stockholders imposed by law by reason of an unsolicited bona fide Superior
Proposal having been made; provided that TSG shall have complied with the
provisions of clauses (B) and (C) of Section 5.03 and shall notify Elcotel at
least 48 hours in advance of its intention to terminate this Agreement or enter
into a definitive agreement with respect to such Superior Proposal; or (ii) the
Board of Directors of Elcotel shall have withdrawn or modified in a manner
materially adverse to TSG its approval or recommendation of this Agreement or
the Merger; or

(d) By Elcotel if the Board of Directors of TSG (x) shall have
withdrawn or modified in a manner materially adverse to Elcotel its approval or
recommendation of this Agreement or the Merger or (y) shall have recommended a
Superior Proposal to the stockholders of TSG or shall have entered into a
definitive agreement providing for a Superior Proposal with a Person other than
Elcotel.

Section 9.02 Effect of Termination.

(a) If this Agreement is validly terminated by either TSG or
Elcotel pursuant to Section 9.01, this Agreement will forthwith become null and
void and there will be no liability or obligation on the part of either TSG or
Elcotel (or any of their respective representatives or Affiliates), except (i)
that the provisions of Sections 10.05 and 10.08, this Section 9.02 and the
Confidentiality Agreement will continue to apply following any such termination,
(ii) that nothing contained herein shall relieve any party hereto from liability
for wilful breach of its representations, warranties, covenants or agreements
contained in this Agreement and (iii) as provided in paragraph (b) below. The
effectiveness of any termination under this Agreement shall be subject to the
payments (if any) required to be made pursuant to paragraph (b) below being so
made;

(b) (i) If this Agreement is terminated by (x) TSG pursuant to
Section 9.01(c)(i) or (y) by Elcotel pursuant to Section 9.01(d)(y), then
TSG shall pay or cause to be paid to Elcotel, by wire transfer of same day
funds on the day of such termination, a termination fee of $1,300,000;

(ii) In the event that (x) this Agreement is terminated by
either party pursuant to Section 9.01(b)(ii)(A) and prior to such
termination any person or group shall have made an Alternative Proposal or
by Elcotel pursuant to Section 9.01(d)(x), then TSG shall pay or cause to be
paid to Elcotel, by wire transfer of same day funds upon receipt of
appropriate documentation therefor, Elcotel's documented out-of-pocket
expenses relating to this Agreement and the transactions contemplated
hereby; provided, however, that such expenses shall not exceed $500,000;

54
<PAGE>

(iii) In the event that this Agreement is terminated by
either party pursuant to Section 9.01(b)(ii)(B) or by TSG pursuant to
Section 9.01(c)(ii), then Elcotel shall pay or cause to be paid to TSG, by
wire transfer of same day funds upon receipt of appropriate documentation
therefor, TSG's documented out-of-pocket expenses relating to this Agreement
and the transactions contemplated hereby; provided however, that such
expenses shall not exceed $500,000;

(iv) In the event that this Agreement is terminated by
either party pursuant to Section 9.01(b)(iii), then the non-terminating
party shall pay or cause to be paid to the terminating party by wire
transfer of same day funds upon receipt of appropriate documentation
therefor, the terminating party's documented out-of-pocket expenses relating
to this Agreement and the transactions contemplated hereby; provided,
however, that such expenses shall not exceed $500,000; and

(c) The parties acknowledge that the agreements contained in this
Section 9.02 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, the parties hereto would not
enter into this Agreement; accordingly, if either party fails promptly to pay
the amount due pursuant to this Section 9.02, and in order to obtain such
payment, either party commences a suit which results in a judgment against the
non-paying party for any fee or expense reimbursement set forth in this Section
9.02, the non-paying party shall pay to the other party as the case may be, its
cost and expenses (including reasonable attorney's fees and expenses) in
connection with such suit, together with interest on the amount of the fee at
the prime rate of Citibank, N.A. in effect on the date such payment was required
to be made.

ARTICLE X
MISCELLANEOUS

Section 10.01 Notices. All notices, requests and other communications
to any party hereunder shall be in writing and will be deemed to have been duly
given only if delivered personally or by facsimile transmission or mailed (first
class mail postage prepaid), or by overnight express courier (charges prepaid or
billed to the account of the sender) to the parties at the following addresses
or facsimile numbers:

If to Elcotel or Merger Subsidiary, to:

Elcotel, Inc.
6428 Parkland Drive
Sarasota, Florida 34243
Fax: (941) 751-4716
Attention: President

55
<PAGE>

with a copy to: Schnader Harrison Segal & Lewis LLP
Suite 3600
1600 Market Street
Philadelphia, Pennsylvania 19103
Fax: (215) 972-7378
Attention: Larry P. Laubach, Esquire

If to TSG, to: Technology Service Group, Inc.
20 Mansell Court East
Suite 200
Roswell, Georgia 30075
Fax: (770) 641-7528
Attention: President

with a copy to: Greenberg Traurig et al.
153 East 53rd Street
New York, New York 10022
Fax: (212) 223-7161
Attention: Judith D. Fryer, Esquire

or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice, request
or other communication shall be effective (a) if delivered personally, upon
delivery, (b) if given by facsimile, when such facsimile is transmitted to the
facsimile number specified in this Section 10.01 and the appropriate facsimile
confirmation is received, (c) if given by mail in the manner described above, on
the third business day after mailing, or (d) if delivered by overnight express
courier, on the next business day.

Section 10.02 Entire Agreement; Non-Survival of Representations and
Warranties; Third Party Beneficiaries.

(a) This Agreement (including any exhibits hereto), the other
agreements referred to in this Agreement and the Confidentiality Agreement
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to such
subject matter. None of this Agreement, the Confidentiality Agreement or any
other agreement contemplated hereby or thereby (or any provision hereof or
thereof) is intended to confer on any Person other than the parties hereto or
thereto any rights or remedies (except that Article I is intended to confer
rights and remedies on the Persons specified therein);

56
<PAGE>

(b) The TSG Disclosure Letter, the Elcotel Disclosure Letter and
any Exhibits attached to this Agreement and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein; and

(c) The representations and warranties contained herein or in any
schedule, instrument or other writing delivered pursuant hereto shall not
survive the Effective Time.

Section 10.03 Amendment. This Agreement may be amended, supplemented
or modified by action taken by or on behalf of the respective Boards of
Directors of the parties hereto at any time prior to the Effective Time, whether
prior to or after the Stockholders' Approvals shall have been obtained, but
after such adoption and approval only to the extent permitted by applicable law.
No such amendment, supplement or modification shall be effective unless set
forth in a written instrument duly executed by or on behalf of each party
hereto.

Section 10.04 Waiver. At any time prior to the Effective Time, any
party hereto may to the extent permitted by applicable law (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other parties hereto contained herein or in any document delivered pursuant
hereto or (iii) waive compliance with any of the covenants, agreements or
conditions of the other parties hereto contained herein. No such extension or
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party extending the time of performance or waiving any
such inaccuracy or non-compliance. No waiver by any party of any term or
condition of this Agreement, in any one or more instances, shall be deemed to be
or construed as a waiver of the same or any other term or condition of this
Agreement on any future occasion.

Section 10.05 Expenses. Except as otherwise specified in Section 9.02
or agreed in writing by the parties, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement, whether or not the Merger is consummated, shall be paid by the party
incurring such cost or expense.

Section 10.06 Successors and Assigns. The provisions of this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns; provided that no party may
assign, delegate or otherwise transfer any of its rights or obligations under
this Agreement without the written consent of the other parties hereto except
that Merger Subsidiary may assign, in its sole discretion, any or all of its
rights, interests and obligations hereunder to any direct or indirect wholly
owned Subsidiary of Elcotel, it being understood that no such assignment shall
relieve Merger Subsidiary from any of its obligations hereunder.

57
<PAGE>

Section 10.07 Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware (without regard
to principles of conflict of laws).

Section 10.08 Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated by this Agreement may be
brought against any of the parties in any federal court located in the State of
Delaware or any Delaware state court, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such courts (and of the appropriate
appellate courts therefrom) in any such suit, action or proceeding and waives
any objection to venue laid therein. Process in any such suit, action or
proceeding may be served on any party anywhere in the world, whether within or
without the State of Delaware. Without limiting the generality of the foregoing,
each party hereto agrees that service of process upon such party at the address
referred to in Section 10.01, together with written notice of such service to
such party, shall be deemed effective service of process upon such party.

Section 10.09 Counterparts; Effectiveness. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.

Section 10.10 Interpretation. When a reference is made in this
Agreement to a Section or Schedule, such reference shall be to a Section of this
Agreement or a Schedule to the Disclosure Letter unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement", "the date hereof", and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to August 13, 1997.

Section 10.11 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against public policy, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated. Upon such determination that any term, provision, covenant or
restriction of this Agreement is invalid, void, unenforceable or against public
policy, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible.

58
<PAGE>

Section 10.12 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement in any
Federal court located in the State of Delaware or any Delaware state court, in
addition to any other remedy to which they are entitled at law or in equity.

59
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.

ELCOTEL, INC.

By: /s/ Tracey Gray
---------------------------
Name: Tracey Gray
Title: President

TECHNOLOGY SERVICE GROUP, INC.

By: /s/ Vincent C. Bisceglia
---------------------------
Name: Vincent C. Bisceglia
Title: President & CEO

ELCOTEL HOSPITALITY SERVICE, INC.

By: /s/ Tracey Gray
---------------------------
Name: Tracey Gray
Title: President

60
<PAGE>

AMENDMENT NO. 1
---------------

Amendment No. 1, dated as of September 30, 1997 to the Agreement and
Plan of Merger ("Merger Agreement") dated as of August 13, 1997 among Elcotel,
Inc. ("Elcotel"), Technology Service Group, Inc. ("TSG") and Elcotel Hospitality
Service, Inc.

WHEREAS the parties hereto are parties to the Merger Agreement; and

WHEREAS the parties hereto desire to amend the Merger Agreement as
provided herein.

NOW, THEREFORE, in consideration of the mutual promises herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:

1. The first sentence of Section 4.05(a) of the Merger Agreement is
hereby amended and restated to read in its entirety as follows:

"The authorized capital stock of Elcotel consists of 20,000,000 shares
of Elcotel Common Stock, par value $0.01 per share on the date of this
Agreement and, subject to the approval of the stockholders of Elcotel
and the filing of an amendment to the certificate of incorporation of
Elcotel to increase the authorized capital stock, will consist of
30,000,000 shares of Elcotel Common Stock, par value $0.01 per share,
at or prior to the Effective Time."

2. The last sentence of Section 4.05(a) of the Merger Agreement is
hereby amended and restated to read in its entirety as follows:

"Except (i) for up to 87,800 shares of Elcotel Common Stock that
may be issued to Wexford Management, LLC ("Wexford") and Cameron
Associates ("Cameron"); (ii) as set forth in this Section 4.05, (iii)
for Elcotel Common Stock that may be issued as provided in Section
5.02(f); and (iv) for the transactions contemplated by this Agreement
(including those permitted in Article II), there are outstanding (x)
no shares of capital stock or other voting securities of Elcotel, (y)
no securities of Elcotel convertible into or exchangeable for shares
of capital stock or voting securities of Elcotel, and (z) no options,
warrants or other rights to acquire from Elcotel, and no preemptive or
similar rights, subscriptions or other rights, convertible securities,
agreements, arrangements or commitments of any character, obligating
Elcotel to issue, transfer or sell, any capital stock, voting
securities or securities convertible into or exchangeable for capital
stock or voting securities of Elcotel or obligating Elcotel to grant,
extend or enter into any such option, warrant, subscription or other
right, convertible security,
<PAGE>

agreement, arrangement or commitment (the items in clauses (x), (y)
and (z) being referred to collectively as the "Elcotel Securities")."

3. Section 5.02(a) of the Merger Agreement is hereby amended and
restated to read in its entirety as follows:

"(a) Other than with respect to an amendment to the Elcotel
certificate of incorporation to increase the authorized capital stock
of Elcotel from 20,000,000 shares of Elcotel Common Stock, par value
$0.01 per share, to 30,000,000 shares of Elcotel Common Stock, par
value $0.01 per share, Elcotel will not adopt or propose any change in
its certificate of incorporation or change in its by-laws, except as
and to the extent required to consummate the Merger;".

4. Section 5.02(f) of the Merger Agreement is hereby amended and
restated to read in its entirety as follows:

"(f) Elcotel will not, and will not permit any Subsidiary of
Elcotel to, issue, deliver, sell, transfer, pledge, dispose of or
encumber any shares of, or securities convertible into or exchangeable
for, or options, warrants, calls, commitments or rights of any kind to
acquire, any shares of capital stock of any class or series of Elcotel
or its Subsidiaries, other than (w) issuances of up to 87,800 shares
of Elcotel Common Stock to Wexford and Cameron,(x) issuances by any
Subsidiary of Elcotel to Elcotel or any other Subsidiary of Elcotel,
(y) issuances pursuant to the exercise of options granted pursuant to
the Elcotel Plans described in Section 4.05(a) which are outstanding
on the date hereof or granted as contemplated in clause (z) below, and
(z) any grant of options to purchase Elcotel Common Stock to new
employees of Elcotel or any of its Subsidiaries pursuant to the
Elcotel Plans that could result in the issuance of not more than
75,000 shares in the aggregate of Elcotel Common Stock;".

5. Section 5.02(h) of the Merger Agreement is hereby amended and
restated to read in its entirety as follows:

"(h) Except as set forth on Schedule 5.02(h) to the Elcotel
Disclosure Letter, Elcotel will not, and will not permit any
Subsidiary of Elcotel to, enter into or amend in any material respect
any employment contract with any of its officers, directors or
employees earning annual compensation of more than $50,000 (other than
as contemplated by Section 6.06), adopt or amend any Elcotel Benefit
Plan in any material respect or make any payments, awards or
distributions under any Elcotel Benefit Plan or otherwise not
consistent with past practice or custom except (i) as required by a
contract in existence on the date hereof and

-2-
<PAGE>

listed on Schedule 4.15 to the Elcotel Disclosure Letter; or (ii) as
necessary to make any Elcotel Benefit Plan listed on Schedule 4.14 to
the Elcotel Disclosure Letter meet the requirements of ERISA to the
extent such amendment is described in such Schedule or is approved by
TSG;".

6. Section 9.01(b)(i) of the Merger Agreement is hereby amended and
restated to read in its entirety as follows:

"(i) at any time after December 31, 1997 if the Merger shall not
have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by or substantially attributable
to a breach of this Agreement by the terminating party;".

7. This Amendment No. 1 shall be governed by and construed in
accordance with the laws of the State of Delaware.

8. Except as expressly amended hereby, the Merger Agreement shall
continue in full force and effect in accordance with the provisions thereof. As
used in the Merger Agreement, the terms "this Agreement", "herein", "hereunder",
"hereof" and words of similar import shall refer to the Merger Agreement as
amended by this Amendment No. 1.

IN WITNESS WHEREOF, Elcotel, TSG and Elcotel Hospitality Service, Inc.
have executed this Amendment No. 1 as of the date first above written.

ELCOTEL HOSPITALITY ELCOTEL, INC.
SERVICE, INC.

By: /S/ Tracey L. Gray By: /S/ Tracey L. Gray
Name: Tracey L. Gray Name: Tracey L. Gray
Title: President & COO Title: President & COO

TECHNOLOGY SERVICE GROUP, INC.

By: /S/ Vincent C. Bisceglia
Name: Vincent C. Bisceglia
Title: President & CEO

-3-
<PAGE>

Appendix B
[Letterhead of Murray, Devine & Co.,Inc.]

Board of Directors
ELCOTEL, INC.
August 5, 1997

August 5, 1997

Board of Directors
ELCOTEL, INC.
6428 Parkland Drive
Sarasota, FL 34243

Gentlemen:

You have requested that we render an opinion as to the fairness, from a
financial point of view, to Elcotel, Inc. (the "Company") under Section 4.25 of
the Agreement and Plan of Merger (the "Merger Agreement", draft date August 2,
1997), among the Company, Technology Services Group, Inc. ("TSG") and Merger
Subsidiary, of the Merger. Unless otherwise defined herein, all capitalized
terms are as defined in the Merger Agreement.

Pursuant to the Merger Agreement, at the Effective Time, Merger Subsidiary shall
be Merged with and into TSG in accordance with the Delaware Law, whereupon the
separate existence of Merger Subsidiary shall cease, and TSG shall continue as
the Surviving Corporation. At the Effective Time by virtue of the Merger: (i)
each share of common stock of TSG held by TSG as treasury stock or owned by the
Company or any subsidiary of the Company immediately prior to the Effective Time
shall automatically be canceled and retired without any conversion thereof, and
no common stock of the Company or other consideration shall be delivered in
exchange therefor; (ii) each share of common stock of Merger Subsidiary
outstanding immediately prior to the Effective Time shall automatically be
converted into and become one share of common stock of the Surviving Corporation
and shall constitute the only outstanding shares of capital stock of the
Surviving Corporation; and (iii) each share of TSG Common Stock outstanding
immediately prior to the Effective Time shall, except as otherwise provided in
(i) above, automatically be converted into the right to receive 1.05 shares of
fully paid and non-assessable common stock of the Company.
<PAGE>

Board of Directors
ELCOTEL,INC.
August 5,1997

In arriving at our opinion, we have, among other things: (i) reviewed the
Merger Agreement and other related documents; (ii) reviewed such publicly
available business and financial information relating to the Company and TSG as
we deemed appropriate; (iii) reviewed certain internal financial and operating
information relating to the Company and TSG (including financial forecasts)
prepared by their respective managements; (iv) discussed the past and current
operations and financial condition and prospects of the Company with the senior
management of the Company; (v) discussed the past and current operations and
financial condition and prospects of TSG with the senior management of TSG; (vi)
reviewed pro forma financial statements (including financial forecasts) of the
Company and TSG on a combined basis (the "Combined Companies") prepared jointly
by the management of the Company and TSG; and (vii) reviewed recent stock market
data relating to the Company and TSG.

We have also considered certain financial data of the Company and TSG and have
compared that data from a financial point of view with similar data for other
publicly-held companies in businesses similar to those of the Company and TSG.
We have also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.

In connection with our review, we have not independently verified any of the
foregoing information, and have relied on its being complete and accurate in all
material respects and we have further relied upon the assurances of the Company
management that they are unaware of any facts that would make the information
provided to us incomplete or misleading in any material respect. With respect
to the financial forecasts, we have assumed that they have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the Company's and TSG' management as to the expected future
financial performance of the Company, TSG and the Combined Companies. In
addition, we have not made any independent evaluation or appraisal of the
individual assets of the Company or TSG, nor have we been furnished with any
such appraisals.

Based upon and subject to the foregoing, including that various assumptions and
limitations set forth herein, it is our opinion that the Merger pursuant to the
Merger Agreement, is fair, from a financial point of view, to the Company.

MURRAY, DEVINE & CO., INC.
<PAGE>

APPENDIX C

CONSOLIDATED FINANCIAL STATEMENTS
OF
TECHNOLOGY SERVICE GROUP, INC.
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF TECHNOLOGY SERVICE GROUP, INC.

Independent Auditors' Report................................................................ C-1

Consolidated Financial Statements

Consolidated Balance Sheets as of March 29, 1996,
March 28, 1997 and June 27, 1997 (unaudited)................................. C-2

Consolidated Statements of Operations for the seven months
ended October 30, 1994, five months ended March 31, 1995,
years ended March 29, 1996 and March 28, 1997 and three months
ended June 28, 1996 (unaudited) and June 27, 1997 (unaudited).................... C-3

Consolidated Statements of Cash Flows for the seven months
ended October 30, 1994, five months ended March 31, 1995,
years ended March 29, 1996 and March 28, 1997 and the three months
ended June 28, 1996 (unaudited) and June 27, 1997 (unaudited).................... C-4

Consolidated Statements of Changes in Stockholders Equity (Deficit)
for the seven months ended October 30, 1994, five months ended
March 31, 1995, years ended March 29, 1996 and March 28, 1997
and three months ended June 27, 1997 (unaudited)................................. C-5

Notes to Consolidated Financial Statements.................................................. C-6

</TABLE>
<PAGE>

INDEPENDENT AUDITORS' REPORT

Stockholders
Technology Service Group, Inc.

We have audited the accompanying consolidated balance sheets of Technology
Service Group, Inc. and subsidiary as of March 28, 1997 and March 29, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for the years ended March 28, 1997 and March
29, 1996, five months ended March 31, 1995, and the seven months ended October
30, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 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 Technology Service Group, Inc. and
subsidiary at March 28, 1997 and March 29, 1996 and the results of their
operations and their cash flows for the years ended March 28, 1997 and March 29,
1996, the five months ended March 31, 1995, and the seven months ended October
30, 1994 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 23, 1997
(June 9, 1997 as to the last
paragraph of Note 14)

C-1
<PAGE>

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>

March 29, March 28, June 27,
1996 1997 1997
--------- --------- ---------
(Unaudited)

<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 20 $ 68 $ 100
Accounts receivable, less allowance
for doubtful accounts of $216, $147
and $147 3,866 3,235 3,162
Inventories 8,659 10,879 9,781
Refundable income taxes -- -- 301
Deferred income taxes 50 543 350
Prepaid expenses and other current assets 146 141 113
--------- --------- ---------
Total current assets 12,741 14,866 13,807
Property and equipment, net 2,199 847 724
Goodwill 3,803 3,252 3,143
Other assets 891 807 894
--------- --------- ---------
$ 19,634 $ 19,772 $ 18,568
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 1,002 $ 243 $ 324
Borrowings under revolving credit
agreement -- 3,811 2,400
Current maturities under long-term
debt and capital lease obligations 118 -- --
Accounts payable 5,031 1,047 1,938
Income taxes payable 167 126 --
Deferred revenue 541 375 --
Accrued liabilities 1,472 1,015 742
Accrued restructuring charges 16 28 --
--------- --------- ---------
Total current liabilities 8,347 6,645 5,404
Borrowings under revolving credit agreement 1,094 -- --
Long-term debt and capital lease
obligations 3,415 -- --
Notes payable to stockholders 2,800 -- --
Deferred revenue 375 -- --
Other liabilities 3 -- --
--------- --------- ---------
16,034 6,645 5,404
--------- --------- ---------
Commitments and contingencies (Note 14) -- -- --
Stockholders' equity:
Preferred stock, $100 par value,
100,000 authorized, none issued or
outstanding -- -- --
Common stock, $.01 par value,
10,000,000 shares authorized,
3,500,000, 4,701,760 and 4,701,760
shares issued and outstanding 35 47 47
Capital in excess of par value 3,465 11,963 11,963
Retained earnings 112 1,122 1,160
Cumulative translation adjustment (12) (5) (6)
--------- --------- ---------
Total stockholders' equity 3,600 13,127 13,164
--------- --------- ---------
$ 19,634 $ 19,772 $ 18,568
========= ========= =========
</TABLE>

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

C-2
<PAGE>

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>

Predecessor Company
------------------------------------------------------------------------------
Three Three
Seven Months Five Months Year Year Months Months
Ended Ended Ended Ended Ended Ended
October 30, March 31, March 29, March 28, June 28, June 27,
1994 1995 1996 1997 1996 1997
-------------- ------------- ----------- ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 11,109 $ 9,161 $ 33,201 $ 33,472 $ 12,078 $ 6,217
-------------- ------------- ----------- ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 9,176 8,226 26,082 26,639 9,840 5,123
General and administrative
expenses 1,742 850 2,205 2,391 645 554
Marketing and selling
expenses 366 372 1,290 881 361 164
Engineering, research and
development expenses 458 480 1,197 1,777 409 292
Restructuring charges
(credits) (534) -- -- 63 -- --
Litigation settlement (261) -- -- (105) (105) --
Interest expense 599 356 941 400 142 72
Other income (14) (58) (17) (117) (16) (14)
-------------- ------------- ----------- ------------ ------------ ------------
11,532 10,226 31,698 31,929 11,276 6,191
-------------- ------------- ----------- ------------ ------------ ------------
Income (loss) before
income tax expense (423) (1,065) 1,503 1,543 802 26
Income tax (expense) benefit -- -- (326) (533) (217) 12
-------------- ------------- ----------- ------------ ------------ ------------
Net income (loss) $ (423) $ (1,065) $ 1,177 $ 1,010 $ 585 $ 38
============== ============= =========== ============ ============ ============
Income (loss) per common and
common equivalent share:
Primary $ (0.30) $ 0.30 $ 0.22 $ 0.13 $ 0.02
============= =========== ============ ============ ============
Assuming full dilution $ (0.30) $ 0.30 $ 0.22 $ 0.13 $ 0.02
============= =========== ============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding:
Primary 3,542 3,871 4,780 4,502 5,025
============= =========== ============ ============ ============
Assuming full dilution 3,542 3,871 4,780 4,502 5,025
============= =========== ============ ============ ============
</TABLE>

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

C-3
<PAGE>

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
<TABLE>
<CAPTION>

Predecessor Company
-------------- -------------------------------------------------------------
Five Three Three
Seven Months Months Year Year Months Months
Ended Ended Ended Ended Ended Ended
October 30, March 31, March 29, March 28, June 28, June 27,
1994 1995 1996 1997 1996 1997
------------- ----------- ----------- ----------- ------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (423) $ (1,065) $ 1,177 $ 1,010 $ 585 $ 38
Adjustments to reconcile net income
(loss) to net cash provided by (used
for) operating activities
Depreciation and amortization 648 408 1,061 1,072 288 227
Loss (gain) on sale of assets 18 5 -- (47) -- (1)
Restructuring charges (credits) (534) -- -- 63 173 61
Provisions for inventory losses and
warranty expense 165 298 352 565 31 --
Provision for uncollectible accounts
receivable 27 (4) 10 -- -- --
Provision for deferred tax expense
(benefits) -- -- 161 (50) (45) 275
Changes in certain assets and
liabilities, net of effects of
acquisition
(Increase) decrease in accounts
receivable 578 (330) (1,206) 632 (2,795) 72
(Increase) decrease in inventories 1,388 (764) (3,428) (2,485) (1,203) 1,070
(Increase) decrease in refundable
income taxes -- -- -- -- -- (301)
(Increase) decrease in prepaid
expenses and other current assets 67 91 (57) 5 76 28
(Increase) decrease in other assets 3 6 (474) (424) -- (127)
(Decrease) increase in accounts
payable (982) (172) 2,072 (3,984) 515 891
(Decrease) increase in income taxes
payable -- -- 165 (39) 114 (126)
(Decrease) increase in deferred
revenue -- 375 541 (541) (341) (306)
(Decrease) increase in accrued
liabilities 458 (299) (105) (761) -- (28)
(Decrease) in accrued restructuring
charges (442) (147) (74) (10) (486) (375)
Other (56) -- (1) (1) (1) --
------------- ----------- ----------- ----------- ------------ -----------
Net cash provided by (used for)
operating activities 915 (1,598) 194 (4,995) (3,089) 1,398
------------- ----------- ----------- ----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (21) (60) (252) (422) -- 1
Proceeds from sale of assets 12 -- -- 59 (59) (38)
------------- ----------- ----------- ----------- ------------ -----------
Net cash used for investing
activities (9) (60) (252) (363) (59) (37)
------------- ----------- ----------- ----------- ------------ -----------
Cash flows from financing activities:
Net proceeds (payments) under
revolving credit agreement (1,491) (1,599) 124 2,717 (901) (1,411)
Proceeds from initial public
offering, net of offering expenses -- -- -- 8,632 8,648 --
Proceeds from exercise of stock
options and warrants -- -- -- 217 160 --
Proceeds from notes payable to banks 402 908 -- -- -- --
Proceeds from notes payable
to stockholders 400 2,800 -- -- --
Payments on notes payable to
stockholders -- -- -- (2,800) (2,800) --
Principal payments on long-term
debt and capital lease obligations (459) (482) (814) (2,600) (2,578) --
Increase (decrease) in bank overdraft 324 121 502 (760) 760 82
------------- ----------- ----------- ----------- ------------ -----------
Net cash provided by (used for)
financing activities (824) 1,748 (188) 5,406 3,289 (1,329)
------------- ----------- ----------- ----------- ------------ -----------
Increase (decrease) in cash 82 90 (246) 48 141 32
Cash, beginning of period 94 176 266 20 20 68
------------- ----------- ----------- ----------- ------------ -----------
Cash, end of period $ 176 $ 266 $ 20 $ 68 $ 161 $ 100
============= =========== =========== =========== ============ ===========
</TABLE>

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

C-4
<PAGE>

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands except per share data)

<TABLE>
<CAPTION>
Common Common
Preferred Series C Series B Series A Stock Stock Capital in Retained Cumulative
Series E Preferred Preferred Preferred $.05 Par $.01 Par Excess of Earnings Translation
Stock Stock Stock Stock Value Value Par Value (Deficit) Adjustment Total
--------- --------- --------- --------- -------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor
Balance at
April 1, 1994 $ 30 $ 234 $ 30 $ 31 $ 22 $ -- $ 22,652 $ (24,450) $ 46 $ (1,405)
Net loss for
the period (423) (423)
Foreign currency
translation
adjustment 7 7
--------- --------- --------- --------- -------- -------- ---------- --------- ---------- ---------
Balance at
October 30, 1994 $ 30 $ 234 $ 30 $ 31 $ 22 $ -- $ 22,652 $ (24,873) $ 53 $ (1,821)
========= ========= ========= ========= ======== ======== ========== ========= ========== =========
Company
Balance at
October 30, 1994 $ 30 $ 234 $ 30 $ 31 $ 22 $ -- $ 22,652 $ (24,873) $ 53 $ (1,821)
Business
combination (30) (234) (30) (31) (22) 35 (19,517) 24,873 (53) 4,991
Net loss for the
period (1,065) (1,065)
--------- --------- --------- --------- -------- -------- ---------- --------- ---------- ---------
Balance at
March 31, 1995 -- -- -- -- -- 35 3,135 (1,065) -- 2,105
Business
combination--
distribution of
escrow
consideration 330 330
Net income for
the year 1,177 1,177
Foreign currency
translation
adjustment (12) (12)
--------- --------- --------- --------- -------- -------- ---------- --------- ---------- ---------
Balance at
March 29, 1996 -- -- -- -- -- 35 3,465 112 (12) 3,600
Net income for
the year 1,010 1,010
Issuance of
1,150,000 shares
in initial public
offering, net of
offering, expenses 11 8,282 8,293
Issuance of 51,760
shares upon
exercise of common
stock purchase
warrants, opinions,
and purchase rights 1 216 217
Foreign currency
translation
adjustment 7 7
--------- --------- --------- --------- -------- -------- ---------- --------- ---------- ---------
Balance at
March 28, 1997 -- -- -- -- -- 47 11,963 1,122 (5) 13,127
Net income for
the period
(unaudited) 38 38
Foreign currency
translation
adjustment
(unaudited) (1) (1)
--------- --------- --------- --------- -------- -------- ---------- --------- ---------- ---------
Balance at
June 27, 1997
(unaudited) $ -- $ -- $ -- $ -- $ -- $ 47 $ 11,963 $ 1,160 $ (6) $ 13,164
========= ========= ========= ========= ======== ======== ========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.

C-5
<PAGE>

TECHNOLOGY SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

1. THE COMPANY

Technology Service Group, Inc. ("TSG") was incorporated in the State
of Delaware in 1975. TSG designs, develops, manufactures and markets public
communication products including microprocessor-based ("smart") wireline and
wireless payphone systems, electronic wireline payphone products and related
payphone components. TSG also provides payphone and payphone component repair,
refurbishment and upgrade conversion services. The accompanying financial
statements include the accounts of TSG's wholly-owned subsidiary, International
Service Technologies, Inc. ("IST"), which has a foreign division located in
Taiwan.

2. ACQUISITION

On October 31, 1994, TSG Acquisition Corp. ("TSG Acquisition"), a non-
operating corporation wholly-owned by Wexford Partners Fund, L.P. ("Wexford"),
acquired all of the outstanding capital stock of TSG pursuant to an Agreement
and Plan of Merger dated October 11, 1994 (the "Plan of Merger") between
Wexford, TSG Acquisition, TSG and the majority holders of TSG's capital stock
(the "Acquisition"). TSG Acquisition paid an aggregate of $3.5 million in cash
pursuant to the Plan of Merger, including $330 of contingent consideration that
was placed in escrow. The consideration consisted of $3,004 to acquire the
outstanding capital stock of TSG and $496 to retire a subordinated master
promissory note of $400 payable to former stockholders and related accrued
interest and preference fees of $96. Cash payments to former stockholders on
October 31, 1994 aggregated $2,992 after deducting $278 to retire certain
obligations of TSG and $230 placed in escrow. Consideration placed in escrow of
$330 consisting of cash of $230 and a subordinated note of TSG payable to one of
the former stockholders in the principal amount of $100 was distributed to
former stockholders in September 1995 upon compliance with indemnification
provisions set forth in the Plan of Merger.

In conjunction with the Acquisition, TSG Acquisition was merged into
TSG, which was then wholly-owned by Wexford. The outstanding shares of TSG's
capital stock and rights to purchase TSG's capital stock, including preferred
stock purchase warrants, at October 31, 1994 and TSG's Incentive Stock Option
Plan were cancelled and the outstanding shares of capital stock of TSG
Acquisition were exchanged for one share of TSG's common stock, $.05 par value
(the "merger share"). TSG is sometimes referred to as the "Predecessor" for
periods prior to the Acquisition.

In addition, TSG entered into an Investment Agreement (the "Investment
Agreement") with Wexford and certain former investors (collectively the
"investors"). TSG issued 3.5 million shares of common stock, $.01 par value, in
exchange for the merger share held by Wexford. Also, TSG borrowed $2.8 million
from the investors and issued 10% interest bearing subordinated promissory notes
due November 1, 1999 (see Note 7).

The Acquisition has been accounted for using the purchase method of
accounting. Accordingly, the aggregate purchase price of $3,170 (excluding
contingent consideration) was pushed down and allocated to assets and
liabilities of TSG as of October 31, 1994 (the date of acquisition) based upon
their estimated fair values. The excess of the purchase price over the fair
value of the net assets acquired of $3,854 was recorded as goodwill (see Note
6). The increase in the aggregate purchase price and goodwill upon the
distribution of escrow consideration of $330 was recognized in TSG's financial
statements during the year ended March 29, 1996.

C-6
<PAGE>

A summary of the book value of the assets and liabilities of TSG as
compared to their estimated fair value reflected in TSG's financial statements
as of the date of acquisition is set forth below.

<TABLE>
<CAPTION>
Book Estimated
Value Fair Value
----------- ------------
<S> <C> <C>
Cash $ 176 $ 176
Accounts receivable 2,337 2,337
Inventories 4,887 4,842
Prepaid expenses and other current assets 180 180
Property and equipment 2,602 2,984
Other assets 216 645
Bank overdraft (380) (380)
Borrowings under revolving credit agreement (1,661) (1,661)
Current maturities under long-term debt
and capital lease obligations (878) (888)
Accounts payable (3,133) (3,133)
Accrued expenses (1,624) (1,749)
Accrued restructuring charges (515) (312)
Notes payable to stockholders (400) --
Long-term debt and capital lease obligations (3,628) (3,725)
----------- ------------
Net assets acquired (1,821) (684)
Excess of purchase price over net assets
acquired -- 3,854
----------- ------------
$ (1,821) $ 3,170
=========== ============
</TABLE>

The accompanying financial statements at March 29, 1996 and March 28,
1997 and for the five months ended March 31, 1995 and years ended March 29, 1996
and March 28, 1997 reflect the effects of the Acquisition. Assuming the
Acquisition had occurred on April 2, 1994, TSG's and the Predecessor's net loss
for the year ended March 31, 1995 including proforma adjustments for
depreciation, interest and amortization of assets to give effect to the
accounting bases recognized in recording the Acquisition would have approximated
$1,599 (unaudited), or a loss of $.45 per share (unaudited), as compared to the
reported loss of $1,488 ($423 for the seven months ended October 30, 1994 and
$1,065 for the five months ended March 31, 1995). The proforma adjustments
include an increase in the amortization of goodwill and other intangible assets
of approximately $140 (unaudited) due to the increase in the basis of intangible
assets and their estimated useful lives, a decrease in depreciation of
approximately $24 (unaudited) due to an increase in the basis of property and
equipment and their estimated useful lives and a decrease in interest expense of
approximately $6 (unaudited) due to revaluation of capital lease obligations,
the financing received from the investors and the repayment of indebtedness
under TSG's revolving credit agreement.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies followed by TSG is
set forth below:

Fiscal Year

TSG operates on a fiscal year ending the Friday nearest March 31
resulting in a 52/53 week year. The accompanying consolidated financial
statements include the audited financial statements of the Predecessor for the
seven months (30 weeks) ended October 30, 1994 and TSG, subsequent to the
Acquisition, for the five months (22 weeks) ended March 31, 1995 and years (52
weeks) ended March 29, 1996 and March 28, 1997.

C-7
<PAGE>

Consolidation

All significant intercompany balances and transactions have been
eliminated in consolidation.

Translation of Foreign Currency

The financial position and results of operations of TSG's foreign
division are measured using local currency as the functional currency. Assets
and liabilities of TSG's foreign division are translated into United States
dollars at the applicable exchange rate in effect at the end of the period.
Income statement accounts are translated at the average rate in effect over the
period. Translation adjustments arising from the use of differing exchange rates
from period to period are accumulated in a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in income in the period in which these transactions occur. The effects
of foreign currency translation on TSG's financial position and results of
operations are not significant. Also, the operations, assets and liabilities of
TSG's foreign division are not significant.

Cash

TSG's cash balances serve as collateral under a loan agreement (see
Note 7) and, accordingly, are restricted.

Inventories

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

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

Property and Equipment

Property and equipment is recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
established useful lives of the assets as follows:

<TABLE>
<CAPTION>
Predecessor Company
--------------- -------------
<S> <C> <C>
Building and building improvements 30 years 30 years
Machinery and equipment 2-10 years 2-5 years
Furniture and fixtures 2-10 years 2-3 years
Leasehold improvements 5-15 years 5 years
</TABLE>

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 eliminated from
the accounts, and any gains or losses are included in income.

Revenue Recognition

Sales and related costs, including reserves for warranties and
returns, are recorded by TSG upon shipment of products. Deferred revenue
consists of prepayments from customers and the refundable portion of proceeds
received from the sale of software (see Note 14) which is classified according
to the terms of the repayment obligation. Deferred revenue is recognized as
earned upon shipment of products or pursuant to the terms of the sales contract.

C-8
<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. TSG capitalizes as
other assets certain product software development costs once technological
feasibility has been achieved. Commencing upon initial product release, these
costs are amortized 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 (see Note 6). Software development costs
incurred prior to achieving technological feasibility are charged to research
and development expense as incurred.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123, which is effective for fiscal years
beginning after December 15, 1995, defines a fair value based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. This statement gives entities a choice of
recognizing related compensation costs by adopting the new fair value method or
to continue to measure compensation using the intrinsic value approach contained
in Accounting Principles Board Opinion 25 ("APB 25"), the former standard. If
the former standard for measurement is elected, SFAS 123 requires supplemental
disclosure to show the effects of using the new measurement criteria. TSG has
elected to continue to apply the former standards contained in APB 25, and as a
result, TSG adopted the pro forma disclosure requirements of SFAS 123 during the
year ended March 28, 1997 (see Note 9). APB 25 requires compensation expense for
stock-based compensation plans to be recognized based on the difference, if any,
between the per-share market value of the stock and the option exercise price on
the measurement date, which is generally the grant date. TSG has not recognized
any compensation expense with respect to stock options granted under TSG's plans
in accordance with the requirements of APB 25.

Fair Value of Financial Instruments and Concentration of Credit Risk

The estimated fair value of TSG's cash, accounts receivable, accounts
payable and outstanding indebtedness approximates the carrying amounts due
principally to their short maturities. Accounts receivable represent the primary
financial instrument which potentially subjects TSG to concentrations of credit
risk. TSG does not require its customers to provide collateral with respect to
amounts owed, but periodically evaluates the credit of its customers (see Note
14). The allowance for non-collection of accounts receivable is estimated based
upon the expected collectibility of all accounts receivable.

Goodwill

The excess of the purchase price over the fair value of TSG's assets
and liabilities at the date of the Acquisition is being amortized to operations
on a straight-line basis over a period of 35 years. At each balance sheet date,
TSG evaluates the realizability of goodwill based on its expectations of future
undiscounted cash flows. Based on TSG's most recent analysis, TSG believes that
no material impairment of goodwill exists at March 28, 1997.

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 in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." SFAS 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Using the enacted
tax rate in effect for the year in which the differences are expected to
reverse, deferred tax assets and liabilities are determined based upon the
differences between the financial reporting basis and income tax basis of the
assets and liabilities (see Note 10). A valuation allowance is established for
deferred tax assets to the extent realization thereof is not assured.

C-9
<PAGE>

Income (Loss) Per Common and Common Equivalent Share

Income (loss) per common and common equivalent share for the five
months ended March 31, 1995 and years ended March 29, 1996 and March 28, 1997 is
computed on the basis of the weighted average number of common and dilutive
common equivalent shares outstanding during the period, except as required by
Accounting Principles Board Opinion No. 15, Earnings per Share, all outstanding
options and warrants during the year ended March 28, 1997 have been included in
the calculation in accordance with the modified treasury stock method, and
except as required by Securities and Exchange Commission Staff Accounting
Bulletin ("SECSAB") Topic 4:D, stock issued and stock options covering 89,000
shares of common stock granted during the 12 months prior to a May 10, 1996
initial public offering (see Note 9) at prices below the public offering price
have been included in the calculation of weighted average number of common and
common equivalent shares outstanding as if they were outstanding as of the
beginning of the period. Also, as a result of the Acquisition, income (loss) per
share is not presented for periods prior to the five months ended March 31, 1995
in accordance with SECSAB Topic 1:B2.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 requires disclosure of basic earnings per share based on income
available to common stockholders and the weighted average number of common
shares outstanding during the period, and diluted earnings per share based on
income available to common stockholders and the weighted average number of
common and dilutive potential common shares outstanding during the period. The
adoption of SFAS 128 is required for fiscal years ending after December 15,
1997, and earlier adoption is not permitted. Had TSG adopted SFAS 128 during the
years ended March 29, 1996 and March 28, 1997, basic earnings per share on a pro
forma basis would have been $.34 and $.22 per share, respectively, and diluted
earnings per share on a pro forma basis would have been $.30 and $.21 per share,
respectively.

New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). SFAS 129 requires a Company to explain the
privileges and rights of its various outstanding securities, the number of
shares issued upon conversion, exercise or satisfaction of required conditions
during the most recent annual fiscal period, liquidation preferences of
preferred stock and other matters with respect to preferred stock. Although the
statement is effective for periods ending after December 15, 1997, TSG's
financial statement disclosures are in compliance with SFAS 129.

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business during a period from transactions and events and circumstances from
non-owner sources, and includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS 130
is effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS 130 will not have a material effect on TSG's results of operations or
financial position.

Also, in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires public
entities to report certain information about operating segments, their products
and services, the geographic areas in which they operate, and their major
customers, in complete financial statements and in condensed interim financial
statements issued to stockholders. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 will not have a
material effect on TSG's results of operations or financial position.

Use of Estimates

C-10
<PAGE>

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.

Interim Financial Information

The financial statements as of and for the three months ended June 27,
1997 and June 28, 1996 are unaudited. In the opinion of management, all
adjustments, including recurring adjustments, necessary for a fair presentation
of the results of operations have been included and these adjustments include no
unusual items.

4. INVENTORIES

Inventories at March 29, 1996, March 28, 1997 and June 27, 1997
consisted of the following:

<TABLE>
<CAPTION>
March 29, March 28, June 27,
1996 1997 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials $ 7,404 $ 6,154 $ 6,229
Work-in-process 1,207 2,117 1,827
Finished goods 1,654 4,036 2,840
----------- ----------- -----------
10,265 12,307 10,896

Reserve for potential losses (1,606) (1,428) (1,115)
----------- ----------- -----------
$ 8,659 $ 10,879 $ 9,781
=========== =========== ===========
</TABLE>

Substantially all inventories are pledged to collateralize notes payable (see
Note 7).

5. PROPERTY AND EQUIPMENT

Property and equipment at March 29, 1996 and March 28, 1997 consisted
of the following:

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
----------- -----------
<S> <C> <C>
Land $ 121 $ --
Building and building improvements 877 --

Machinery and equipment 2,009 2,287
Furniture and fixtures 120 111
Leasehold improvements 151 168
----------- -----------
3,278 2,566
Accumulated depreciation (1,079) (1,719)
----------- -----------
$ 2,199 $ 847
=========== ===========
</TABLE>

C-11
<PAGE>

Substantially all property and equipment is pledged to collateralize
notes payable (see Note 7).

Depreciation expense for the seven months ended October 30, 1994 and
five months ended March 31, 1995 aggregated $455 and $308, respectively.
Depreciation expense for the years ended March 29, 1996 and March 28, 1997
aggregated $784 and $795, respectively.

Assets under capital leases are capitalized using interest rates
appropriate at the date of purchase or at the inception of the lease, as
applicable. The following is a summary of TSG's assets under capital leases
which are included in property and equipment at March 29, 1996:

<TABLE>
<S> <C>
Land $ 121
Building and building improvements 877
Machinery and equipment 60
----------
1,058
Accumulated depreciation (71)
----------
$ 988
==========
</TABLE>

During the year ended March 28, 1997, TSG closed a one hundred
thousand square foot manufacturing facility located in Paducah, Kentucky and
assigned its capital lease obligation to an unaffiliated third party.
Accordingly, TSG recorded the retirement of the outstanding capital lease
obligation and the disposition of the property during the year ended March 28,
1997. In connection with this transaction, TSG realized a gain of $44
representing the difference between the outstanding lease obligation ($933) plus
the proceeds received ($50) and the net book value of the property ($939).

6. OTHER ASSETS AND GOODWILL

Other assets at March 29, 1996 and March 28, 1997, net of accumulated
amortization of $206 and $375 respectively, consisted of the following:

March 29, March 28,
1996 1997
----------- -----------
<S> <C> <C>
Product software, net of accumulated
amortization of $66 and $113 168 543
Patents, net of accumulated amortization
of $46 and $79 118 85
Customer contracts, net of accumulated
amortization of $55 and $94 71 32
Unpatented technology, net of accumulated
amortization of $16 and $27 44 33
Patent license, net of accumulated
amortization of $23 and $62 110 71
Deferred initial public offering expenses 338 --
Deposits 41 40
Other 1 3
----------- -----------
$ 891 $ 807
=========== ===========
</TABLE>

C-12
<PAGE>

The excess of the purchase price over the fair value of net assets
acquired in connection with the Acquisition (goodwill), including the escrow
consideration distributed during the year ended March 29, 1996, aggregated
$4,184. Tax benefits of acquired deferred tax assets of $211 and $442 during the
years ended March 29, 1996 and March 28, 1997, respectively, were applied
against the excess purchase price (see Note 10). Accumulated amortization of
goodwill at March 29, 1996 and March 28, 1997 was $169 and $278, respectively.

Other intangible assets recorded in connection with the Acquisition
consisted of product software of $234 patents of $164, customer contracts of
$126 and unpatented technology of $60. These assets are being amortized over
estimated useful lives ranging from less than two years to five years, and are
reported at the lower of cost, net of accumulated amortization, or net
realizable value.

During the year ended March 28, 1997, TSG capitalized software
development costs of $422 in connection with the development of new products.
Software development costs during the five months ended March 31, 1995 and year
ended March 29, 1996 were not significant.

Amortization expense for the seven months ended October 30, 1994, five
months ended March 31, 1995 and years ended March 29, 1996 and March 28, 1997
amounted to $193, $100, $277 and $277, respectively.

7. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT, LONG-TERM DEBT, CAPITAL LEASE
OBLIGATIONS AND NOTES PAYABLE TO STOCKHOLDERS

Borrowings Under Revolving Credit Agreement

At March 29, 1996, TSG was able to borrow up to a maximum of $9
million under term and installment notes and a revolving credit agreement under
the terms of a Loan and Security Agreement (the "Loan Agreement") between TSG
and its bank. Indebtedness under the Loan Agreement at March 29, 1996 included
$2,525 outstanding under term and installment notes and $1,094 outstanding under
the revolving credit agreement.

At March 28, 1997 and June 27, 1997, TSG was able to borrow up to a
maximum of $9 million under the revolving credit agreement. At March 28, 1997
and June 27, 1997, TSG had outstanding debt of $3,811 and $2,400 (unaudited),
respectively, under the revolving credit agreement.

Amounts borrowed under the Loan Agreement are collateralized by
substantially all assets of TSG including accounts receivable, inventories and
property and equipment. The borrowing limit under the revolving credit agreement
is based upon specified percentages applied to the value of collateral,
consisting of accounts receivable and inventories (less amounts outstanding
under a $2.2 million term note at March 29, 1996), and varies based upon changes
in the collateral value. Interest is payable monthly based upon the greater of
the actual outstanding debt balances or $4 million at a variable rate per annum
equal to 1.5% above a base rate quoted by Citibank (8.25% March 29, 1996 and
8.50% at March 28, 1997). The Loan Agreement is renewable annually for one year
periods unless terminated by the bank upon an occurrence of an event of default
or by TSG upon at least 90 days notice. TSG has agreed to pay termination fees
of up to 2% of the average monthly borrowings or the minimum loan amount ($4
million), whichever is greater, if the Loan Agreement is terminated on the date
other than an anniversary date.

The Loan Agreement contains conditions and covenants that prevent TSG
from engaging in certain transactions without the consent of the bank, including
merging or consolidating, payment of subordinated stockholder debt obligations,
declaration or payment of dividends and disposition of assets, among others.
Additionally, the Loan Agreement requires TSG to comply with specific financial
covenants, including covenants with respect to cash flow, working capital and
net worth. Noncompliance with any of these conditions and covenants or the
occurrence of any other event of default, if not waived or corrected, could
accelerate the maturity of the borrowings outstanding under the Loan Agreement.
TSG was in compliance with the covenants and conditions contained in the Loan
Agreement at March 29, 1996 and March 28, 1997.

Pursuant to an amendment to the Loan Agreement on October 31, 1994,
$2.2 million of debt outstanding under the revolving credit agreement was
converted into a term note payable on November 30, 1997.

C-13
<PAGE>

In addition, the term of the Loan Agreement was extended from May 31, 1995 to
November 30, 1997, and the interest rate on amounts borrowed under the terms of
the Loan Agreement was reduced by .75%. Proceeds of $2,569 pursuant to
subordinated promissory notes dated October 31, 1994 issued to stockholders were
used to retire debt outstanding under the revolving credit agreement. After such
repayment, the initial principal balance outstanding under the $2.2 million term
note on October 31, 1994 amounted to $1,292. Between October 31, 1994 and March
31, 1995, TSG borrowed the balance available under the $2.2 million term note of
$908.

Pursuant to a June 9, 1994 amendment to the Loan Agreement, the
aggregate principal obligation under an installment note was decreased from $500
to $465, and TSG borrowed an additional $402. The expiration date of the Loan
Agreement and the due date of the term and installment notes were extended from
February 28, 1995 to May 31, 1995. The monthly principal payment under the
installment note was increased from $21 to $25. This note was repaid during the
year ended March 29, 1996.

In May 1996, TSG completed an initial public offering of equity
securities (see Note 9). A portion of the proceeds of the initial public
offering were used to repay TSG's then outstanding indebtedness under the Loan
Agreement. Accordingly, TSG classified $1,094 of indebtedness outstanding under
the revolving credit facility as a long-term obligation at March 29, 1996.

Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations payable at March 29, 1996
consisted of the following:

<TABLE>
<S> <C>
Loan and Security Agreement
$2.2 million secured term note, principal balance due November
30, 1997 $ 2,200
$650 secured term note, principal payable in sixty equal monthly
installments of $8, with remaining principal balance due
November 30, 1997 325
Unsecured non-interest bearing promissory note, payable in nineteen
equal monthly installments of $11 33
Obligations under capital leases 975
-----------
3,533
Less - current maturities (118)
-----------
$ 3,415
===========
</TABLE>

At March 31, 1995, TSG had outstanding indebtedness of $203 pursuant
to 10% interest bearing promissory notes payable to a company affiliated with
certain officers and employees of TSG. Outstanding indebtedness under these
promissory notes was paid in full during the year ended March 29, 1996. Interest
paid pursuant to these notes during the years ended March 31, 1995 and March 29,
1996 aggregated $49 and $9, respectively. On November 9, 1994, TSG executed a
non-interest bearing promissory note in the principal amount of $207
representing unpaid royalties at October 31, 1994 due to TSG affiliated with
certain of TSG's officers and employees. The note, payable in nineteen equal
monthly installments of $11 commencing on December 11, 1994, had an outstanding
balance of $33 at March 29, 1996. This note was paid in full during the year
ended March 28, 1997.

In May 1996, TSG completed an initial public offering of equity
securities (see Note 9). A portion of the proceeds of the initial public
offering were used to repay TSG's then outstanding indebtedness under the Loan
Agreement. Accordingly, TSG classified indebtedness outstanding under the $2.2
million term note and $310 of indebtedness then outstanding under the $650 term
note as long-term obligations at March 29, 1996.

During the year ended March 28, 1997, TSG assigned its capital lease
obligation with respect to a one hundred thousand square foot manufacturing
facility located in Paducah, Kentucky to an unaffiliated third

C-14
<PAGE>

party. Accordingly, TSG recorded the retirement of the capital lease obligation
with a then outstanding balance of $933 (see Note 5) during the year ended March
28, 1997.

Notes Payable to Stockholders

On June 9, 1994, TSG borrowed $400 from its preferred stockholders and
issued a subordinated master promissory note payable on demand bearing interest
at a rate of 10% per annum. This note, accrued interest and preference fees,
which when added to accruing interest would equal 5% of the outstanding
principal amount for each month that the note was outstanding, became due upon
the Acquisition. Accordingly, the subordinated master promissory note, together
with accrued interest and preference fees from the date of issuance aggregating
$96 were retired on October 31, 1994.

On October 31, 1994, TSG entered into an Investment Agreement with the
investors. Under the terms of the Investment Agreement, TSG borrowed $2.8
million from the investors and issued 10% interest bearing subordinated
promissory notes due November 1, 1999. During the year ended March 28, 1997,
TSG repaid the subordinated promissory notes with a portion of the proceeds from
its initial public offering (see Note 9). Interest accrued under the terms of
the subordinated promissory notes was payable semi-annually beginning May 1,
1995. During the years ended March 29, 1996 and March 28, 1997, TSG paid
interest with respect to the subordinated notes of $280 and $152, respectively.
At March 29, 1996, interest accrued under the terms of the subordinated
promissory notes aggregated $117.

8. ACCRUED LIABILITIES

Accrued liabilities at March 29, 1996 and March 28, 1997 consisted of
the following:

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
----------- -----------
<S> <C> <C>
Workers' compensation and employee group
insurance $ 117 $ 104
Salaries, wages and related employee
benefits and taxes 339 255
Interest 150 32
Royalties 273 --
Warranty expense 210 367
Sales and use taxes 24 7
Professional fees 99 91
Environmental costs 13 1
Property taxes 21 29
Bonuses 75 62
Other 151 67
----------- -----------
$ 1,472 $ 1,015
=========== ===========
</TABLE>

9. STOCKHOLDERS' EQUITY

Preferred Stock

TSG is authorized, under its Certificate of Incorporation as amended
on October 31, 1994, to issue up to 100,000 shares of preferred stock, $100 par
value, in one or more series or other designations determined by the Board of
Directors ("Board") of TSG. The Board is authorized to determine, as to any
particular series of preferred stock: the dividend rights, including annual
dividend rates and whether the dividends shall be cumulative

C-15
<PAGE>

or non-cumulative; redemption provisions; per-share liquidation preferences;
voting powers; conversion terms; and any other rights or preferences. No
dividends may be paid or declared on TSG's common stock or on any other class of
stock ranking junior to the preferred stock, nor shall any shares of common
stock or any other class of stock ranking junior to the preferred stock be
purchased, retired or otherwise acquired by TSG unless all dividends accrued and
payable on preferred shares and all amounts required to retire the preferred
shares have been paid out of assets legally available for the payment of such
obligations.

At March 28, 1997, no preferred stock had been issued, nor has the
Board designated any series of preferred stock for issuance or determined any
related rights or preferences.

In connection with the Acquisition, the then outstanding shares of
TSG's Series A, Series B, Series C and Series E preferred stock were cancelled.
The Series A, Series B, Series C and Series E preferred stock had per-share
liquidation preferences of $15, $5, $2.50 and $2.50, respectively, plus declared
and unpaid dividends. The aggregate liquidation preference of the preferred
stock in order of priority were as follows: Series E - $750; Series C - $5,852;
Series B - $1,500; and Series A - $4,600. The shares of preferred stock were
convertible into an equal number of shares of common stock, subject to certain
anti-dilution provisions. Shares of Series A, Series B and Series C preferred
stock were convertible into voting common stock. Shares of Series E preferred
stock were convertible into non-voting common stock. Series A, Series B and
Series C preferred shares had voting rights equal to the number of shares of
common stock which would have been received upon conversion to common shares.
The Series E preferred stock had no voting rights.

TSG could not, without the consent of stipulated percentages of
holders of the applicable series of preferred stock, authorize or create any
class or series of capital stock ranking, either as to payment of dividends or
distribution of assets, prior to or on a parity with such series of convertible
preferred stock or alter or change the powers, preferences or rights of such
series of convertible preferred stock. Further, TSG could not sell shares of
capital stock ranking, either as to payment of dividends or distribution of
assets, prior to or on parity with those of convertible preferred stock at
prices less than the conversion prices or convertible into common stock at
prices less than the conversion prices of convertible preferred stock without
such consent(s).

Common Stock

TSG is authorized, under its Certificate of Incorporation as amended
on October 31, 1994, to issue up to 10,000,000 shares of common stock, $.01 par
value. As described in Note 1, TSG issued 3.5 million shares of common stock on
October 31, 1994 in accordance with the terms of an Investment Agreement between
TSG, Wexford and certain former investors.

Holders of voting common stock are entitled to one vote per share on
all matters to be voted on by the stockholders. No dividends may be paid or
declared on TSG's common stock until all dividends accrued and payable on
preferred shares outstanding have been paid.

In connection with the Acquisition, the then outstanding shares of
TSG's common stock were cancelled. Prior to the Acquisition, TSG was authorized
to issue 11,100,000 shares of common stock, $.05 par value.

Initial Public Offering and Common Stock Purchase Warrants

In May 1996, TSG completed an initial public offering of 1,150,000
units (the "Units"), each Unit consisting of one share of common stock and one
redeemable warrant ("Redeemable Warrant") at a price of $9.00 per Unit for gross
proceeds of $10,350. In connection with the offering, TSG issued warrants to the
underwriters to purchase 100,000 shares of common stock (the "Underwriter
Warrants") for nominal consideration. Net proceeds received by TSG, after
underwriting discounts and expenses of $1,232 and other expenses of $825,
amounted to $8,293. At March 29, 1996, TSG had incurred, and deferred as other
assets, offering expenses of $338. Accordingly, net proceeds during the year
ended March 28, 1997 amounted to $8,632.

Two Redeemable Warrants entitle the holder thereof to purchase one
share of common stock at an exercise price of $11.00 per share. Unless the
Redeemable Warrants are redeemed, the Redeemable Warrants

C-16
<PAGE>

may be exercised at any time beginning on May 10, 1996 and ending May 9, 1999,
at which time the Redeemable Warrants will expire. Beginning on February 10,
1997, the Redeemable Warrants are redeemable by TSG 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 price of the common stock equals or
exceeds $12.00 per share for 20 consecutive trading days ending within five days
prior to the date of the notice of redemption. The Redeemable Warrants will be
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 a stock dividend, stock split or similar
reorganization.

The Underwriter Warrants are initially exercisable at a price of
$10.80 per share of common stock. 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 exercise
of the Underwriter Warrants. The Underwriter Warrants may be exercised at any
time beginning on May 10, 1997 and ending May 9, 2001, at which time the
Underwriter Warrants will expire.

As of October 31, 1994, TSG had outstanding warrants to purchase an
aggregate of 312,000 shares of Series C preferred stock at a price of $2.50 per
share. These warrants were cancelled upon consummation of the Acquisition.
Generally, the warrants were exercisable for five-year periods beginning either
on the issuance date or one year thereafter, and expired on various dates
through March 31, 1996.

On May 23, 1995, TSG issued a warrant to one of its contract
manufacturers to purchase 40,000 shares of common stock, $.01 par value, at a
price of $4.00 per share in return for the extension of credit under the terms
of a manufacturing agreement between TSG and the contract manufacturer. On June
17, 1996, the warrant was exercised and TSG issued 40,000 shares of common stock
for aggregate proceeds of $160.

Stock Options

On November 1, 1994, TSG's Board of Directors adopted the 1994 Omnibus
Stock Plan (the "Stock Plan"). The Stock Plan provides the Board or a committee
of the Board with the authority to grant to officers and employees of TSG
incentive stock options within the meaning of Section 422A of the Internal
Revenue Code and to grant to directors, officers, employees and consultants of
TSG non-qualified stock options and restricted stock which do not qualify as
incentive stock options. An aggregate of 635,000 shares of TSG's common stock
may be issued under the Stock Plan. The maximum number of shares with respect to
which options may be granted to any one employee may not exceed 300,000 shares.
The Board's authority to grant options under the Stock Plan expires on November
1, 2004. The Stock Plan is administered by a Stock Plans Committee consisting of
members appointed by the Board.

The Board has the authority to determine option periods, the number of
shares of common stock subject to options granted and such other terms and
conditions under which options may be exercised. The Board also has the
authority to determine at which times options or restricted stock may be
granted, the purchase price of restricted stock, whether an option shall be an
incentive stock option or a non-qualified option, whether restrictions such as
repurchase rights are to be imposed on shares subject to options and restricted
stock, and the nature of such restrictions. The per-share option price of
incentive stock options granted under the Stock Plan shall not be less than the
per-share fair market value, as determined by the Board, of TSG's common stock
as of the date of grant, 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 TSG's stock. Option periods shall not
exceed ten years from the date options are granted, or five years with respect
to incentive stock options to employees owning 10% or more of the total voting
power of all classes of TSG's stock. Options granted under the Stock Plan
generally expire 60 days after termination of employment or at the end of the
option period stipulated by the Board in the option agreement, whichever is
earlier.

The Board has the authority to accelerate the date of exercise of an
option or any installment thereof, unless, in the case of incentive stock
options, such acceleration would violate the annual vesting limitations
contained in Section 422(d) of the Internal Revenue Code. The exercise prices of
options granted under the Stock Plan are subject to adjustment upon any
subdivision, combination, merger, splits, split-up, liquidation, or the like,

C-17
<PAGE>

to reflect such subdivision, combination or exchange. The number of shares of
common stock to be received upon exercise of options granted under the Stock
Plan are subject to adjustment upon declarations of stock dividends between the
date of grant and the date of exercise of options. Also, the number of shares
of common stock reserved for issuance under the Stock Plan shall be adjusted
upon the occurrence of such events.

The Board may grant restricted stock under the Stock Plan pursuant to
a restricted stock agreement. The Board has the authority to determine the
number of shares of common stock to be issued and to the extent, if any, to
which they shall be issued in exchange for cash and/or other consideration.
Shares issued pursuant to restricted stock may not be sold, transferred,
pledged, or otherwise disposed of, except by the laws of descent and
distribution, or as otherwise determined by the Board for a period as determined
by the Board from the date the restricted stock is granted. TSG has the right to
repurchase restricted stock at such price as determined by the Board on the date
of grant. The repurchase rights are exercisable on such terms as determined by
the Board upon the termination of services of the grantee prior to expiration of
the restriction on transfer of the shares, failure of the grantee to pay TSG
income taxes required to be withheld in respect of the restricted stock or under
such other circumstances as the Board may determine.

The following table summarizes the status and changes in stock options
outstanding under the Stock Plan for the five months ended March 31, 1995 and
years ended March 29, 1996 and March 28, 1997:

<TABLE>
<CAPTION>
Weighted
Option Average
Number Price Exercise
of Range Price
Shares Per Share Per Share
------------ --------------- -------------
<S> <C> <C> <C>
Outstanding at October 31, 1994 -- $ -- $ --
Options granted 357,000 1.00 1.00
------------
Outstanding at March 31, 1995 357,000 1.00 1.00
Options granted 89,000 1.00 - 5.00 4.78
Options cancelled (11,750) 1.00 1.00
------------
Outstanding at March 29, 1996 434,250 1.00 - 5.00 1.77
Options granted 191,250 8.00 - 10.781 9.23
Options exercised (5,000) 1.00 1.00
Options cancelled (78,500) 1.00 - 9.50 7.74
------------
Outstanding at March 28, 1997 542,000 1.00 - 10.781 3.55
============
Options Exercisable at March 31, 1995 89,250 1.00 1.00
============
Options Exercisable at March 29, 1996 196,750 1.00 - 5.00 1.43
============
Options Exercisable at March 28, 1997 327,563 1.00 - 10.781 2.35
============
</TABLE>

Options granted and outstanding under the Stock Plan are generally
exercisable in four equal annual installments beginning on the date of grant. At
March 28, 1997, outstanding options under the Stock Plan have a weighted average
remaining contractual life of 8.17 years. At March 29, 1996 and March 28, 1997,
635,000 and 630,000 shares, respectively, were reserved for issuance under the
Stock Plan.

On May 10, 1995, the Board of Directors approved the adoption of the
1995 Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan
provides the Board of Directors with the authority to grant to TSG's officers
and employees the right to purchase up to 100,000 shares of common stock at 85%
of the public market price. However, the Employee Plan did not become effective
until TSG's initial public offering. The rights granted under the Employee Plan
are exercisable for an offering period as determined by the Board of Directors,
which may not exceed 27 months. No employee may be granted an option under which
the employee's

C-18
<PAGE>

right to purchase shares under the Employee Plan first become exercisable at a
rate in excess of $25 in fair market value (determined at the date of grant) in
any calendar year. Also, an employee may not allocate in excess of 10% of his or
her compensation for purchase of stock under the Employee Plan during any
offering period. The Stock Plans Committee of the Board of Directors administers
the Employee Plan. The Employee Plan was approved by the stockholders of TSG on
December 26, 1995. At March 29, 1996 and March 28, 1997, 100,000 and 93,240
shares of common stock, respectively, were reserved for issuance under the
Employee Plan.

During the first offering period ending November 15, 1996, 6,760
shares were purchased by employees at a price of $7.65 per share. During the
second offering which commenced January 13, 1997 (and which will end on July 11,
1997), 5,930 shares are subject to purchase under the Employee Plan based on the
base compensation of participates and the per-share market price of TSG's common
stock on January 13, 1997. The actual number of shares that may be issued will
vary based upon compensation of the participants during the offering period, the
per-share market value of TSG's common stock on July 11, 1997, and the number of
participates who have not withdrawn by the July 11, 1997 end date.

On May 10, 1995, the Board approved the adoption of the 1995 Non-
Employee Director Stock Option Plan (the "Director Plan"). The Director Plan
provides for the grant to directors who are not employees of TSG of options to
purchase up to 100,000 shares of common stock. The Director Plan is administered
by the Stock Plans Committee consisting of members appointed by the Board.
Pursuant to the Director Plan, each non-employee director was automatically
granted a non-qualified option to purchase 10,000 shares of common stock upon
the consummation of TSG's initial public offering on May 10, 1996. Thereafter,
on September 1 of each year, each non-employee director receives a non-qualified
option to purchase 3,000 shares of common stock. Any non-employee director who
is first appointed or elected after TSG's initial public offering will receive a
non-qualified stock option to purchase 3,000 shares of common stock upon such
appointment or election and an additional option to purchase 3,000 shares of
common stock on each anniversary of the date of his or her election, provided
that he or she is then serving as a non-employee director. Options granted upon
consummation of TSG's initial public offering became exercisable six months from
the date the offering. All other options become exercisable on the anniversary
of the date of grant. Option periods shall not exceed ten years from the date
options are granted. Options granted under the Director Plan have an exercise
price equal to the market value per share of the common stock on the date of
grant. Options granted expire 180 days after the date a director ceases to serve
as a director or 10 years from the grant date, whichever is earlier. Vesting is
accelerated in the event of a change of control of TSG.

On May 10, 1996, options to purchase 30,000 shares of common stock
were automatically granted to non-employee directors at an exercise price of
$8.50 per share. On May 17, 1996, options to purchase 3,000 shares of common
stock were granted at an exercise price of $10.781 to a non-employee director
elected to the Board on that date. On September 1, 1996, options to purchase
9,000 shares of common stock were automatically granted to non-employee
directors at an exercise price of $10.812 per share. On March 14, 1997, options
to purchase 3,000 shares of common stock were granted at an exercise price of
$5.00 to a non-employee director elected to the Board on that date. At March 28,
1997 options to purchase 45,000 shares of common stock at a weighted-average
exercise price of $8.88 per share were outstanding under the Director Plan.
Options granted under the Director Plan to purchase 30,000 shares of common
stock at a weighted-average exercise price of $8.50 per share were exercisable
at March 28, 1997.

At March 28, 1997, outstanding options under the Director Plan have
exercise prices ranging between $5.00 and $10.812 per share and a weighted
average remaining contractual life of 9.23 years. TSG has reserved 100,000
shares of common stock for issuance under the Director Plan at March 29, 1996
and March 28, 1997.

C-19
<PAGE>

The following table summarizes information about stock options
outstanding under the Stock Plan and Director Plan at March 28, 1997:

Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Exercise Average Average Average
Price Remaining Exercise Exercise
or Range Number Contractual Price Number Price
Per Share Outstanding Life (years) Per Share Exercisable Per Share
- ------------------ ---------------- -------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
$ 1.00 337,250 7.45 $ 1.00 254,500 $ 1.00

5.00 83,000 8.89 5.00 40,000 5.00

8.50 30,000 9.11 8.50 30,000 8.50

9.50 123,500 9.31 9.50 32,750 9.50

10.78-10.81 13,250 9.33 10.80 313 10.78

Total 587,000 8.17 3.96 357,563 2.86

</TABLE>

On October 31, 1994 upon consummation of the Acquisition,
TSG's Incentive Stock Option Plan (the "Plan") adopted by the Board of Directors
effective June 1, 1992 was cancelled. The Plan provided the Board with the
authority to grant to key employees of TSG incentive stock options to purchase
up to a maximum of 300,000 shares of TSG's common stock. Options granted under
the Plan were intended to constitute incentive stock options within the meaning
of Section 422A of the Internal Revenue Code. The Board had the authority to
determine option periods, the number of shares of common stock subject to
options granted and such other terms and conditions under which options may be
exercised. Options granted under the Plan were to expire upon termination of
employment or at the end of the option period stipulated by the Board in the
option agreement, whichever was earlier. The Plan specifically limited the
aggregate fair market value of options which could be exercised by an employee
in any one calendar year to $100. The Board's authority to grant options under
the Plan was to expire on May 31, 2002. On August 4, 1994, the Board of
Directors authorized management to grant options covering 253,500 shares of
common stock to employees. However, as of the date of cancellation of the Plan,
no options had been granted.

Stock Option Compensation

TSG has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for stock options and
purchase rights granted under TSG's plans in accordance with the requirements of
APB 25. Had compensation cost related to stock options and purchase rights
granted under TSG's plans been recognized based on the fair value of awards on
the grant dates consistent with SFAS 123, TSG would have recorded compensation
expense of $55 and $613 during the years ended March 29, 1996 and March 28,
1997.

The fair value of each option or right granted under TSG's
stock option and purchase plans is estimated on the date of grant using the
Black-Scholes option pricing model. The significant weighted-average

C-20
<PAGE>

assumptions used during the years ended March 29, 1996 and March 28, 1997 to
estimate the fair values of options and rights granted under TSG's plans are
summarized in the following table.

<TABLE>
<CAPTION>
Year Ended Year Ended
March 29, March 28,
1996 1997
-------------- ---------------
<S> <C> <C>
Stock Plan:
Expected volatility 74.80% 72.30%
Expected life 3.5 years 3.5 years
Risk-free interest rate 5.22% 6.35%
Expected dividend yield None None
Director Plan:
Expected volatility -- 76.00%
Expected life -- 2.67 years
Risk-free interest rate -- 6.30%
Expected dividend -- None
Employee Plan:
Expected volatility -- 76.90%
Expected life -- .5 years
Risk-free interest rate -- 5.32%
Expected dividend -- None

</TABLE>

Based on these assumptions, the weighted-average fair value of
each option and right granted under TSG's plans for the years ended March 29,
1996 and March 28, 1997 amounted to $2.63 and $4.70, respectively. The
weighted-average fair value of each option granted under the Stock Plan during
the years ended March 29, 1996 and March 28, 1997 was $2.63 and $5.04,
respectively. The weighted-average fair value of each option granted under the
Director Plan during the year ended March 28, 1997 was $4.53. The
weighted-average fair value of each purchase right granted under the Employee
Plan during the year ended March 28, 1997 was $1.91.

A comparison of TSG's net income and net income per share as
reported and on a pro forma basis had compensation cost been recorded based on
the fair value at the grant dates for options and rights granted under TSG's
plans in accordance with SFAS 123 for the years ended March 29, 1996 and March
28, 1997 is set forth below:

<TABLE>
<CAPTION>
Year Ended Year Ended
March 29, March 28,
1996 1997
-------------- ---------------
<S> <C> <C> <C>
Net income As reported $ 1,177 $ 1,010
Pro Forma $ 1,144 $ 635

Net income per share - primary As reported $ 0.30 $ 0.22
Pro Forma $ 0.30 $ 0.14

Net income per share - assuming full dilution As reported $ 0.30 $ 0.22
Pro Forma $ 0.30 $ 0.14
</TABLE>

C-21
<PAGE>

Common Stock Reserved

The number of shares of Common stock reserved for issuance
pursuant to TSG's stock option and purchase plans and outstanding common stock
warrants at March 29, 1996 and March 28, 1997 is summarized as follows:

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
----------------- ---------------
<S> <C> <C>
Stock Option and Purchase Plans 835,000 823,240
Redeemable Warrants -- 575,000
Underwriter Warrants -- 100,000
Common Stock Purchase Warrants 40,000 --
----------------- ---------------
875,000 1,498,240
================= ===============
</TABLE>

10. INCOME TAXES

There was no income tax expense (benefit) for the seven months
ended October 30, 1994 and five months ended March 31, 1995. Income tax expense
(benefit) for the years ended March 29, 1996 and March 28, 1997 and three months
ended June 27, 1997 and June 28, 1996 is summarized as follows:

<TABLE>
<CAPTION>
Three
Year Three Months Months
Ended Year Ended Ended Ended
March 29, March 28, June 28, June 27,
1996 1997 1996 1997
------------- -------------- ----------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current tax expense:
Federal $ 102 $ 564 $ 218 $ (257)
State 64 19 44 (30)
------------ ------------- ------------- -------------
Total current 166 583 262 (287)
------------ ------------- ------------- -------------
Deferred tax (benefit) expense:
Federal 150 (53) (35) 249
State 10 3 (10) 26
------------ ------------- ------------- -------------
Total deferred 161 (50) (45) 275
------------ ------------- ------------- -------------
$ 326 $ 533 $ 217 $ (12)
============ ============= ============= =============
</TABLE>

C-22
<PAGE>

Income tax expense differs from the amount of income taxes
determined by applying the applicable U.S. statutory federal income tax rate to
income (loss) before income taxes as a result of the following:

<TABLE>
<CAPTION>
Five
Seven Months Three Three
Months Ended Year Year Months Months
Ended March Ended Ended Ended Ended
October 30, 31, March 29, March 28, June 28, June 27,
1994 1995 1996 1997 1996 1997
------------- ----------- -------------- ------------ -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statutory income tax $ (144) $ (362) $ 511 $ 525 $ 273 $ 8
State taxes, net -- -- 47 13 26 (19)
Non-deductible expenses 15 41 103 58 15 14
Losses for which no
tax benefit was provided 129 321 -- -- -- --
Utilization of loss
carryforwards -- -- (335) (72) (72) (72)
Other -- -- -- 9 (25) (57)
------------ --------- --------- ---------- ------------ -------------
Effective income tax $ -- $ -- $ 326 $ 533 $ 217 $ (12)
============ ========= ========= ========== ============ =============
</TABLE>
Deferred tax assets and liabilities arising from temporary
differences at March 29, 1996 and March 28, 1997 are comprised of the following:

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
------------ ----------
<S> <C> <C>
Deferred tax assets:--
Net operating loss carryforwards $ 6,597 $ 5,411
Inventories 900 908
Accrued liabilities 166 205
Accrued restructuring charges 6 11
Deferred revenue 145 145
Accounts receivable 84 57
Depreciation -- 51
Long-term debt 36 --
---------- ---------
Total deferred tax assets 7,934 6,788
---------- ---------
Deferred tax liabilities:
Other assets (72) (45)
Property and equipment (59) (65)
Depreciation (87) --
---------- ---------
Total deferred tax liabilities (218) (110)
---------- ---------
Excess of deferred tax assets over liabilities 7,716 6,678
Valuation allowance (7,666) (6,135)
---------- ---------
Net deferred tax assets $ 50 $ 543
========== =========
</TABLE>

C-23
<PAGE>

The valuation allowance for deferred tax assets during the seven
months ended October 30, 1994 and five months ended March 31, 1995 increased by
$964 and $425, respectively. The valuation allowance for deferred tax assets
during the years ended March 29, 1996 and March 28, 1997 decreased by $1,407 and
$1,531, respectively. A full valuation allowance was maintained through March
31, 1995 because it is more likely than not that deferred tax assets will not be
realized.

Income taxes currently payable for the years ended March 29, 1996 and
March 28, 1997 were reduced by $455 and $72, respectively, through the
utilization of net operating loss carryforwards. During the years ended March
29, 1996 and March 28, 1997, TSG reduced the valuation allowance and recorded
tax benefits of $50 and $493, respectively. Deferred tax benefits from
utilization of net operating loss carryforwards and reductions in the valuation
allowance of $211 and $442 were allocated to reduce goodwill during the years
ended March 29, 1996 and March 28, 1997, respectively.

As of March 28, 1997, TSG has tax net operating loss carryforwards
available to reduce future taxable income of approximately $14 million, which
expire from 1998 through 2010. The utilization of such net operating loss
carryforwards and realization of tax benefits in future years depends
predominantly upon the recognition of taxable income. Further, the utilization
of these carryforwards is subject to annual limitations as a result of the
change in ownership of TSG (as described in Note 2) as defined in the Internal
Revenue Code. The limitation approximates $210 annually and represents the value
of TSG's capital stock immediately before the date of the ownership change
multiplied by the federal long-term tax-exempt rate in effect during the month
the ownership change occurred. This limitation does not reduce the total amount
of net operating losses which may be taken, but rather substantially limits the
amount which may be used during a particular year. As a result, TSG will be
unable to use a significant portion of its net operating loss carryforwards.

11. RESTRUCTURING CHARGES AND CREDITS

As a result of the Acquisition and additional financing described in
Note 2, TSG was able to settle certain severance obligations under terminated
employment contracts and negotiate the termination of certain non-cancelable
lease obligations with respect to facilities closed in connection with a
restructuring initiated in fiscal 1994. The severance and lease obligations were
settled on terms more favorable than previously estimated, which resulted in the
recognition of restructuring credits of $249 and $274, respectively, during the
seven months ended October 30, 1994. In addition, TSG revised its estimate of
certain other severance obligations, and recorded additional restructuring
credits of $11. Accordingly, during the seven months ended October 30, 1994, TSG
realized net restructuring credits of $534.

During the year ended March 28, 1997, TSG approved and initiated a
consolidation plan intended to augment its on-going productivity and quality
improvement programs. The consolidation plan provided for the closure of TSG's
Kentucky manufacturing facility, the closure of TSG's Georgia corporate office
facility, the consolidation of repair, refurbishment and conversion service
operations into TSG's Virginia facility and the consolidation of corporate
activities and product assembly operations into a new Georgia facility. In
connection with this plan, TSG recorded restructuring charges of $63 during the
year ended March 28, 1997. These restructuring charges consist of severance
obligations and losses related to abandonment of assets. Relocation expenses and
other incremental costs incurred in connection with the consolidation and
charged to operations during the year ended March 28, 1997 approximated $350.

C-24
<PAGE>

12. PROFIT SHARING RETIREMENT PLAN

On January 1, 1995, TSG adopted a 401(k) retirement and profit sharing
plan. Eligible employees of TSG who are 21 years of age with one or more years
of service and who are not covered by collective bargaining agreements may elect
to participate in the plan. Employees who elect to become participants in the
plan may contribute up to 15% of their compensation to the plan up to a maximum
dollar limit established by law. TSG may also contribute to the plan at the
discretion of the Board of Directors. Contributions by TSG may consist of
matching contributions, discretionary profit sharing contributions and other
special contributions. During the five months ended March 31, 1995 and years
ended March 29, 1996 and March 28, 1997, TSG accrued profit sharing and
retirement expense of $2, $16 and $27, respectively, pursuant to discretionary
matching contributions authorized by the Board of Directors. Contributions to
the plan funded by TSG during the years ended March 29, 1996 and March 28, 1997
amounted to $14 and $26, respectively. Participants are 100% vested with respect
to their compensation contributions to the plan. Vesting in Company
discretionary contributions begins at 20% after one year of service and
increases by 20% annually each year 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 TSG. Benefits are payable in lump sums equal
to 100% of the participant's account balance.

C-25
<PAGE>

13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the seven months ended October
30, 1994, five months ended March 31, 1995, excluding the effects of the
Acquisition, years ended March 29, 1996 and March 28, 1997 and three months
ended June 27, 1997 and June 28, 1996 consists of the following:

Seven Five Three Three
Months Months Year Year Months Months
Ended Ended Ended Ended Ended Ended
October 30, March 31, March 29, March 28, June 28, June 27,
1994 1995 1996 1997 1996 1997
----------- --------- --------- --------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest paid $ 457 $ 226 $ 966 $ 516 $ 284 $ 82
Income taxes paid -- -- -- 625 149 140
Non-cash activities:
Deferred offering expenses
charged against proceeds
of initial public offering -- -- -- 338 338 --
Fixed assets acquired
under capital leases 34 9 -- -- -- --
Retirement of capital
lease obligation and
write-off of related -- -- -- 933 -- --
property
Write-off of property and
equipment against
accrued restructuring 186 -- -- 41 -- --
charges
Write-off of property and
equipment against
impairment reserve 118 -- -- -- -- --
Other current assets
acquired
by assumption of debt 165 -- 132 -- -- --
obligations
Accrued liabilities converted
to notes payable -- 207 -- -- -- --
Write-off of inventory
against accrued
restructuring charges 70 -- -- -- -- --
Write-off of other
assets against accrued
restructuring charges -- 15 -- -- -- --
Write-off of property
and equipment against
accounts payable -- -- 2 -- -- --
Increase in goodwill
from distribution of
escrow consideration -- -- 330 -- -- --
Tax benefits applied to
goodwill -- -- 211 442 160 82

</TABLE>

C-26
<PAGE>

14. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases

Minimum future rental payments at March 28, 1997 under non-cancellable
operating leases with an initial term of more than one year are summarized as
follows:
<TABLE>
<S> <C>
1998 $ 331

1999 221

2000 213

2001 210

2002 210
---------
1,185
---------
Less sublease rentals (29)
---------
$1,156
=========
</TABLE>

Rental expense approximated $257 for the seven months ended October
30, 1994, $176 for the five months ended March 31, 1995, $376, net of sublease
income of approximately $18, for year ended March 29, 1996 and $323, net of
sublease income of approximately $45, for the year ended March 28, 1997.

Litigation, Disputes and Environmental Matters

During the seven months ended October 30, 1994, TSG settled litigation
against a supplier to recover costs and damages attributable to defective
components supplied to TSG, and realized a gain of $261, net of legal fees of
$56.

Pursuant to the terms of a settlement agreement and mutual release
dated July 3, 1996, a suit filed against TSG by a former supplier to collect
approximately $400 of unpaid obligations was dismissed with prejudice. Under the
terms of the settlement agreement, TSG paid $180 and agreed to pay an additional
$112 in six equal monthly installments of $19 commencing on August 15, 1996. As
a result of the settlement agreement, TSG realized a gain of $105 representing
the difference between unpaid obligations recorded in TSG's accounts and
aggregate settlement payments set forth in the settlement agreement. The gain is
reflected in TSG's results of operations for the year ended March 28, 1997.

TSG has been involved in a dispute with a former contract manufacturer
since 1994 with respect to inventories acquired by the manufacturer for TSG's
programs, which approximate $l million, unpaid obligations of TSG of
approximately $265, and other matters including an alleged claim of lost profits
by the contract manufacturer of approximately $916 related to TSG's minimum
contract purchase commitment. TSG has alleged that the contract manufacturer
breached the agreement, is obligated to pay unpaid obligations to TSG of
approximately $125 and is obligated to TSG for lost business and expenses due to
the delivery of defective products and the termination of a significant sales
agreement. Neither party is presently pursuing the dispute. There is no
assurance, however, that the dispute will not be pursued or escalate into
litigation. Should the dispute escalate into litigation, TSG intends to defend
and pursue its positions vigorously. In the opinion of management, the ultimate
outcome of this matter will not have a material impact on TSG's financial
statements.

TSG is a potentially responsible party with respect to undertaking
response actions at a facility for the treatment, storage and disposal of
hazardous substances operated by an unaffiliated party. In the opinion of
management, the ultimate outcome of this environmental action will not have a
material impact on TSG's financial statements.

C-27
<PAGE>

Significant Customers

TSG's primary customers consist of the regional bell telephone
companies. During the seven months ended October 30, 1994, three of the regional
bell telephone companies accounted for 33%, 23% and 11% of TSG's consolidated
sales. During the five months ended March 31, 1995, four of the regional bell
telephone companies accounted for 34%, 23%, 11% and 10% of TSG's consolidated
sales. During the year ended March 29, 1996, three of the regional bell
telephone companies accounted for 47%, 17% and 24% of TSG's consolidated sales.
During the year ended March 28, 1997, three of the regional bell telephone
companies accounted for 14%, 16% and 60% of TSG's consolidated sales. Accounts
receivable at March 29, 1996 and March 28, 1997 consists primarily of amounts
due from the regional bell telephone companies.

Royalty and License Agreements

Pursuant to the terms of an asset purchase agreement entered into on
January 11, 1991, TSG agreed to pay royalties equal to 3.5% of sales of
microprocessor-based components to a company affiliated with certain officers
and employees of TSG. On November 9, 1994, the royalty provisions of the
purchase agreement were amended to eliminate royalties for the period April 2,
1994 to September 30, 1994. In return, the term of the royalty obligation was
extended from December 31, 1995 to June 30, 1996. Royalty expense under this
agreement amounted to $4 during the seven months ended October 30, 1994, $94
during the five months ended March 31, 1995, $564 during the year ended March
29, 1996 and $196 during the year ended March 28, 1997.

TSG has entered into a patent license agreement providing TSG with the
exclusive world-wide rights to certain algorithm software covered by a patent
application. TSG is obligated to pay license fees aggregating $200 at a rate of
$50 annually over a four year period commencing on the date the patent is
issued. Further, the agreement provides for the payment of royalties on products
incorporating the licensed software. Minimum royalties payable upon issuance of
the patent will range between $125 and $500 annually during the life of the
patent. The term of the license agreement will correspond to the expiration date
of the patent upon its issuance. As of March 28, 1997, the patent has not been
issued. Accordingly, TSG has not recorded the contingent liability in the
accompanying financial statements. Further, as of March 28, 1997, TSG has not
sold any products incorporating the licensed software or incurred any royalty
obligations under the agreement.

In December 1994, TSG sold the rights to certain product software
for an aggregate purchase price of $500. TSG received an exclusive irrevocable
perpetual right to sublicense the software in connection with the sale of
products to other customers. In return, TSG agreed to pay royalties equal to the
greater of 4.44% of sales or ten dollars per unit sold. As of March 28, 1997,
TSG has not sold any products incorporating the licensed software to other
customers or incurred any royalty obligations under the agreement TSG was
obligated to repay, three years from the date of the contract, a portion of the
purchase price up to a maximum amount of $375 depending upon the amount of
aggregate royalties paid pursuant to the agreement. However, in May 1997, TSG
entered into an agreement that terminated TSG's royalty and repayment
obligations.

Employment Contracts

On October 31, 1994, TSG entered into an employment contract with one
of its executives that provides for minimum annual compensation of $147 through
December 31, 1996 and $160 from January 1, 1997 through December 31, 1997. The
contract provides for compensation increases at the discretion of the Board of
Directors, additional compensation in the form of bonuses based on performance,
benefits equal to those provided to other executives of TSG, reimbursement of
business expenses, travel and temporary living expenses and options to purchase
shares of TSG's common stock. The agreement provides for annual renewals
subsequent to December 31, 1997 at the option of TSG. Termination by TSG without
cause entitles the executive to receive his current salary and benefits for the
remaining term of the agreement or for a period of six months, whichever is
greater. The agreement may be terminated by the executive upon 120 days notice
effective on December 31, 1997 or thereafter.

On October 31, 1994, TSG entered into an agreement with the Chairman
of the Board of Directors that provides for minimum annual compensation of $60
through December 31, 1997. The agreement provides for additional compensation
based on services performed not to exceed $3 per month, benefits equal to

C-28
<PAGE>

those provided to other executives of TSG, reimbursement of business expenses
and options to purchase shares of TSG's common stock. Termination by TSG without
cause entitles the Chairman to receive his current salary and benefits for the
remaining term of the agreement or for a period of six months, whichever is
greater. The agreement may be terminated by the Chairman upon 90 days written
notice. Prior to execution of the Chairman's Agreement, the Chairman provided
consulting services, as President of Atlantic Management Associates, Inc., to
TSG during the seven months ended October 30, 1994 similar to those provided
under the Chairman's Agreement. In addition, Atlantic Management Services, Inc.
assisted TSG and its stockholders in their efforts to attract a buyer for the
equity of TSG, and received a success fee in connection with the Acquisition of
$75 representing compensation for such services. During fiscal 1995, TSG paid
Atlantic Management Associates, Inc. $43 for consulting services, excluding
expenses of $7, rendered prior to the date of the Chairman's Agreement. During
fiscal 1995, TSG paid the Chairman and Atlantic Management Associates, Inc. $30,
excluding expenses of $9, for services rendered under the terms of the
Chairman's Agreement. During the year ended March 29, 1996, TSG paid the
Chairman and Atlantic Management Associates, Inc. $66, excluding reimbursed
expenses of $9, for services rendered under the terms of the Chairman's
Agreement. During the year ended March 28, 1997, TSG paid the Chairman and
Atlantic Management Associates, Inc. $69, excluding reimbursed expenses of $11,
for services rendered under the terms of the Chairman's Agreement.

Purchase and Sales Commitments

At March 28, 1997, TSG has outstanding purchase order commitments to
purchase approximately $5.5 million of microprocessor-based products under the
terms of a manufacturing agreement entered into in October 1994. Upon a
termination of the agreement by TSG, TSG is obligated to purchase inventories
held by the manufacturer and pay vendor cancellation and restocking charges, and
a reasonable profit thereon. In addition, TSG is obligated to pay a cancellation
penalty of up to $500 if it cancels its purchase obligation or a substantial
portion thereof. The amount of the cancellation penalty, if any, will vary
depending upon quantities purchased by TSG.

In June 1997, TSG entered into an agreement that supersedes and
terminates a December 1994 sales agreement. Under the new agreement, TSG agreed
to reduce the customers remaining purchase commitment of certain smart
processors and other components to approximately $3 million from approximately
$8 million under the former agreement and, among other things, upgrade the
customer's payphone management system. In return, the customer made a $250 cash
payment to TSG, terminated TSG's obligation to pay royalties on sales of certain
products to other customers and terminated TSG's obligation to repay $375
received from the sale of certain product software under the December 1994
agreement. The customer also agreed to make additional cash payments of $250 on
July 2, 1997, $100 on September 1, 1997, $150 on December 31, 1997 and $250 on
March 31, 1998 to TSG subject to TSG's compliance with the terms and conditions
of the agreement, including conditions with respect to product performance,
service and repair. The customer has the right to cancel the agreement upon
default by TSG. Therefore, there is no assurance that TSG will receive the
additional payments or that its will ship the products set forth in the
agreement.

15. SUBSEQUENT EVENT (UNAUDITED)

On August 13, 1997, TSG entered into an Agreement and Plan of Merger
with Elcotel, Inc. ("Elcotel") and Elcotel Hospitality Service, Inc. ("EHS"), a
wholly-owned subsidiary of Elcotel (the "Merger Agreement"). The Merger
Agreement provides for the merger of EHS into TSG and for TSG to be the
surviving corporation (the "Merger"). At the effective time of the Merger, each
outstanding share of TSG's common stock will be converted into and represent the
right to receive 1.05 shares of Elcotel common stock, $0.01 par value per share.
The closing of the Merger is subject to certain conditions and approvals,
including the approval of TSG's and Elcotel's stockholders.

C-29
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Elcotel is a Delaware corporation. The Delaware General Corporation Law (the
"Delaware Law") generally provides that a director, employee, officer or agent
of a Delaware corporation who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, may be indemnified
against liability, expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such proceeding (other than in a proceeding by or in the right
of the corporation), provided such person acted in good faith and in a manner
such person reasonably believed to be in, or at least not opposed to, the best
interests of the corporation, and, with respect to any criminal proceeding,
had no reasonable cause to believe the conduct was unlawful. For actions or
suits brought by or in the right of the corporation, the Delaware Law provides
that a director, employee, officer or agent of a Delaware corporation may be
indemnified against expenses (including attorneys' fees) as incurred by such
person in connection with such proceeding if such person acted in good faith
and in a manner such person reasonably believed to be in, or at least not
opposed to, the best interests of the corporation, except that if such person
is adjudged to be liable to the corporation, such person can be indemnified if
and only to the extent that a court determines that despite the adjudication
of liability, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court
deems proper.

The Delaware Law provides that a corporation may include, in its articles or
certificate of incorporation, a provision which limits or eliminates the
personal liability of a director to the corporation or its stockholders for
monetary damages for such persons's conduct as a director, provided that such
provision may not so limit a director's liability (i) for a breach of his or
her duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends, certain stock
repurchases or redemptions; or (iv) for any transaction from which the
director derived an improper personal benefit. The Elcotel Certificate of
Incorporation so limits the personal liability of directors to the fullest
extent permitted under the Delaware Law. The Delaware Law further provides
that where a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding for which indemnification is permissible, or in defense of any
claim, issue or matter related thereto, he will be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection therewith.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The exhibits to this registration statement on Form S-4 (together with
all amendments, supplements and exhibits thereto, the "Registration
Statement") are listed in the Exhibit Index hereto and are incorporated herein
by reference.

(b) All financial statement schedules have been omitted because they are not
required or the information required to be set forth therein is included in
the financial statements included in Elcotel's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997, which is incorporated herein by
reference.

(c) The opinion of Murray, Devine & Co. is included in Part I as Annex B to
the Joint Proxy Statement-Prospectus included in this Registration Statement
and is incorporated herein by reference.

ITEM 22. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes as follows:

(i) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

A. to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "1933 Act");

II-1
<PAGE>

B. to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and

C. to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.

(ii) that, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and

(iii) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act that
is incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(c) The undersigned Registrant hereby undertakes that, prior to any public
reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus shall contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.

(d) The undersigned Registrant hereby undertakes that every prospectus: (i)
that is filed pursuant to the immediately preceding paragraph (c), or (ii)
that purports to meet the requirements of Section 10(a)(3) of the 1933 Act and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the 1933 Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

(e) Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 20 of this Registration Statement, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant shall, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and shall be governed by the final adjudication of such issue.

(f) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Joint Proxy Statement-
Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.

(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.

II-2
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SARASOTA,
STATE OF FLORIDA, ON OCTOBER 28, 1997.

Elcotel, Inc.

By: /s/ C. Shelton James
---------------------------------
C. SHELTON JAMESCHAIRMAN OF THE
BOARD

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATE INDICATED.

SIGNATURE TITLE DATE

<S> <C> <C>
/s/ C. Shelton James Chairman of the October 28,
- ------------------------------------- Board, Chief 1997
C. SHELTON JAMES Executive Officer
(Principal
Executive Officer
and Director)

/s/ Tracey L. Gray President, Chief October 28,
- ------------------------------------- Operating Officer 1997
TRACEY L. GRAY and Director

/s/ Dwight Jasmann Director October 28,
- ------------------------------------- 1997
DWIGHT JASMANN

/s/ Charles H. Moore Director October 28,
- ------------------------------------- 1997
CHARLES H. MOORE

/s/ Thomas E. Patton Director October 28,
- ------------------------------------- 1997
THOMAS E. PATTON

/s/ T. Raymond Suplee Director October 28,
- ------------------------------------- 1997
T. RAYMOND SUPLEE

Director October 28,
- ------------------------------------- 1997
THOMAS R. WILTSE

/s/ Ronald M. Tobin Vice President and October 28,
- ------------------------------------- Chief Financial 1997
RONALD M. TOBIN Officer (Principal
Financial and
Accounting Officer)
</TABLE>

II-3
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 13, 1997 among the
Registrant, Technology Service Group, Inc. and Elcotel Hospitality
Service, Inc. (incorporated by reference to Appendix A to the Joint
Proxy Statement--Prospectus included as part of this Registration
Statement)*
2.2 Voting Agreement dated as of August 13, 1997 among the Registrant,
Wexford Partners Fund, L.P. and Fundamental Management Corporation
(incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K dated August 13, 1997)
2.3 Form of Stockholders' Agreement among the Registrant, Wexford Partners
Fund, L.P. and Fundamental Management Corporation (incorporated by
reference to Exhibit 2.3 to the Registrant's Registration Statement on
Form S-4, File No. 333-38439)
2.4 Amendment No. 1 dated as of September 30, 1997 to the Agreement and
Plan of Merger among the Registrant, Technology Service Group, Inc.
and Elcotel Hospitality Service, Inc.
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-18, File No. 33-8565)
3.2 Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1987)
4.1 Specimen Common Stock Certificate of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form 8-A dated
November 21, 1986)
4.2 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 the Registrant's
Registration Statement on Form S-4, File No. 333-38439)
4.3 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 the Registrant's Registration Statement on
Form S-4, File No. 333-38439)
5.1 Opinion of Schnader Harrison Segal & Lewis llp as to the legality of
the securities being registered by this Registration Statement
8.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel as to
certain tax matters relating to the Merger
10.1 1991 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Registrant's Annual Report on Form 10-K for the year ended March
31, 1992)
10.2 Directors Stock Option Plan (incorporated by reference to Exhibit 10.3
to the Registrant's Annual Report on Form 10-K for the year ended
March 31, 1992)
10.3 Mortgage and Security Agreement between the Registrant and NationsBank
of Florida, N.A. dated January 20, 1994 (incorporated by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form 10-KSB for the
year ended March 31, 1994)
10.4 Loan Agreement between the Registrant and NationsBank of Florida, N.A.
dated May 23, 1994 (incorporated by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-KSB for the year ended March 31,
1994)
10.5 Amendment to Loan Agreement and Second Amendment to Collateral
Assignment and Security Agreement between the Registrant and
NationsBank of Florida, N.A. dated August 31, 1995 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1995)
10.6 Mortgage Note between the Registrant and Carl G. Santangelo, as
Trustee of Elcotel Mortgage Trust dated September 28, 1993
(incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1993)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(a) Mortgage Modification Agreement between the Registrant and
NationsBank of Florida, N.A. dated May 23, 1994 (incorporated by
reference to Exhibit 10.9(a) to the Registrant's Annual Report on Form
10-KSB for the year ended March 31, 1994)
(b) Assignment of Note and Mortgage between Carl G. Santangelo, as
Trustee of Elcotel Mortgage Trust and NationsBank of Florida, N.A.
dated May 23, 1994 (incorporated by reference to Exhibit 10.9(b) to
the Registrant's Annual Report on Form 10-KSB for the year ended March
31, 1994)
(c) Mortgage Modification Agreement between the Registrant and
NationsBank of Florida, N.A. dated August 31, 1995 (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1995)
10.7 Replacement Promissory Note between the Registrant and NationsBank of
Florida, N.A. dated August 31, 1995 (incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1995)
10.8 Consolidation Promissory Note between Registrant and NationsBank of
Florida, N.A. dated August 31, 1994 (incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1994)
10.9 Renewal Promissory Note between the Registrant and NationsBank of
Florida N.A. dated August 31, 1995 (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1995)
10.10 Second Amendment to Loan Agreement and Third Amendment to Collateral
Assignment and Security Agreement between the Registrant and
NationsBank, N.A. (South) effective August 28, 1996 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996)
10.11 Renewal Promissory Note between Registrant and NationsBank, N.A.
(South), effective August 28, 1996 (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
10.12 Security Agreement between Elcotel Direct, Inc. and NationsBank, N.A.
dated October 2, 1997 (incorporated by reference to Exhibit 10.12 to
the Registrant's Registration Statement on Form S-4, File No. 333-
38439)
10.13 Continuing and Unconditional Guaranty between the Registrant and
NationsBank, N.A. dated October 2, 1997 (incorporated by reference to
Exhibit 10.13 to the Registrant's Registration Statement on Form S-4,
File No. 333-38439)
10.14 Promissory Note between the Registrant and NationsBank, N.A. dated
October 2, 1997 in the amount of $3,050,000 (incorporated by reference
to Exhibit 10.14 to the Registrant's Registration Statement on Form S-
4, File No. 333-38439)
10.15 Promissory Note between the Registrant and NationsBank, N.A. dated
October 2, 1997 in the amount of $950,000 (incorporated by reference
to Exhibit 10.15 to the Registrant's Registration Statement on Form S-
4, File No. 333-38439)
10.16 Promissory Note between the Registrant and NationsBank, N.A. dated
October 2, 1997 in the amount of $2,850,000 (incorporated by reference
to Exhibit 10.16 to the Registrant's Registration Statement on Form S-
4, File No. 333-38439)
10.17 Third Amendment to Loan Agreement and Fourth Amendment to Collateral
Assignment and Security Agreement between the Registrant and
NationsBank, N.A. dated October 2, 1997 (incorporated by reference to
Exhibit 10.17 to the Registrant's Registration Statement on Form S-4,
File No. 333-38439)
10.18 Employment Agreement between the Registrant and C. Shelton James dated
October 1, 1997 (incorporated by reference to Exhibit 10.18 to the
Registrant's Registration Statement on Form S-4, File No. 333-38439)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.19 Employment Agreement between the Registrant and Tracey L. Gray dated
October 1, 1997 (incorporated by reference to Exhibit 10.19 to the
Registrant's Registration Statement on Form S-4, File No. 333-38439)
10.20 Employment Agreement between the Registrant and Vincent C. Bisceglia
dated September 24, 1997
10.21 Agreement for the Purchase and Sale of Assets between Elcotel Direct,
Inc. and Lucent Technologies Inc. dated September 30, 1997
(incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated September 30, 1997)
10.22 Technology Transfer Agreement between the Registrant and Lucent
Technologies Inc. dated September 30, 1997 (incorporated by reference
to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated
September 30, 1997)
10.23 Patent License Agreement between the Registrant and Lucent
Technologies Inc. dated September 30, 1997 (incorporated by reference
to Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated
September 30, 1997)
13.1 Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997
13.2 Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997
23.1 Consent of Deloitte & Touche llp with respect to the Registrant's
financial statements
23.2 Consent of Deloitte & Touche llp with respect to the financial
statements of Technology Service Group, Inc.
23.3 Consent of Murray, Devine & Co., Inc.
23.4 Consent of Schnader Harrison Segal & Lewis llp (included in Exhibit
5.1 above)
23.5 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel (included
in Exhibit 8.1 above)
23.6 Consent of Vincent C. Bisceglia as a person about to become a director
of the Registrant (incorporated by reference to Exhibit 23.6 to the
Registrant's Registration Statement on Form S-4, File No. 333-38439)
23.7 Consent of Mark L. Plaumann as a person about to become a director of
the Registrant (incorporated by reference to Exhibit 23.7 to the
Registrant's Registration Statement on Form S-4, File No. 333-38439)
23.8 Consent of Kenneth Rubin as a person about to become a director of the
Registrant (incorporated by reference to Exhibit 23.8 to the
Registrant's Registration Statement on Form S-4, File No. 333-38439)
23.9 Consent of David R.A. Steadman as a person about to become a director
of the Registrant (incorporated by reference to Exhibit 23.9 to the
Registrant's Registration Statement on Form S-4, File No. 333-38439)
99.1 Form of Proxy Card of Elcotel, Inc. (incorporated by reference to
Exhibit 99.1 to the Registrant's Registration Statement on Form S-4,
File No. 333-38439)
99.2 Form of Proxy of Technology Service Group, Inc. (incorporated by
reference to Exhibit 99.2 to the Registrant's Registration Statement
on Form S-4, File No. 333-38439)
</TABLE>
- --------
* Pursuant to Item 601(b)(2) of Regulation S-K, certain of the schedules and
similar attachments to this exhibit have been omitted. The Registrant agrees
to furnish supplementally such schedules and attachments to the Commission
upon request.

<PAGE>

Exhibit 2.4