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

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

Minnesota

41-1649949

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

15500 Wayzata Blvd. #1029 Wayzata, MN 55391

(Address of principal executive offices)

Issuer’s telephone number:

(952) 249-1801

Title of each class:

Name of each exchange on which registered:

Common Stock, $.01 par value

The NASDAQ SmallCap Market

Redeemable Warrant

The NASDAQ SmallCap Market

Page

Report of Independent Auditors

F-1

Consolidated Financial Statements:

Consolidated Balance Sheets for Years Ended December 31, 2001 and 2000

F-2

Consolidated Statements of Operations for Years Ended December 31, 2001 and 2000

F-3

Consolidated Statements of Shareholders’ Equity for Years Ended December 31, 2001 and 2000

F-4

Consolidated Statements of Cash Flows for Years Ended December 31, 2001 And 2000

F-5

Notes to Consolidated Financial Statements

F-7

Name and Address of Beneficial Owner

Number of Shares
Beneficially Owned (1)

Percent of
Outstanding Shares (2)

Andrew Redleaf (3)
3033 Excelsior Blvd.
Minneapolis, Minn.  55416

445,063

14.7

%

Perkins Capital Management (3)
730 East Lake Street
Wayzata, Minn.  55391

292,936

9.6

%

Melvin Graf (4)
2601 Abbey Hill Dr.
Minnetonka, Minn. 55305

213,334

7.0

%

Directors, nominees and executive officers:

Gary S. Kohler (5)(6)(9)

918,460

30.3

%

Jeffrey R. Paletz

342,358

11.3

%

Jack S. Kohler (6)

260,800

8.6

%

Robert A. Hegstrom (7)

176,341

5.5

%

Michael Wigley (7)(8)(9)

417,091

13.0

%

All directors, nominees and executive officers as a group (5 persons)

1,819,725

53.9

%

ChoiceTel Communications, Inc.

Date: April 23, 2002

By /s/

Gary S. Kohler

Gary S. Kohler

/s/ Schechter Dokken Kanter Andrews & Selcer Ltd.

CONSOLIDATED

CHOICETEL COMMUNICATIONS, INC.

BALANCE SHEETS

AND SUBSIDIARY

DECEMBER 31

2001

2000

Assets:

Current assets:

Cash and cash equivalents

$

751,059

$

580,926

Investments

2,454,084

2,203,306

Receivables

278,066

521,072

Prepaid and other assets

325,354

228,054

Deferred taxes

493,000

1,873,000

Total current assets

4,301,563

5,406,358

Property and equipment, net

1,843,101

2,307,683

Other assets

67,292

30,591

$

6,211,956

$

7,744,632

Liabilities and shareholders’ equity:

Current liabilities:

Accounts payable

$

15,468

$

1,788,235

Accrued expenses

241,920

588,888

Total current liabilities

257,388

2,377,123

Shareholders’ equity

5,954,568

5,367,509

$

6,211,956

$

7,744,632

CONSOLIDATED

CHOICETEL COMMUNICATIONS, INC.

STATEMENTS OF OPERATIONS

AND SUBSIDIARY

YEARS ENDED DECEMBER 31

2001

2000

Service revenue

$

3,807,325

$

4,408,542

Cost of service

1,416,455

1,883,101

Gross margin

2,390,870

2,525,441

Selling, general and administrative expenses

2,177,647

4,004,614

Loss from impairment and sale of assets

3,776,783

Amortization and write-off of goodwill

1,061,735

Adjustment of accrued sales tax liability

(508,876

)

Deferred loss

66,280

Total operating expenses

2,177,647

8,400,536

Operating income (loss)

213,223

(5,875,095

)

Other income

Gain on sale of subsidiary, net

1,893,515

Investment income

250,778

203,306

Interest income, net

15,327

107,807

2,159,620

311,113

Income (loss) before income taxes

2,372,843

(5,563,982

)

Provision for income tax (benefit)

1,368,734

(1,751,000

)

Income (loss) before minority interest

1,004,109

(3,812,982

)

Minority interest

791,654

Net income (loss)

$

1,004,109

$

(3,021,328

)

Earnings (loss) per share:

Net income (loss), basic and diluted

$

.31

$

(0.93

)

Weighted average number of shares outstanding:

Basic

3,220,728

3,245,016

Diluted

3,235,985

3,245,016

CONSOLIDATED STATEMENTS

OF SHAREHOLDERS’ EQUITY

CHOICETEL COMMUNICATIONS, INC.

YEARS ENDED

AND SUBSIDIARY

DECEMBER 31, 2001 AND 2000

15,000,000 shares authorized, $.01 par

Shares

Amount

Additional

paid-in

capital

Accumulated

deficit

Total

Balance, January 1, 2000

2,926,906

$

29,269

$

6,181,621

$

(36,019

)

$

6,174,871

Issuance of minority shares of subsidiary

135,000

135,000

Issuance of stock options for services

38,000

38,000

Issuance of common stock

618,793

6,188

2,285,741

2,291,929

Repurchase of common stock

(137,618

)

(1,376

)

(249,587

)

(250,963

)

Net loss

(3,021,328

)

(3,021,328

)

Balance, December 31, 2000

3,408,081

34,081

8,390,775

(3,057,347

)

5,367,509

Issuance of stock in connection with sale of subsidiary

20,000

200

19,800

20,000

Issuance of common stock

100

1

124

125

Repurchase of common stock

(392,386

)

(3,924

)

(433,251

)

(437,175

)

Net income

1,004,109

1,004,109

Balance, December 31, 2001

3,035,795

$

30,358

$

7,977,448

$

(2,053,238

)

$

5,954,568

CONSOLIDATED

CHOICETEL COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS

AND SUBSIDIARY

YEARS ENDED DECEMBER 31

2001

2000

Cash flows from operating activities:

Net income (loss)

$

1,004,109

$

(3,021,328

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Deferred taxes

1,380,000

(1,571,000

)

Depreciation

277,286

392,055

Amortization and goodwill write-off, net

18,299

770,542

Stock based compensation issued

38,000

Stock issued in connection with sale of subsidiary

20,000

Minority interest loss

(791,654

)

(Gain) loss on disposals, net

(1,893,515

)

1,449,336

Impairment loss

2,744,184

Increase in value of investments

(250,778

)

(203,306

)

Changes in operating assets and liabilities:

Coin in phone

98,455

Income tax receivable

(180,000

)

Receivables

242,870

942,634

Prepaid expenses

(97,300

)

(33,745

)

Accounts payable

(78,162

)

1,723,548

Accrued expenses

(43,959

)

(1,758,870

)

Income tax payable

(221,000

)

Net cash provided by operating activities

578,850

377,851

Cash flows from investing activities:

Purchase of:

Site contracts

(55,000

)

Equipment

(40,681

)

(3,836,481

)

Short-term investments

(2,000,000

)

Proceeds from sale of equipment and rental contracts

19,514

2,071,200

Proceeds from sale of Advants

500

Net cash used in investing activities

(75,667

)

(3,765,281

)

Cash flows from financing activities:

Proceeds from issuance of:

Common stock in subsidiary

225,000

Common stock

125

2,106,308

Proceeds of note payable

104,000

Repurchase of common stock

(437,175

)

(250,963

)

Principal payments on long-term debt

(387,475

)

Payment in notes payable

(47,858

)

Net cash provided by (used in) financing activities

(333,050

)

1,645,012

CONSOLIDATED

CHOICETEL COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS

AND SUBSIDIARY

YEARS ENDED DECEMBER 31

2001

2000

Net increase (decrease) in cash and cash equivalents

$

170,133

$

(1,742,418

)

Cash and cash equivalents, beginning

580,926

2,323,344

Cash and cash equivalents, ending

751,059

$

580,926

Supplemental disclosure of cash flow information:

Cash paid for interest

$

4,584

Supplemental cash flow information:

Non-cash investing and financing activities:

Note payable settled partially by prepaid expenses

$

302,142

Common stock issued in non-cash transactions

$

20,000

$

185,621

The gain on disposal of subsidiary includes the elimination of the following items:

Accounts payable

$

1,694,605

Accrued expenses

303,009

Sale of equipment

(219,986

)

Issuance of notes payable

104,000

Receivables and other

11,387

$

1,893,015

1.

Nature of business and discontinued operations:

Nature of business:

ChoiceTel Communications, Inc. and Subsidiary (the Company) includes a formerly 80% owned subsidiary, Advants, Inc.

(formerly Public Internet Access Holdings Corporation).  The Company’s primary business is providing pay phone related

service in Puerto Rico. ChoiceTel Communications, Inc. increased its ownership interest in Advants, Inc. (Advants) from 60%

to 80% during 2000 mainly by providing a significant investment in Advants common stock.  Advants was in the business of

providing public internet access through kiosks located in perceived high traffic areas such as gas stations and supermarkets.

Advants had minimal revenue and incurred large expenses for hardware and software in development.  Advants’ total

liabilities exceed total assets by approximately $1.7 million as of December 31, 2000.  Advants was sold in May 2001.

Discontinued operations:

The Company decided to discontinue its pay phone operations in December 1999 (measurement date).  The Company had

estimated it would realize an overall gain on the disposal of discontinued operations. In 1999, the Company sold all of its

phones in two territories in separate transactions totaling approximately $6,400,000. In March 2000, the Company sold its

operations in the Eastern United States for approximately $2,000,000.

During 2001 the Company unsuccessfully sought buyers for its Puerto Rican operations. Consequently, the Company has

reclassified items reported in 2000 as components of discontinued operations as continuing since the attempted disposal period

had spanned multiple periods. There is no change in the Company’s total reported earnings from 2000 as a result of this

change and the Company continues to make efforts to sell the operations.

2.

Summary of significant accounting policies:

Principles of consolidation:

The consolidated financial statements for 2001 and 2000 include the accounts of ChoiceTel Communications, Inc., and its 80%

owned subsidiary, Advants.  All material intercompany balances have been eliminated. The Company sold its investment in

Advants in May 2001.

Concentration of credit risk:

The Company maintains its cash in bank deposit accounts at financial institutions where balances, at times, may exceed federally

insured limits.  It is management’s opinion that the risk of loss is minimal.

The Company has an investment with Whitebox Statistical Arbitrage Fund, LP, a fund with a stated objective of providing

superior short-term risk adjusted returns through the use of a statistical arbitrage trading strategy. This investment is neither

guaranteed nor insured. Consequently, the entire investment is subject to market risk.

Property and equipment and depreciation methods:

Property and equipment is recorded at cost. Depreciation is being provided by the straight-line method over the estimated useful

lives generally between 5 and 10 years.

Impairment of assets:

During 2000 the Company determined that substantially all of the assets of Advants and related goodwill had become

impaired, as defined by Statement of Financial Accounting Standards No. 121 (SFAS No. 121) Accounting for Impairment

of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.  The impaired assets included public access Internet

kiosks, related equipment and capitalized software development costs. Pursuant to the requirements of SFAS No. 121, the

Company had recorded an impairment loss on these assets.

Income taxes:

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently

due plus deferred taxes.  Deferred taxes are recognized from differences between the tax basis of assets and liabilities and

their reported amounts in the financial statements.  The deferred tax assets and liabilities represent the future tax expense of

those differences.

For 2001, the Company will file a consolidated tax return that includes Advants from January 1 through May 8, 2001. For tax

purposes, the Company has made an election that will enable the Company to carry forward substantially all of the net

operating losses incurred by Advants from its inception through May 8, 2001.

For 2000, the Company filed a consolidated tax return that includes Advants for the period August 1, 2000 through December

31, 2000.

Stock-based compensation:

The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25

(APB No. 25), Accounting for Stock Issued to Employees, and related interpretations.  As such, compensation expense is

recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The

Company has also adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize

the expense over the vesting period of the fair value of all stock-based awards on the date of grant.

Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide proforma net

income disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been

applied.  The Company has elected to continue to apply the provisions of APB No. 25 and provide the proforma disclosure

provisions of SFAS No. 123.

Earnings per share:

The Company adopted SFAS No. 128, Earnings per Share.  Basic earnings per common share are based on the weighted

average number of common shares outstanding in each year.  Diluted earnings per common share assume that outstanding

common shares were increased by shares issuable upon exercise of stock options and warrants for which market price

exceeds exercise price, less shares which could have been purchased by the Company with related proceeds.  This

calculation added 15,257 and zero shares to the diluted weighted average shares outstanding for 2001 and 2000,

respectively.

Earnings per share (continued):

Stock options and warrants for 1,085,282 shares for December 31, 2000, were not used in the calculation of diluted earnings

per share because they were antidilutive.

Cash equivalents:

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to

make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, the actual amounts

could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the year in which such

adjustments are determined.  Estimates that are susceptible to significant change are contingencies, asset impairment, and

deferred taxes.

3.

Related party transactions:

During 2000, the Company invested $2,000,000 in Whitebox Arbitrage Fund, LP.  A holder of more than 10% of the

Company’s common stock is the President of Whitebox Advisors, Inc., which is the general partner of Whitebox Arbitrage

Fund, LP.  The value of the investment at December 31, 2001 is $2,454,084. The investment was redeemed by the Company

on January 1, 2002 for cash of the same amount.

4.

Write-off of goodwill and asset impairments:

During the fourth quarter of 2000, management determined that the Company’s efforts to penetrate the public access Internet

kiosk business were not going to generate a cash flow sufficient to support the cost of the related assets.  Consequently, the

Company wrote-off goodwill generated in 2000 of approximately $1,062,000.

Additionally, in the fourth quarter of 2000, the Company recorded asset impairments of $2,744,184.  These asset impairments

were required to reduce the carrying value of the Company’s Internet kiosks, related equipment and related capitalized

software development costs.  The reported values of the profitable assets were determined from an analysis of projected

undiscounted cash flows, which were no longer deemed adequate to support the value of the goodwill or of the assets.

Reported values of most of the assets were based upon salvage values net of costs required for disposal.  These write-downs

relate to substantially all of the assets of Advants and related goodwill generated by common stock purchases of Advants by

ChoiceTel Communications, Inc.

5.

Property and equipment:

2001

2000

Office equipment

$

97,868

$

129,603

Telephones and equipment

2,335,739

2,346,048

Kiosks

154,500

Accumulated depreciation

(590,506

)

(372,468

)

1,843,101

2,257,683

In process software

50,000

$

1,843,101

$

2,307,683

6.

Commitments and contingencies:

Commitments:

Phone locations:

The Company rents phone locations from merchants and property owners under varying lease terms, usually ten years,

generally cancelable by the Company upon 30 days notice.

Consulting agreement:

The Company paid a director/shareholder $28,800 for certain consulting services in each year 2001 and 2000.

Leases:

The Company leases its corporate  offices and its Puerto Rico offices under a lease which became month-to-month in 2002.

Rent expense was $44,132 and $121,878 for the years ended December 31, 2001 and 2000, respectively.

Contingencies:

Sales tax:

During 2000, the Company reached a settlement with the Minnesota Department of Revenue covering all sales tax liabilities

during the period the Company operated pay phones in the State of Minnesota.  As a result of the settlement the Company

recognized a $509,000 gain.

Lawsuits:

The Company has been named in several lawsuits for unpaid bills of Advants, as well as for claims of promissory estoppel and

other matters.  The Company intends to defend these lawsuits and believes that the likelihood of an unfavorable outcome is

remote. Further, the Company does not believe that any loss pursuant to these claims will have a material effect on the

financial statements. Consequently, no provision has been made in the financial statements.

The Company was unable to reconcile outstanding invoice balances during the period of March 1998 to May 2000 because

line rates were in dispute with PRTC. At December 31, 2000 the Company had accrued a $250,000 liability which was

believed to be adequate to cover any losses resulting from resolution of this matter. During 2001, the matter was resolved

with a credit of $325,000 issued to the Company by PRTC which the Company is using to offset future phone bills.  The

unused credit approximates $177,000 at December 31, 2001 and is included in prepaid expenses.

In 2000, the Company entered into an agreement to settle certain other claims by issuing 46,560 shares of common stock and a

$175,000 payment.

7.

Stock options and warrants:

On April 11, 1997, the Company’s Board of Directors adopted the 1997 Long-Term Incentive and Stock Option Plan (the Plan).  The Plan provides for the issuance of incentive stock options and non-qualified stock options to key employees and directors of the Company.  The total number of shares of common stock authorized and reserved for issuance under the Plan is 350,000 shares.  The exercise price for each incentive stock option granted under the Plan may not be less than the fair market value of the common stock on the date of the grant, except in the case of incentive stock options.  In this case the optionee owns greater than 10% of the total combined voting power of all classes of capital stock of the Company, in which the exercise price may not be less than 110% of the fair market value of the common stock on the date of the grant.

The exercise price for each non-qualified option may not be less than 85% of the fair market value of the common stock on the date of grant. Unless otherwise determined by the Board, incentive options granted under the Plan have a maximum duration of 10 years, non-qualified options and awards have a maximum duration of 15  years.  Vesting is based on such terms and conditions as the Board shall determine.

The proforma effects of options issued to employees are as follows:

2001

2000

Shares

Weighted average

exercise price

Shares

Weighted average

exercise price

Outstanding at beginning of year

345,824

$

3.02

252,666

$

3.21

Granted

142,858

0.92

123,158

3.18

Exercised

Forfeited

(90,000

)

2.36

(30,000

)

5.75

Outstanding at end of year

398,682

$

2.29

345,824

$

3.02

Range of exercise prices of options outstanding at December 31

$

0.92 - $5.00

$

2.25 - $5.00

Options exercisable at year end

398,682

342,491

Weighted average remaining life

3.0 years

2.4 years

Independent Auditors' Report

Notes to Consolidated Financial Statements

CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY

YEARS ENDED DECEMBER 31, 2001 AND 2000

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

Weighted average

2001

2000

exercise price

Issued as part of units in public offering

800,000

800,000

$

9.50

Granted to underwriter in public offering

160,000

160,000

8.95

Granted to underwriter in private offering

629,457

629,457

4.95

Granted to investor in former subsidiary(a)

150,000

150,000

5.00

Granted to investment relations company

50,000

100,000

7.00

Outstanding at year end

1,789,457

1,839,457

Warrants exercisable at year end

1,789,457

1,839,457

$

7.44

Weighted average remaining life

2.2 years

3.4 years

8.

Income taxes: