TELS CORP, 10-K, 1998-03-31

TELS CORP
10-K, 1998-03-31
COMPUTER INTEGRATED SYSTEMS DESIGN

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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 or

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File No. 0-12993
---------------------------

TELS Corporation
(Name of small business issuer in its charter)

UTAH 87-0373840
- ---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

705 East Main Street, American Fork, Utah 84003
- ----------------------------------------- -----
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (801)756-9606

Securities registered pursuant to Section 12 (b) of the Act:
"None"

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.02 par value

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

The issuer's revenues for its most recent fiscal year were $6,195,060.

The aggregate market value of the voting and non voting common equity held by
non-affiliates of the registrant as of February 28, 1998, was approximately
$1,290,494.

The issuer had issued and outstanding 3,891,819 shares of its common stock on
February 28, 1998.

DOCUMENTS INCORPORATED BY REFERENCE

Those sections of portions of the registrant's 1998 Proxy Statement for its
Annual Meeting of Shareholders to be held on June 1, 1998, are incorporated by
reference into Part III hereof.

<PAGE>

PART I
Item 1. Business

Introduction
- ------------

TELS Corporation, ("TELS", the "Company" or "Registrant"-NASDAQ:"TELS")
is a Utah Corporation, incorporated in February, 1981, with its principal
executive offices at 705 East Main Street, American Fork, Utah, 84003, telephone
number (801) 756-9606.

MICROMEGA CORPORATIONTM is a wholly-owned subsidiary of TELS
Corporation. MICROMEGA was formed in March, 1991, for the purpose of providing
research and development services for TELS and other companies. MedTech, Inc.,
dba INTERRO, a wholly-owned subsidiary of MICROMEGA, was formed in April, 1991,
for the purpose of providing further development of the INTERRO medical
electronics product.

D.J. GunTEL, Inc., was formed on May 21, 1993, as a wholly-owned
subsidiary of TELS for the purpose of operating the personal computer ("P.C.")
reseller division of the Company. This subsidiary was established as a result of
the acquisition of the assets of Computer Express in 1993 and also the
acquisition of the assets of Micro Station in 1994. Computer Express and Micro
Station operate as dba's under D.J. GunTEL, Inc. The Company operated this P.C.
reseller division through January, 1996, at which time the Company made the
decision to discontinue all P.C. reseller operations (by closing all of the
Computer Express operations and selling the assets of Micro Station on March 31,
1996).

Hash Tech, Inc. ("HTI"), a Utah corporation, was formed on March 31,
1994, as a wholly-owned subsidiary of TELS for the purpose of operating the
manufacturing and assembly division of TELS. This subsidiary was formed as a
result of the acquisition of the assets of Hash Tech, a California corporation,
on March 31, 1994, by TELS. HTI, operates as a full service turnkey or
consignment contract manufacturer of: printed circuit boards (through-hole and
surface mount); cable, harness, chassis wiring; and electro-mechanical
assemblies.

TEL electronics, inc. ("TEL"), was formed on September 26, 1994, as a
wholly owned subsidiary of TELS for the purpose of operating the
telecommunications business of TELS. TEL designs, builds, sells and services
microprocessor-based computer systems for telecommunications applications in
various industries, particularly the lodging industry. TEL's diversified line of
telephone call management products are also used in business, education and
government applications, where they cost-effectively bill and record telephone
system usage. TEL also supplies interactive voice response and processing
systems and telecommunications specialty products.

General
- -------

TELS products and services are divided into two different product and
service sectors: first, and the most typical products for the Company for the
last 17 years, the telecommunications products, are used to provide management,
accounting, and billing information to various business, education, and
government entities, but primarily to the lodging industry; and second, the
manufacturing and assembly operation, which provides comprehensive full service
turnkey or consignment contract manufacturing services. The Company's continuing
segment information is provided in Note 14 of the financial statements.

Products and Services
- ---------------------

The Company distributes its telecommunication products through dealers,
distributors, management companies, and national account chains throughout the
United States.

The INN-FORM/XL(R) product continues to account for a majority of the
Company's telecommunications sector sales, followed by the INN-SURETM, which
provides answer detection and verification for phone calls. The
telecommunication division accounted for 44% of consolidated sales for 1997. The
manufacturing and assembly operation accounted for approximately 56% of
consolidated sales for 1997.

<PAGE>

INN-FORM/XL(R), INN-FORM PLUS(R) . The INN-FORM/XL provides immediate
on-site billing data, permitting hotel/motel guests to make direct-dialed long
distance calls and eliminating costly operator-assisted calls. The INN-FORM
PLUS, a larger version of the INN-FORM/XL, includes many business features
similar to TEL-EXECUTIVE, below, and is ideal for larger hotels and motels with
gift shops, etc., or other business needs.

INN-FORM EXPRESSTM. This product, released in 1996, is an expanded
version of INN-FORM/XL and the INN-FORM PLUS, with new capabilities for custom
needs of users.

TEL-SENSE(R) and TEL-SENSE/K(R). These products track business phone
usage and record time spent and charges for telephone calls. These products
operate automatically, reducing clerical errors and accounting effort.
TEL-SENSE/K is for smaller key telephone systems.

TEL-EXECUTIVE(R). This product, a "big brother" to TEL-SENSE, is
targeted for larger businesses with higher calling traffic and/or more
sophisticated data analysis needs. Product advantages include small,
in-box-storage of 60,000 or more detailed call records; larger display for
tutorial aids to users; added reporting capabilities; soft function keys (usage
defined by the display); additional interface ports, including one Centronics
parallel port and three RS-232C serial ports; and a full QWERTY keyboard for
entering alphabetic and numeric data.

TEL-SENSE/PCSTM. This product is targeted for and used by personal
computer ("PC") owners. Product advantages include disk storage for millions of
calls; interfaces for spreadsheet and data base programs to customize
reports/analyses; toll fraud detection; cost control; and trunk planning.

WIN-SENSETM. This Windows(R)-based business call accounting PC software
system, distributed in 1997, has been designed to compete favorably with
competitive products in the telephone call accounting business applications
market. WIN-SENSE has graphical representations in full color, with intuitive
commands and processes.

INN-SURETM. This product provides answer detection-verification
information. In many cases, telephone bills generated by long-distance companies
(and typically by most companies, to include hotels and motels) have been
computed based upon an assumption as to whether a call was answered or not - and
not upon any exact method of knowing whether such calls actually are answered.
Thus, short answered calls go incorrectly "un-billed" - a loss of revenue -
while longer unanswered calls are incorrectly billed, causing complaints from
customers. The INN-SURE provides "answer detection" and "answer verification"
solving these problems by accounting for (and billing, in resale systems) all
answered calls regardless of duration and by ignoring unanswered calls. The
INN-SURE system increases revenues and reduces customer complaints, providing
excellent capabilities for any type of business.

INN-TELTM. This call accounting system is a PC software-only system
roughly similar to the INN-FORM/XL, adding telephone call accounting and billing
capabilities to standard PC's. The memory or call storage of an INN-TEL system
is dependent only on the size of the disk storage of the PC used, so the INN-TEL
can handle very large hotels for long periods of time.

INTERROTM. The INTERRO is a proprietary medical electronics product
that provides many capabilities similar to acupuncture, however, the INTERRO
procuct is implemented via non-invasive, unharmful electronic stimulation at
lower intensity than the stimulation from standard light bulbs. The INTERRO
product is currently being sold only to international markets as a research
tool. United States sales were halted several years ago due to FDA issues with
alternative medicine procedures or devices.

ISO 9002 Quality Services. TELS, through its subsidiary HTI, provides
electronics production services for companies needing high quality turnkey or
consignment contract manufacturing. HTI utilizes state-of-the-art equipment and
ISO 9002 certified quality control systems to provide services to companies
needing circuit board manufacturing, cable assembly, chassis wiring and
electro-mechanical assembly services. When coupled with the research and
development capabilities of MICROMEGA, TELS provides a complete service
opportunity, from research and development to final assembly, under the
management of one company. HTI had one customer which accounted for
approximately 26% of consolidated net sales for 1997.

<PAGE>

Management believes that the future success of any of its products will
require closer relationships between TELS and its major customers. TEL continues
to provide additional services and discounts to its volume telecommunications
dealers and these programs are expected to continue. Several activities, to
include special volume promotions, support and upgrade agreements, new
advertising methods, etc., are now in place and should help TEL to continue to
improve relationships with major dealers, in particular.

The Company continues with its travel program to improve sales,
attending various trade shows and visiting with major dealers from time to time.
In addition, key management personnel are involved in travel to coordinate the
activities of the various TELS companies.

Management believes computer technology will continue to evolve and be
a dominant element in the telecommunications industry. TELS recognizes major
telecommunications industry changes ahead as a result of changes in the "NANP"
(North American Numbering Plan) and "NADP" (North American Dialing Plan), which
went into effect in 1995. These changes in the numbering plan and method for
making telephone calls in the United States created strong demand for the
Company's telecommunications products in the first half of 1995 as customers
upgraded older systems. The Company expects its telecommunications products
and/or enhancements will need to be further developed to meet the changes
expected in 1998 and beyond.

Research and Development
- ------------------------

The Company spent approximately $184,000, and $172,000, including
certain capitalized expenses, on research and development activities in the
years ended December 31, 1997 and 1996, respectively. All research and
development expenses originated from MICROMEGA.

TELS formed and operates MICROMEGA CORPORATION as a wholly-owned
subsidiary to create an environment where engineering personnel are part of a
larger entity and also to solicit outside contracts with entities other than
TELS. The Company believes that this arrangement improves the efficiency and
quality in research and development. MICROMEGA carried out all research and
development for TEL in 1997.

Competition
- -----------

The telecommunications and computer industries are highly competitive.
The Company competes with a number of manufacturers and distributors of similar
telecommunications products, some of which have a longer operating history,
greater financial strength, manufacturing capabilities, and name recognition in
the marketplace. In addition, some large telecommunications companies and other
companies incorporate call accounting, answer detection, voice processing and/or
other capabilities into their own products, which they sell directly or
indirectly into the same marketplace addressed by the Company's products. There
can be no assurance that the Company will be able to compete successfully with
these companies in the future. Additionally, there are relatively few barriers
to entry into this marketplace. Because of the divestiture by AT&T and the
changing regulatory climate, AT&T and the regional BELL operating companies
("RBOCs") have begun competing with the Company and the Company's dealers and
distributors. The Company's ability to meet this competition will depend upon,
among other things, the Company's ability to expand sales capabilities; attract
management as well as technical and marketing personnel; develop enhancements to
existing products; develop and market new products; and obtain financing as
needed.

The Company competes with many printed circuit board and cable assembly
operations, many who have a longer operating history, greater financial
strength, and larger manufacturing capabilities. In addition, many companies
incorporate their own manufacturing capabilities internally within their own
operations. There can be no assurance that the Company will be able to compete
successfully with these companies in the future. However, in an effort to
modernize its operation, the Company spent considerable effort and resources in
obtaining and re-certifying its ISO 9002 certification. The ISO 9002 is a
quality standard adopted by the international business community to assure
consistent quality manufacturing standards throughout the world. Management
believes that the ISO 9002 certification for HTI should continue to enhance the
Company's ability to compete in a changing manufacturing environment.

<PAGE>

Year 2000
- ---------

The Company is in the process of identifying operating and application
software problems related to the "Year 2000" issue, both internally and
externally. The Company expects to resolve its internal Year 2000 compliance
issues substantially through replacement and upgrades of software and hardware.
The Company estimates it will spend approximately $20,000 to modify existing
systems. However, there can be no assurance that there will not be interruption
of operating or other limitations of system functionality or that the Company
will not incur substantial costs to avoid such limitations. Any failure to
effectively monitor, implement, or improve the Company's operational, financial,
management and technical support systems could have a material adverse effect on
the Company's business and consolidated results of operations.

Changing Marketplace
- --------------------

As a result of governmental actions, AT&T has been divided into a
number of independent public companies, each with a separate and distinct
charter. Each of these independent companies has a major impact on the
telecommunications industry. AT&T and the RBOCs are aggressively pursuing their
independent activities, while evolving technologies are creating many new
opportunities for cable T.V. and utilities companies in the telecommunications
marketplace. As a result of changes in the telecommunications industry, there
can be no assurance that the Company's products will continue to find a
receptive marketplace. These changes have adversely affected many dealers,
distributors, and manufacturers in the telecommunications industry. Since major
competitive forces in the telecommunications industry exist and since new
technologies may tend to favor larger and better-financed companies with their
often entrenched distribution networks, there can be no assurance that a dealer
and distributor network will continue to exist in its previous form or, if such
exists, that the network will consist of enough dealers and distributors
committed to TELS' products sufficient to generate a profitable level of sales
for TELS.

The manufacturing and assembly marketplace is ever changing to meet the
demands of newer and more sophisticated products. The Company will need to
continue to purchase more sophisticated equipment and will also need to continue
its development of quality manufacturing standards in order to meet the needs of
its customers in a rapidly changing technology and product-driven marketplace.

Competitive Strategy
- --------------------

Management believes the Company's products compete on the basis of (i):
product quality, meaning features, technology, reliability, simplicity of use,
price, and size and (ii): service quality, meaning responsive customer support
and company personnel dedicated to profitably satisfying every customer. From
the outset, the Company's telecommunications products have been designed for
small and medium-sized hotels, professional firms and general business
establishments. TELS' telecommunications products are based on state-of-the-art
technologies and designs, yet are relatively simple in function, with the result
that they may be priced lower than competitors' equipment without sacrificing
profit margin. Management believes that the wholesale prices of its
telecommunications products are competitive relative to their features, thereby
allowing end-user to be lower than or close to that of its competitors. The
Company has seen a general reduction in the retail prices of certain of its
competitors' telecommunications products, and thus the Company cannot predict at
present whether it will continue to enjoy its current pricing advantage.
Moreover, there can be no assurance that the price of the Company's
telecommunications products will not increase.

TELS' telephone call accounting products are designed to include
advanced features, to occupy a minimum amount of space, to be very easy to use,
and to sell at competitive prices. The small physical product size (smaller than
an average size telephone) provides a competitive advantage over the larger and
more bulky equipment marketed by many competitors.

<PAGE>

Proprietary Rights
- ------------------

TELS does not currently hold, nor has it applied for, any patents.
Management does not believe that the Company's business is dependent upon the
acquisition of patents. TELS always seeks special copyright protection for its
names, software and developmental products. The Company designs its own printed
circuit boards and software for use in its telecommunications products. TELS'
proprietary telecommunications software is either imbedded in machine code in
microprocessors or is available on protected, but standard PC floppy discs.
Management believes that the circuit boards and the software would be difficult
to "reverse engineer". The Company continues to take steps to protect its trade
names and trademarks and the products and software developed through licensing,
or other approaches designed to contractually protect TELS' proprietary
information. There can be no assurance that competitors may not independently
develop the same or similar technology or obtain access to the Company's
proprietary technology. TELS has no proprietary rights to the products
previously marketed in its computer sector businesses.

Employees
- ---------

As of December 31, 1997, the Company had 71 full-time employees.

Manufacturing and Supply
- ------------------------

TELS' telecommunications products are assembled from components
manufactured by unaffiliated suppliers and designed for modular assembly. This
approach permits efficient use of the Company's production staff in the assembly
and testing of these purchased items and the end products. The Company has
designed its own printed circuit boards for its telecommunications business,
which are manufactured to TELS' specifications by subcontractors.
Telecommunications products are generally designed to permit multiple source
procurement, and it is TELS' policy to develop multiple sources of supply for
components it uses. There have been occasional shortages of the electronic
components included in TELS' telecommunications products, and during such
periods, suppliers have rationed the available components among their customers.
TELS may experience manufacturing delays, sales delays, additional costs, or
contract cancellations if certain of its suppliers should fail to deliver
sufficient computer products. To date, management believes that TELS has not
been materially adversely affected by any failure of suppliers to deliver
systems or components on schedule.

Customer Service
- ----------------

The Company's telecommunications products are serviced by its dealers,
with assistance as required from TEL employees. It has been TELS' experience
that its products have not required a significant amount of customer service
support because of their design, simplicity and reliability.

Each of the Company's call accounting products now carries a two year
limited warranty covering the material and workmanship of the entire system,
including the material and workmanship of the systems' printed circuit boards
and electronic components. Other company telecommunications products carry a one
year warranty. Products purchased for resale, such as printers, computers, etc.,
carry the original manufacturer's warranty only.

Federal and State Regulations
- -----------------------------

The FCC has adopted regulations with respect to the interconnection of
communications equipment with telephone lines and regulations with respect to
radiation emanations of certain equipment. TELS has complied with these
regulations and received all necessary FCC approvals for its telecommunications
products, or has submitted products for testing and certification for
compliance, and is submitting all new products for such testing as they are
completed. TELS anticipates that the new products will be approved, but there
can be no assurance that such approvals will be obtained. Products purchased for
resale, such as printers, computers, etc., include original manufacturer's
certifications of compliance with FCC regulations.

Rulings by the FCC adopted in 1976 and 1980 permit users of the public
switched network services, i.e., hotels, network managers, equipment
manufactures, and other potential resellers, to earn revenues through resale on
telephone calls. These rulings have enabled hotel and other users of the public
switch network services to convert their telephone operations centers from a
service or a convenience to a potential profit center.

<PAGE>

Item 2. Properties

The Company currently owns and occupies a facility with approximately
15,000 square feet of space in American Fork, Utah, which was purchased on
August 15, 1984, and includes a 4,800 square foot addition plus renovation
completed in 1988. This facility houses the Company's telecommunication,
administrative and research and development offices. The Company leases a 15,000
square foot space in a building located in Santa Clara, California which houses
the HTI manufacturing operation. Management believes that these facilities are
adequate for operations and production needs at current production levels.

Item 3. Legal Proceedings

Diane Neuenswander and Harold Neuenswander vs. TEL electronics, inc.,
Hash Tech Inc., R. James Taylor, John L. Gunter, and Stephen M. Nelson, et.al.
(Superior court of the State of California, County of Santa Clara, Case No.
CV755710, filed February 5, 1996). In the Complaint, the Plaintiffs have alleged
causes of action for the following: (1) rescission, (2) civil conspiracy, (3)
fraud, (4) violation of California securities laws, (5) intentional interference
with economic advantage, (6) common law gender discrimination, (7) intentional
infliction of emotional distress, and (8) breach of fiduciary duty. The essence
of each of Plaintiffs' claims is that the Company induced Plaintiffs to sell
their interest in a business referred to as "HTI" by allegedly making false
statements relating to employment security, stock options, and bonuses.
Plaintiffs claim that they have not received the employment security, stock
options, and bonuses because their employment has been terminated.
Plaintiffs seek general damages, special damages and punitive damages
in an unspecified amount. In addition, Plaintiffs seek entry of an order
rescinding the Asset Purchase Agreement entered into between TEL electronics,
inc. and Hash Tech, Inc. on March 16, 1994 and the Employment Agreements entered
into by Hash Tech, Inc. and the Neuenswanders on March 31, 1994. Plaintiffs also
seek recovery of their attorney's fees and costs.
The company denies the allegations of the Complaint and intends to
vigorously defend the matter. On October 7, 1997, the company filed a
cross-complaint in the Superior Court for the County of Santa Clara, against the
Plaintiffs for breach of non-compete agreements, breach of severance agreements,
and intentional and negligent misrepresentations. In the cross-complaint, the
Company requests compensatory and punitive damages and other appropriate relief
of an unspecified amount. On December 10, 1997, the Plaintiffs filed their
answer to the cross-complaint denying generally and specifically each and every
allegation in the cross-complaint and asserted various affirmation defenses. The
parties mediation to resolve this matter was unsuccessful.
In view of the uncertainties inherent in litigation, the Company is
unable to express any judgements as to the outcome of this matter.

NASDAQ Market Listing
- ---------------------

NASDAQ, on August 22nd, 1997, with SEC approvals, announced new listing
requirements for maintaining NASDAQ Small Cap stock listings. To maintain a
NASDAQ Small Cap listing of a company's stock, effective February 23rd, 1998, a
company must, at a minimum: be registered under Section 12(g) of the Securities
and Exchange Act of 1934 or equivalent; have Net Tangible Assets of $2 million,
or Market Capitalization of $35 million, or Net Income in the latest fiscal year
of $500,000; have 500,000 shares of stock in the Public Float; have a market
value of $1 million for the Public Float shares; have a minimum Bid Price of
$1.00; have 2 Market Makers; have 300 shareholders; and comply with Corporate
Governance requirements. The Company complies with all new NASDAQ requirements
except the minimum Bid Price of Company Stock. On March 2nd, 1998, the Company
was notified by NASDAQ that it was not in compliance with the minimum Bid Price
requirement. As a result, the Company was provided 90 calendar days, which
expires May 28, 1998, to regain compliance with this standard. The Company may
regain compliance if its securities trade at or above the minimum requirement
for at least 10 consecutive trade days. If the securities do not regain
compliance within 90 days, NASDAQ will issue a delisting letter which will
identify the review procedures available to the Company. The Company may request
a review at that time, which will generally stay delisting. The Company cannot
provide any assurance that it will meet the bid price by this deadline. If the
Company ceases to be listed on the NASDAQ Small Cap Market, it may continue to
be listed on the OTC Bulletin Board.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.

<PAGE>

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Price Range of Common Stock

The Company's Common Stock trades on The NASDAQ SmallCap Market tier of
The NASDAQ Stock Market under the symbol "TELS". The following table sets forth
the range of high and low sales prices per share of the Company's Common Stock
for the calendar quarters indicated, as reported by NASDAQ. Quotations represent
actual transactions in NASDAQ's quotation system but do not include retail
markup, markdown, or commission.

1997 High Low 1996 High Low
---- ---- --- ---- ---- ---

First Quarter $ .75 $ .50 First Quarter $ 1.32 $ .59
Second Quarter .56 .25 Second Quarter 1.28 .50
Third Quarter .38 .22 Third Quarter .97 .56
Fourth Quarter .44 .25 Fourth Quarter .69 .41

Approximate Number of Equity Security Holders:

As of February 28, 1998 there were 1,210 shareholders of record of the
Companies Common Stock. Included in the number of shareholders of record are
shares held in "nominee" or "street" names. Because many of such shares are held
by brokers and other institutions on behalf of shareholders, the Company is
unable to estimate the total number of shareholders reported by these record
holders.

Dividends:

The Company has not paid dividends to date and intends to retain its
future earnings to finance the development and growth of its business. Under a
loan agreement dated July 11, 1997, the Company is required to obtain permission
from the lender for the payment of any cash dividends. The Company intends for
the foreseeable future to continue the policy of retaining its earnings to
finance the development and growth of its business.

(THIS SPACE INTENTIONALLY LEFT BLANK)

<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operations

The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto, all included
elsewhere herein.

Results of Operations
- ----------------------

Consolidated net sales for 1997 decreased 8% to $6,195,060, a decrease
of $533,756 when compared to consolidated net sales of $6,728,816 for 1996. The
decrease in sales is due primarily to decreased sales activity in the
manufacturing division where sales decreased by $898,283. The Company
anticipates that sales levels in the manufacturing sector will remain constant,
throughout the first half of 1998, as a result of increased competition from
smaller competitors and from lower demands from customers outsourcing their
manufacturing operations. However, the manufacturing division implemented the
"O.S.C.R.", On Site Customer Rework, program in the first quarter of 1998. This
service includes; on site rework or limited assembly for all R&D, prototype, and
manufacturing departments at the customer's facility; reserved work area at
HTI's facility for jobs requiring additional resources; and on-call pager,
weekend, and after hours service. Initial response has been very positive from
those customers who have taken advantage of this new program.
The decrease in sales in the manufacturing division was partially
offset by an increase in sales of the Company's call accounting products. In
1997, sales of telecommunications products increased 16% or $370,833 to
$2,697,473 compared to $2,326,640 for 1996. This increase in sales in the
telecommunications product sector is attributable to increased sales from the
Company's dealer distribution channel, increased sales through national
accounts, and through the new WIN-SENSE product. The Company anticipates that
sales to national accounts and dealers will continue to increase and account for
the majority of sales in the telecommunications division in 1998.
Consolidated gross profit increased 14% or $406,882 in 1997, when
compared to 1996. The gross profit of $3,293,232 for 1997, represented 53% of
sales. In 1996, gross profit of $2,886,350 represented 43% of sales. The
increase in gross profit as a percentage of sales is due to the change in the
sales mix from 1996 to 1997 and reductions in manufacturing costs, primarily
labor costs, in the contract manufacturing business. In 1997, sales in the
telecommunications sector accounted for 44% of total sales, compared to 35% of
total sales for 1996. Because the telecommunication products have a higher gross
profit margin than products in the manufacturing sector, the Company believes
that its consolidated gross profit margin will be higher when sales from the
telecommunication products increase over those in the manufacturing sector. Even
though net sales in the manufacturing sector decreased by $898,283, the gross
profit in the manufacturing sector increased by 12% or $138,094. The gross
profit for the manufacturing sector of $1,287,814 for 1997, represented 37% of
sales, whereas, in 1996, gross profit of $1,149,720 represented 26% of sales. In
1998, the Company anticipates that the gross profit percentage will be
consistent with 1997 results.
Consolidated research and development expenditures consisted of several
components in 1997. The consolidated expense of $140,448 for 1997 consists of
$67,817 for current expenses and $72,631 for amortization of projects which were
capitalized in prior years. In addition to these costs currently being expensed,
the Company also spent $115,705 in 1997 and $73,031 in 1996, which have been
capitalized as software development costs. The Company is continuing its efforts
in research and development on products which will primarily be introduced into
the telecommunications marketplace. As it looks for opportunities to improve
existing products and identify areas for new products, the Company may need to
increase research and development activity in the near future.
Consolidated selling, general and administrative expenses decreased 4%
to $2,970,693 for 1997, when compared to $3,097,796 for 1996. This decrease in
1997 is attributable to management's continued efforts to control costs and
reduce expenses. Management anticipates that it will continue to reduce expenses
in 1998 in certain operations of the Company as it continues to focus its
efforts toward increased profitability. As a percentage of consolidated net
sales, selling, general and administrative expenses were 48% in 1997, compared
to 46% in 1996.
For 1997, the Company reported income from continuing operations of
$96,656 or $.02 per share, compared to a loss from continuing operations of
$348,695 for 1996, or $(.09) per share. This significant increase in earnings of
$445,351 is a result of increased sales related to telecommunications products,
where the gross profit contribution is significantly higher than other sectors
of the Company as well as an increase in the gross margin in the manufacturing
sector. As of December 31, 1997, the Company has a net deferred tax asset (net
of valuation allowance of $109,400) of $840,886 which is primarily the result of
net operating loss carry forwards. The Company believes that it is more likely
than not that through the generation of taxable income, it will be able to
realize the benefit of the net deferred tax asset in the future.

<PAGE>

Liquidity and Capital Resources
- -------------------------------

At December 31, 1997, the Company reported current assets of $2,024,186
and current liabilities of $1,472,096, resulting in working capital of $552,090.
This is an increase in working capital of $44,423 when compared to working
capital of $507,667 at the end of 1996. This increase in working capital is due
to reductions in accounts payable of $106,789 and reductions in accrued expenses
of $158,703. These reductions to increase working capital were offset by
increases in the current portion of long-term debt of $199,767. Net cash
provided by operating activities was also used to purchase equipment of $70,028
and for capitalized software development costs of $159,675.

The Company increased its borrowing on a line of credit by $65,679 in
1997 and reduced its long-term debt by $81,967 from $403,083 at the end of 1996.
The Company refinanced its line of credit by entering into a new inventory and
accounts receivable financing agreement with a lender on July 1, 1997. This
agreement is for twenty-four months, with interest at prime plus 3%. The Company
is continuing its efforts to find additional financing through investment equity
which may be needed to fund operations, future acquisitions and final
development and marketing of new products under consideration. The Company has
evaluated its existing system for compliance with the year 2000 and has
determined that an upgrade to their existing accounting system will be required.
This upgrade was purchased in 1997 for the telecommunications sector. The
telecommunications industry is experiencing drastic changes which could limit
the Company's ability to meet sales projections in this industry and there can
be no assurance that the Company will be able to generate a profitable level of
sales.

Effects of Inflation
- --------------------

The Company 's operations have not been significantly affected by
inflation during the periods covered in this report.

Outlook: Issues and Uncertainties
- ----------------------------------

The Management Discussion and Analysis contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, among others: (i) results of
operations (including expected changes in the Company's gross profit margin and
general, administrative and selling expenses); (ii) the Company's business
strategy for increasing sales; (iii) the Company's strategy to increase its size
and customer base; (iv) the Company's ability to successfully increase its size
through acquisition/merger activity; and (v) the Company's ability to
distinguish itself from its current and future competitors.

These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) delays in the release of new products or new versions of existing
products; (ii) the shortage of reliable market data regarding the telephone call
management and contract manufacturing industries market; (iii) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (iv)
anticipated working capital or other cash requirements; (v) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the market; and (vi) various competitive factors that
may prevent the Company from competing successfully in the marketplace. In light
of these risks and uncertainties, there can be no assurance that the events
contemplated by the forward-looking statements contained herein will in fact
occur.

In January, 1998, TELS signed a non binding letter of intent to
purchase K. S. Telecom, Inc., dba Key Systems U. S. Key Systems has offered
competitively priced, fully featured, proprietary telephone and voice mail
systems for small to medium-sized businesses for 10 years under the Atlas and
Salta brands. Key Systems also offers "InnFONE", a telephone system especially
designed for lodging properties with up to 400 rooms, with a PC front desk
system and an integrated voice mail system. Key Systems provides OEM telephone
systems products to Cortelco (formerly ITT Telecom) under the Odyssey brand. The
acquisition is being carried out with the assistance of Travis Capital,
financial advisor to TELS. However, in view of uncertainties inherent with these
types of non binding agreements, the Company is unable to express an opinion as
to the ultimate outcome of this matter.

<PAGE>

The Company's business and products may be significantly influenced by
the constantly changing body of regulatory laws and regulations, which require
that certain regulatory standards be met and impose liability for the failure to
comply with such standards. While the Company endeavors at each of its
facilities to assure compliance with regulatory laws and regulations, there can
be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in civil or
criminal enforcement actions or private actions that could have a materially
adverse effect on the Company.
The Company's future operating results depend in part upon its ability
to retain and attract qualified engineering, manufacturing, technical, sales,
and support personnel for its operations. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect the Company's business and results of
operations.
The Company's success will depend in significant part upon the
continued contributions of its officers and key personnel, many of whom would be
difficult to replace. The loss of any key person could have a material adverse
effect on the business, financial condition, and results of operations of the
Company.

Impact of Recently Issued Accounting Standards
- ----------------------------------------------

In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, which prescribes standards for reporting comprehensive
income and its components. Comprehensive income consists of net income or loss
for the current period and other comprehensive income (income, expenses, gains
and losses that currently bypass the income statement and are reported directly
in a separate component of equity). SFAS 130 requires that components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 is effective for
financial statements issued for periods beginning after December 15, 1997. The
new standard is a disclosure change only and will have no effect on the
Company's financial condition or results of operations.
Also in June 1997, the FASB issued Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. SFAS 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented. The new standard
is a disclosure change only and will have no effect on the Company's financial
condition or results of operations.
In addition, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position No. 98-1 (SOP 98-1), Accounting for the Cost of
Computer Software Development or Obtained for Internal Use. The SOP was issued
to address diversity in practice regarding whether and under what conditions the
costs of internal-use software should be capitalized. SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The Company is
currently evaluating the impact SOP 98-1 will have on its financial statements,
if any.
The Company has reviewed all other recently issued, but not yet
adopted, accounting standards in order to determine their effects, if any, on
the results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.

<PAGE>

Item 7. Financial Statements and Supplementary Data.

The following constitutes a list of Financial Statements and related
notes as required in Part II of this report.

Report of Independent Accountants.
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996.
Consolidated Statements of Changes in Stockholder's Equity for
the years ended December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996.
Consolidated Notes to Financial Statements for the years ended
December 31, 1997 and 1996.

Item 8. Disagreements on Accounting and Financial Disclosures.

None.

<PAGE>

Report of Independent Accountants

To the Shareholders and Board of Directors of TELS Corporation and Subsidiaries:

We have audited the consolidated financial statements of TELS Corporation
and Subsidiaries as listed in Item 13(a) of the Form 10-K SB. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 audits 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TELS Corporation
and Subsidiaries as of December 31, 1997, and the consolidated results of their
operations and their cash flows for the two years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Salt Lake City, Utah
March 25, 1998

<PAGE>

TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997

ASSETS 1997

Current assets:
Cash and cash equivalents .................................. $ 13,845
Cash investments ........................................... 67,364
Trade accounts receivable, less allowance for doubtful
accounts of $119,381 .................................... 719,260
Employee and other receivables ............................. 117,438
Inventories, net ........................................... 795,955
Prepaid expenses ........................................... 171,168
Deferred income taxes ...................................... 139,156
-----------
Total current assets .............................. 2,024,186

Property and equipment, net .................................... 758,149
Software development costs, net ................................ 189,216
Intangible assets, net ......................................... 119,017
Deferred income taxes .......................................... 701,730
Other assets ................................................... 167,938
-----------
$ 3,960,236

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ..................................... $ 294,644
Accrued expenses ........................................... 149,530
Accrued vacation ........................................... 94,562
Current portion of long-term debt .......................... 824,043
Deposits and advances ...................................... 109,317
-----------
Total current liabilities ......................... 1,472,096
-----------
Long-term debt, less current portion ........................... 19,683
-----------
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
Common stock, $.02 par value,
Authorized 10,000,000 shares; issued and
outstanding 3,891,819 shares ............................ 77,835
Additional paid-in capital ................................. 4,226,532
Accumulated deficit ........................................ (1,825,735)
Deferred compensation ...................................... (10,175)
-----------
Stockholders' equity .............................. 2,468,457
-----------
$ 3,960,236
===========

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

TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997 and 1996

1997 1996
---- ----
<S> <C> <C> <C> <C> <C> <C>

Net sales ......................................................... $ 6,195,060 $ 6,728,816
Cost of goods sold ................................................ 2,901,828 3,842,466
----------- -----------
Gross profit ...................................................... 3,293,232 2,886,350

Research and development expenses ................................. 140,448 98,906
Selling, general and administrative expenses ...................... 2,970,693 3,097,796
----------- -----------
Operating income (loss) ......................................... 182,091 (310,352)
Other income (expense):
Interest income ................................................. 17,934 10,765
Interest expense ................................................ (122,060) (104,297)
Other, net ...................................................... 50,895 25,810
----------- -----------
(53,231) (67,722)
Income (loss) from continuing operations before ----------- -----------
income tax benefit (provision) .................................. 128,860 (378,074)
Income tax benefit (provision) .................................... (32,204) 29,379
----------- -----------
Income (loss) from continuing operations .......................... 96,656 (348,695)
Discontinued operations:
Loss from discontinued operations (less applicable
income tax benefit of $44,148) ................................ -- (78,486)
----------- -----------
Net income (loss) ............................................. $ 96,656 $ (427,181)
=========== ===========
Net income (loss) per common and common equivalent share:
Basic earnings (loss) per share from continuing operations (Note 12) $ .02 $ (.09)
Loss per share from discontinued operations (Note 12) ........... -- (.02)
----------- -----------
Net income (loss) ................................................. $ .02 $ (.11)
=========== ===========

Diluted earnings (loss) per share (Note 12) ....................... $ .02 $ (.11)
=========== ===========

Basic and diluted weighted average number of shares outstanding ... 3,891,819 3,888,564
=========== ===========
</TABLE>

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

TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY for the years ended December 31, 1997
and 1996

Additional
Common paid-in Accumulated Deferred Stockholders'
stock capital deficit compensation equity
----- ------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>

Balances at December 31, 1995 ......... $ 77,825 $ 4,231,567 $(1,495,210) $ (111,175) $ 2,703,007

Net loss .............................. -- (427,181) -- (427,181)
Amortization of deferred
compensation ........................ -- -- -- 60,500 60,500
Grant of 2,500 shares for stock bonuses 50 2,225 -- -- 2,275
Issuance of 6,000 shares upon
exercise of options ................ 120 2,580 -- -- 2,700
Cancellation of 8,000 shares ......... (160) (9,840) -- -- (10,000)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 ......... 77,835 4,226,532 (1,922,391) (50,675) 2,331,301

Net income ............................ -- -- 96,656 -- 96,656
Amortization of deferred
compensation ........................ -- -- -- 40,500 40,500
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 ......... $ 77,835 $ 4,226,532 $(1,825,735) $ (10,175) $ 2,468,457
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements

TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1997 and 1996

1997 1996
---- ----

Cash flows from operating activities:
Net income (loss) .......................................... $ 96,656 $(427,181)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................... 396,311 392,012
Deferred income taxes ................................. 12,191 35,479
Stock bonuses and amortization of deferred compensation 40,500 62,775
Cancellation of stock ................................. -- (10,000)
Loss on disposal of equipment ......................... -- (4,328)
Changes in operating assets and liabilities:
Receivables ......................................... 17,766 313,044
Inventories ......................................... (45,528) 349,617
Prepaid expenses .................................... (22,164) (76,181)
Trade accounts payable and accrued expenses ......... (263,647) (11,906)
Other assets and liabilities ........................ (6,264) (29,312)
Noncash charges and working capital changes
of discontinued operations .......................... -- 329,177
--------- ---------
Net cash provided by operating activities .... 225,821 923,196
--------- ---------

Cash flows from investing activities:
Net purchase of investments ................................ (4,965) (5,782)
Capital expenditures ....................................... (70,028) (74,936)
Proceeds from disposal of equipment ........................ 7,000 1,900
Software development costs ................................. (159,675) (73,031)
--------- ---------
Net cash used in investing activities ........ (227,668) (151,849)
--------- ---------

Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreement . 65,679 (624,057)
Principal payments on long-term debt ....................... (81,967) (146,085)
Proceeds from issuance of common stock ..................... -- 2,700
--------- ---------

Net cash used in financing activities ........ (16,288) (767,442)
--------- ---------
</TABLE>

- Continued -
The accompanying notes are an integral part
of these consolidated financial statements

<PAGE>

TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
for the years ended December 31, 1997 and 1996

1997 1996
---- ----

Net increase (decrease) in cash and cash equivalents $ (18,135) $ 3,905

Cash and cash equivalents at beginning of year ..... 31,980 28,075

Cash and cash equivalents at end of year ........... $ 13,845 $ 31,980
========= =========

Supplemental disclosure of cash flow information:
Cash paid during the year for interest .......... $ 122,060 $ 128,408
Cash paid during the year for income taxes ...... $ 4,000 $ 618

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

<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

Business Information
--------------------

TELS Corporation and subsidiaries (the Company) designs, manufactures
and sells telecommunications/call accounting products to hotels, motels
and small businesses throughout the United States. They also provide
contract production and assembly services for computer and electronics
companies located mainly in California.

On January 31, 1996, the Company's Board of Directors approved a plan
to discontinue the Company's computer retail business which is located
in Texas (see Note 15, "Discontinued Operations").

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of TELS
Corporation and its 100% owned subsidiaries, DJ GunTEL, Hash Tech,
Medtech, Micromega, and Tel electronics. All significant intercompany
balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents
-------------------------

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

Cash Investments
----------------

Cash investments consist of certificates of deposit, stated at cost,
which approximates market value.

Inventories
-----------

Raw materials are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Work-in-process and
finished goods are stated at the accumulated manufacturing cost, but
not in excess of market.

Property and Equipment
----------------------

Property and equipment are stated at cost. Equipment under capital
leases is stated at the lower of cost or the present value of minimum
lease payments at the inception of the lease.

Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets
ranging from fifteen to forty years for building and improvements and
five to ten years for furniture and equipment. Equipment held under
capital leases is amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.

Continued

<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, Continued:

Software Development Costs
--------------------------

The Company capitalizes certain costs associated with development of
software that will be sold as part of its principal products.
Amortization of these costs is calculated using the straight-line
method over 24 months or the ratio of current year gross revenue to
total current and anticipated gross revenues, whichever results in the
greater annual amortization.

The realizability of software development costs is evaluated
periodically as events or circumstances indicate a possible inability
to recover the carrying amount. Such evaluation is based on various
analyses, including cash flow and profitability projections.

Intangible Assets
-----------------

The Company amortizes goodwill and other intangible assets related to
acquired businesses using the straight-line method over a period of 5
to 7 years. The realizability of intangible assets is evaluated
periodically as events or circumstances indicate a possible inability
to recover the carrying amount. Such evaluation is based on various
analyses, including cash flow and profitability projections.

Revenue Recognition
-------------------

Revenues are derived primarily from sales of Tel electronics accounting
products and custom assembly services of elctro-mechanical, cable and
printed circuit boards. Revenues are recorded at the time of shipment
of products or performance of services. Revenues from service contracts
are recognized in earnings over the terms of the contract.

Income Taxes
------------

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
(SFAS No. 109). Deferred income taxes are provided for the differences
between the financial statement and tax bases of assets and liabilities
using applicable future tax rates.

Net Income (Loss) Per Share
---------------------------

In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128., Earnings Per Share ("SFAS 128"), which
superseded APB Opinion No. 15. Earnings per share for all periods
presented has been restated to reflect the adoption of SFAS 128. SFAS
128 requires companies to present basic earnings per share, and if
applicable, diluted earnings per share, instead of primary and fully
diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if options to issue common stock
were exercised into common stock.

Continued

<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, Continued:

Estimates
---------

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

Concentrations of Credit Risk
-----------------------------

Approximately 18% of the Company's trade accounts receivable are due
from one customer in the computer production and assembly industry. The
Company does not anticipate the termination of this relationship.

New Accounting Pronouncements
-----------------------------

Also in June 1997, the FASB issued Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
requires publicly-held companies to report financial and descriptive
information about its operating segments in financial statements issued
to shareholders for interim and annual periods. The statement also
requires additional disclosures with respect to products and services,
geographical areas of operations, and major customers. SFAS 130 and
SFAS 131, which are effective for fiscal years beginning after December
15, 1997, expand or modify disclosures and will have no impact on the
Company's consolidated financial position, results of operations or
cash flows.

In addition, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position No. 98-1 (SOP 98-1), Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use. The
SOP was issued to address diversity in practice regarding whether and
under what conditions the costs of internal-use software should be
capitalized. SOP 98-1 is effective for financial statements for years
beginning after December 15, 1998. The Company has not determined the
effect which SOP 98-1 will have on its consolidated financial position
or results of operations.

Continued

<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Inventories:

Inventories at December 31, 1997 consisted of the following:

Finished goods $ 49,362
Work-in-process 143,679
Raw materials and supplies 653,875
Reserve for obsolete inventory (50,961)
-------

$ 795,955
==========

3. Property and Equipment:

Property and equipment at December 31, 1997 consisted of the following:

Land $ 35,380
Building and improvements 478,371
Furniture and equipment 1,619,184
Equipment under capital lease 195,835
------------
2,328,770
Less accumulated depreciation and
amortization (1,570,621)
------------
$ 758,149
=============

Depreciation expense totaled $199,584 and $242,228 for the years
ended December 31, 1997 and 1996, respectively.

4. Software Development Costs:

Capitalized software development costs at December 31, 1997 consisted
of the following:

Software development costs $ 401,186
Less accumulated amortization (213,970)
--------
$ 189,216
=========

Amortization expense totaled $116,601 and $66,969 for the years ended
December 31, 1997 and 1996, respectively.

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

5. Intangible Assets:

Intangible assets at December 31, 1997 consisted of the following:

Non-compete agreements $ 308,000
Goodwill 56,041
Organizational costs 41,398
Other 11,511
Less accumulated amortization (297,933)
--------
$ 119,017
==========

Amortization expense totaled $80,126 and $82,815 for the years ended
December 31, 1997 and 1996 respectively.

6. Long-term Debt:

Long-term debt at December 31, 1997, the carrying value of which
approximates fair value, consisted of the following:

Revolving line of credit payable to a financial
institution, bearing interest at the institution's
index rate plus 3.0% (11.5% at December 31, 1997),
interest due monthly, principal due 1998,
collateralized by trade accounts receivable
and inventories. The unused line of credit
at December 31, 1997 was $227,389. $ 522,611

Mortgage note payable to a bank in monthly
installments of $3,063, including interest
at the bank's index rate plus 1.5%
(10% at December 31, 1997), final payment
of $184,898 due May 1998; collater-
alized by real property. $ 192,937

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6. Long-term Debt, Continued:

Note payable under non compete agreement,
payable in quarterly principal installments
of $1,000, through April 1997.
Payments suspended by Company until resolution
of contract terms. $ 7,000

Note payable under non compete agreement
payable in (a) monthly installments of $2,000,
final payment due March 1995 and (b) quarterly
installments of $15,000, final payment due
July 1997. Payments suspended by Company until
resolution of contract terms. (Note 13) 75,000

Capital leases for equipment (Note 7) 46,178
----------

Total long-term debt 843,726

Less current portion (824,043)
----------
Long-term debt, less current portion $ 19,683
=========

The Company's revolving line of credit contains various covenants and
restrictions that specify the Company maintain certain reporting
requirements and minimum financial amounts with regard to cash flow and
renews in July 1999.

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

7. Leases:

The Company is obligated under capital leases for machinery and
equipment that expire between September 1998 and February 2000. At
December 31, 1997, the gross amount of machinery, equipment and related
accumulated amortization recorded under capital leases were as follows:

Equipment under capital lease $ 195,835
Less accumulated amortization (157,521)
--------
$ 38,314
==========

The Company leases office space and equipment under noncancelable
operating lease agreements. Rent expense was $92,308 and $181,397 for
the years ended December 31, 1997 and 1996, respectively. Future
minimum rental payments required under capital leases and operating
leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1997 are as follows:

Capital Operating
leases leases
------ ------
Year ending December 31:
1998 $ 30,611 $116,544
1999 18,662 70,723
2000 2,711 -
--------- --------

Total minimum lease payments 51,984 $187,267
=======

Less amount representing interest
at rates ranging from 5.5% to 20%) ( 5,806)
----------

Present value of net minimum
capital lease payments 46,178

Less current installments of
obligations under capital leases (26,495)
----------
Obligations under capital leases,
excluding current installments $ 19,683
========

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Income Taxes:

Income tax benefit (expense) attributable to income from continuing
operations consists of:

1997 1996
---- ----
Current:
Federal $ - $ -
State (20,013) (6,100)
------- ------
(20,013) (6,100)
------- ------
Deferred:
Federal (7,945) 32,879
State (4,246) 2,600
------ -----
(12,191) 35,479
------- ------
Total $(32,204) $ 29,379
======== =========

The income tax benefit (expense) attributable to income from continuing
operations differs from the expected tax benefit (expense) computed by
applying the U.S. federal corporate income tax rate of 34 percent to
earnings (loss) before income taxes as follows:

1997 1996
---- ----

Computed expected tax benefit (expense) $ (43,812) $ 128,545
Increase (decrease) in income
taxes resulting from:
Change in valuation allowance 19,500 -
Effect of expiring tax credits (18,994) -
Officers' life insurance (645) (1,646)
State income taxes, net of
federal income tax benefit 1,054 (24,197)
Prior year taxes - (53,944)
Other, net 10,693 (19,379)
--------- ---------

Total income tax benefit (expense) $ (32,204) $ 29,379
========== =========

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Income Taxes, Continued:

The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1997 are presented below:

Deferred tax assets:
Deferred revenue $ 36,800
Accounts receivable 44,500
Inventories 19,000
Accrued liabilities 38,800
Intangible assets 64,500
General business tax credits 105,700
AMT tax credit 4,000
Jobs credit 3,700
Net operating loss carry forward 702,886
----------
Deferred tax assets 1,019,886
Less valuation allowance (109,400)
---------
Total deferred tax assets 910,486

Deferred tax liability:
Property and equipment (69,600)
----------
Net deferred tax asset $ 840,886
==========

The net deferred tax asset as of December 31, 1997 is reflected in the
consolidated balance sheet as follows:

Current deferred tax asset $139,156
Long-term deferred tax asset 701,730
----------
$840,886
==========
Based on the level of current taxable income and projections for future
taxable income over the periods in which the deferred tax assets are
expected to be realized, management believes that it is more likely than
not that the Company will realize the benefit of the deferred tax assets in
the future, net of the existing valuation allowance.

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Income Taxes, Continued:

As of December 31, 1997, the Company has net operating loss carry
forwards, investment tax credit carry forwards and research and
experimentation credit carry forwards for federal income tax purposes
which expire as follows:

Research and
Net Investment experimentation
Expiration operating loss tax credit credit
date carry forwards Carry forwards carry forwards
---- -------------- -------------- --------------

1998 $ - $ 1,500 $ 13,000
1999 - 1,800 1,000
2000 - 6,200 -
2001 380,900 - 6,000
2002 - - 14,500
2003 - - 23,700
2004 - - 19,700
2005 60,100 - -
2006 - - 11,300
2007 5,800 - 10,700
2008 648,400 - -
2009 - - -
2010 151,000 - -
2011 638,000 - -
2012 - - -
---------- --------- ---------
$1,884,200 $9,500 $ 99,900
========== ========= =========

9. Capital Stock:

Stock Option and Bonus Plans

On June 7, 1993, the Board of Directors approved the 1993 TELS
Corporation Stock Option and Incentive Plan (the 1993 Plan) which
replaced the Company's 1984 Stock Option and Bonus Plan (the 1984
Plan). The Company had reserved 1,237,500 shares of its common stock
for issuance under the 1984 Plan, of which 247,750 remained available
for grant. The Company will not make any further grants under the 1984
Plan. Under the 1993 Plan, as amended on June 6, 1994, the maximum
number of shares issuable to employees, non employees, and consultants
totals 2,000,000 shares. The exercise price of options granted is not
less than the fair market value on the date of grant as determined by
the Compensation Committee (Committee) appointed by the Board of
Directors. The options become exercisable over a three-year period, in
equal annual increments beginning one year after the date of grant, and
expire ten years after the date of grant.

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

9. Capital Stock, Continued:

Stock Option and Bonus Plans, Continued

On June 6, 1994, the Board of Directors also approved the TELS
Corporation 1994 Outside Directors Stock Option Plan (the Director
Plan) for which 500,000 shares of the Company's common stock have been
reserved. Under the Director Plan, non employee directors may be
granted stock options pursuant to an automatic and nondiscretionary
grant mechanism. Options granted under this plan fully vest upon the
six month anniversary of receipt and may be exercised at any time
during the period beginning six months after the date of grant, and
ending ten years after the date of grant. The exercise price of the
options granted is the fair market value on the date of grant.

The Company applies APB Opinion No. 25 and related interpretations in
accounting for options granted under either plan and for other option
agreements. Consistent with FASB Statement 123, the Company calculated
the options fair value based on the grant dates and determined that
FASB Statement 123 would not result in a significant difference from
reported net income (loss) and earnings (loss) per share.

1997 1996
---- ----

Earnings per Earnings per
share basic share basic
Net income and diluted Net (loss) and diluted
---------- ------------ ----------- ------------
As Reported $ 96,656 $0.02 $(427,181) $(0.11)
Pro Forma $ 95,964 $0.02 $(427,520) $(0.11)

The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: an expected life of 10 years, expected
volatility of 92%, no dividend yield and a risk free rate of 5%.

A summary of activity related to stock options is indicated in the
following table:

1997 1996
---- ----
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
------ ----- ------ -----

Outstanding at beginning of year 746,250 $0.95 875,500 $0.95
Granted 79,000 0.59 65,000 0.78
Exercised - 0.00 6,000 0.45
Forfeited 76,375 0.59 188,250 1.23
--------- ---------
Outstanding at end of year 748,875 0.87 746,250 0.87
Options exercisable at year end 585,510 0.90 536,518 0.90

Continued
<PAGE>
<TABLE>
<CAPTION>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Number Weighted Weighted Number Weighted
Range of outstanding at average average exercisable at average
exercise December 31, remaining exercise December 31, exercise
prices 1997 contractual life price 1997 price
--------------- --------------- ---------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>

$ .45 to $ .66 433,875 5.71 years $0.48 325,509 $0.45
$ .86 to $1.11 45,000 8.19 years $0.92 16,668 $0.94
$1.21 to $1.59 270,000 6.81 years $1.49 243,333 $1.51
-------------- ------------ --------------- -----------
748,875 $0.87 585,510 $0.90
============== ===============
</TABLE>

At December 31, 1997, 2,422,276 shares of the Company's common stock
are authorized for issuance under the stock option and bonus plans.

In May 1995, the Company granted stock bonuses aggregating 48,000
common shares to three outside directors of the Company. Shares granted
to one of the directors were fully vested on the date of the grant.
Shares granted to the other two directors vested equally over two
years, beginning on the date of the grant. Compensation expense of
$20,000 was recognized in 1996 with respect to this grant. During 1996,
one of the directors returned the 8,000 shares he received. The Company
canceled those shares.

In April 1993, stock bonus awards were made to officers totaling
450,000 shares that vest over a five-year period commencing in 1993.
Compensation expense of $40,500 and $40,500 was recognized in 1997 and
1996, respectively, with respect to this grant. The remaining deferred
compensation expense will be recognized in 1998.

10. Related Party Transactions:

Included in employee and other receivables at December 31, 1997 is a
$39,302 uncollateralized note receivable due from the CEO of the
Company. The note bears interest at eight percent and is due on demand.

Included in employee and other receivables at December 31, 1997, are
expense advances to the CEO of the Company of $32,657. These expense
advances bear no interest and are due on demand.

Included in selling general and administrative expense are payments
totaling $12,756 in 1997 and $12,756 in 1996 to the CEO of the Company
for the Company's use of vehicles and property owned by the CEO.

11. Employees' Profit Sharing Plan:

The Company has an employees' profit sharing plan covering
substantially all employees who have attained age 21 with service in
excess of six months. The plan provides for Company contributions at
the discretion of the Board of Directors. Company contributions begin
vesting after the first full year in which eligible employees complete
501 hours of service, with full vesting occurring after seven years.
Contributions to the plan during the year ended December 31, 1997 and
1996 totaled $0 and $15,000, respectively.

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

12. Net Income (Loss) Per Share:

Options to purchase 748,875 and 746,250 shares of common stock at
prices ranging from $0.45 to $1.59 per share were outstanding at
December 31, 1997 and 1996, but were not included in the computation of
diluted earnings per share because the effect would have been
antidilutive.

13. Contingencies:

On February 2, 1996, the former owners of Hash Tech (Plaintiffs) filed
a complaint in the Superior Court for the County of Santa Clara,
California, against the company and several of its officers and
directors in their individual and representative capacities, and also
against HTI, a wholly owned subsidiary of the Company. The Plaintiffs
have alleged causes of action for recision of a certain "Asset Purchase
Agreement" dated March 31, 1994, civil conspiracy, fraud, violation of
California securities laws, common law gender discrimination, and
intentional infliction of emotional distress. The Company and its
officers deny any wrongdoing in regard to the above allegations. On
April 15, 1996, the Company filed a complaint in the Third Judicial
District Court of Salt Lake City, Utah, against the Plaintiffs for
breach of "non compete agreements" and breach of a "Severance
Agreement" between the Plaintiffs and the Company and on February 24,
1997, the Company filed a Motion for Summary judgment in this matter,
which is awaiting oral argument. In addition, the Company has filed a
complaint with the American Arbitration Association, which is being
held pending the outcome of certain legal hearings. On April 9, 1996,
the Superior Court of Santa Clara, California, heard and denied the
Company's motion to compel arbitration. In July 1996, the Company filed
an appeal to reverse this decision with the Sixth Appellate District
in the Court of Appeal of the State of California. On February 18, 1997
this appeal was denied. While the Company believes that the litigation
will be resolved without a materially adverse effect on the Company's
business or financial position, there can be no assurance as to the
ultimate outcome of, or the costs incurred by the Company in defending
this litigation.

14. Segment Information:

Substantially all of the Company's continuing operations are in
telecommunications and contract computer production and assembly. Total
revenue by industry segment includes both sales to unaffiliated
customers, as reported in the Company's consolidated statement of
operations, and intersegment sales, which are accounted for based on
the estimated fair market value of the products. Intersegment sales are
not material.

Operating income (loss) is total revenue less operating expenses. In
computing operating income (loss), the effects of general corporate
expenses, interest expense and income taxes are not included.

Identifiable assets by industry are those assets that are used in the
Company's operations in each business segment. One customer, in the
contract computer production and assembly industry, accounted for
approximately 26% of the Company's sales in 1997. The same customer
accounted for 17% of the sales in 1996. Identifiable assets are
principally property and equipment, capitalized software development
costs, deferred tax assets and other assets.

Continued
<PAGE>

TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

14. Segment Information:

Financial information by segments is as follows:

1997 1996
---- ----

Net sales:
Telecommunications $ 2,697,473 $ 2,326,640
Computer production and assembly 3,495,682 4,393,965
Corporate and other 1,905 8,211
----------- ----------
$ 6,195,060 $ 6,728,816
========== ==========

Operating income (loss):
Telecommunications $ 788,562 $ 786,517
Computer production and assembly 433,822 123,910
Corporate and other (1,040,293) (1,220,779)
---------- -----------
$ 182,091 $ (310,352)
=========== =============

Identifiable assets:
Telecommunications $ 949,315 $ 574,079
Computer production and assembly 1,219,669 1,039,365
Corporate and other 1,791,252 2,498,933
---------- ----------
$ 3,960,236 $ 4,112,377
========== ==========

Depreciation and amortization expense:
Telecommunications $ 189,795 $ 186,344
Computer production and assembly 153,020 147,531
Corporate and other 53,496 58,137
------------ ----------
$ 396,311 $ 392,012
=========== ===========

Capital expenditures:
Telecommunications $ 17,814 $ 16,307
Computer production and assembly 39,913 24,401
Corporate and other 12,301 33,688
----------- ----------
$ 70,028 $ 74,396
============ ===========

15. Discontinued Operations:

In January 1996 the Company formalized a plan to discontinue the
operations of Computer Express and Micro Station. On April 3, 1996, the
Company entered into an agreement to sell the net assets of Micro
Station to a former employee for a $60,792 note (the Note). The Note is
collateralized by a security agreement covering non-real property and
bears interest at 12%. One-third of the purchase price was due and
payable 30 days from the contract date, one-third was due and payable
60 days from the contract date and the remaining amount was due and
payable 80 days from the contract date. As of December 31, 1997, the
receivable had been either collected or fully reserved. Revenues for
the year ended December 31, 1996 were not significant.

<PAGE>

PART III

Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act

Information regarding directors and officers of the Company is
incorporated by reference from "Information Relating to Directors, Nominees,
Executive Officers, Promoters, and Control Persons" in the 1998 Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on June 1, 1998.

Information required by item 401 and 405 of Regulation S-B is
incorporated by reference from "Compliance with section 16(a) of the Securities
Exchange Act of 1934" in the 1998 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 1, 1998.

Item 10. Executive Compensation

Information regarding this item is incorporated by reference from
"Executive Compensation" in the 1998 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 1, 1998.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Information regarding this item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" in the 1998
Proxy Statement to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 1, 1998.

Item 12. Certain Relationships and Related Transactions

Information regarding this item is incorporated by reference from
"Certain Transactions" in the 1998 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 1, 1998.

<PAGE>

PART IV

Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be included in this report:

1.Financial Statements - Included in Part II,
Report on Audit of Financial Statements.
Report of Independent Accountants.
Consolidated Balance Sheet as of December 31, 1997.
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the years
ended December 31, 1997 and 1996.
Consolidated Notes to Financial Statements for the years
ended December 31, 1997 and 1996.

2. Financial Statement Schedules - None
Schedules are omitted because of the absence of conditions under
which they are required or because the required information is
presented in the Financial Statements or Notes thereto.

3. Exhibits - Exhibit number and description

3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-18, SEC File No. 2-93915-D, and
incorporated herein by this reference.

3.2 By-laws, as amended, filed as Exhibit 3.2 to the Company's Registration
Statement on form S-18, SEC File No. 2-93915-D, and incorporated herein by
this reference.

3.3 Certificate of Amendment of TEL electronics, inc. dated July 28, 1987,
changing the corporation name from Tel Electronics Inc., to TEL
electronics, inc., filed as exhibit 10.11 to the Company's Form 10-K for
the year ended December 31, 1988, and incorporated herein by this
reference.

3.4 Articles of Amendment to the Articles of Incorporation of TEL
electronics, inc., dated May 25, 1989, adding Article XIII - Director
Liability, filed as exhibit 3.4 to the Company's Form 10-K for the year
ended December 31, 1989, and incorporated herein by this reference.

3.5 Certificate of Amendment of TEL electronics, inc., dated July 10, 1990,
changing the par value of common stock to $.02 and the authorized shares to
10,000,000, filed with the Company's form 10-K, and incorporated herein by
this reference.

3.6 Certificate of Amendment of TELS Corporation, dated August 24, 1994,
changing the name of the Company from TEL electronics, inc., to TELS
Corporation, and increasing the number of authorized common stock to
50,000,000 shares, and authorizing the number of preferred shares of stock
to 10,000,000 shares, filed as exhibit 3.6 to the Company's Form 10-K for
the year ended December 31, 1994, and incorporated herein by this
reference.

10.1 1984 Executive Stock bonus Plan, filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-18, SEC File No. 2-93915-D, and
incorporated herein by this reference.

10.2 1984 Incentive Stock Option Plan, filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-18, SEC File No. 2-93915-D, and
incorporated herein by this reference.
<PAGE>

10.3 Form of 1984 Incentive Stock Option Agreement filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-18, SEC File No. 2-93915-D,
and incorporated herein by this reference.

10.4 1984 Non-Qualified Stock Option Plan filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-18, SEC File No. 2-93915-D, and
incorporated herein by this reference. 10.5 Form of 1984 Non-Qualified
Stock Option Agreement filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-18, SEC File No. 2-93915-D, and incorporated herein by
this reference.

10.6 Form of Warrant issued to The Stuart-James Co., incorporated on June
28, 1985, filed as Exhibit 4.2 to the Company's Registration Statement on
Form S-18, SEC File No. 2-93915-D, and incorporated herein by this
reference.

10.7 Warrant Agreement (including the form of warrant) between the Company
and Rooney Pace dated April 4, 1984, filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-18, SEC file No. 2-93915-D, and
incorporated herein by this reference.

10.8 Employment Agreement between the Company and Dr. John L. Gunter dated
April 1, 1988, filed as Exhibit to the Company's form 10-K, and
incorporated herein by this reference.

10.9 Warrant Agreement (including the Form of Warrant) issued to Redwood
Micro Cap Fund, inc. dated November 10, 1993, filed as exhibit to the
Company's Registration on Form S-3, Sec File No. 2-93915-D and incorporated
herein by this reference.

10.10 Employment Agreement between the Company and Dr. John L. Gunter dated
March 1, 1994, filed as exhibit to the Company's 1994, form 10-K, and
incorporated herein by this reference.

10.11 Employment Agreement between the Company and Stephen M. Nelson dated
March 1, 1994, filed as exhibit to the Company's 1994, form 10-K, and
incorporated herein by reference.

10.12 Employment Agreement between the Company and Harold Neuenswander
dated March 31, 1994, filed as exhibit to the Company's 1994, form 10-K,
and incorporated herein by reference.

16.1 Letter on changes in Certifying Accountant filed as Exhibit 16 to the
Company's form 8-K, filed on May 4, 1995, and incorporated herein by this
reference.

16.2 Letter on changes in Certifying Accountant filed as Exhibit 16 to the
Company's form 8-K, filed on November 3, 1995, and incorporated herein by
this reference.

22.1 Wholly owned Subsidiaries of TELS Corporation: TEL electronics, inc.
MICROMEGA CORPORATION
MedTech, Inc.
D.J. GunTEL, Inc.
Hash Tech, Inc.

23.1 Consent of Certifying Accountant filed as Exhibit 23 in connection to
the Company's Registration Statements on Form S-8, SEC File No.'s
333-17149, 333-17163, and 333-17169, effective December 2, 1996 and
incorporated herein by reference.

27.1 Article 5 Financial Data Schedule for year ended December 31, 1997,
Form 10-KSB.

<PAGE>

Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K, cont.

(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed during the
last quarter of the period covered by this report.

(THIS SPACE INTENTIONALLY LEFT BLANK)

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

TELS Corporation
----------------
(Registrant)

March 31, 1998 By: /s/John L. Gunter
- -------------- -----------------
Date John L. Gunter, CEO

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

/s/John L. Gunter Chairman of the Board of March 31, 1998
- ----------------- Directors, and CEO --------------
John L. Gunter (Principal Executive Officer)

/s/Willard H. Gardner Director and Secretary March 31, 1998
- --------------------- --------------
Willard H. Gardner

/s/Stephen M. Nelson Director, President and March 31, 1998
- -------------------- Treasurer --------------
Stephen M. Nelson

/s/Melody J. Rasmussen CFO and Controller March 31, 1998
- ---------------------- --------------
Melody J. Rasmussen
<PAGE>
Consent of Independent Accountants

We consent to the incorporation by reference in the registration statement
of Tels Corporation on Form S-8, (File No. 333-17149, 333-17163, 333-17169) of
our report dated March 25, 1998, on our audit of the financial statements of
TELS Corporation as of December 31, 1997 and for each of the two years in the
period ended December 31, 1997, which report is included in this Annual Report
on Form 10-K.

Coopers & Lybrand L.L.P.

Salt Lake City, Utah
March 31, 1998

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