CODED COMMUNICATIONS CORP /DE/, 10KSB, 1998-03-31

CODED COMMUNICATIONS CORP /DE/
10KSB, 1998-03-31
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20

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

[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-17574

CODED COMMUNICATIONS CORPORATION
(Name of Small Business Issuer in Its Charter)

Delaware 33-0580412
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1939 Palomar Oaks Way, Carlsbad, California 92009
Address of Principal Executive Offices) (Zip Code)

(760) 431-1945
(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange
Act:

None

Securities registered under Section 12(g) of the Exchange
Act:

Common Stock, $.01 par value
(Title of class)

Check whether issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the 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. [x] Yes [ ] No

Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not 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 to this Form 10-KSB. [ ]

The Registrant's revenues for its most recent fiscal
year were $13,271,000.

As of March 23, 1998, the aggregate value of common
stock held by non-affiliates of the Registrant was
$2,764,000 based on the closing bid price as reported by the
OTC Electronic Bulletin Board. The number of shares of
common stock outstanding on March 23, 1998 was 76,568,112.

DOCUMENTS INCORPORATED BY REFERENCE

The following document is incorporated by reference
into Part III of this Annual Report on Form 10-KSB:
Definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders.

CODED COMMUNICATIONS CORPORATION
1997 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS

PART I

Page

Item 1. Description of Business 3

Item 2. Description of Property 13

Item 3. Legal Proceedings 13

Item 4. Submission of Matters To A Vote of Security
Holders 14

PART II

Item 5. Market for Common Equity and Related
Stockholder Matters 15

Item 6. Management's Discussion and Analysis or
Plan of Operation 16

Item 7. Financial Statements. 23

Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 23

PART III

Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act 24

Item 10. Executive Compensation 24

Item 11. Security Ownership of Certain Beneficial
Owners and Management 24

Item 12. Certain Relationships and Related
Transactions 24

Item 13. Exhibits and Reports on Form 8-K 24

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Coded Communications Corporation (the "Company") was
initially incorporated on September 12, 1980, under the laws
of the Province of British Columbia. In 1993, the Company's
shareholders approved a series of transactions which
resulted in the Company reincorporating in the United States
under the laws of the State of Delaware. The
reincorporation did not affect the business, assets,
liabilities or operations of the Company, other than for the
costs related to the transaction.

The Company, through its wholly-owned subsidiaries
Coded Mobile Communications, Inc. ("Coded") and Decom
Systems, Inc. ("Decom") designs, manufactures and
distributes a wide range of wireless digital receiving and
processing equipment, software and systems for use in two
primary markets: mobile data communications and aerospace
telemetry. The Company's mobile data and aerospace
telemetry products employ similar technologies and
techniques to receive and process digitized information
transmitted over public and private wireless data
communications networks and satellite communications links.
The Company's sales by major product lines for the three
year period ended December
31, 1997, were:
<TABLE>
<CAPTION> 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Mobile data communications $ 6,676,000 66% $ 7,880,000 70% $ 9,529,000 72%
Aerospace telemetry 3,495,000 34 3,430,000 30 3,742,000 28
$10,171,000 100% $11,310,000 100% $13,271,000 100%
</TABLE>

The Company, through its wholly-owned subsidiary Coded,
designs, manufactures and markets a wide range of equipment
used to provide wireless communications for the mobile
workforce using mobile and fixed radio systems. Coded's
products include wireless radio modems, mobile computer
terminals, automatic vehicle location terminals using the
Global Positioning Satellite system ("GPS"), mobile network
connectivity software, and radio system network controllers.
The Company's communications systems provide a wireless
means of transmitting and receiving information digitally
over radio channels, enabling the mobile
workforce to interface and interact with information systems
on a real-time basis. The Company believes mobile data
communications products and services will represent more
than 70% of consolidated sales in the future.

The Company's aerospace telemetry products include
telemetry front-end ground support equipment such as PCM bit
synchronizers operating at data rates of up to 35 megabits
per second, PCM decommutators and QPSK modems. These
products are used to receive, demodulate, synchronize and
decode digital signals in radio and satellite communication
links. In 1996, the Company discontinued marketing its Quad
7 telemetry acquisition system. The Company's aerospace
telemetry systems and products are used in space, aircraft
and weapons research, development and test
programs conducted by major aerospace and defense
contractors and United States government agencies. The
Company's aerospace telemetry products are also used in
military satellite communications systems.

Cautionary Statements

The Annual Report on Form 10-KSB (the "Annual Report")
contains forward-looking statements within the meaning of
the Securities Act of 1933, as amended. Discussions
containing such forward-looking statements, which include
projections of the timing and amount of new orders, gross
margin, operating expenses and management's future plans,
may be found throughout this Annual Report, including
without limitation in the materials set
forth under "Description of Business", "Cautionary
Statements" and "Management's Discussion and Analysis or
Plan of Operations." Actual events or results may differ
materially from those discussed in the forward-looking
statements as a result of various factors, including without
limitation the risks set forth under the notes to the
consolidated financial statements and the
matters set forth in this Annual Report generally.

Current Developments

On March 3, 1997, Mr. Gary L. Luick was named the
Company's president and chief executive officer. In
addition, Mr. Luick was appointed to the Company's board of
directors. Mr. Luick served as president of the publicly-
held GTI Corporation from 1989-1995 and as CEO from 1991-
1995. Effective February 17, 1998, Mr. Luick resigned as
the Company's CEO and president to pursue other business
opportunities. Mr. Luick was removed from
the Company's board of directors by the written consent
action of the Company's majority shareholder on February 13,
1998. The Company and Mr. Luick have entered into a
separation agreement under which Mr. Luick received a lump
sum separation payment of $225,000. This payment will be
recognized as a charge to income in the first quarter of
1998.

Effective February 17, 1998, Mr. Hugo Camou, chairman
of the board of directors, was named chief executive
officer; and Mr. John Wiggins, the Company's chief operating
officer, was appointed to the board of directors and assumed
additional responsibilities as the Company's president. In
addition, Mr. Fernando Pliego was named executive vice
president finance. Mr. Pliego served as a director of the
Company from September 1996 to May 1997.

Investment and Restructuring of Debt

In the first quarter of 1995, the Company reorganized
its operations and management. These actions included the
closing of the Company's VSAT product line and all
international mobile data sales offices. In addition, the
Company's CEO resigned and a number of management positions
were eliminated to reduce costs and expenses. As a result
of the reorganization, operating expenses in the year ended
December 31, 1995 were reduced by approximately $8,400,000
compared to 1994, and the Company achieved its first
operating profit, before interest and income
taxes, in the last half of 1995.

In the first half of 1995, as an integral part of its
restructuring plan, the Company proposed an out-of-court
composition settlement plan (the "Creditor Plan") to
substantially all unsecured creditors with past due claims.
Under the terms of the Creditor Plan, received 50% of their
unsecured claims in full settlement (the "settlement value")
of their claim, with 5% of the settlement value paid
quarterly beginning September 1995, and a final payment of
the remaining settlement value made on December 31, 1997.
In addition to the Creditor Plan, the Company negotiated
settlements with certain other unsecured creditors. In the
year ended December 31, 1995, creditors with claims valued
at approximately $3,200,000 settled their claims at a
discount and the Company recognized a gain of
$1,367,000 from the extinguishment of debt, net of related
expense. In the year ended December 31, 1996, additional
settlements were reached with unsecured creditors, including
those creditors participating in the Creditor Plan, with
claims totaling approximately $1,504,000, and the Company
recognized a gain of $995,000 from the extinguishment of
debt, net of related expense. See Note 3 "Extraordinary
Gain on Extinguishment of Debt" and Note 6 "Debt and Credit
Lines ."

In September 1996, the Company completed a series of
transactions which resulted in ISA Investments Corporation
("ISA"), a majority-owned subsidiary of ISA Corporativo,
S.A. de C.V. ("ISA Corp."), acquiring a 76% common stock
ownership interest in the then outstanding common shares of
the Company; and the restructuring of the Company's
$6,600,000 in secured debt. ISA and ISA Corp. are part of
an affiliated group of privately-held Mexican corporations
controlled by Mr. Hugo R. Camou and his immediate family.

ISA acquired its 57,272,767 shares or 76% common stock
ownership interest for, among other things, cash payments
totaling $1,400,000 and an ISA guarantee of not less then
$10,000,000 in orders for the Company's mobile data
communications products from ISA customers in Mexico and
Latin America, to be placed over an eighteen month period.
In 1997, ISA fulfilled its commitment for $10,000,000 in
customer orders. Prior to its investment in the Company,
ISA was a distributor of the Company's mobile data
communications products in Mexico. As a result of its
controlling interest in the Company's common
stock and its ability to nominate and elect a majority of
the members of the Company's Board of Directors, the Company
is considered to be controlled by ISA.

In connection with the ISA investment in the Company in
1996, holders of the Company's senior secured $1,800,000
principal amount Bridge Loan canceled their debt in exchange
for a cash payment of $400,000; the issuance of 8,000 shares
of the Company's Series A preferred stock (with a
liquidation preference of $800,000); and the issuance of
$600,000 principal amount, 6% Term Notes. The 6% Term Notes
are convertible, at the option of the holders, into
2,400,000 shares of common stock and are collateralized by a
subordinated security interest in the Company's assets. In
addition, the holder of the Company's secured $4,000,000
principal amount, 12% Convertible Debentures
("12% Debentures") converted the 12% Debentures and accrued
interest of approximately $800,000 into a new seven year,
$4,800,000 principal amount 6% Convertible Debenture (the
"6% Debenture"). The 6% Debenture was subsequently
converted in December 1996 into 48,000 shares of the
Company's Series B preferred stock, with a liquidation
preference of $4,800,000. All of the shares of Series B
preferred stock are held by Renaissance Capital Partners,
II, Ltd., an investment partnership fund based in Dallas,
Texas. See Note 9 "Common and Preferred Stock."

As a result primarily of the ISA investment of
$1,400,000, the conversion of approximately $5,600,000 of
secured debt into common and preferred stock, and net income
for the year ended December 31, 1996, the Company eliminated
a shareholder deficit of $7,571,000 existing at the
beginning of 1996, and reduced debt and liabilities in 1996
by $8,319,000 as compared to the end of 1995.

The business and operations of the Company following
the investment by ISA and the restructuring of debt were not
changed, and it is the present intent of ISA to continue the
Company as a publicly-held corporation with its principal
operations located in the United States.

Management's Plan For Future Operations and Financing

Prior to the Company's reorganization of its business
operations and management in the first quarter of 1995, the
Company had operated at a loss since its inception. In
addition, the Company had accumulated a significant
shareholders' deficit and liabilities.

Following the restructuring of the Company's operations
and management in the first quarter of 1995, operating
expenses were reduced, gross margin on sales increased and,
as a result, the Company achieved marginal profitability
before interest expense and income taxes in the second half
of 1995 and for the years ended December 31, 1996 and 1997.

The Company achieved operating profits before
litigation settlement, interest expense and income taxes of
$250,000 in the second half of 1995, and $345,000 and
$592,000 for the years ended December 31, 1996 and 1997,
respectively. However, the Company operates in markets that
are emerging, volatile and highly competitive. Moreover,
the Company's orders are typically concentrated in large
contracts with a long sales cycle derived
from a small base of customers. As a result, new orders,
sales levels and operating profitability, if any, can and
will fluctuate on a quarter-by-quarter basis. Although the
Company believes the recent trend of annual operating
profitability will continue in 1998, based on current
information the Company expects to report a loss from
operations in the first quarter of 1998. There is no
assurance that the Company will operate at a
profit in the future.

Financing will be required to support working capital
and operations in 1998. The Company believes that
additional financing, in the form of short-term and long-
term debt, preferred and common stock, or a combination of
debt and equity will be available in 1998 under terms and
conditions that are acceptable to the Company. Additional
capital in 1998 is likely to be provided or arranged by the
Company's controlling shareholder, ISA.

Wireless Mobile Data Communications Products and Services

The Company, through its wholly-owned subsidiary Coded,
designs, manufactures and markets a wide range of equipment
used to provide wireless communications for the mobile
workforce using mobile and fixed radio systems. Coded's
products include wireless radio modems, mobile computer
terminals, automatic vehicle location terminals using the
Global Positioning Satellite system ("GPS"), mobile network
connectivity software, and radio system network controllers.
The Company's communications systems provide a wireless
means of transmitting and receiving information digitally
over radio channels, enabling the mobile workforce to
interface and interact with information systems on a
real-time basis. Sales of mobile data communications
products and services were $6,676,000, $7,880,000 and
$9,529,000 in 1995, 1996, and 1997, respectively. The
Company believes mobile data communications products and
services will represent not less than 70% of consolidated
sales in the future.

The need for increased speed and accuracy in
information transfer in a mobile environment, and the
growing amount of data contained in computerized information
databases, has increased the demand for systems which
provide efficient and accurate data communications.
Operators of vehicle fleets relying on conventional voice
radio communications often encounter problems
in communicating with the mobile workforce due to
overcrowded voice channels and inefficiencies in
transferring information stored in computers. Through the
use of wireless mobile data communications, vehicle fleet
operators realize increased mobile workforce and vehicle
productivity, improved customer service and
faster response times. In addition, the mobile workforce
can interact with information databases on a real-time
basis; and radio system operators significantly increase
information throughput and maximize the utilization of
available radio air time. The efficient and effective
management of the mobile workforce, vehicle fleets and
remote access to information databases through the use of
wireless communications, in the opinion of the Company, is
becoming a significant competitive and safety issue for the
mobile workforce.

New Products

The Company's development efforts in 1997 focused on
new mobile products and applications designed to provide
Coded customers with innovative field productivity tools,
and greater flexibility and efficiency in integrating their
mobile workforce with information databases.

DualCom Multi-System Modem. DualCom is a multi-system
wireless modem capable of operating simultaneously on both
conventional private radio and public Cellular Digital
Packet Data ("CDPD") networks. DualCom is designed to allow
the mobile workforce to automatically or manually select the
most efficient radio network for a particular reporting
application, or to select the radio network with the best
radio coverage. Dual radio system flexibility may be a
critical feature in mobile data communications systems for
public safety customers, where uninterrupted communication
service during an emergency or large-scale disaster is
mandatory. The DualCom modem can be integrated
with an internal GPS receiver to provide real-time vehicle
location. The DualCom modem is fully compatible with the
Company's new line of MCT 700 Series mobile computers as
well as the current line of mobile terminal products.
Additional development of the DualCom modem is required in
1998, and deliveries of the first version of DualCom are
expected to begin in the second half of 1998.

MCT 700 Series Mobile Computer Terminals. The
Company's MCT 700 series of ruggedized mobile computers are
specifically designed for the harsh and demanding mobile
operating environment. The MCT 700 computers feature
extended heat and vibration specifications to help ensure
long life and maximum in-use availability, as well as a wide
selection of sizes, productivity features and displays.
Standard features of the MCT 700 Series include 133 to 200
MHz Pentium processors, vehicle air-bag friendly case
designs, and high-resolution active matrix color TFT
displays. The MCT 700 Series computers can be
integrated with in-vehicle GPS receivers, printers, magnetic
strip and bar code readers, and many other mobile devices to
meet the varied requirements of the mobile workforce.
Additional development of the MCT 700 Series mobile computer
terminals is required in 1998, with customer deliveries
expected to begin in the second half of 1998.

DataLink Pro Series Wireless Network Hub. DataLink is
a high-speed mobile radio local area network ("LAN") meeting
the IEEE 802.11 specification for wireless Lan's. By
utilizing spread spectrum radio transmission technology,
DataLink can transmit digital information between a mobile
and a fixed access point at data rates of up to 1 million
bits per second ("Mbps"). DataLink is specifically designed
for public safety mobile data applications where the
transmission of large amounts of information is required,
such as in the case where it is necessary to transmit
fingerprint images, photographs, and large text files.
DataLink is currently in development. The initial
beta site installation is expected in the last quarter of
1998, with system deliveries first beginning in 1999.

Mobile Data Communications Network Systems and Products

The Company provides a wide range of equipment to meet
the mobile communications needs of its customers. The
Company's engineering capabilities include the design and
installation of end-to-end solutions for voice and digital
wireless mobile data communications networks. The Company
supplies complete wireless systems as a prime contractor
directly to end-use customers, or as a subsystem contractor
to large system integrators. When providing complete end-
to-end wireless mobile data communications systems or
subsystems, the Company will integrate its products
with equipment and software supplied by third parties, such
as mobile and base station radios, automatic vehicle
location equipment, laptop computers and applications
software.

The Company's wireless mobile data communications
networks are designed around its core systems products,
which include high-speed RF modems, mobile data computers
and terminals, wireless networking connectivity software and
radio network controllers. These products provide the
system infrastructure needed to interface and interact with
information databases, and communicate with and control
large numbers of vehicles and mobile data devices operating
over wide geographical areas and multiple radio systems.

The Company's RF modem, the IQmodem, is an intelligent,
specialized protocol modem designed to meet the requirements
of small and large data terminal equipped vehicle fleets.
The IQmodem can be integrated with mobile or laptop
computers, mobile display terminals, printers and automatic
vehicle location ("AVL") equipment. The IQmodem can be used
in most conventional private radio networks and computer-
controlled Specialized Mobile Radio ("SMR") systems. The
IQmodem operates at data transmission rates up to 9,600 bits
per second ("bps") (higher transmission rates can be
achieved using data compression techniques) and
incorporates digital signal processing circuits for
equalization, filtering and synchronization. The Company's
RF modem product line also includes the Landmarc 5000, an
integrated RF modem and AVL receiver using the GPS for
tracking vehicle location, speed and direction.

The Company's wireless network connectivity software
includes the IQswitch and WinMCT. The IQswitch serves as a
gateway between the mobile data network and host computers;
computer-aided dispatch application software; local, state
and national information databases; and other private or
public networks. The IQswitch utilizes a UNIX operating
system and is scaleable to meet a customer's exacting
requirements. The Company's WinMCT in-vehicle software
manages incoming and outgoing data messages
and interfaces the data communications system to the
customer's specific mobile computer software applications.

The Company's wireless connectivity products also
include the In-Vehicle Controller ("IVC"), a protocal
conversion and control device that allows various mobile
data devices installed in a vehicle, such as a mobile
computer, GPS location receiver, mobile printer and magnetic
strip card reader to interface with one another and the
mobile data communications system network. The
IVC is software configurable to support a wide variety of
combinations of mobile devices.

The Company's radio and network controller system
products and software include base station radio controllers
and UNIX-based radio network controllers. Base station
controllers are used to manage base station radios, and
include software to control radio channel contention,
provide forward error correction of digital transmissions
and to switch radio channel traffic from data to
voice and voice to data. Network system controllers are
used to handle the real-time communications requirements of
a mobile data communications system, including tracking
radio channel availability, the location of mobile users on
multiple channel radio systems, and the interface of the
mobile communications system with host computers and host
information databases. The network controller also provides
remote access to the radio system for diagnostics and system
operating statistics. These features significantly reduce
costly on-site service calls, time-consuming trouble
shooting effort and unnecessary loss of host computer
access.

The Company's principal mobile computer and terminal
product lines are its MCT computer platform and the DXT IQ
mobile data terminal.

The MCT computer platform includes several versions of
the Company's Windows-based MCT Series 2000 mobile computer.
The MCT product group includes ruggidized mobile computers
featuring Pentium processors, full keyboards and keypads,
and the choice of a CRT display, black and white LCD display
or full color TFT flat screen display. The MCT computer
operates with the Company's high-speed RF modem and other
interconnect devices for use in many different public and
private mobile communications systems. For its MCT laptop
computer products, the Company purchases notebook and laptop
computers from other manufacturers and ruggidizes the
computer to meet the demanding operating conditions of the
mobile environment.

The DXT IQ mobile terminal features a CRT display with
a keypad and full keyboard. The DXT IQ mobile terminal
operates at date transmission rates of up to 9,600 bps on
both public and private conventional and trunked radio
systems. The DXT IQ mobile terminal is manufactured by the
Company.

In addition to the MCT and DXT mobile computer and
terminal product lines, the Company offers several other
mobile displays for use in vehicles. The Company's CMX
mobile status terminal product line includes two or four
line LCD displays with keypad and status keys. All of the
Company's mobile computers and terminals can be used with
the Company's AVL receivers and other mobile devices such as
bar code and magnetic strip card readers and printers.

Mobile Data Communications Marketing

The present markets for voice and data land-based radio
communications systems include public safety agencies (fire
and police), emergency medical services ("EMS") and
operators of vehicle fleets and mobile work forces such as
utility, transportation, overnight courier services,
customer field service and taxi vehicle fleets. The Company
markets its mobile data communications systems primarily to
public safety, EMS and utility markets. Public safety
customer applications of mobile data communications include
automatic vehicle location, computer-aided dispatch,
messaging, access to and interaction with host
record management databases, and access to other local,
state and national databases. The Company estimates that
over 75% of its mobile data communications revenues are
presently derived from public safety customers in the United
States and Mexico.

The Company markets wireless mobile data communications
network systems and products in the United States, the
United Kingdom and Mexico through a sales staff supported by
application engineers primarily to system integrators,
original equipment manufacturers ("OEM's") and large end-use
vehicle fleet operators. Beginning in 1998, the Company
will also market its products in the United States through
mobile radio dealers and distributors. The Company's
marketing strategy for wireless mobile communications
systems includes the formation of formal and/or informal
teaming relationships with system integrators,
mobile radio equipment manufacturers and application
software providers with the technical and financial
resources required to support large-scale data
communications system installations and services. The
Company believes its teaming strategy will allow
it to compete for large system orders against much larger
competitors.

Substantially all of the Company's mobile
communications sales are currently derived from customers in
the United States and Mexico. The Company believes export
sales to Europe, Mexico and Latin America could represent
over 50% of its mobile communications revenues in the near
future. The Company's export business is and will be
subject to risks customarily encountered in foreign markets,
including fluctuations in monetary exchange rates, export
controls and other regulatory policies of the United States
and foreign governments. Sales of mobile data
communications products, principally to public safety
customers in Mexico, were approximately 53% and 59%,
respectively, of total mobile data communications sales in
1996 and 1997.

Mobile Data Communications Competition

Competition for the sale of wireless mobile data
communications systems and equipment is intense and many of
the competitors have substantially greater resources than
the Company. In addition, a number of private and publicly
held telecommunications companies are developing new land-
based and satellite wireless communications systems and
products that will compete for business in the Company's
present markets.

The primary competitive factors for the sale of
wireless mobile data communications products and services
include reputation, knowledge of the order, digital
signaling throughput performance, compatibility with
existing mobile radio and control system equipment, and
price.

The primary competitors for the sale of wireless mobile
data communications network products and systems include
Motorola, Inc., of Schaumberg, Illinois, ("Motorola") and
large system integrators and radio equipment manufacturers,
such as TRW and Ericsson, Inc. On a contract by contract
basis, system integrators and radio equipment manufacturers
may compete against the Company or team with it. The
Company believes Motorola holds a dominant market position
for terrestrial mobile data systems used by courier
services, public safety and taxi vehicle fleets.

Mobile Data Communications Order Backlog

The Company's backlog of orders for wireless mobile
communications products was approximately $3,318,000 and
$2,007,000, respectively, at December 31, 1996 and 1997.
Substantially all backlog at December 31, 1997 is expected
to be
delivered within one year.

A significant portion of backlog is typically comprised
of large orders, and the total value of backlog can be
expected to fluctuate from year to year. The aggregate
single orders of five customers represented 85% and 83%,
respectively, of backlog at December 31, 1996 and 1997. The
Company has experienced fluctuations in order rates on a
quarterly basis, and declines and delays in orders from time
to time. The Company may experience similar declines or
delays in the future.

From time to time, the Company's may experience delays
in completing customer contracts. Historically, the Company
has successfully renegotiated delivery schedules with its
customers and the Company has experienced no customer
cancellations of major contracts. However, the Company may
experience delays in completing contracts in the future and
in the event contract schedules are not renegotiated,
contracts could be terminated.

Mobile Data Communications Customers

A small number of customers and special order sales
account for a relatively large portion of the Company's
wireless mobile data communications product revenues. In
1995, 1996 and 1997, aggregate sales to the five largest
mobile data communications product customers represented
approximately 60%, 77% and 79%, respectively, of mobile data
communications sales. In 1995, sales to three customers
represented 10%, 11% and 25%, respectively, of mobile data
communications sales. In 1996, sales to two customers in
Mexico represented approximately 53% of mobile data
communications sales. In 1997, sales to two customers
represented 59% and 11%, respectively, of mobile data
communications sales. Sales are typically made to customers
on a special order basis. There are no contracts at
December 31, 1997 requiring customers to purchase
substantial fixed quantities of products over more than a
one year period. The cancellation of orders of major
customers could have a significant adverse effect
on the operations of the Company.

Mobile Data Communications Research and Development

Research and development expenditures for mobile
communications products and improvement of existing products
were $496,000 in 1995 (7% of mobile communications sales),
$984,000 in 1996 (13% of mobile communications sales) and
$929,000 in 1997 (10% of mobile communications sales). The
Company plans to spend approximately 10% to 12% of mobile
data communications product sales for research and
development in the future, primarily in the development of
its wireless modems, mobile computers, mobile
network connectivity software, and the development and
enhancement of new software products. The Company believes
this level of investment will be sufficient to maintain the
competitive position of the Company's present core mobile
data products in the near term. However, higher investment
rates could be required thereafter to expand the Company's
product line and software technology to meet customer
requirements and new competition.

The market for the Company's mobile data communications
products is characterized by rapid change driven by
advancements in digital signal processing technology, the
miniaturization of electronic components and the
construction of new wireless land-based and satellite
communications systems. The Company's ability to compete
successfully depends, in part, on its knowledge of the
mobile data communications market, its ability
to anticipate and react to such changes, and its ability to
implement technological advancements in new products and
software to meet customer requirements.

Aerospace Products and Services

The Company, through its wholly-owned subsidiary,
Decom, designs, manufactures and markets electronic
communications equipment for aerospace and commercial
telemetry applications, using technology similar to that
used by the Company in its wireless mobile data
communications systems. Telemetry is the technology of the
wireless transmission of data in order to measure operating
parameters, such as pressure, temperature or vibration, at a
distance. Telemetry systems employ a radio carrier to
transmit information from one location to another, and
are used extensively in missile, aircraft, satellite and
other aerospace vehicles. Decom designs and manufactures
the receiving and test equipment used primarily in ground-
based Pulse Code Modulation ("PCM") and Phase Shift Keyed
("PSK") telemetry systems. Sales of aerospace telemetry
products and services were $3,495,000, $3,430,000 and
$3,742,000 in 1995, 1996 and 1997, respectively.

The PCM data transmission technique is extensively used
in aerospace telemetry applications because it has the
capability to combine many channels of information on a non-
interfering basis into a common frequency band for
transmission over a single carrier. The PCM carrier signal
has a low susceptibility to degradation and is a reliable
method of transmitting data.

The Company's telemetry front-end ("TFE") ground
support equipment consist primarily of fully tunable PCM bit
synchronizers operating at signal acquisition data rates up
to 35 megabits per second ("Mbps"), PCM decommutators, QPSK
modems and telemetry link analyzers. These products are
used in receiving, demodulating, synchronizing, decoding and
converting telemetry signals in a transmission link.

In 1997, the Company discontinued marketing of its Quad
7 telemetry processing system. The Quad 7 was a highly
integrated data acquisition and processing system platform
designed specifically for telemetry ground-based fixed and
mobile flight test instrumentation requirements, telemetry
signal processing and satellite communications applications.
Sales of Quad 7 systems and services represented
approximately 33% and 8%, respectively, of aerospace
telemetry revenue in 1996 and 1997.

Aerospace Telemetry Marketing

The Company markets its aerospace telemetry systems and
equipment through a small sales staff supported by
applications engineers and independent sales
representatives. The sales efforts of these personnel are
directed toward major aerospace companies, various agencies
of the United States and foreign governments, satellite
telecommunications companies and end-users of telemetry
equipment and systems. The Company's marketing
strategy has been to supply technical applications
engineering support for its sales personnel and to conduct
comprehensive equipment demonstrations for customers. The
Company believes this strategy permits it to compete against
larger competitors by emphasizing the Company's
technological capabilities.

Aerospace telemetry product sales to major aerospace
companies are usually on a subcontract basis under
negotiated firm fixed-price contracts. A substantial
portion of these sales are indirectly or directly funded by
the United States government and its agencies. The Company
believes that in 1995, 1996 and 1997, approximately 55%, 61%
and 72% of aerospace telemetry product sales, respectively,
were directly and indirectly funded by agencies of the
United States government. Direct sales of aerospace
telemetry products to the United States government and
its agencies were 8%, 18% and 19%, respectively, of
aerospace telemetry sales in 1995, 1996 and 1997.

Aerospace Telemetry Customers

A small number of customers account for a relatively
large portion of the Company's aerospace telemetry revenues.
Aggregate sales to five customers, including direct sales to
the United States government and its agencies, represented
approximately 50%, 63% and 78%, respectively, of aerospace
telemetry sales in 1995, 1996 and 1997. In 1995, two
customers each represented 12% of aerospace telemetry sales.
In 1996, two customers represented approximately 17% and
14%, respectively, of aerospace telemetry sales. In 1997,
three customer represented approximately 25%, 18% and 17%,
respectively, of aerospace telemetry sales.

Aerospace Telemetry Competition

The Company faces intense competition in the
marketplace for all of its aerospace products. Competitors
include many of the major aerospace contractors, all of whom
have much greater financial and technological resources than
the Company.

The Company believes the primary competitive factors in
its aerospace markets are product performance and quality,
knowledge of order opportunities, technological reputation
and cost. The Company's market penetration has been
influenced by the Company's relatively small marketing and
sales force and the long established reputations of some of
its competitors. In addition, a substantial portion of the
Company's business is obtained through the submission of
competitive proposals. See "Business - Aerospace Telemetry
Contracting."

Aerospace Telemetry Order Backlog

The Company's backlog of unfilled aerospace telemetry
product orders was approximately $1,715,000 and $1,366,000
at December 31, 1996 and 1997, respectively. The Company
estimates that substantially all of its backlog will be
shipped within one year.

Delays and cancellations of defense procurements in the
Company's market have adversely affected order rates from
time to time. Changing international and domestic political
events, and uncertainties regarding the level and priority
of defense budgets are expected to continue to have an
impact on new order levels.

A significant portion of the aerospace telemetry order
backlog at December 31, 1996 and 1997, was concentrated in a
few orders. The aggregate orders of five customers
represented approximately 65% and 75%, respectively, of
backlog at December 31, 1996 and 1997.

A substantial portion of backlog represents orders from
the United States government and its agencies and
subcontracts from prime contractors directly or indirectly
funded by agencies of the United States government. These
orders can be canceled at the convenience of the government.
In such a case, the Company is generally entitled to recover
costs incurred prior to the termination as well as a
negotiated profit.

Aerospace Telemetry Research and Development

Research and development for new aerospace telemetry
products and improvement of existing products was $583,000
in 1995 (17% of aerospace telemetry sales), $787,000 in 1996
(23% of aerospace telemetry sales) and $355,000 in 1997 (10%
of aerospace telemetry sales).

The market for the Company's aerospace telemetry
products is characterized by technological change. The
Company's ability to compete successfully depends, in part,
on its ability to develop new products and improve existing
ones. As a result of the Company's primary focus on its
mobile data communications business, the Company's
investment in aerospace telemetry product
research and development is likely to be reduced.
Accordingly, the Company may be unable to maintain the
competitive position of its aerospace telemetry products.
As a result, the Company may attempt to license the products
and software of third parties in order to continue to market
competitive products.

Aerospace Telemetry Contracting

In 1995, 1996, and 1997, approximately 55%, 61% and
72%, respectively, of aerospace telemetry sales were
believed to be derived directly and indirectly from defense
contracts for end-use by the United States government.
Substantially all of these orders are negotiated firm fixed-
price contracts. Under firm fixed-price contracts, the
Company agrees to provide equipment and services for a fixed
price and derives benefits from cost savings, but bears the
entire risk of cost overruns.

The Company is subject to certain business risks as a
supplier of defense-related equipment to the United States
government, including dependence on congressional
appropriations and changes in procurement policies, both of
which are subject to uncertainty. Reductions in government
expenditures for defense programs and changes in defense
priorities may have an adverse effect on the Company's
aerospace telemetry revenues and operating results.

Employees

At December 31, 1996 and 1997, the Company employed
approximately 70 and 75 personnel, respectively, all of whom
were located in the United States. A number of key
employees are highly skilled and critical to particular
aspects of the Company's business. The Company believes its
current human resources and its access to additional
resources should be adequate to support anticipated sales
levels in 1998. The Company operates in emerging and highly
competitive markets, and it must compete for skilled
technical personnel against competitors that are
significantly larger. As a result, the Company may be
unable to hire and retain personnel with the experience and
skills that are critical to its operations. In the event
such personnel cannot be hired or leave the employment
of the Company and cannot be replaced, the operations of the
Company would be adversely affected.

The Company has never experienced a work stoppage and
no employees are represented by a labor union. The Company
believes its employee relations are good.

Manufacturing

The Company's mobile data communications and aerospace
telemetry products are designed to be manufactured with
standard electronic components and surface mounted devices.
Manufacturing and material procurement for all of the
Company's products are integrated into one manufacturing
operation. The Company also designs and evaluates
communications systems and purchases products and software
from other manufacturers to offer complete
end-to-end communications systems.

The Company purchases integrated circuits, electronic
components, printed circuit boards and other fabricated
parts from outside vendors. The Company subcontracts the
assembly of all surface-mounted printed circuit boards to
third party contractors. The Company has multiple sources
for most of its purchased materials and components. For a
few components, such as the Company's MCT Series 2000 mobile
computer which is manufactured by a third party supplier,
only a single source may be immediately available and there
is a risk of delay in delivering product. The Company has
from time to time experienced delays from vendors, however,
these delays have not materially affected its business.

The Company maintains an in-house repair facility where
its products can be refurbished or repaired. The Company
generally warrants its products against defects and
workmanship for a period of ninety days and up to one year
from the date of shipment. Warranty extensions may be
purchased by any customer. Warranty expense has not been a
material factor in the Company's operations.

Environment

Compliance with federal, state and local laws and
regulations involving the protection of the environment did
not have and is not expected to have a material effect on
the Company's capital expenditures, earnings or competitive
position.

Trademarks and Patents

In 1994, the Company was awarded a patent on its
Automatic Deviation Compensation ("ADC") circuit. The ADC
circuit is used in the Company's mobile data communications
systems to monitor radio system performance and to
automatically correct individual mobile radio transmission
deviations from performance specifications to improve signal
reliability. However, the principal fields in which the
Company operates are characterized by technological
innovations and design obsolescence. As a result, the
Company believes that its success does not depend on
trademarks and patents to protect its hardware and software
designs, but primarily on the Company's ability to introduce
new products, advance its technology, and anticipate the
requirements of its customers.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's operations are headquartered in a single
building in Carlsbad, California with approximately 19,000
square feet. The facility is leased by the Company under an
agreement expiring in October 1998. The Company also leases
approximately 2,800 square feet of office and engineering
space in Clearwater, Florida, under a lease cancelable in
January 1999.

In 1997, the Company entered into a lease for a new
facility in Carlsbad, California. The new facility is
approximately 45,000 square feet and is leased by the
Company for an initial term of ten years. The Company
anticipates relocating its operations to the new facility in
May 1998.

ITEM 3. LEGAL PROCEEDINGS

On March 17, 1995, the Company, John A. Robinson, Jr.,
its former chief executive officer, and its wholly-owned
subsidiary ComViSat, Inc. were named as defendants in a suit
brought in Superior Court, San Diego County, by the two
founders of ComViSat, Inc. for, among other claims, wrongful
termination of employment of the two plaintiffs in January
1995 and alleged breach of duty of good faith, fraud and
defamation in connection with the Company's acquisition of
ComViSat, Inc. in 1994. The complaint sought unspecified
general, special and punitive damages and costs and
expenses. On May 5, 1995, the Company
filed an answer with the Superior Court denying all
allegations and filed a cross-complaint against the two
plaintiffs alleging, among other things, breach of contract
and the implied covenant of good faith and fair dealing,
breach of the duty of loyalty, fraud and intentional
interference with contractual relationships. The cross-
complaint sought unspecified damages, preliminary and
punitive injunctive relief, and costs and
expenses.

The plaintiffs' complaint and the Company's cross-
complaint were dismissed in 1996, and the parties agreed to
binding arbitration. An arbitration hearing was concluded
on February 1, 1998. On February 24, 1998 the arbitrator
ruled the Company did not have the right to terminate the
employment contracts of the plaintiffs in 1995 for the
failure to meet established financial performance targets,
and awarded plaintiffs damages of approximately $431,000 and
legal fees of $125,000. The damages awarded to plaintiffs
were approximately equivalent to the salary and benefits
payable under the unexpired term of their employment
agreements. The Company recorded expense for litigation
settlement of $516,000 in the fourth quarter of 1997.

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

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock is presently traded in the
over-the-counter market and quoted on the OTC Electronic
Bulletin Board under the trading symbol CODD. The
quotations represent inter-dealer quotations, without retail
markups, markdowns or commissions, and may not necessarily
represent actual transactions.
<TABLE>
The following table sets forth, for the fiscal quarter
indicated, the high and low closing bid price of the
Company's common stock as reported by the OTC Electronic
Bulletin Board.
<CAPTION>
High Low
Year ended December 31, 1997:
<S> <C> <C>
March quarter $ .51 $ .32
June quarter .35 .25
September quarter .39 .26
December quarter .39 .16

Year ended December 31, 1996:

March quarter $ .42 $ .19
June quarter .55 .28
September quarter .64 .34
December quarter .56 .39
__________________________
</TABLE>
The number of shareholders of the Company's common
stock, including holders whose shares are held in street
name, was estimated to be in excess of 2,000 at December 31,
1997.

There have been no dividends or other distributions on
common stock or preferred stock made by the Company since
its inception. The Company does not anticipate paying cash
dividends in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION

The Company operates in a single industry - the design,
manufacture and integration of digital communications
products and systems used primarily in land-based radio
systems. The two principal markets in which the Company
competes are wireless mobile data communications and
aerospace telemetry systems.

Results of Operations - 1997 Compared With 1996
<TABLE>
Sales by the Company's major product lines are
presented
below.
<CAPTION>
1996 1997
<S> <C> <C>
Mobile data communications...$ 7,880,000 $ 9,529,000
Aerospace telemetry............3,430,000 3,742,000
$11,310,000 $13,271,000
</TABLE>

The following table sets forth, as a percentage of
revenues, certain income (loss) data for the years ended
December 31, 1996
and 1997:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net sales.......... 100.0% 100.0%
Cost of sales...... 55.2 55.3
Gross profit....... 44.8 44.7
Operating expenses:
Selling, general and administrative 26.0 30.6
Research and development.... 15.7 9.7
Litigation Settlement. -- 3.9

Operating income (loss)...... 3.1 0.5
Income (loss) before extraordinary gain (1.7) 0.2
Extraordinary gain......... 8.8 0.1
Net income................. 7.1 0.3
</TABLE>

Operating Income

For the year ended December 31, 1997 ("1997"), the
Company reported income before extraordinary gain of $25,000
compared to a loss before extraordinary items of $187,000 in
the year ended December 31, 1996 ("1996"). Included in
income before extraordinary gain in 1997 is a charge of
$516,000 for litigation settlement. The improved operating
performance in 1997 compared to 1996 resulted primarily from
increased sales, a reduction in research and development
expense and interest expense, offset by an increase in
selling and administration expense.

The improvement in operating performance before the
loss for litigation settlement continued a trend toward
profitability begun in the second half of 1995, when the
Company reported its first operating profit. Although the
Company presently anticipates that the recent trend toward
annual operating profitability will continue in 1998, delays
in the award of new contracts experienced in the second half
of 1997 will adversely effect sales levels in the first
quarter of 1998, with the result that the Company expects an
operating loss in the first quarter of 1998.

Sales and New Orders

Net sales in 1997 were $13,271,000, an increase of 17%
over sales of $11,310,000 in 1996. Sales of mobile data
communications products in 1997 were $9,529,000, an increase
of 21% over sales of $7,880,000 in 1996. The increase in
sales resulted entirely from sales to customers in Mexico.
Sales of mobile data communications products to customers in
Mexico represented 53% and 59%, respectively, of mobile data
communications product sales in 1996 and 1997.

New orders for mobile data communications products
increased by 11% in 1997 over 1996, entirely as a result of
new orders from domestic customers. New order levels for
mobile data communications products from customers in Mexico
decreased by 9% in 1997 compared to 1996. The Company
expects that a significant portion of its new orders in 1998
for mobile data communications systems will be derived from
customers in Mexico. New orders from international
customers are subject to risks customarily encountered in
foreign markets, including fluctuations in monetary exchange
rates, export controls and political risk.
Future devaluations of Mexico's new peso compared to the
United States dollar will increase the cost of the Company's
products in Mexico. As a result, customers in Mexico could
delay the purchase of the Company's products or attempt to
renegotiate purchase prices. In such event, the Company's
revenue and gross margin could be adversely effected.

Sales of aerospace telemetry products in 1997 were
$3,742,000, an increase of 9% over sales of $3,430,000 in
1996. New orders for aerospace telemetry products in 1997
increased 8% over 1996.

The backlog of orders for mobile data communications
and aerospace telemetry products was approximately
$5,033,000 and $3,373,000 at December 31, 1996 and 1997,
respectively. The decrease in backlog resulted primarily
from a delay in customer orders experienced in the last half
of 1997. The Company anticipates new order levels and
backlog, for the first half of 1998, to significantly
improve over levels in the second half of 1997 based on
current bid and proposal activity. However, it is difficult
to estimate with certainty the timing and award of contracts
and, accordingly, there is no assurance there will be
an increase in new orders and backlog. The backlog of
orders is generally concentrated in the single orders of a
few customers, and the cancellation of any major orders
would have an adverse effect on the Company's net sales in
1998. Historically, the Company has not experienced a high
rate of order cancellations by customers.

Gross Margin

Gross margin, as a percentage of sales, was 45% of
sales in 1996 and 1997. Gross margin on sales of mobile
data communications products significantly improved in 1997
over 1996, primarily as a result of an increase in prices
and a change in product mix in 1997, with a higher
percentage of sales represented by standard products and
software which typically yield higher gross margin than
other product sales, which can include the products of
third-party suppliers such as mobile radios, applications
software and computer equipment.

The gross margin, as a percentage of sales, on
aerospace telemetry products decreased in 1997 compared to
1996 primarily as a result of a loss on a single customer
contract for a specially-modified telemetry system. The
gross margin on aerospace telemetry product sales in 1998 is
expected to return to historical gross margin levels.

The Company anticipates that gross margin in 1998, as a
percentage of sales, will be consistent with or slightly
improved over gross margin in 1997, based on projected sales
levels and product mix. Gross margin, however, can be
expected to fluctuate on a quarter-to-quarter basis and, in
the event projected sales levels are not achieved, gross
margin as a percentage of sales could be adversely effected.

Extraordinary Gain on Extinguishment of Debt and
Litigation Settlement

In 1996 and 1997, agreements for the settlement of
unsecured debt at a discount resulted in an extraordinary
gain of $995,000 and $13,000, respectively, net of related
expense. The gain on extinguishment of debt is reflected as
an extraordinary item in the consolidated financial
statements.

In February 1998, an arbitrator ruled the Company did
not have the right in 1995 to terminate the employment of
two officers of its subsidiary ComViSat, Inc. and awarded
damages and legal fees of approximately $556,000 to the
former officers of ComViSat. The damages awarded to the
former officers were approximately equivalent to the salary
and benefits payable over the unexpired term of their
employment contracts. The litigation settlement of
$516,000, net of reserves, is reflected as a charge against
income before extraordinary gain in the consolidated
financial statements.

Operating Expense, Interest Expense and Income Taxes

Selling, general and administrative expense was
$4,057,000 in 1997, an increase of $1,111,000 or 38%
compared to 1996. In addition, selling, general and
administrative expense increased to 31% of sales in 1997
from 26% of sales in 1996. The increase in selling, general
and administrative expense in 1997 resulted primarily from
increased mobile data communication product selling expense,
including advertising, trade show attendance and
travel expense. In addition, in 1997 the Company expanded
its domestic mobile data direct sales force. Selling,
general and administrative expense in 1998, as a percentage
of sales, is expected to be consistent with or slightly
lower than 1997 expense levels.

Research and development costs in 1997 decreased by
$487,000 or 27% compared to 1996 As a percentage of sales,
research and development expense decreased to 10% of sales
in 1997 from 16% of sales in 1996. The decrease in research
and development expense was a result of sharply reduced
development expense for aerospace telemetry products.
Research and development expense for mobile data
communications products in 1997 was comparable to 1996.
Research and development expense, as percentage of sales, is
expected to range from 10% to 12% of sales in 1998.

Interest expense was $79,000 in 1997, a decrease of
$445,000 from interest expense of $524,000 in 1996. The
decrease in interest expense resulted primarily from a
conversion of debt to preferred stock at the end of 1996.

Income tax expense, net of the benefit from the
utilization of federal and state net operating loss
carryforward benefits, was $24,000 in 1996 and 1997,
representing a provision for state income taxes. At
December 31, 1997, the Company and its wholly-owned
subsidiaries have combined net operating loss carryforward
benefits of approximately $28,800,000 available to offset
future federal income taxes, if any. The annual use of any
future net operating loss carryforward benefits, however,
will be limited on an annual basis due to the change in
ownership of the Company and its subsidiaries. This
limitation in the annual use of federal net operating loss
tax carryforward benefits is not expected to have a material
effect on income tax expense in 1998. The realization of
loss carryforward tax benefits is dependent upon
generating sufficient future taxable income prior to the
expiration of the loss carryforwards. Because the Company's
history of profitable operations is very recent, there is no
assurance that any loss carryforward tax benefits will be
realized in the future.

Results of Operations - 1996 Compared With 1995

The Company restructured its business operations and
management in the first quarter of 1995 which resulted in,
among other things, a significant reduction in operating
expenses in 1995. Any comparison of operating expenses
between the years ended 1996 and 1995 may not represent a
meaningful analysis because of the business restructuring.

<TABLE>
The following table sets forth, as a percentage of
revenues, certain income (loss) data for the years ended
December 31, 1995 and 1996:
<CAPTION>
1995 1996
<S> <C> <C>
Net sales............ 100.0% 100.0%
Cost of sales....... 72.6 55.2
Gross profit......... 27.4 44.8
Operating expenses:
Selling, general and administrative. 33.4 26.0
Research and development...... 10.6 15.7

Operating income (loss)......... (16.6) 3.1
Loss before extraordinary gain... (24.4) (1.7)
Extraordinary gain............... 13.4 8.8
Net income (loss)................ (11.0)% 7.1%
</TABLE>

Operating Income (Loss)

For the year ended December 31, 1996 ("1996"), the
Company reported its first annual operating profit of
$345,000 before interest expense, income taxes and
extraordinary gain, compared to an operating loss of
$(1,688,000) in the year ended December 31, 1995 ("1995").
The sharp turnaround in operating performance in 1996
compared to 1995 resulted primarily from increased sales,
improved gross margin on sales and a reduction in selling,
general and administrative expense; offset by an increase in
research and development costs.

The improvement in operating performance continued a
trend toward profitability begun in the second half of 1995,
when the Company reported an operating profit of
approximately $250,000 for the six month period. The trend
toward operating profitability is a direct result of the
Company's restructuring efforts completed in the first
quarter of 1995. These efforts included changes in
management, closing the VSAT product line and all
international mobile data communications sales offices, a
reduction in personnel and improved gross margins on sales.
Although the Company has recently established a trend toward
operating profitability, there can be no assurance that the
Company will be profitable in the future. The Company
operates in markets with intense competition and against
competitors with significantly greater financial and
technical resources. In addition, the Company's business is
presently concentrated in large single orders from a small
base of customers and, as a result, new order levels, sales
and operating profits or losses can fluctuate significantly
on a quarter-to-quarter and annual basis.

Sales and New Orders

Net sales in 1996 were $11,310,000, an increase of 11%
over sales of $10,171,000 in 1995. Sales of mobile data
communications products in 1996 were $7,880,000, an increase
of 18% over sales of $6,676,000 in 1995. The increase in
sales resulted entirely from an increase in sales to
customers in Mexico. Sales of mobile data communications
products to customers in Mexico were not significant in 1995
and represented 53% of mobile data communications product
sales in 1996. Sales of mobile data products to other
customers, primarily in the United States, decreased by 56%
in 1996 compared to 1995, primarily as a result of depressed
new order levels experienced in 1995 and the first half of
1996. The Company believes that its weak financial
condition in 1995 was a primary factor impacting new orders
for mobile data communications products. The Company, based
on current bid and proposal activity, believes that new
orders for mobile data communications products from
customers in the United States will increase in 1997.
However, because the Company's mobile data communications
product sales are concentrated in single large orders from a
small base of customers, it is extremely difficult to
project new order and sales levels with any certainty.

Sales of aerospace telemetry products in 1996 were
$3,430,000, a decrease of 2% from sales of $3,495,000 in
1995.

New orders for mobile data communications products
increased by 129% in 1996 over 1995, entirely as a result of
new orders from customers in Mexico. New order levels for
mobile data communications products from other customers,
primarily in the United States, decreased by 31% in 1996
compared to 1995. New orders for aerospace telemetry
products in 1996 were unchanged from 1995. The backlog of
orders for mobile data communications and aerospace
telemetry products was approximately $5,033,000 and
$5,703,000 at December 31, 1996 and 1995, respectively.

Gross Margin

Gross margin, as a percentage of sales, improved to 45%
of sales in 1996 from 27% of sales in 1995. Gross margin on
sales of mobile data communications products improved by
over 100% in 1996 compared to 1995, primarily as a result of
a change in product mix in 1996, with a higher percentage of
sales represented by standard products and software which
typically yield higher gross margin than other product
sales, which can include the products of third-party
supplier such as mobile radios, applications software and
computer equipment. The gross margin on mobile data product
sales in the first half of 1995 was adversely effected by
contract cost overruns.

The gross margin, as a percentage of sales, on
aerospace telemetry products increased by 37% in 1996 over
1995. Gross margin on the sale of aerospace telemetry
products in 1995 was impacted by charges for losses on
certain contracts in the first half of 1995.

Extraordinary Item - Gain on Extinguishment of Debt

In 1996, agreements for the settlement of unsecured
debt at a discount resulted in an extraordinary gain of
$995,000, net of related expense. The gain on
extinguishment of debt is reflected as an extraordinary item
in the consolidated financial statements.

Operating Expense, Interest Expense and Income Taxes

In the first half of 1995, the Company restructured its
operations and significantly reduced its level of operating
expenses. As a result, a comparison of operating expenses
for the years ended 1996 and 1995 may not be meaningful.

Selling, general and administrative expense was
$2,946,000 in 1996, a decrease of $451,000 or 13% compared
to 1995. In addition, selling, general and administrative
expense was reduced to 26% of sales in 1996 from 33% of
sales in 1995. The decrease in selling, general and
administrative expense in 1996 resulted primarily from lower
mobile data communication product selling expense and a
reduction in general and administrative expense.
These reductions resulted from reduced personnel costs and
discretionary selling expenses, such as advertising, trade
show and travel expense.

Research and development costs in 1996 increased by
$692,000 or 64% over 1995. As a percentage of sales,
research and development expense increased to 16% of sales
in 1996 from 11% of sales in 1995. Research and development
expense in 1995 was significantly below historical levels,
primarily as a result of the completion of major research
and development programs in 1995 and a reduction in
engineering personnel. Research and development expense in
1996, as a percentage of sales, returned to a level more
consistent with prior years as the Company added
engineering personnel to support mobile data communications
product software development projects.

Interest expense was $524,000 in 1996, a decrease of
$251,000 from interest expense of $775,000 in 1995. The
decrease in interest expense resulted from a restructuring
of debt in 1996, with lower interest rates on remaining
outstanding debt and a conversion of debt to preferred
stock.

Income tax expense, net of the benefit from the
utilization of federal and state net operating loss
carryforward benefits, was $24,000 in 1996 and 1995,
representing a provision for State income taxes.

Liquidity and Capital

Since its inception, the Company has financed its
operations, investments in new product development and met
its working capital requirements through the sale of common
stock, convertible debentures and other financings. In
1996, cash requirements were met by $273,000 in cash flow
from operations and proceeds of $1,430,000 from the sale of
common stock. In 1997, cash requirements where met
primarily with $512,000 in cash flow from operations and
borrowings of $613,000 under new bank credit lines.

In 1997, accounts receivable increased by $420,000 from
the prior year, due primarily to the timing of sales in the
last quarter of 1997 compared to 1996. Included in accounts
receivable at December 31, 1996 and 1997 were $584,000 and
$525,000, respectively, in receivables due from ISA.
Unbilled costs and earnings on contracts decreased by
$180,000 in 1997. The decrease was a result of the
difference in the timing of revenue recognition for
financial statement purposes and actual contract invoicing
which is determined by contract terms. Inventories in 1997
and 1996 were comparable. Prepaids and other assets
increased by $214,000 primarily as a result of deposits
with suppliers for inventory purchases and rent and security
deposits required under the terms of the new facility lease
agreement executed in 1997.

Investments in property and equipment were
approximately $322,000 in 1997. At December 31, 1997, the
Company had no material commitments for the purchase of
capital equipment. In 1997, the Company entered into a ten
year agreement for the lease of a new 45,000 square foot
headquarters and operations facility in Carlsbad,
California. The annual lease payments under the non-
cancelable lease for the first year are approximately
$451,000, with annual payments thereafter subject to a 4%
per year escalation factor.

In December 1997, the Company entered into a new
revolving credit arrangement with a bank. Under the
revolving credit line, which was modified in March 1998, the
Company can borrow up to the lesser of $1,000,000 or 80% of
eligible accounts receivable (as defined). At December 31,
1997 and March 24, 1998, there was $600,000 and $700,000,
respectively, outstanding under the revolving credit line.
The credit line is collateralized by a security interest in
all of the Company's assets and a $200,000 certificate of
deposit. The revolving credit line expires in January 1999,
at which time the credit line may be extended solely at the
option of the bank

The revolving credit line with the bank requires the
Company to meet various financial covenants on a quarterly
basis. At December 31, 1997, the Company did not meet the
financial covenants for minimum tangible effective net worth
and debt coverage ratios, as defined. As of December 31,
1997 and March 24, 1998, the bank has not waived compliance
with the financial covenants; however, the bank has agreed
to continue to advance loans under the revolving credit
line. In the event the Company does not meet these or other
loan covenants in the future, the bank may call all of its
debt for repayment and additional financing would be
required to retire the bank debt.

As a result of an adverse decision in litigation, the
Company is required to pay approximately $556,000 in
damages, which includes legal fees, to two plaintiffs. The
terms and conditions of payment are subject to future
discussion and negotiations. The cash required to meet this
obligation is expected to be provided by cash flow from
operations and additional financing.

Financing will be required for working capital and
operations in 1998. The Company believes that additional
financing, in the form of short-term and long-term debt,
preferred and common stock, or a combination of debt and
equity will be available in 1998 under terms and conditions
that are acceptable to the Company. Additional capital in
1998 is likely to be provided or arranged by the Company's
controlling shareholder, ISA. In the event financing is not
available in the time frame required, then
the Company would be forced to reduce its rate of sales
growth, if any, reduce operating expenses and reschedule
research and development projects. In addition, the Company
might be required to sell certain of its assets or license
its technologies to others. These actions, while necessary
for the continuance of operations during a period of cash
constraints and a shortage of working capital, could
adversely effect the Company's long-term business and
shareholder value.

Inflation, Changing Prices and Impact from the Year 2000

The effects of inflation have not had a material impact
on revenues or expenses during the three year period 1995
through 1997. At the present time, the Company is reviewing
its internal systems to determine the impact, if any, the
calendar year 2000 will have on its systems. It is the
intention of the Company to modify its system, if any
changes in systems are required.

Cautionary Statements

In the interest of providing the Company's shareholders
and potential investors with certain Company information,
including management's assessment of the Company's future
potential, certain statements set forth herein or elsewhere
in the Annual Report on Form 10-KSB and the consolidated
financial statements, contain or are based on projections of
the timing and amount of new orders, sales, gross margin,
operating expenses, the realization of assets and other
financial items or relate to management's future plans and
objectives or to the Company's future economic performance.
Such statements are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and in Section 21E of the Securities Exchange Act
of 1934, as amended.

Although any forward-looking statements contained
herein or otherwise expressed by or on behalf of the Company
are to the knowledge and in the judgment of the management
of the Company, expected to prove true and to come to pass,
management is not able to predict the future with certainty.
Accordingly, shareholders and potential investors are hereby
cautioned that certain events or circumstances could cause
actual results to differ materially from those projected or
predicted herein. In addition, the forward-looking
statements herein are based on management's knowledge and
judgment as of the date hereof, and the Company does not
intend to update any forward-looking statements to reflect
events occurring or circumstances existing hereafter.

In particular, the Company believes that the factors
described elsewhere herein the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997, as well as
the following factors could impact forward-looking
statements made herein or in future written or oral releases
and by hindsight, prove such statements to be overly
optimistic and unachievable.

The Company has a history of operating losses, with an
accumulated deficit of $30,201,000 at December 31, 1997.
Following a restructuring of its business operations and
management in the first quarter of 1995, the Company has
reported marginal operating profitability. The Company
reported income before litigation settlement, interest and
income tax of approximately $250,000 in the second half of
fiscal 1995; $345,000 for the year ended December 31, 1996;
and $592,000 for the year ended December 31, 1997. Although
the Company has established a recent trend of operating
profitability, the Company expects to report an operating
loss in the first quarter of 1998 and there is no assurance
that the Company will operate at a profit in the future.

The Company's results of operations, new order rates
and backlog have fluctuated in the past and are likely to
fluctuate from period to period depending on a number of
factors, including the timing and receipt of significant
orders, the timing of the completion of contracts, increased
competition, changes in the demand for the Company's
products, changes in the sales mix of products and general
economic conditions. The effects of these factors can have
a material impact on quarterly results of operations and
cash flow.

The Company's revenue is dependent, in part, on
significant contracts from a limited number of customers.
In the years ended December 31, 1995, 1996 and 1997,
approximately 38%, 57% and 65%, respectively, of the
Company's consolidated revenue was generated
by five or fewer customers. The Company believes that
revenue derived from large orders from current and future
customers will continue to represent a significant portion
of its revenue; however, recent efforts to expand the
Company's sales force and broaden its product line are
expected to lead to an increase in the Company's customer
base. The inability of the Company to continue to secure
and maintain a sufficient number of large contracts would
have a material adverse effect on the Company's business
operating results and financial position.

The purchase of a wireless mobile data communications
networking and information system is often a large-scale
purchase by the customer and, accordingly, requires the
Company to engage in sales efforts over an extended period
of time which can range from several months to several
years. Further, sales of the Company's mobile data
communications networking systems are concentrated in public
safety customers whose purchases are generally made under
highly competitive public requests for proposal. As a
result, the Company will make a considerable
investment in a potential contract award with no certainty
that the Company's bid will be successful.

The Company supplies complex wireless mobile data
communications systems, which include its own proprietary
products and software, as well as products, software and
services of other third party suppliers. From time to time,
the Company may encounter problems with its products and
software or the products and software of third party
suppliers. Such problems could result in loss of or delay
in market acceptance of the Company's products, contract
cost over-runs, or a delay in payments from customers. All
of these factors could have a material adverse effect on the
Company's business operations and financial position.

Approximately 75% of the Company's current outstanding
shares of common stock are held by a single shareholder,
ISA. As a result of its controlling ownership interest in
common stock, ISA has the right to nominate and elect a
majority of the members of the board of directors, and to
approve significant transactions.

At the present time, the only trading market for the
Company's common stock is the United States over-the-counter
market. The price per share and trading volume of the
Company's common stock is subject to significant volatility
in both market price per share and trading volume. Factors
such as new product announcements and contract awards by the
Company or its competitors; fluctuations in operating
results; new order and backlog levels; the terms and
conditions of new financing; and general market and economic
conditions could have an immediate and significant impact on
the market price of shares of common stock.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements and supplementary
data required by this Item are set forth at the pages
indicated in Item 13(a).

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT

The information required by this item is contained in
the definitive Proxy Statement of the Company to be filed in
connection with its 1998 Annual Meeting of Shareholders,
which information is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Financial Statements and Exhibits.
Page
(1) Financial Statements:
Report of Independent Accountants 28

Consolidated Balance Sheets as of December
31, 1996 and 1997 29

Consolidated Statements of Income (Loss)
for the Years Ended December 31, 1995,
1996 and 1997 30

Consolidated Statements of Shareholders'
Equity (Deficit) for the Years Ended
December 31, 1995, 1996 and 1997 31

Consolidated Statements of Cash Flows for
the Years Ended December 31, 1995,
1996 and 1997 32

Notes to Consolidated Financial Statements 33

(2) Financial Statement Schedules:
II: Valuation and Qualifying Accounts 45

All other financial statement schedules have been
omitted since the information is not applicable or
required, or is included in the financial statements or
notes thereto.

(b) Reports on Form 8-K:

None.

2.1: Agreement and Plan of Reorganization, dated as of
February 27, 1993, among CCI Coded Communications, Inc.,
Coded Communications Corporation, Decom Acquisition Corp.
and Decom Systems, Inc. (1)

2.2: CCI Coded Communications, Inc. (Wyoming) and Coded
Communications Corporation (Delaware) Articles of Merger and
Agreement and Plan of Merger. (2)

2.3: CCI Coded Communications, Inc. (British Columbia)
and CCI Coded Communications, Inc. (Wyoming) Certificate of
Registration and Articles of Continuance. (2)

2.4: Mutual Agreement of Terms and Conditions, dated
May 1, 1996 and the Second Agreement, dated July 17, 1996
(filed as Exhibits to the Company's Definitive Proxy
Statement dated July 26, 1996).

3.1: Certificate of Incorporation and Bylaws of Coded
Communications Corporation (Delaware). (1)

3.2: Certificate of Amendment of Certificate of
Incorporation. (4)

3.3: Certificate of Correction of Certificate of
Designation of Preferred Stock, Series A and Certificate of
Designation of Preferred Stock, Series A. (4)

3.4: Certificate of Correction of Certificate of
Designation of Preferred Stock, Series B and Certificate of
Designation of Preferred Stock, Series B. (4)

4.1: 6% Convertible Debenture and Fourth Amendment to
Loan Agreement by and between Coded Communications
Corporation, Coded Mobile Communications Corporation, Coded
Mobile Communications Corporation and Renaissance Capital
Partners II, Ltd. (4)

10.1: Executive Employment Agreement between Coded
Communications Corporation, Decom Systems, Inc. and John A.
Robinson, Jr. (2)

10.2: Executive Employment Agreement between Coded
Communications Corporation, Decom Systems, Inc. and Steven
E. Borgardt. (2)

10.3: Executive Employment Agreement between Coded
Communications Corporation, Decom Systems, Inc. and Richard
K. Carrine. (2)

10.4: Executive Employment Agreement between Coded
Communications Corporation and James B. Moore. (2)

10.5: Executive Employment Agreement between Coded
Communications Corporation and Maurice Nieman. (2)

10.6: Industrial Lease by and between Madison Square
Development Partnership and Decom Systems, Inc. (filed as an
exhibit to Decom's Annual Report on Form 10-K for the fiscal
year ended September 30, 1987 and incorporated herein by
reference).

10.7: Agreement for the Purchase and Sale of Assets and
to Appoint Distributors by and between Coded Communications
Corporation, Decom Systems, Inc. and Consolidated Coded
Communications Corporation (filed as an exhibit to Decom's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1987 and incorporated herein by reference).

10.8: Executive Employment Agreement between Coded
Communications Corporation and Gerard P. Dennehy (filed as
an exhibit to the Company's Registration Statement on Form
SB-2 (No 33-72526) and incorporated herein by reference).

10.10: Consolidated Coded Management Incentive Program,
with First and Second Amendments (filed as an exhibit to the
Company's Registration Statement on Form 10 dated September
8, 1989 and incorporated herein by reference).

10.11: Declaration of the Management Incentive Trust
(filed as an exhibit to the Company's Registration Statement
on Form 10 dated September 8, 1989 and incorporated herein
by reference).

10.12: Loan Agreement, as amended, between Renaissance
Capital Partners, II Ltd.; Jersey Invest, Ltd; Stewart
Leasing Company; Mindful Partners, L.P.; S.L. Rudick IRA;
Herman Hodges and M. Driver and Coded Communications
Corporation, Coded Mobile Communications, Inc.; ComViSat,
Inc.; and Decom Systems, Inc. (filed as an exhibit to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995 and incorporated herein by
reference).

20.1: Post Effective Amendment No. 1 to Coded
Communications Corporation Stock Option Plan for Employees
of Coded Communications Corporation and Subsidiaries (filed
as an exhibit to the Company's Registration Statement on
Form S-8 (No. 33-51912) dated November 5, 1993 and
incorporated herein by reference).

20.2: Coded Communications Corporation Stock Option Plan
for Employees of Decom Systems, Inc. (filed as an exhibit to
the Company's Registration Statement on Form S-8 (No. 33-
71264) dated November 5, 1993 and incorporated herein by
reference).

21.1: List of Subsidiaries (filed herein).

23.1: Consent of Coopers & Lybrand, L.L.P. (filed
herein).

27.1: Financial Data Schedule as of December 31, 1997
(filed herein).
_____________________

(1) Incorporated by reference to Registration Statement
on Form S-4 (File No. 33-59046) declared effective July 9,
1993.

(2) Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB (File No. 0-17574) for the quarter
ended October 2, 1993.

(3) Incorporated by reference to the Company's Definitive
Proxy Statement dated January 26, 1996.

(4) Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB (File No. 0-17574) for the quarter
ended September 28, 1996.

SIGNATURES

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

CODED COMMUNICATIONS CORPORATION
(Registrant)

s/s Hugo R. Camou
Hugo R. Camou
Chief Executive Officer
and Director

In accordance with the Exchange Act, this report has
been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

Signature Title Date

/s/Hugo R. Camou Chief Executive Officer March 24, 1998
Hugo R. Camou and Director

/s/ John Wiggins President and Director March 24, 1998
John Wiggins

/s/ Fernando Pliego Executive Vice President March 24, 1998
Fernando Pliego Finance

/s/ Steven E. Borgardt Vice President Finance March 24, 1998
Steven E. Borgardt and Chief Financial
Officer (Chief
Accounting Officer)

Director
Fernando Molina

/s/ Miguel Vildosola Director March 24, 1998
Miguel Vildosola

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of
Coded Communications Corporation

We have audited the consolidated financial statements and
financial statement schedule of Coded Communications
Corporation and subsidiaries (the "Company") as of December
31, 1996 and 1997 and the related consolidated results of
operations and cash flows for each of the three years in the
period ended December 31, 1997. 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 audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of the Company at
December 31, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated
financial statements, the Company's liquidity has been adversely
affected by losses from operations. In addition, continuation
of operations is dependent upon the availability of additional
capital and the Company's ability to generate increased
revenues and satisfactory margins on sales. These
issues raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The
consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.

/s/ COOPERS & LYBRAND L.L.P.

San Diego, California
February 27, 1998

<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<CAPTION>
December 31,
1996 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 963,000 $ 351,000
Restricted cash -- 200,000
Accounts receivable. 1,776,000 2,174,000
Unbilled costs and earnings on contracts 180,000 --
Inventories 1,480,000 1,475,000
Prepaids and other assets 206,000 420,000
Total current assets ,605,000 4,620,000

Property and equipment, net (Note 5) 730,000 689,000
Other assets 186,000 --

$ 5,521,000 $ 5,309,000

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current portion of debt (Note 6) $ 1,441,000 $ 613,000
Accounts payable 979,000 810,000
Accrued payroll and related benefits 489,000 425,000
Deferred revenue and customer payments 748,000 773,000
Accrued loss on litigation (Note 12) -- 556,000
Other accrued liabilities 1,416,000 929,000
Total current liabilities 5,073,000 4,106,000

Long-term debt, net of current portion (Note 6) -- 600,000
Commitments and contingencies (Notes 1, 2 and 10) -- --

Shareholders' equity (Note 9):
Preferred stock, liquidation preference
$5,478,000 in 1996 and $5,367,000 in 1997 1,000 1,000
Common stock, $.01 par value; 75,699,812
and 76,568,112 shares issued and outstanding
in 1996 and 1997, respectively 757,000 765,000
Additional paid-in capital 29,929,000 30,038,000
Accumulated deficit (30,239,000) (30,201,000)
Total shareholders' equity 448,000 603,000

$ 5,521,000 $ 5,309,000
</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.

<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Years Ended December 31,
1995 1996 1997
<C> <C> <C> <C>
Net sales $ 10,171,000 $ 11,310,000 $ 13,271,000
Cost of sales 7,383,000 6,248,000 7,338,000

Gross margin 2,788,000 5,062,000 5,933,000

Operating expense:
Selling and administrative
expense 3,397,000 2,946,000 4,057,000
Research and development expense 1,079,000 1,771,000 1,284,000
Litigation settlement -- -- 516,000

Total operating expense 4,476,000 4,717,000 5,857,000

Operating income (loss) (1,688,000) 345,000 76,000

Interest expense 775,000 524,000 79,000
Interest and other income (3,000) (16,000) (52,000)
Provision for income taxes 24,000 24,000 24,000

Income (loss) before
extraordinary item (2,484,000) (187,000) 25,000

Extraordinary gain from
extinguishment of debt 1,367,000 995,000 13,000

Net income (loss) $(1,117,000) $ 808,000 $ 38,000

Basic earnings per common
share (Note 13):
Income (loss) before
extraordinary items $ (.17) $ -- $ --

Extraordinary items, net .10 .02 --
Net income (loss) $ (.07) $ .02 $ --

Diluted earnings per common
share (Note 13):
Income (loss) before
extraordinary items $ (.17) $ -- $ --

Extraordinary items, net .10 .02 --
Net income (loss) $ (.07) $ .02 $ --

</TABLE>

The accompanying notes are an integral part of the
consolidated financial statements.

<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

Total
Common Stock Preferred Stock Additional Accumulated Shareholders'
Shares Par Value Par Value Paid-in Capital Deficit Equity(Deficit)

<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994. 12,538,324 $ 125,000 --- $22,191,000 $ (29,930,000) $(7,614,000)

Conversion of 13.5%
debentures. ......... 1,319,997 13,000 --- 977,000 --- 990,000
Issuance of common
stock for services.... 707,880 8,000 --- 162,000 --- 170,000
Net loss for year. --- --- --- --- (1,117,000) (1,117,000)

Balances, December
31, 1995 14,566,201 146,000 --- 23,330,000 (31,047,000) (7,571,000)

Issuance of common stock
for services 244,000 2,000 --- 46,000 --- 48,000
Issuance of Series A
preferred stock in
exchange for debt --- --- --- 800,000 --- 800,000
Issuance of Series B
preferred stock in
exchange for debt --- --- 1,000 4,799,000 --- 4,800,000
Conversion of Series B
preferred stock to
common stock... 200,006 2,000 --- (2,000) --- ---
Issuance of common stock
in exchange for accrued
interest................ 273,585 3,000 --- 130,000 --- 133,000
Issuance of common stock
for cash and other
consideration..........60,416,020 604,000 --- 826,000 --- 1,430,000
Net income for year. --- --- --- --- 808,000 808,000

Balances, December 31,
1996......... .....75,699,812 757,000 1,000 29,929,000 (30,239,000) 448,000

Issuance of common stock
for services..... 225,000 2,000 --- 41,000 --- 43,000
Issuance of common stock
for cash........ 310,000 3,000 --- 71,000 --- 74,000
Conversion of Series A
preferred stock to
common stock 333,300 3,000 --- (3,000) --- ---
Net income for year. .--- --- --- --- 38,000 38,000

Balances, December 31,
1997.... ............76,568,112 $ 765,000 $ 1,000 $30,038,000 $(30,201,000) $ 603,000
</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.

<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,117,000) $ 808,000 $ 38,000
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Extraordinary items, net (1,367,000) (995,000) (13,000)
Depreciation and amortization 495,000 367,000 363,000
Other 296,000 93,000 124,000
(1,693,000) 273,000 512,000
Change in assets and liabilities,
net of effects of non-cash transactions:
Restricted cash -- -- (200,000)
Accounts receivable 482,000 81,000 (420,000)
Unbilled costs and earnings
on contracts 410,000 637,000 180,000
Inventories 381,000 60,000 5,000
Other current and long-term assets 182,000 158,000 (87,000)
Accounts payable 450,000 (400,000) (169,000)
Accrued loss on litigation -- -- 556,000
Reserve for restructuring (960,000) 138,000 (142,000)
Accrued and other liabilities (23,000) (550,000) (371,000)

Net cash provided (used) by
operating activities (771,000) 397,000 (136,000)

Cash flows from investing activities:
Additions to property and equipment (159,000) (276,000) (322,000)

Net cash used by investing activities (159,000) (276,000) (322,000)

Cash flows from financing activities:
Issuance of common stock for cash -- 1,430,000 74,000
Additions to debt 1,050,000 12,000 613,000
Payments on debt, including capital leases (379,000) (801,000) (841,000)

Net cash provided (used) by
financing activities 671,000 641,000 (154,000)

Net increase (decrease) in cash and
cash equivalents (259,000) 762,000 (612,000)
Cash and cash equivalents, beginning
of year 460,000 201,000 963,000

Cash and cash equivalents, end of year $ 201,000 $ 963,000 $ 351,000

Supplemental cash flow information:
Cash paid for interest $ 144,000 $ 160,000 $ 25,000
Cash paid for income taxes 16,000 20,000 8,000
</TABLE>

The accompanying notes are an integral part of the
consolidated Financial statements.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Summary of Significant Accounting
Policies:

Company Operations Coded Communications Corporation
and its wholly-owned subsidiaries (the "Company") develop,
manufacture and market wireless digital receiving and
processing equipment, and mobile network software and
systems for use in two primary markets: mobile data
communications and aerospace telemetry. The Company's
products employ similar technologies and techniques to
receive and process digitized information transmitted over
conventional voice radio channels and satellite
communications links. The Company's mobile data
communications products and systems are marketed to small
and large operators of vehicle fleets and include public
safety, emergency medical services, utility and service
fleets. The Company's aerospace telemetry
products and systems are marketed to the United States and
foreign governments and agencies and to defense prime
contractors for use in research, development, test and
evaluation programs for aircraft, space and weapons systems.

In 1996, ISA Investments Corporation ("ISA") acquired
57,272,767 shares or approximately 76% of the then
outstanding shares of common stock of the Company. ISA is
majority controlled subsidiary of ISA Corporativo, S.A. de
C.V. ("ISA Corporativo"). ISA Corporativo is majority owned
by Mr. Hugo R. Camou and his immediate family. As a result
of its common stock ownership interest and its ability to
nominate and elect a majority of the members of the
Company's board of directors, the Company is considered to
be controlled by ISA.

Basis of Presentation - The consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles. 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.

Principles of Consolidation - The consolidated
financial statements include the accounts of Coded
Communications Corporation and its wholly-owned
subsidiaries. All material intercompany accounts and
transactions have been eliminated.

Accounts Receivable. The Company provides a reserve
for doubtful accounts where circumstances indicate that a
reserve is necessary. As of December 31, 1996 and 1997, the
Company's reserve for doubtful accounts was $208,000 and
$186,000, respectively.

Inventories - Inventories are valued at the lower of
cost or market, but not in excess of net realizable value.
Cost is determined by the first-in, first-out method. The
Company has provided estimated reserves for inventory in
excess of the Company's current needs and for technological
obsolescence. Due to the uncertainties inherent in the
evaluation process it is at least reasonably possible that
reserves for excess and obsolete inventories could be
further revised within the next year. The
components of inventory are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
<S> <C> <C>
Raw materials and supplies.. $ 475,000 $ 497,000
Work-in-process......... 1,163,000 1,098,000
Finished goods....................7,000 44,000
Less progress billings.........(165,000) (164,000)
$1,480,000 $1,475,000
</TABLE>

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has multiple sources of supplies for most
of its purchased parts and components. For a few
components, there may be only a single source of supply.
Although the Company believes that other suppliers could
provide similar components, a change in suppliers could
cause a delay in manufacturing and customer
delivery, and a possible loss of sales. A delay in or loss
of sales would adversely affect operating results.

Property and Equipment - Property and equipment is
carried at cost. Depreciation and amortization are provided
under the straight-line method with expected lives ranging
from three to five years for office equipment, capitalized
design costs and manufacturing and test equipment. Leasehold
improvements and leased equipment are amortized over the
useful life or the term of the respective lease, whichever
is less.

Revenue Recognition - Revenues on engineering and
systems contracts requiring contract performance prior to
commencement of deliveries are recorded using the
percentage-of-completion method, primarily based on contract
costs incurred to date compared to total estimated contract
costs. Losses, if any, are recorded when known. Revenue
recognized in excess of amounts billed is classified as
current or non-current, on the basis of expected realization
or payment within or beyond one year, under unbilled costs
and earnings on contracts. Contract invoicing in
excess of revenue is classified as a current liability.
All other revenue is recognized upon shipment of products or
performance of services. The Company has provided loss
reserves for certain contracts based on the estimated cost
to complete the contracts. Due to the uncertainties
inherent in the estimation process it is at least reasonably
possible that an increase in the contract loss reserves
could be required within the next year.

Income Taxes - Income taxes are provided utilizing the
liability method. The liability method requires the
recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and
liabilities. Additionally, under the liability method,
changes in tax rates and laws will be reflected in income in
the period such changes are enacted.

Statements of Cash Flows - For purposes of the
Statements of Cash Flows, cash and cash equivalents include
cash deposits and bank money market accounts.

In 1997, non-cash financing activities included the
issuance of 225,000 shares of common stock in exchange for
services valued at $43,000.

In 1996, non-cash financing activities included the
issuance of Series A and Series B preferred stock with an
aggregate liquidation value of $5,600,000 in exchange for
debt and accrued interest; the issuance of 517,585 shares of
common stock for services and the settlement of accrued
interest valued at $181,000; and the issuance of non-
interest bearing creditor notes in the amount of $207,000
for the settlement of approximately $414,000 in unsecured
creditor claims.

In 1995, non-cash financing activities consisted of the
issuance of 1,319,997 shares of common stock in exchange for
$990,000 principal amount of 13.5% Convertible Senior
Subordinated Debentures, the issuance of 707,880 shares of
common stock for services valued at $170,000 and the
issuance of non-interest bearing creditor notes in the
amount of $1,473,000 for the settlement of approximately
$2,946,000 in unsecured creditor claims.

Research and Development Costs - Company-sponsored
research and product development costs are charged to
expense as incurred.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk. The Company invests its
excess cash, if any, in bank money market accounts, and debt
instruments of financial institutions and corporations with
strong credit ratings. The Company has established
guidelines relative to diversification and maturities that
maintains safety and
liquidity.

The Company manufactures and sells communications
products and systems to United States government agencies,
municipalities and commercial customers. The Company
performs ongoing credit evaluations of its customers and
generally does not require collateral. A substantial
portion of international sales are shipped against letters
of credit or cash advances. The Company maintains reserves
for estimated credit losses.

Fair Value of Financial Instruments. The carrying
amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents, accrued liabilities
and short-term borrowings approximate fair value due to the
short-term nature of these instruments. Fair value
approximates cost for all other financial instruments.

Restricted Cash. The Company, under the terms of a
loan agreement with a bank, has agreed to maintain a
certificate of deposit in the amount of $200,000 as
collateral. At December 31, 1997, such cash amount is
restricted for that purpose.

Stock-Based Compensation. The Company accounts for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair
market value of the Company's common stock at the date of
the grant over the amount an employee must pay to
acquire the common stock.

Basic Earnings Per Share Available to Common
Shareholders. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") effective December 31, 1997.
SFAS 128 requires the presentation of basic and diluted
earnings per share. Basic EPS is computed
by dividing income available to common stockholders,
adjusted for any cumulative dividends on preferred stock
earned during the year, by the weighted average number of
common shares outstanding for the period. Diluted EPS, is
computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive
potential common shares consist of the incremental common
shares issuable upon the conversion of convertible preferred
stock (using the "if converted" method), convertible debt
and exercise of stock options and warrants for
all periods. All prior period earnings per share amounts
have been restated to comply with the SFAS 128. See Note 13
"Earnings Per Share."

Recent Accounting Pronouncements. During 1997, the
Financial Accounting Standards board issued Statement No.
130, Reporting Comprehensive Income ("SFAS 130"), and
Statement No. 131, Disclosures of an Enterprise and Related
Information ("SFAS 131"). These accounting standards are
effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes new standards for reporting
and displaying comprehensive income and its components.
SFAS 131 requires disclosure of certain information
regarding operating segments, products and services,
geographic areas of operation and major customers. The
adoption of these Statements is expected to have no material
impact on the Company's consolidated financial statements.

Reclassification. Certain amounts in the 1995 and 1996
consolidated financial statements have been reclassified and
restated to conform with the current year presentation.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Management's Plan for Future Operations and
Financing:

Following the restructuring of the Company's operations
and management in the first quarter of 1995, operating
expenses were reduced and gross margin on sales increased.
As a result, the Company achieved operating profits before
litigation settlement, interest expense and income taxes of
$250,000 in the second half of 1995, and $345,000 and
$592,000 for the years ended December 31, 1996 and 1997,
respectively. However, the Company operates in
markets that are emerging, volatile and highly competitive.
Moreover, the Company's orders are typically concentrated in
large contracts with a long sales cycle derived from a small
base of customers. As a result, new orders, sales levels
and operating profitability, if any, can and will fluctuate
on a quarter-by-quarter basis. Although the Company
believes the recent trend of annual operating profitability
will continue in 1998, based on current information, the
Company expects to report a loss from operations in the
first quarter of 1998. There is no assurance that the
Company will operate at a profit in the future.

3. Extraordinary Gain on Extinguishment of Debt:

As more fully discussed in Note 6 "Debt and Credit
Lines", in 1995, 1996 and 1997 agreements were reached with
certain unsecured creditors on the extinguishment of debt
resulting in gains, net of related expense, of $1,367,000 in
1995, $995,000 in 1996 and $13,000 in 1997. The gains on
extinguishment of debt are reflected as an extraordinary
item in the accompanying consolidated financial statements.

4. Investment and Restructuring of Debt:

In September 1996, the Company completed a series of
transactions which resulted in ISA acquiring a 76% common
stock ownership interest in the then outstanding shares of
the Company's common stock; and the restructuring of the
Company's $6,600,000 in secured debt. See Note 1 "The
Company and Summary of Significant Accounts Policies."

ISA acquired its 57,272,767 shares or 76% common stock
ownership interest for, among other things, cash payments
totaling $1,400,000 and an ISA guarantee of not less then
$10,000,000 in orders for mobile data communications
products from its customers in Mexico and Latin America,
over an eighteen month period. Prior to its investment in
the Company, ISA was a distributor of the Company's mobile
data communications products in Mexico. As a condition of
its agreement with the Company, ISA was required to deposit
in a third party escrow account 24,000,000 shares of the
Company's common stock to secure its guarantee of
$10,000,000 in product orders. In the event ISA
placed less than $10,000,000 in product orders over the
eighteen month period, then a portion of the escrowed shares
were to be canceled and returned to the Company. In 1997,
ISA met its obligation to place not less than $10,000,000 in
product orders over an eighteen month period and all of the
escrowed shares are to be released to ISA.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the ISA investment in the Company in
1996, holders of the Company's senior secured $1,800,000
principal amount Bridge Loan canceled their debt in exchange
for a cash payment of $400,000; the issuance of 8,000 shares
of the Company's Series A preferred stock (with a
liquidation preference
of $800,000); and the issuance of new $600,000 principal
amount, 6% Term Notes. The 6% Term Notes are convertible,
at the option of the holders, into 2,400,000 shares of
common stock and are collateralized by a security interest
in the Company's assets. In addition, the holder of the
Company's secured $4,000,000 principal amount, 12%
Convertible Debentures ("12% Debentures")
converted the 12% Debentures and accrued interest of
approximately $800,000 into a new seven year, $4,800,000
principal amount 6% Convertible Debenture (the "6%
Debenture"). The 6% Debenture was subsequently converted in
December 1996 into 48,000 shares of the Company's Series B
preferred stock, with a liquidation value of $4,800,000.
The Series B preferred stock is convertible into
approximately 7,837,000 shares of the Company's
common stock. All of the shares of Series B preferred stock
are held by Renaissance Capital Partners, II, Ltd., an
investment partnership based in Dallas, Texas.

5 Property and Equipment:
<TABLE>
Property and equipment consisted of:
<CAPTION>
December 31,
1996 1997
<S> <C> <C>
Manufacturing, test and
demonstration equipment $ 2,272,000 $ 2,452,000
Leaseholds, office and other
equipment 1,559,000 1,699,000
Capitalized designs and tooling 125,000 125,000
Equipment under capitalized leases 13,000 13,000
3,969,000 4,289,000
Less accumulated depreciation
and amortization (3,239,000) (3,600,000)
$ 730,000 $ 689,000
</TABLE>
6. Debt and Credit Lines:
<TABLE>
<CAPTION>
Debt and credit lines consisted of: December 31,
1996 1997
<S> <C> <C>
Revolving credit line with bank,
due January 1999 $ -- $ 600,000
Note with bank, due May 1998 -- 13,000
6% Term Notes, due March 1999 600,000 600,000
Creditors' Notes, non-interest bearing 837,000 --
Installment notes, interest
rates up to 16% 4,000 --
1,441,000 1,213,000
Less amount due within one year (1,441,000) (613,000)
Long-term debt, due after one year $ -- $ 600,000
</TABLE>

In December 1997, the Company entered into revolving
credit line and note agreements with a bank which were
subsequently modified in March 1998, under which the Company
can borrow, on the revolving credit line, up to the lesser
of $1,000,000, or 80% of eligible accounts receivables, as
defined. The revolving credit line matures January 1, 1999
and may be extended solely at the bank's option. Interest
on the revolving credit line is at the bank's referenced
rate plus 2.5% percent (reference rate plus 0.5%, or 9% at
December 31, 1997) and is payable monthly. The
revolving credit line is collateralized by a $200,000
certificate of deposit and a senior security interest in all
of the Company's assets.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The revolving credit line and revolving note agreements
require the Company to meet certain financial covenants on a
quarterly basis. At December 31, 1997, the Company did not
meet the financial covenants for minimum tangible effective
net worth and debt coverage ratios, as defined. As of
December 31, 1997 and March 24, 1998, the bank has not
waived compliance with the financial covenants; however, the
bank has agreed to continue to advance loans under the
revolving credit line. In the event the Company does not
meet these or other loan covenants in the future, the bank
may call all of its debt for repayment and additional
financing would be required to retire the bank debt.

The revolving credit line is classified as of current
liability in the consolidated financial statements.

The 6% Term Notes were originally due in September
1997. Prior to the maturity date, the holders of the notes
extended the maturity date to March 1, 1999. Interest on
the 6% Term Notes is payable quarterly, and the notes are
collateralized by a subordinated security interest in the
assets of the Company. The 6% Term Notes are convertible
into shares of the Company's common stock at a per share
price of $.25 (an aggregate of 2,400,000 shares of common
stock).

In 1995, the Company engaged the San Diego Wholesale
Credit Association to assist in the formation of an
unsecured creditors' committee and an out-of-court
composition plan (the "Creditor Plan") for the settlement of
unsecured creditors' claims. Under the Creditor Plan
implemented by the Company in September 1995,
certain unsecured creditors accepted 50% of their credit
claims in full settlement of their claims (the "settlement
value"), with quarterly repayments beginning September 30,
1995 at a fixed rate of 5% of the settlement value with the
remaining balance of the settlement value due December 31,
1997. At December 31, 1995 and 1996, the balance of the
non-interest bearing Creditors' Note was $1,394,000 and
$837,000, respectively. The Creditors' Note was
repaid in full in December 1997.

7. Income Taxes:
<TABLE>
The provision for income taxes consisted of the
following:
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Current $ 24,000 $ 24,000 $ 24,000
Deferred -- -- --
$ 24,000 $ 24,000 $ 24,000
</TABLE>

A reconciliation of the statutory federal income tax
and the Company's pretax income or loss (including
extraordinary gain) with the Company's reported income tax
expense is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Federal statutory rate. (34.0)% 34.0% 34.0%
State income taxes, net
of federal tax benefits ..1.5 1.9 35.5
Income tax benefits not
recognized (recognized) for
financial statement purposes.. 33.7 (33.0) (30.8)

1.2% 2.9% 38.7%
</TABLE>

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
The major components of deferred tax assets consisted
of the following:
<CAPTION>

1996 1997
<S> <C> <C>
Deferred tax assets:
Net operating losses and
tax credit carryforward $ 10,422,000 $ 10,300,000
Reserves not currently
deductible 671,000 120,000
11,093,000 10,420,000
Valuation allowance (11,093,000) (10,420,000)
Net deferred tax assets $ -- $ --
</TABLE>

The Company has established a valuation allowance
against its deferred tax assets due to the uncertainty
surrounding the realization of such assets. The Company
periodically evaluates the recoverability of the deferred
tax assets. At such time as it is determined that it is
more likely than not that deferred tax assets are
realizable, the valuation allowance will be reduced.

At December 31, 1997, the Company had estimated net
operating loss carryforwards for federal tax purposes of
approximately $28,800,000 and tax credit carryforwards of
$518,000, which expire in the years 1998 through 2011. The
realization of these loss carryforwards and tax credits are
dependent upon the Company generating sufficient future
taxable income prior to the expiration of the net operating
loss and tax credit carryforwards. Because of the Company's
history of operating losses, there is no assurance that any
amount of the net operating loss carryforwards and tax
credits will be realized.

The Internal Revenue Code (the "Code") limits the
availability of income tax net operating losses and certain
tax credits that arose prior to certain cumulative changes
in a corporation's ownership resulting in a change of
control of the Company. The Company's use of its net
operating loss carryforwards and tax credit carryforwards
will be significantly limited because the Company underwent
"ownership changes" in 1993 and 1996. In each
year following the changes, the Company will be able to
offset taxable income by a limited amount of the pre-
ownership change carryforwards. Net operating losses and tax
credits that are unavailable in any year as a consequence of
this limitation may be carried forward for future use
subject to the restrictions of the Code.

8. Related Party Transactions:

In 1996 and 1997, third party customers of ISA placed
new orders for mobile data communications products of
approximately $5,346,000 and $5,000,000, respectively. The
Company believes the terms and conditions of these orders
are consistent with the terms and conditions of similar
orders accepted by the Company from third party customers in
the United States. In addition, sales to ISA customers in
Mexico in 1996 and 1997 were approximately $4,141,000 and
$5,663,000, respectively, and at December 31, 1996 and 1997
there was $584,000 and $525,000, respectively, in accounts
receivable due from ISA. See Note 11 "Product Lines and
Major Customers."

In 1995, two independent directors each received
100,000 shares of the Company's common stock for services.
The shares of common stock were valued at an aggregate of
$52,000. The independent directors received no other direct
compensation for their services, except for the
reimbursement of expenses incurred to attend Board of
Director meetings. Both independent directors
resigned their positions in 1996.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Common and Preferred Stock:

The Company is authorized 100,000,000 shares of $.01
par value common stock. In 1996, the Company's shareholders
approved an amendment to the Company's Certificate of
Incorporation authorizing 2,000,000 shares of $.01 par value
preferred stock. At December 31, 1997, the Board of
Directors had designated Series A and Series B preferred
stock.

On September 27, 1996, the Company issued 8,000 shares
of $.01 par value convertible Series A preferred stock in
exchange for the settlement of debt. Each share of Series A
preferred stock is entitled to receive dividends on a
cumulative basis at the annual rate of $8.00 per share, when
and as declared by the Board of Directors. Dividends on the
Series A preferred stock have preference over any
distributions to the holders of the Series B
preferred stock and common stock. Undeclared cumulative
dividends on Series A preferred stock were approximately
$55,000 at December 31, 1997. Each share of the Series A
preferred stock is convertible into 300 shares of common
stock, subject to certain anti-dilution provision (2,066,700
shares of common stock at December 31, 1997), and the Series
A preferred stock has a liquidation preference of $100.00
per share over any distributions to holders of common stock
and Series B preferred stock. Holders of the Series A
preferred stock have votes per share equivalent to the
number of shares of common stock to which
the Series A preferred stock may be converted, and such
votes are combined with the votes of common and Series B
stockholders and voted as a single class. At December 31,
1996 and 1997, there were 8,000 and 6,889 shares,
respectively, of Series A preferred stock outstanding with
an aggregate liquidation preference value
of $800,000 and $689,000, respectively.

On December 20, 1996, the Company issued 48,000 shares
of $.01 par value convertible Series B preferred stock in
exchange for debt. Each share of Series B preferred stock
is convertible into 163.27 shares of common stock (7,636,954
shares of common stock at December 31, 1997) subject to
certain anti-dilution provision, and each share of Series B
preferred stock is entitled to receive dividends on a
cumulative basis at the annual rate of
$6.00 per share, when and as declared by the Board of
Directors. Dividends on the Series B preferred stock have
preference over distributions to common stockholders and are
junior to any distributions to Series A preferred
stockholders. Undeclared cumulative dividends on Series B
preferred stock were $281,300 at December 31, 1997. The
holder of the Series B preferred stock has votes per share
equivalent to the number of shares of common
stock to which the Series B preferred stock may be
converted, and such votes are combined with the votes of
common and Series A stockholders and voted as a single
class. At December 31, 1996 and 1997, there were 46,775
shares of Series B preferred stock outstanding with an
aggregate liquidation preference value of
$4,678,000.

In 1997, the Company issued 225,000 shares of common
stock in exchange for services valued at $43,000, and
310,000 shares of common stock valued at $74,000 for the
exercise of stock options. The value of the services was
charged to expense in 1997. In addition, 1,111 shares of
Series A preferred stock were converted into 333,300 shares
of common stock.

In 1996, in connection with the ISA investment and the
restructuring of debt, 60,272,767 shares of common stock
were issued for a value of $1,400,000. See Note 4
"Investment and Restructuring of Debt." In addition, in
1996 the Company issued 517,585 shares of common stock in
exchange for services and accrued interest valued at
$181,000 and issued 143,250 shares of common stock for
$30,000 in cash upon the exercise of outstanding
employee stock options. The value of the services and
interest was charged to expense in 1996.

In 1995, the Company issued 1,319,997 shares of common
stock in exchange for $990,000 principal amount, 13.5%
Debentures and issued 707,880 shares of common stock in
exchange for services valued at $170,000. The value of the
services was charged to expense in 1995.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under the Company's 1992 Incentive and Non-Qualified
Stock Option Plan (the "1992 Option Plan"), as amended on
September 19, 1996, options to purchase an aggregate of
13,250,000 common shares may be granted to directors,
officers and employees. Options under the 1992 Option Plan
are granted at a price not less than 75% of the fair market
value of a common share at the date of grant,
and the right to exercise the option generally vests over
such periods as determined by the Board of Directors, but
generally over a period of six months to three years, and
expires in five years. As of December 31, 1997, options to
purchase 11,162,300 shares had been granted under the 1992
Option Plan.
<TABLE>
The following table summarizes stock option
transactions for the three years ended December 31, 1997:
<CAPTION>

Weighted
Number Average Price
of Shares Per Share
<S> <C> <C>
Balance, as of December 31, 1994 1,054,288 $ 2.18
Granted 2,953,000 $ .32
Canceled (764,373) $ 2.45
Balance, as of December 31, 1995 3,242,915 $ .49
Granted 7,542,500 $ .30
Exercised (143,250) $ .20
Canceled (2,067,165) $ .51
Balance, as of December 31, 1996 8,575,000 $ .29
Granted 3,405,000 $ .33
Exercised (110,000) $ .21
Canceled (707,700) $ .31
Balance, as of December 31, 1997 11,162,300 $ .30
</TABLE>

The weighted average life of options outstanding at
December 31, 1997 was 37 months. At December 31, 1997,
options for 3,919,016 shares were exercisable at prices
ranging from $.20 to $.40 per share, and 1,834,450 shares
were available for future grant.

The Company has adopted the disclosure-only provisions
of SFAS No. 123 "Accounting for Stock-Based Compensation."
Had compensation costs for the Company's stock option plan
been determined based on the fair-value at the grant date
for awards in 1995, 1996 and 1997 consistent with the
provisions of SFAS No. 123, net income (loss) and net income
(loss) per common share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Net income (loss):
As reported $(1,117,000) $ 808,000 $ 38,000
Pro forma (1,165,000) 376,000 (18,000)

Net income (loss)
per basic and diluted
common share:
As reported $ .07 $ .02 $ --
Pro forma .07 .01 --
</TABLE>

The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for
grants in 1995, 1996 and 1997: dividend yield of 0%;
expected volatility ranging from 61% to 77%; risk-free
interest rates ranging from 5.1% to 6.6%; and expected lives
of 2 to 4 years.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1997 the Company had reserved
25,100,404 common shares for issuance of 12,996,750 shares
under employee stock options; 9,703,654 common shares for
issuance upon the conversion of Series A and Series B
preferred stock into common stock; and 2,400,000 common
shares for issuance upon the conversion of 6% Term Notes
into common stock.

10. Commitments and Employee Savings Plan:

The Company leases its Carlsbad, California
administrative and manufacturing facility under a non-
cancelable operating lease expiring in October 1998. The
minimum annual lease payments under this lease are
approximately $172,000 in 1998. In addition, the Company
leases an office in Florida under a lease cancelable in
January 1999. The minimum annual lease payments
under this lease in 1998 are approximately $38,000 per year.

In 1997, the Company entered into a non-cancelable
operating lease for a new 45,000 square foot headquarters
and operations facility located in Carlsbad, California.
The basic terms of the lease expires in 2007, and requires
annual minimum lease payments in the first year of
approximately $451,000, with 4% per year annual increases in
lease payments thereafter. The Company expects to relocate
to the new facility in May 1998.
<TABLE>
Annual future minimum lease payments, which include
$6,000 for the potential exercise of a cancelable option,
are as follows:
<CAPTION>
Years Ending December 31,
<C> <C>
1998 $ 454,000
1999 468,000
2000 481,000
2001 500,000
2002 520,000
</TABLE>

Total rent expense, including month-to-month
equipment rentals, was $448,000, $194,000 and $246,000,
respectively, for the years ended December 31, 1995, 1996
and 1997.

The Company entered into employment agreements in
1996 and 1997 with executive officers. These agreements
cover a term of three years. Base salaries vary under the
individual agreements and provide for annual incentive
bonuses under a plan approved by the Board of Directors.
The agreements also contain severance provisions in the
event that the Company terminates the
employment of the executive officers without cause and
under certain defined circumstance, if the executive officer
terminates employment. In February 1998, the Company's
chief executive officer and president resigned. Under a
negotiated separation and release agreement, the former
officer was paid $225,000 in February 1998. This payment
will be charged to expense in the first quarter of 1998.

The Company maintains a 401(k) Savings Plan covering
substantially all full time employees. Plan participants
may contribute up to 15 percent of their eligible
compensation to the plan. The Company made elective
matching contributions to the Plan of $13,000 and $46,000,
respectively, in 1996 and 1997. The Company did not make an
elective matching contribution to the plan in 1995.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Product Lines and Major Customers:

The Company operates in a single business segment
engaged in the design, manufacture and marketing of a wide
range of digital receiving and processing equipment for use
in two markets, wireless mobile data communications and
aerospace telemetry. Net sales of wireless mobile data
communications and aerospace telemetry products and services
for the three years ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Mobile data communications $ 6,676,000 $ 7,880,000 $ 9,529,000
Aerospace telemetry 3,495,000 3,430,000 3,742,000
VSAT earthstations -- -- --
$10,171,000 $11,310,000 $ 13,271,000
</TABLE>
In 1995, sales to three customers represented 10%, 11%
and 25%, respectively, of mobile data communications product
sales. Included in mobile data communications sales in 1995
is $394,000 in revenue recognized from the licensing of
manufacturing rights of the Company's MPT 1327 modem. The
MPT 1327 modem is marketed primarily in the United Kingdom.
In 1996, sales of mobile data communications products to two
customers in Mexico represented approximately 53% of mobile
data communications sales. In 1997, customers in Mexico
represented 59% of mobile data communications
sales, and one other customer represented 11% of mobile data
product sales.

In 1995, two customers each represented 12% of
aerospace telemetry sales. In 1996, two customers
represented 17% and 14%, respectively, of aerospace
telemetry sales. In 1997, three customers represented 25%,
19% and 18%, respectively, of aerospace telemetry sales.
Export sales of aerospace telemetry products represented
18%, 12% and 3% of total aerospace telemetry
sales in 1995, 1996 and 1997, respectively. Direct sales of
aerospace telemetry products to the United States government
and its agencies represented 8%, 18% and 19% of aerospace
telemetry sales in 1995, 1996 and 1997, respectively.

12. Litigation Loss:

In March 1995, the Company and its wholly-owned
subsidiary ComViSat, Inc. were named as defendants in a suit
brought in Superior Court, San Diego County, by the two
founders of ComViSat, Inc. for, among other claims, wrongful
termination of employment of the two plaintiffs in January
1995 and alleged breach of duty of good faith, fraud and
defamation in connection with the Company's acquisition of
ComViSat, Inc. in 1994. In May 1995, the Company filed an
answer with the Superior Court denying all allegations and
filed a cross-complaint against the two plaintiffs alleging,
among other things, breach of contract and the implied
covenant of good faith and fair dealing, breach of
the duty of loyalty, fraud and intentional interference with
contractual relationships.

The parties agreed to binding arbitration in 1996,
and the plaintiffs' complaint and the Company's cross-
complaint were dismissed. An arbitration hearing was
concluded on February 1, 1998. On February 24, 1998, the
arbitrator ruled the Company did not have the right to
terminate the employment contracts of the plaintiffs in 1995
for the failure to meet established financial
performance targets, and awarded plaintiffs damages of
approximately $431,000 and legal fees of $125,000. The
damages awarded to plaintiffs were approximately equivalent
to the salary and benefits payable under the unexpired term
of their employment agreements. The Company recorded an
expense from litigation settlement, net of reserves, of
$516,000 in the fourth quarter of 1997.

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Earnings Per Share (EPS):
<TABLE>
In accordance with the disclosure requirements of
SFAS 128, a reconciliation of the numerator and denominator
of basic and diluted EPS is provided as follows:
<CAPTION>

Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Basic Earnings Per Share:
Numerator:
Income (loss) before
extraordinary gain $ (2,484,000) $ (187,000) $ 25,000
Less preferred stock
dividends -- (27,000) (336,000)

Income (loss) available to
common shareholders (2,484,000) (214,000) (311,000)
Extraordinary gain 1,367,000 995,000 13,000

Net income (loss) available
to common shareholders $ (1,117,000) $ 781,000 $ (298,000)

Denominator:
Average common shares
outstanding 14,244,000 44,309,000 76,151,000

Diluted Earnings Per Share:
Numerator:
Income (loss) before
extraordinary gain $ (2,484,000) $ (187,000) $ 25,000
Add interest expense -- 33,000 33,000

Income (loss) available
to common shareholders (2,484,000) (154,000) 58,000
Extraordinary gain 1,367,000 995,000 13,000

Net income (loss) available
to common shareholders $ (1,117,000) $ 841,000 $ 71,000

Denominator:
Denominator - Basic EPS 14,244,000 44,309,000 76,151,000

Effect of dilutive securities:
Convertible preferred stock -- 926,000 9,926,000
Convertible debt -- 2,400,000 2,400,000
Common stock options -- 582,000 733,000

14,244,000 48,217,000 89,210,000
</TABLE>

_______________________

CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
Charged
Beginning (Credited) To Account Ending
Description Balance Expense Reclassification Write-Off Balance
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:

Year Ended 1997 $ 208,000 $ (8,000) $ -- $ (14,000) $ 186,000

Year Ended 1996 $ 237,000 $ 4,000 $ -- $ (33,000) $ 208,000

Year Ended 1995 $ 110,000 $ 50,000 $ 77,000 $ -- $ 237,000

<CAPTION>
Charged Inventory
Beginning (Credited) To Write-Off Ending
Description Balance Expense Reclassification Balance

Inventory reserves:
<S> <C> <C> <C> <C>
Year Ended 1997 $ 687,000 $ 128,000 $(293,000) $ 522,000

Year Ended 1996 $ 754,000 $ 122,000 $(189,000) $ 687,000

Year Ended 1995 $ 610,000 $ 118,000 $ 26,000 $ 754,000

<CAPTION>
Charged
Beginning (Credited) To Charged Ending
Description Balance Expense to Reserve Balance

Restructuring reserves:
<S> <C> <C> <C> <C>
Year Ended 1997 $ 157,000 $(102,000) $ (40,000) $ 15,000

Year Ended 1996 $ 295,000 $ -- $ (138,000) $ 157,000

Year Ended 1995 $1,359,000 $ -- $(1,064,000) $ 295,000
</TABLE>

Exhibit 21.1

CODED COMMUNICATIONS CORPORATION
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1997

Name State or Country Percent
of Incorporation Owned

Wholly-owned subsidiaries of
Coded Communications Corporation:

Coded Mobile Communications, Inc. Delaware 100%
Decom Systems, Inc. Delaware 100%
ComViSat, Inc. California 100%
Coded ComViSat de Mexico, S.A. Mexico 100%

Wholly-owned subsidiaries (inactive)
of Decom Systems, Inc.:

Coded LMR Holding, Inc. California 100% (1)
Coded Land Mobile Radio, Inc. California 100% (1)
Coded Communications Network
Systems, Inc. California 100% (1)
DSI Management Co. California 100% (1)
Decom Systems, International California 100% (1)
Decom Systems GmbH Germany 100% (1)

___________________________________________
(1) Percentage of ownership of Decom Systems, Inc.

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the
registration statements of Coded Communications Corporation
on Form S-8 (Registration No. 33-532802) pertaining to the
Coded Communications Corporation and subsidiaries' 1992
Incentive and Non-Qualified Stock Option Plan of our report
dated February 27, 1998, which includes an explanatory
paragraph about the Company's ability to continue as a going
concern, on our audits of the consolidated financial
statements and financial statement schedule of Coded
Communications Corporation as of December 31, 1996 and
1997 and for each of the three years in the period ended
December 31, 1997, which is included in this Annual Report
on Form 10-KSB.

COOPERS & LYBRAND L.L.P.

San Diego, California
February 27, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 351,000
<SECURITIES> 0
<RECEIVABLES> 2,360,000
<ALLOWANCES> (186,000)
<INVENTORY> 1,475,000
<CURRENT-ASSETS> 4,620,000
<PP&E> 4,289,000
<DEPRECIATION> (3,600,000)
<TOTAL-ASSETS> 5,309,000
<CURRENT-LIABILITIES> 4,106,000
<BONDS> 1,213,000
0
5,367,000
<COMMON> 25,437,000
<OTHER-SE> (30,201,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,309,000
<SALES> 13,271,000
<TOTAL-REVENUES> 13,271,000
<CGS> 7,338,000
<TOTAL-COSTS> 5,857,000
<OTHER-EXPENSES> (52,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,000
<INCOME-PRETAX> 49,000
<INCOME-TAX> 24,000
<INCOME-CONTINUING> 25,000
<DISCONTINUED> 0
<EXTRAORDINARY> 13,000
<CHANGES> 0
<NET-INCOME> 38,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>