<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

        For the transition period from             to                    
                                       -----------    ----------------

                         COMMISSION FILE NUMBER 0-26140

                       HIGHWAYMASTER COMMUNICATIONS, INC.
             (Exact name of Registrant as specified in its charter)

<TABLE>


                               DELAWARE                                            51-0352879
<S>                                                                  <C>
(State or other jurisdiction of incorporation or organization)       (I.R.S. Employer Identification Number)
</TABLE>

                                 1155 KAS DRIVE
                            RICHARDSON, TEXAS 75081
          (Address of principal executive offices, including zip code)

      (Registrant's telephone number, including area code): (972) 301-2000

        Securities Registered Pursuant to Section 12(b) of the Act: NONE

          Securities Registered Pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.01 PAR VALUE
                             (Title of each Class)

         Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X   NO
                                             ---    ---

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

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 22, 1999 was $19,398,743.*

         The number of shares outstanding of Registrant's Common Stock was
24,967,960 as of March 22, 1999.


<PAGE>   2


                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 1999 annual meeting of stockholders are incorporated herein by
reference into Part III of this Report. Such proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 1998.

         Certain exhibits filed with the Registrant's Registration Statement on
Form S-1 (Registration No. 33-91486), as amended, the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, the Registrant's Form
10-Q Quarterly Report for the quarterly period ended June 30, 1996, the
Registrant's Current Report on Form 8-K filed on October 7, 1996, the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, the Registrant's Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1997, the Registrant's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1997, the Registrant's Registration Statement on Form S-3
(Registration No. 333-57281), as amended, the Registrant's Registration
Statement on Form S-4 (Registration No. 333-38361), as amended, the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, the
Registrant's Form 10-Q Quarterly Report for the quarterly period ended June 30,
1998, the Registrant's Form 10-Q Quarterly Report for the quarterly period ended
September 30, 1998, the Registrant's Current Report on Form 8-K on September 17,
1998, and the Registrant's Current Report on Form 8-K on September 4, 1998 are
incorporated herein by reference into Part IV of this Report.

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

         *Excludes the Common Stock held by executive officers, directors and
by stockholders whose ownership exceeds 5% of the Common Stock outstanding at
March 22, 1999. Exclusion of such shares should not be construed to indicate
that any such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the Registrant or that
such person is controlled by or under common control with the Registrant.



<PAGE>   3


                       HighwayMaster Communications, Inc.

                                   FORM 10-K
                  For the Fiscal Year Ended December 31, 1998

                                     INDEX
<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                               ----
<S>               <C>                                                                                           <C>
PART I   .........................................................................................................1
         ITEM 1.  BUSINESS........................................................................................1
         ITEM 2.  PROPERTIES.....................................................................................22
         ITEM 3.  LEGAL PROCEEDINGS..............................................................................22
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................24

PART II  ........................................................................................................24
         ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                      STOCKHOLDER MATTERS........................................................................24
         ITEM 6.  SELECTED FINANCIAL DATA........................................................................26
         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS........................................................27
         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................31
         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................31
         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE........................................................32

PART III ........................................................................................................32
         ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................32
         ITEM 11. EXECUTIVE COMPENSATION.........................................................................32
         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                      AND MANAGEMENT.............................................................................32
         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................32

PART IV  ........................................................................................................33
         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                      ON FORM 8-K................................................................................33
</TABLE>


                                       i

<PAGE>   4


                                     PART I

ITEM 1.     BUSINESS

GENERAL

         The following discussion is qualified in its entirety by the more
detailed information and consolidated financial statements (including the notes
thereto) appearing elsewhere in this Annual Report on Form 10-K. Stockholders
should carefully consider the information presented under "Risk Factors" below.


HISTORICAL BACKGROUND

         HighwayMaster Communications, Inc., a Delaware Corporation, (the
"Company" or "HighwayMaster") through its wholly-owned subsidiary HighwayMaster
Corporation develops and implements mobile communications solutions for long
haul truck fleets, service vehicle fleets and other mobile asset fleets,
including integrated voice, data and position location services. The Company
provides mobile communications services through a wireless enhanced services
network, which utilizes patented technology developed and owned by the Company
to integrate various transmission, long-distance, switching, tracking and other
services provided through contracts with certain telecommunications companies
and more than 70 cellular carriers. Through its agreements with cellular
carriers, the Company is able to capitalize on the more than $50 billion which
cellular carriers have invested to establish and expand cellular coverage in
the United States. The Company's communications network covers 99% of the
available cellular service areas in the United States and 100% of the available
A-side coverage in Canada. Call processing and related functions for the
Company's network are provided through a network switching center (the "NSC").
The Company holds 19 United States patents that cover certain key features of
its network which are used in locating and communicating with vehicles using
the existing cellular infrastructure.

         The Company was organized on April 24, 1992 as By-Word Joint Venture
L.P., a Delaware limited partnership with one general partner, By-Word
Technologies, Inc. and one limited partner, the FBR Eighteen Corporation
("FBR"). FBR was wholly-owned by the Eighteen Wheeler Corporation ("Eighteen
Wheeler"). On April 27, 1992, By-Word Joint Venture L.P. change its name to
HighwayMaster L.P. (the "Limited Partnership").

         On February 4, 1994, HighwayMaster L.P. was recapitalized resulting in
the creation of HM Holding Corporation with Eighteen Wheeler becoming a
wholly-owned subsidiary of HM Holding Corporation. FBR and the Limited
Partnership were merged with and into Eighteen Wheeler, and the name of the
surviving corporation was changed to HighwayMaster Corporation. By virtue of the
merger, HighwayMaster Corporation became the successor in interest to the
Limited Partnership. In February 1995, HM Holding Corporation changed its name
to HighwayMaster Communications, Inc.

PRODUCTS AND SERVICES

         The Company's products and services can be classified into three major
categories: truck fleet mobile communications, service vehicle management and
mobile asset tracking.

TRUCK FLEET MOBILE COMMUNICATIONS

         The initial applications for the Company's wireless enhanced services
network have been developed for, and are currently being marketed and sold to
companies which operate in the long-haul trucking market. The Company provides
long-haul trucking customers with a comprehensive package of mobile
communications and management control services, thereby enabling its trucking
customers to effectively monitor their operations and improve the performance
of their fleets.


                                       1

<PAGE>   5


         These services are provided by linking customers to the Company's
network through the installation of Series 5000 Mobile Units in their trucks.
The Series 5000 Mobile Unit enables a truck driver to send and receive voice
and data messages and utilize all of the other features and capabilities of the
Company's enhanced communications network. The Series 5000 Mobile Unit also has
navigational tracking capabilities which allow trucking companies to map a
truck's position, typically within 100 meters, anywhere in the United States
and Canada. Furthermore, the Series 5000 Mobile Unit is capable of performing a
number of other functions such as calculating fuel tax mileage, estimating
times of arrival, storing data and monitoring on-board electronic engine and
other electronic functions. For small to mid-sized fleets, the Company also
offers a dispatch software package that enables a trucking dispatcher to
optimize the use of its fleet by processing data transmitted by the Series 5000
Mobile Units and performing a variety of fleet management information
functions.

         Series 5000 Mobile Unit. The Series 5000 Mobile Unit includes the
following: (i) a menu-driven display module which provides two large lines of
scrollable text on the dashboard; (ii) a microphone which clips on the sun
visor for "hands free" communication utilizing voice-recognition and
voice-synthesis technologies; (iii) a modified cellular telephone handset and
cradle; (iv) a cellular antenna; (v) a Global Positioning System ("GPS")
navigational antenna; and (vi) a computerized system module in the vehicle
which contains the positional reporting device, the cellular transceiver and
the on-board computer. The system module also houses voice-activation and
voice-synthesis software, data storage capability and unique technology that
significantly reduces the risk of cellular roaming fraud. The module provides
ports to allow for incorporation of peripheral equipment, such as a fax
machine, printer and engine monitoring equipment. The Series 5000 Mobile Unit
was designed to be "user-friendly," to have installation times that are shorter
than competing satellite unit installations, and to limit driver training to an
average of one hour. The system module is remotely programmable from the host
computer by the trucking company and by the Company.

SERVICE VEHICLE MANAGEMENT

         In August 1998, the Company entered into an agreement with member
companies of SBC Communications, Inc. (the "SBC Companies"), whereby the SBC
Companies purchased 11,500 mobile units, customized proprietary software and
accompanying services from the Company for an initial term of one year. Based
on the Series 5000 platform, in addition to fleet monitoring capabilities and
voice communication, the mobile units purchased by the SBC Companies feature
alarm monitoring capabilities whereby the driver can summon emergency
assistance if required. In the first quarter of 1999, the Company entered into
a second agreement with the SBC Companies which extended the initial one year
term to three years. Subsequently, the SBC Companies ordered an additional
3,140 mobile units. The Company is actively investigating the application of
its service vehicle product to other prospective service fleet operators.

MOBILE ASSET TRACKING

         The Company is currently developing TrackWare(TM); a new tracking
product application which will be initially marketed to current and potential
truck fleet customers. The Company plans to introduce its TrackWare(TM)
mobile-asset tracking product in mid-1999. The initial configuration is being
designed to allow trucking companies to track their tethered or un-tethered
trailers and report position data to a host on their office personal computer.
Based in part on a strategic alliance with Cellemetry L.L.C. allowing the
Company to utilize the Cellemetry(R) data network, the Company believes its
tracking solution will be among the most efficient in delivering short data
messages for a low monthly cost, and with a low initial hardware investment.
TrackWare(TM) is a trademark of HighwayMaster Communications, Inc. Cellemetry(R)
is a registered service mark of Cellemetry L.L.C.

DISCONTINUED PRODUCTS AND SERVICES

         During the first quarter of 1998, the Company released its Series 3000
Mobile Unit. Less expensive and with more limited functionality than the
Company's Series 5000 product, the Series 3000 was primarily a voice and limited
data product. It was targeted at small fleets and owner operators who did not
require all the features of the Series 5000

                                       2

<PAGE>   6


Mobile Unit, but could benefit from the Company's wireless enhanced services
network. Initial sales volumes were less than expected, and as a result, sales
and marketing activities were suspended in the second quarter of 1998. After a
reassessment of the market potential of this product offering, the Company
discontinued the Series 3000 Mobile Unit in the third quarter of 1998.

         On August 31, 1998, the Company announced that it halted the
development of AutoLink(R) and would not launch the service in late 1998 as
previously anticipated. Targeted at both original equipment manufacturers
("OEM") and aftermarket segments, the AutoLink(R) product and service was
designed to provide motorists with an intelligent communications link to various
emergency, roadside assistance and information service providers. Factors that
contributed to the decision include the fact that no orders had been obtained
for sales of the AutoLink(R) product to the OEM market, resulting in an
inability to achieve economies of scale in the product and infrastructure for
the aftermarket. In addition, the Company's strategic partner in the venture
indicated that it would not proceed with the Company. The Company performed a
"soft wrap-up" of the AutoLink(R) assets and proprietary software and remains
positioned to proceed with the product should the Company identify a new
strategic partner and obtain firm OEM market commitments. AutoLink(R) is a
registered trademark of Prince Corp.

COMPETITION

         In each of the markets currently targeted by the Company, there are a
number of other companies that offer or plan to offer some form of two-way
mobile communication using a variety of different technologies which compete or
could eventually be used to compete with the Company. These companies primarily
utilize satellite-based communications technologies, specialized mobile radio
("SMR"), enhanced specialized mobile radio ("Enhanced SMR"), and terrestrial
links for dedicated short range communications systems. See "Risk Factors --
Competition and Technological Change."

         Conventional Satellite Communications. Satellite communication is
accomplished through transmission of a signal from an earth-based transmitter
to a satellite, which automatically retransmits the signal to an earth-based
receiver. Many communication satellites are geo-stationary and remain over a
single point over the equator by orbiting the earth in the same direction and
at the same speed as the rotation of the earth. Mobile equipment designed for
satellite communication is equipped with highly specialized rotating antennae,
which are continuously directed toward the satellite, and utilize highly
complex data or voice compression systems to minimize demands on satellite
capacity. This type of mobile communication equipment broadcasts over the radio
frequency spectrum. Domestically, the FCC regulates and controls the number of
satellite communications systems that may be placed in service.

         Satellite communication available to the transportation industry
generally utilizes a single earth station to transmit and receive data via
satellite to and from satellite communication units installed in trucks.
Messages created by truck drivers on an onboard keyboard can be stored,
compressed and transmitted in short bursts. Although voice communication is
theoretically possible for mobile communication systems that utilize satellite
transmissions, the current limited capacity and high cost of satellite
communication have tended to limit competitive product offerings to data-only
services.

         Satellite systems currently cover 100% of the continental United
States, and their comprehensive coverage may be perceived by truckers and
trucking companies as an advantage over the cellular system. The Company
believes that any marketing or operational advantage derived from satellite
coverage, as compared to the Company's system (which covers approximately 95% of
the United States interstate highway system), is nullified by the fact that
satellite systems require more costly equipment and do not currently offer voice
communication on a cost-effective basis. Furthermore, satellite system users can
experience queuing delays during peak periods between transmission and receipt
of messages. In addition, because geo-stationary satellites stay over the
equator, transmission and receipt of data in North America is sometimes
interrupted or rendered impossible by obstacles on the southern horizon, such as
nearby tall buildings or mountains. There can be no assurance that the costs of
satellite systems and satellite-based voice communication services will remain
higher than the cost of the Company's products and voice communication services.

                                       3

<PAGE>   7


         The Company's primary satellite competitor in the long-haul trucking
market is Qualcomm, Inc. ("Qualcomm") which markets its products and services
primarily to large fleets in the United States. Drivers access and utilize the
system through an onboard keyboard and data display screen. Management believes
that Qualcomm offers or plans to offer its products and services in certain
international markets including Canada, Mexico and Europe. It is believed
Qualcomm has about 230,000 OmniTRACS(R) systems worldwide, of which an estimated
180,000 are in service within the United States. OmniTRACS(R) is a registered
trademark of Qualcomm, Inc.

         At least one other entity offers or plans to offer satellite-based
data communication and tracking services to the long-haul trucking industry.
American Mobile Satellite Corporation's ( "AMSC") geo-stationary
satellite-based system is similar to the Qualcomm system in that the mobile
communications equipment consists of a keyboard and data screen mounted in each
truck. Recent enhancements allow dual SMR or satellite communication in a
single unit in order to produce least-cost routing of data. The AMSC system
offers both voice and data communications, and in 1998 AMSC acquired Motorola's
Ardis data messaging business.

         Middle and Low Earth Orbit Satellites. In order to maintain a
stationary position over the earth, communication satellites currently in use
must maintain a very high orbit, which requires earth stations to generate
relatively high powered transmissions for communication with the satellite.
Certain entities, including Qualcomm, are participating in the development of
Middle Earth Orbit ("MEO") and Low Earth Orbit ("LEO") satellite networks,
which are designed to employ multiple satellites in relatively lower earth
orbits, rapidly circling the earth. The lower earth orbits should facilitate
both voice and data communication services and will be accessible through
relatively lower powered transmitters and receivers, allowing them to be
installed in portable communication equipment. In terms of product and service
offerings, MEO and LEO systems can be expected to compete directly with
cellular services, including the Company's products and services, and will
offer coverage in remote areas and foreign countries currently unserved by
cellular carriers.

         Specialized Mobile Radio. SMR has traditionally been used to serve the
needs of local dispatch services such as taxis and couriers, which typically
broadcast short messages to a large number of units. SMR wireless communication
systems rely on high-powered voice or data transmissions among widely-spaced
receiver/transmitter sites within a discrete local or regional area. These
systems generally have lower capacity to support simultaneous transmissions in
a given area than do cellular systems, which transmit and receive radio
communications from numerous closely-spaced cell sites. The radio hardware
currently used to operate the various SMR systems varies widely, making it
impossible for a customer to "roam" into a neighboring region that is served by
a carrier with a different hardware configuration.

         Enhanced Specialized Mobile Radio. Enhanced SMR operators are
currently developing and implementing Enhanced SMR digital technology to offer
relatively low-cost mobile telephone services, with construction expected to be
completed in several years. One company, Nextel, Inc., is implementing a
nationwide digital Enhanced SMR network to provide mobile telephone service and
has begun providing service in dozens of major metropolitan areas. Nextel is
developing its Enhanced SMR network using uniform standards and a coordinated
infrastructure to provide mobile telephone services with no roaming charges
anywhere in the U.S. Other local and regional Enhanced SMR operators in
addition to Nextel may eventually be able to offer region-to-region calling and
call delivery services which will compete with the Company's services.

         Dedicated Data Networks. Bell South Wireless Data (formerly RAM Mobile
Data), ARDIS (now owned by American Mobile Satellite), and Teletrac each own
and operate dedicated wireless data networks. Bell South Wireless Data
and ARDIS have built packet data networks in most metropolitan areas and a few
rural areas, but Teletrac's coverage is more restricted to a limited number of
markets. Most users of dedicated data networks are field service personnel,
transportation, security, field sales and public sector operations.

         Telecommunications Act of 1996. The Telecommunications Act is intended
to increase competition in virtually every arena of communications and
eliminate many regulatory barriers to new competitors. It is unknown at this
time what effect this legislation will have on the Company's ability to compete
in the marketplace. See "Risk Factors -- Uncertainty of Government Regulation."

                                       4

<PAGE>   8


         Although there can be no assurances that competitors of the Company
will not adversely impact the ability of the Company to effectively market its
products and services, management believes that several significant factors
differentiate the products and services provided by the Company through its
wireless enhanced services network from conventional cellular service,
including the following:

         Immediate Nationwide Call Delivery. In order to automatically (with no
user intervention) provide immediate call delivery to cellular subscribers who
travel outside of their home markets, a cellular carrier must install advanced
switching equipment (IS-41 capable), establish physical connectivity and
establish the appropriate roaming agreements with other cellular carriers. The
Company uses a patented technology which works independently from cellular
carriers' IS-41 protocol to automatically provide immediate call delivery to
its customers on essentially a nationwide basis.

         Fraud Control. Conventional cellular service has historically
experienced relatively high levels of fraud. Industry sources estimate that
cellular fraud resulted in losses totaling approximately $150 million in 1997.
The Company has been able to significantly limit fraud through the architecture
of its network, which requires that all calls originated by customers be routed
to the NSC and thereby reduces or eliminates cellular cloning, fraud and call
blocking for its customers. Although to date, neither the Company nor the
cellular carriers that have properly implemented the Company's protocols have
experienced any identifiable roamer fraud in connection with the mobile
communications services provided through the Company's network, there can be no
assurance that the Company and its cellular carriers will not experience
significant roamer fraud with the mobile communications services provided
through the Company's enhanced network.

         Nationwide Network. The Company's network spans across the United
States and Canada, and represents the broadest enhanced cellular coverage in
the industry.

         Additional Value-Added Services. The Company offers its customers
additional value-added services which are not offered by cellular carriers who
are unable to supplement the capabilities of the existing cellular
infrastructure with the features and capabilities of the Company's enhanced
communications network. The value-added services currently offered by the
Company include data transmission and fleet tracking, as well as a number of
other ancillary services, such as estimating times of arrival, calculating fuel
tax mileage and engine monitoring. There can be no assurance that competitors
will not be able to provide value-added services which directly compete with
the Company's services.

INDUSTRY SEGMENTS

         The Company considers its operations to be classified into one
industry segment: Cellular and Other Wireless Communications.

EMPLOYEES

         As of December, 31, 1998, the Company employed approximately 227
employees. The Company's employees are not represented by a collective
bargaining agreement.

OTHER

INFRASTRUCTURE AND OPERATIONS

Network Configuration. The diagram set forth below depicts the configuration of
the Company network, as it is currently utilized to provide services for Series
5000 Mobile Units and is expected to be utilized to provide services for the
TrackWare(TM) product:

         INSERT DIAGRAM

                                       5

<PAGE>   9


         Series 5000 Mobile Units. The processes illustrated in the diagram
above are fully automated, allowing communication with vehicles from any
telephone in the United States and Canada. As the vehicle enters a new cellular
coverage area, the mobile unit (1) automatically sends an identifying signal to
the cellular carrier (2). This cellular carrier information is sent via
specialized hardware and software provided by GTE Telecommunication Services,
Inc. ("GTE-TSI") (3) and occasionally EDS (4) to the Network Services Center
("NSC") (5) so the NSC will be able to direct future incoming calls for that
vehicle to the appropriate cellular carrier.

         When the driver makes a phone call, the unit (1) is connected to the
NSC (5) via the cellular carrier (2) and existing long distance lines (6), and
the NSC switches the call to the appropriate destination, which may be the
dispatcher workstation for data (7) or any other telephone for voice (8). The
Company's NSC requires entry of a personal billing account or selected credit
card number for the separate billing of personal calls.

         When dispatchers or outside callers desire to call a driver, their
calls are switched by the NSC (5) directly over existing long distance lines
and local exchange carriers (6) to the appropriate cellular carrier (2), which
completes the call to the driver (1). Data messages are first stored in the NSC
(5) and then forwarded to or from the dispatcher workstation (7) and the unit
(1).

         The unit (1) automatically records a precise position report obtained
from GPS satellites (9) on a configurable basis. This log of reports and any
other stored data is uploaded to the NSC with every business voice or data call
made to or from the unit. Additionally, the Dispatcher workstation (7) can
initiate a call at any time to obtain an immediate position report from any
truck.

         TrackWare(TM) Product. The TrackWare(TM) Unit (1) automatically
records a precise position report obtained from GPS satellites (9) and reports
the data to the NSC (5) on a scheduled basis. Additionally, the dispatcher
workstation (7) can initiate a call to obtain a position report from any
trailer or asset. The TrackWare(TM) product is based upon Cellemetry L.L.C.'s
short data message network, allowing use of the existing cellular
infrastructure in conjunction with Cellemetry's Gateway.

         Wireless Telephony. Cellular communication is the primary medium for
wireless voice communication currently in use in the United States and Canada.
The cellular infrastructure utilized by the Company is already in place. By
contrast, the Company's satellite and Enhanced SMR competitors must expend
substantial amounts of capital and several years of development time to
construct networks capable of transmitting and receiving voice messages from
customers nationwide.

         The Federal Communications Commission (the "FCC") has provided for a
two-operator duopoly in each cellular market. Only two licenses were awarded to
provide cellular service in any specific cellular metropolitan statistical area
("MSA") or rural statistical area ("RSA"). One of the two licenses in each
market was initially awarded to a company or group that was affiliated with a
local landline telephone carrier in the market (the "Wireline" or "B- Side"
license) and the other license in each market was initially awarded to a
company, individual or group not affiliated with any landline telephone carrier
(the "Non-Wireline" or "A-Side" license). However, once a license was awarded,
the license holder could sell the license to another qualified entity,
including the sale of "B-Side" licenses to groups not affiliated with the
landline telephone carrier, and the sale of "A-Side" licenses to a landline
telephone carrier. HighwayMaster's system utilizes both the A-Side and B-Side
carriers in its coverage areas, and has agreements with both A-Side and B-Side
carriers in approximately 55% of its markets, allowing system redundancy and
greater flexibility. In addition to cellular licenses, the FCC has issued up to
six licenses in each market to PCS providers. Currently, PCS is generally
available only in certain metropolitan markets and surrounding areas, and these
new carriers are creating increased competition for cellular operators where
available. See "Risk Factors--Competition and Technological Change."

         Increased demand for wireless service is driving investment in
wireless networks and improving service coverage. Cumulative capital investment
within the wireless industry has reached $50 billion as of June 1998, up from

                                       6

<PAGE>   10


approximately $6.3 billion in December 1990. The total number of cellular tower
sites increased to 57,674 in June 1998, up from 10,307 in December 1992. Total
wireless customers reached more than 60.8 million in June 1998.

         Management believes that due to the large number of existing cellular
subscribers, consumer ownership of cellular telephones and the extensive
capital investment by cellular carriers in the existing cellular
infrastructure, it is unlikely that the existing cellular network will be
abandoned or replaced by Enhanced SMR or other competing technologies. A number
of cellular carriers are in the process of upgrading from existing analog
cellular systems to enhanced systems utilizing digital technology. However,
management believes that the large number of analog telephones already owned by
cellular subscribers will ensure that cellular telephone operators continue to
offer services to existing analog users concurrently with digital users, over
an extended or indefinite phase-in period that exceeds the expected useful life
of the current analog Series 5000 Mobile Units. See "Risk Factors -- Dependence
on Cellular Infrastructure"

         Network Services Center. The Company's Network Service Center 
provides switching services among each Series 5000 Mobile Unit, 
HighwayMaster's nationwide enhanced services network, the dispatcher
workstation and the nationwide landline telephone network. The NSC is capable
of processing, storing and transmitting data. Additionally, voice
communications are routed from each Series 5000 Mobile Unit through
HighwayMaster's nationwide enhanced services network to the NSC which
automatically completes the call through the public telephone network to the
end user. Voice communications from the dispatcher or personal calls for the
driver are routed through a toll-free telephone number to the NSC, which
completes the call through the appropriate wireless cellular system for the
region in which the truck is operating. Data packets from the host or a Series
5000 Mobile Unit are stored in the NSC, then transmitted in cost-effective
batches. Time critical information, as configured by the trucking company, is
immediately transmitted to the receiving party. The NSC records data from each
transmission, generates a call record and processes the information into
customer billing records. HighwayMaster can increase capacity of the NSC as
needed to meet growing caller demands by increasing the line capacity and
number of modems and controllers.

         Call Routing. Each time a Series 5000 Mobile Unit travels into a new
MSA or RSA, it automatically registers with the cellular carrier under contract
with the Company. The cellular carrier routes the message to GTE-TSI or
Electronic Data Systems, Inc. ("EDS"). Pursuant to contracts with the Company,
GTE-TSI and EDS provide the NSC with call delivery information utilized by the
NSC to deliver calls to the Series 5000 Mobile Unit as it travels through a new
MSA or RSA. Subsequent telephone calls or data transmissions originating from
the Series 5000 Mobile Unit are recognized by the local cellular carrier and
screened to allow call routing only through the NSC, where additional security
screening is conducted.

         Before a call originating from a Series 5000 Mobile Unit is received by
the NSC, the Series 5000 Mobile Unit must establish an encoded electronic
"handshake" with the NSC substantially eliminating roamer fraud. The substantial
elimination of roamer fraud is a factor in the Company's ability to contract
with local cellular carriers throughout the country.

         Navigation Technology. Global Positioning System technology ("GPS")
allows users to identify the location of any truck at any time via satellite.
GPS is operated by the United States government and broadcasts navigational
information from a network of dedicated satellites orbiting the earth. GPS
navigational receivers interpret signals from multiple satellites to determine
the receiver's geographical coordinates, elevation and velocity. GPS units
available for civilian use are generally accurate within 100 meters. GPS
navigational signals can be received worldwide, without adaptation of the
receiver unit to foreign standards. Management believes that the network of GPS
navigational satellites will be maintained by the United States Defense
Department in an operational status for the foreseeable future. Although
stand-alone GPS units are available for purchase by any consumer at relatively
low cost, raw navigational information is of little use to trucking companies
unless the GPS receiver is integrated with a computer system, such as the
Series 5000 Mobile Unit, to record routes traveled relative to mapped roadways
or to transmit position reports to a central dispatcher.

                                       7

<PAGE>   11


         The Company's use of government-operated GPS satellites differs
substantially from competitors' use of satellites for two-way communications.
GPS satellites send one-way signals to mobile receivers, allowing the Series
5000 Mobile Unit to plot its geographical coordinates. GPS satellites are not
capable of two-way communication, and no charges are assessed to users of the
GPS services. For two-way mobile communications, the Company relies exclusively
on earth-based cellular systems. The Company's primary competitors utilize
leased or owned communications satellites for two-way data communications,
incurring costs associated with ownership or leasing of satellite communication
capacity.

STRATEGIC SERVICE ALLIANCES OF THE COMPANY

         Local Cellular Carriers. The Company has established a network for
United States-based trucking operators that offers mobile communication coverage
in 99% of the available cellular service areas in the United States (which
covers approximately 95% of the United States interstate highway system) and
100% of the A-Side coverage in Canada. The Company has agreements in place with
more than 70 cellular carriers, including all the regional Bell operating
companies, GTE Wireless, Inc., and Rogers Cantel, Inc., in more than 712 markets
in the United States and Canada. The Company has entered into contracts with
both A-side and B-side carriers in approximately 55% of United States cellular
coverage regions. Management expects its back-up coverage to continue to
increase as more relationships are established. Management believes that local
cellular carriers are motivated to make capacity available to the Company for
various reasons, including: (i) increases in volume of air time usage; (ii) no
customer service expense; (iii) the inability of customers using the Company's
system to switch to another cellular carrier; (iv) no customer acquisition
costs; (v) access to a national customer base not otherwise available to local
cellular carriers; (vi) use of the Company's system by long-haul truckers who
typically travel through less dense cellular coverage areas; (vii) use of the
Company's system by truckers typically during off-peak time periods; and (viii)
no expenses associated with fraudulent usage as a result of the security
protection afforded by the Company's system. In most cases, current terms of
contracts between the Company and each of its cellular carriers are generally
for one year, with automatic one-year successive renewal terms unless either
party elects to terminate the contract upon 30 day notice prior to the end of
the term. The Company has recently executed new contracts with certain of its
cellular carriers that are substantially similar to the existing contracts
except that they provide for an initial three-year term. The Company's
agreements with cellular carriers provide that the Company will not be required
to reimburse carriers for fraudulent usage unless the carriers have fully
implemented the Company's protocol. Although the Company's protocol has been
effective to prevent fraud to date, there can be no assurance that this will be
the case in the future. See "Risk Factors -- Dependence on Cellular
Infrastructure"

         The Company's current contracts with cellular carriers permit the
Company to utilize their cellular networks to provide mobile communications
services to vehicles engaged in long-haul transportation and certain
recreational uses so long as such vehicles travel outside of their home areas
for specified periods of time. The Company has also amended the contracts with
64 carriers to utilize their cellular systems to provide emergency and roadside
assistance service to motorists in their home markets. There can be no assurance
that the Company will be able to obtain the additional amendments covering all
MSAs and RSAs in which it currently provides mobile communications services to
long-haul transportation vehicles.

         GTE-TSI and EDS. GTE-TSI and EDS provide clearinghouse functions to the
cellular industry, creating the data link between a foreign network and a
traveling vehicle's home cellular service area, performing credit checking
functions and facilitating roamer incoming call delivery functions. The
Company's contract with GTE-TSI covers certain functions that are critical to
the Company's ability to instantly deliver calls nationwide. It covers an
initial term of three years that began on January 15, 1999. The Company is
guaranteed the right to renew the contract for up to 10 one-year periods beyond
the initial term, at a reasonable rate to be determined by GTE-TSI. A dispute
has arisen relating to the interpretation of certain intellectual property
provisions contained in the TSI Service Agreement and the inventorship of
certain patents of the Company. The Company and TSI are currently engaged in
good faith settlement discussions involving the execution of a new TSI Service
Agreement which contains language more clearly defining the intellectual
property rights of the parties and resolving the inventorship issues relating
to at least one of the Company's patents. TSI and the Company have reached a
preliminary understanding regarding the resolution of these issues and are
working together to draft final agreements. Although there can be no assurance
that the dispute will be resolved promptly or favorably to the Company,
management believes that the Company is close to reaching final resolution of
this dispute. 

         The agreement between the Company and EDS involves the provision by EDS
of certain clearinghouse functions in connection with EDS' cellular carrier
customers. Fewer data processing functions are conducted by EDS due to the
Company's consolidation of certain common data processing functions with
GTE-TSI. The agreement with EDS expires on October 24, 1999 and is






                                       8

<PAGE>   12


renewable for subsequent one-year terms through 2003, unless 60 days notice is
provided prior to the termination date of the agreement. See "Risk Factors --
Dependence on Clearinghouse Services."

         IEX Corp. IEX designed, tested, constructed and currently serves as
facility manager for the NSC. The NSC constitutes a critical link in providing
certain enhanced call processing, data management services and is necessary for
the Company to receive, store and route voice and data transmissions to and
from its customers. IEX also provides maintenance and support services for the
NSC pursuant to an agreement which is renewable on an annual basis. The Company
is currently negotiating a new software maintenance and support agreement with
IEX.

         IEX and the Company have reached mutual agreement to relocate the NSC
from the IEX facility to the Company's corporate headquarters in Richardson,
Texas. The relocation of the NSC to the Company's headquarters will allow the
Company to maintain greater control over the operation and expansion of the NSC.
In connection with the relocation, the Company hired the former IEX switch
technicians whose primary responsibility at IEX was maintaining the NSC. See
"Risk Factors -- Relocation and Company Operation of NSC."

         GTE Wireless. GTE Wireless provides a significant amount of cellular
coverage for the Company's network and pays all cellular carriers on behalf of
the Company, billing the Company on a monthly basis. The term of the current
agreement with GTE Wireless expired on March 20, 1999 and GTE Wireless has
informed the Company that it does not intend to renew its service agreement with
the Company. According to the service agreement, GTE Wireless is obligated to
continue to provide services for at least a nine month transition period to
allow the Company to transition to a new service provider. The Company has
executed an Administrative Carrier Agreement with Southwestern Bell Mobile
Systems, Inc. ("SBMS") whereby SBMS will replace GTE Wireless in providing the
services. The Company is currently negotiating a Transition Agreement with GTE
Wireless to effectuate a smooth transition to SBMS.

         Key Suppliers. The Company does not have the ability to manufacture or
assemble its products. To the extent that the Company is dependent on a single
supplier to manufacture and assemble the Series 5000 Mobile Units and the
TrackWare(TM) Units, the possibility exists that problems experienced by the
suppliers could adversely affect the Company. The Company has an agreement with
K-Tec Electronics Corporation ("K-Tec") for the assembly of the Series 5000
Mobile Units. The Company has an agreement with Wireless Link, Inc. for the
manufacture of the TrackWare(TM) Units. The Company plans to continue to order
Series 5000 Mobile Units from K-Tec and TrackWare(TM) Units from Wireless Link.
Additionally, the Company subcontracts for the manufacture of various
components for the Series 5000 Mobile Units from various suppliers. All
transceivers for the Series 5000 Mobile Units are manufactured by Motorola, and
the Company believes that there is a limited number of suppliers who are
capable of manufacturing transceivers that meet the Company's requirements.

PATENTS AND PROPRIETARY TECHNOLOGY

         The Company has obtained 19 domestic patents and has applied for
additional domestic and foreign patents. In general, the Company's existing
patents relate to certain features and capabilities of the HighwayMaster mobile
units used in locating and communicating with vehicles through the cellular
infrastructure. The Company's software is also protected under state trade
secret law and federal copyright law. See "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Rights."

REGULATION

         The Company's products and services are subject to various regulations
promulgated by the Federal Communications Commission ("FCC") which apply to the
wireless communications industry generally. The Company's Series 5000 Mobile
Units and its TrackWare(TM) Units must meet certain radio frequency emission
standards so as to avoid interfering with other devices. The Company relies on
the manufacturer of the cellular transceiver components

                                       9

<PAGE>   13


of the Series 5000 Mobile Units and the TrackWare(TM) Units to carry out
appropriate testing and regulatory compliance procedures regarding the radio
emissions of the cellular transceiver component.

         The FCC also controls several other aspects of the wireless industry
that affect the Company's ability to provide services. The FCC controls the
amount of radio spectrum available to cellular carriers, which could eventually
limit growth in cellular carrier capacity. Management expects the FCC to expand
capacity available to the cellular industry as it becomes necessary in order to
maintain current levels of service, although there is no assurance that such
expansion will occur.

         The FCC also regulates telecommunications service providers or common
carriers requiring approval for entry into the marketplace and regulating the
service rates offered through tariff filing requirements. Additionally, most
state regulatory commissions regulate rate and entry for telecommunications
service providers. In order to encourage growth within the information services
segment of the telecommunications industry, the FCC issued an order creating
the enhanced services exemption from regulation. Basically, providers of
enhanced services are not subject to regulation by the FCC or the various state
regulatory agencies. Generally, services qualify as enhanced services if data
is transmitted between the provider and customer so that the customer is able
to interact with or manipulate the data regardless of whether the services
provided include telecommunications transmission components such as cellular or
long distance services. The Company believes that the services it provides to
its customers in connection with the Series 5000 and TrackWare(TM) Units
qualify as enhanced services and are exempt from both FCC and state regulation.
Alternatively, the Company believes that its services may be characterized as a
private network not offered to the public at large but offered to specific
group of users which management believes also exempts the Company from FCC and
state regulation.

         The wireless telecommunications industry currently is experiencing
significant regulatory changes which may require a re-examination of laws and
regulations applicable to the Company's operations. The Company's services may
be characterized by the FCC as Commercial Mobile Radio Services ("CMRS"). If
the Company's services are classified as CMRS, the Company would subject to FCC
regulation as telecommunications service provider. However, the FCC has decided
to forbear from most regulation of the CMRS marketplace, including regulation
of the rates and terms of entry for interstate services offered by CMRS
providers. In addition, Congress has preempted state regulation of CMRS entry
and rates. Recent FCC decisions have enhanced the development of CMRS,
including requiring local telephone companies to offer interconnection and
access to their networks to CMRS providers and to establish reciprocal
compensation arrangements with CMRS providers for the transportation and
termination of calls at prices that are cost-based and just and reasonable.

         If any services offered by the Company are determined to be
telecommunications services by the FCC, the revenues generated from these
services would be subject to the federal universal service fund contribution
tax. At this time, revenues generated from the Company's services which meet the
definition of Enhanced Services are not subject to FCC mandated universal
service fund contribution. However, based on a conservative interpretation, the
Company has reported certain revenues generated by the personal calling plan
service offered by the Company as a telecommunications service for purposes of
federal universal service fund contribution filings. Various states have
instituted their own universal service fund mechanisms which may or may not
follow the federal statues in exempting revenues generated by Enhanced Services.
The Company cannot predict the impact of any requirement to contribute to state
and federal universal service mechanisms. See "Risk Factors -- Uncertainty of
Government Regulations"

         Long-distance providers face regulatory schemes similar to cellular
carriers, with greater state involvement in requiring posting of bonds as
security against customer deposits and in other matters. The Company believes
current long-distance regulations apply to those companies providing
long-distance services directly to its customers, without long-distance
regulatory involvement by the Company.

                                      10

<PAGE>   14


RISK FACTORS

Forward Looking Statements

         This Form 10-K ("Form 10-K") contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based
upon management's beliefs, as well as assumptions made by and information
currently available to management. When used in this Form 10-K, the words
"anticipate," "believe," "estimate" or "expect" and similar expressions are
intended to identify forward-looking statements. Any statement that an event
will happen in the future is a forward-looking statement, and should not be
interpreted as a promise that the event will occur. The Company's actual
results could differ materially from those projected in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in this section, as well as those discussed elsewhere in this
Form 10-K or in the documents incorporated herein by reference.

Operating History; Significant Losses

         The Company commenced its operations in April 1992. The Company began
offering its long-haul trucking application on a commercial basis in September
1993. Since its inception, the Company has experienced significant operating
losses and as a result it has a substantial accumulated deficit. The Company
must significantly increase its product sales and service revenues while
decreasing its operating expenses to achieve profitability. The Company expects
to continue to incur losses and negative cash flow from operations in the
future. There can be no assurance that the Company's future operations will
generate operating or net income or positive cash flow from operations. If the
Company does not achieve significant operating and net income and positive cash
flow, it will not have the funds required to pay the principal amount of the 13
3/4% Senior Notes ("Senior Notes") at maturity in 2005 or to make interest
payments on the Senior Notes beyond September 15, 2000, until such date the
payment of interest is provided for through a portfolio of U.S. Government
securities held in escrow. If the Company is unable to service the Senior Notes
using earnings or cash flow from operations, it will have to  identify alternate
means of repayment that could include restructuring or refinancing its
indebtedness or seeking additional sources of debt or equity financing. There
can be no assurance either that the indenture for the Senior Notes (the
"Indenture") would permit the Company to pursue alternative means of repayment
or that the Company would be able to effect such a restructuring or refinancing
or obtain such additional financing if permitted to do so. The likelihood of the
long-term success of the Company must be considered in light of the expenses,
difficulties and delays frequently encountered in connection with the early
stages of the development and marketing of telecommunications products and
services, as well as the competitive environment in which the Company operates
and the other risks and uncertainties discussed in this Form 10-K. See " Item 6
Selected Financial Data," and " Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Limitations Due to Debt

         The Indenture imposes significant operating and financial limitations
on the Company. Such limitations will affect, and in many respects significantly
restrict or prohibit, among other things, the ability of the Company to pay
dividends, make investments and incur additional indebtedness. These
restrictions, in combination with the Company's substantial leverage, could
limit the ability of the Company to effect future financings or otherwise
restrict the nature and scope of its activities. The degree to which the Company
is leveraged could have important consequences to Company's stockholders and to
the holders of the Senior Notes, including: (i) the impairment of the Company's
ability to obtain additional financing in the future; (ii) the reduction of
funds available to the Company for its operations or for capital expenditures as
a result of the dedication of a substantial portion of the Company's net cash
flow from operations to the payment of principal of and interest on the Senior
Notes; (iii) the possibility of an event of default under covenants contained in
the Indenture, which could have a material adverse effect on the business,
financial condition and results of operations of the Company; (iv) the placement
of the Company at a relative competitive disadvantage as compared to competitors
who are not as highly leveraged as the Company; and (v) vulnerability in the
event of a downturn in general economic conditions or its business because of
the Company's reduced financial flexibility. In addition, to the extent that the
Company enters into a bank credit agreement in the future as permitted by and
defined in the Indenture, such agreement is likely to impose additional
operating and financial restrictions on the Company, which may be more
restrictive than those provided for in the Indenture. See "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and "Business --- Recent Financing Transactions."

                                       11

<PAGE>   15


No Remote Disaster Recovery System

         Currently, the Company's disaster recovery systems focus on internal
redundancy and diverse routing around and within the NSC operated for the
Company. The Company does not currently have access to a remote back-up complex
that would enable it to continue to provide mobile communications services to
customers in the event of a natural disaster or other occurrence that rendered
the NSC unavailable. Accordingly, the Company's business is subject to the risk
that such a disaster or other occurrence could hinder or prevent the Company
from continuing to provide services to some or all of its customers. See
"Other -- Infrastructure and Operations."

Relocation and Company Operation of NSC

         As noted above, the Company is relocating the NSC from the IEX
facilities to its new corporate headquarters in Richardson, Texas. There can be
no assurance that the Company's network will not suffer service interruption
during this physical relocation. As stated above, the Company will operate and
maintain the NSC subsequent to the relocation. The Company has limited
experience maintaining and supporting the NSC and its software and hardware
systems. Although the Company has successfully hired the former IEX switch
technicians, the Company has limited abilities to provide software maintenance
and support for the NSC. The Company is currently negotiating a service and
support agreement with IEX to provide this software support and maintenance for
the NSC. Any significant performance or other operational problems affecting the
NSC could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Other -- Infrastructure and
Operations."

AT&T Litigation

         On February 16, 1996, the Company filed a lawsuit against AT&T, which
operated an enhanced switching complex for the Company (the "AT&T Complex")
until December, 1997, in the U.S. District Court, Northern District of Texas,
Dallas Division. The Company sought preliminary and permanent injunctive relief
restraining AT&T from using and disclosing the Company's trade secrets and
proprietary information relating to its mobile communications technology.

         In September 1996, the Company amended its pleadings and filed
additional claims against AT&T related to additional breaches of contract and
various tortious activities. The Company sought a declaration that the patents
issued to AT&T using the Company's proprietary information were invalid or,
alternatively, should be transferred from AT&T to the Company, and that certain
actual or threatened AT&T conduct infringed the Company's patents. The Company
also brought claims against AT&T pursuant to the Texas Deceptive Trade Practices
Act ("DTPA") and sought actual, punitive and treble damages and attorneys' fees
in connection with its claims. Additionally, the Company's amended complaint
added another defendant, Lucent Technologies, Inc. ("Lucent"), to which AT&T
transferred certain of the patents at issue in the lawsuit.

         In July and October 1996, AT&T filed counterclaims essentially
mirroring the Company's claims. AT&T sought an injunction preventing the Company
from using or disclosing AT&T's alleged trade secrets, a declaratory judgment
defining the parties' intellectual property rights, actual and punitive damages
and attorneys' fees in connection with its counterclaims. In November 1996,
AT&T filed a partial motion to dismiss the Company's DTPA claims, various tort
claims and the patent invalidity charges. Additionally, in November 1996,
Lucent filed a motion to dismiss all of the Company's claims against Lucent.
The Court ruled in December 1997 on the motions by granting the dismissal of
one non-essential tort claim against AT&T and the dismissal of the patent
invalidity charges with respect to Lucent only on the grounds that Lucent has
expressed no intent to enforce any of its patents against the Company.

         On February 25, 1999, the Company and AT&T engaged in a mediation in an
effort to resolve all claims between the parties asserted in the litigation. The
Company and AT&T resolved all disputes relating to the litigation in this
mediation. The Company and AT&T have executed a binding memorandum of settlement
which will be finalized in a formal Joint Compromise, Release and Settlement
Agreement. Additionally, on March 25, 1999, the Company and Lucent resolved all
disputes related to the litigation in a mediation. The Company and Lucent
executed a binding memorandum of settlement. The terms of the settlements with
AT&T and Lucent will not adversely impact the Company's results of operations or
financial position.

                                       12

<PAGE>   16
Uncertainty Regarding Patents and Proprietary Rights

         The Company's success depends upon its technology and the scope and
limitations of its proprietary rights therein. In order to protect its
technology, the Company relies on a combination of patents, copyrights and
trade secret laws, as well as certain customer licensing agreements, employee
and third-party confidentiality and non-disclosure agreements and other similar
arrangements. If the Company's assertion of proprietary rights is held to be
invalid or if another person's use of the Company's technology were to occur to
any substantial degree, the Company's business, financial condition and results
of operations could be materially adversely affected.

         The patents and other intellectual property rights of the Company
cannot prevent competitors from developing competing systems using other
land-based wireless communications systems or using the cellular system through
a different method. While the Company believes that the nature and scope of the
HighwayMaster communications system, including the Company's strategic business
and technological relationships, would be difficult for a competitor to
duplicate, there can be no assurance that a competitor would consider these
hindrances to be material in light of the market potential. A competitor could
invest time and resources in an attempt to duplicate certain key features of
the Company's products and services, which could result in increased
competition and have a material adverse effect on the Company's business.

         Several of the Company's competitors have obtained and can be expected
to obtain patents that cover products or services directly or indirectly
related to those offered by the Company. There can be no assurance that the
Company is aware of all patents containing claims that may pose a risk of
infringement by its products or services. In addition, patent applications in
the United States are confidential until a patent is issued and, accordingly,
the Company cannot evaluate the extent to which its products or services may
infringe on future patent rights held by others. In general, if it were
determined that any of the Company's products, services or planned enhancements
infringed valid patent rights held by others, the Company would be required to
cease marketing such products or services or developing such enhancements, to
obtain licenses (which might require the payment of royalties) to develop and
market such products, services or enhancements from the holders of the patents
or to redesign such products or services to avoid infringement. In such event,
the Company also might be required to pay past royalties or other damages.
There can be no assurance that the Company would be able to obtain licenses on
commercially reasonable terms, or that it would be able to design and
incorporate alternative technologies, without a material adverse effect on its
business.

         On February 23, 1999, Aeris Communications, Inc. filed an Original 
Complaint against the Company in the United States District Court for the 
Northern District of California alleging that the certain of the Company's 
products may infringe Aeris' United States Patent No. 5,594,740. Aeris has not 
served the lawsuit pursuant to a standstill agreement reached between the 
parties. The parties are currently in negotiations in an effort to resolve the 
disputes. However, there can be no assurance that the Company will be able to 
resolve these disputes. If it were determined that any of the Company's 
products infringed a valid patent held by Aeris, the Company may be required to 
cease marketing of such products, to obtain licenses (which might require the 
payment of past and future royalties) from Aeris or to redesign such products 
to avoid infringement. There can be no assurance that the Company would be able 
to obtain licenses on commercially reasonable terms, or that it would be able 
to design and incorporate alternative technologies, without a material adverse 
effect on the Company and its business, financial condition and results of 
operations. See "Item 3 -- Legal Proceedings."


                                       13

<PAGE>   17



Products in Development

         The TrackWare(TM) product and service described in this Form 10-K
requires significant development efforts before commercial release. Although
the Company has executed agreements with Cellemetry, L.L.C. to utilize its
Cellemetry(R) network for the Company's TrackWare(TM) product and service,
various hardware, software and network solutions must be developed for the
TrackWare(TM) product and service to be successful. Furthermore, the current
Cellemetry(R) network must be expanded to include more cellular carriers in
order to provide nationwide coverage similar to the Company's current service
offerings. There can be no assurance that these steps will be accomplished as
currently expected, or at all. See "Business -- Products and Services --
TrackWare(TM)."

Dependence on SBC Regional Service Vehicle Contract

         In August 1998, the Company entered into an agreement with the SBC
Companies whereby the SBC Companies purchased 11,500 mobile units, customized
proprietary software and accompanying services from the Company for an initial
term of one year. In the first quarter of 1999, the Company entered into a
second agreement with the SBC Companies which extended the initial one year
term to three years. Subsequently, the SBC Companies ordered an additional
3,140 mobile units. In total, this agreement represents the largest purchase
and service contract in the history of the Company.

         The agreement requires the Company to perform certain product
modifications and software development for SBC in substantial conformance with
the technical specifications of the contract. The terms of the agreement
provide that SBC may receive up to a 100% refund of amounts paid to the Company
if the Company is unable to deliver mobile units and services which
substantially comply with the technical specifications of the agreement. There
are no assurances that the Company will be able to satisfy the technical
specifications of the agreement. The failure of the Company to

                                       14

<PAGE>   18


timely satisfy the functional requirements could have a material adverse effect
on its business, financial condition and results of operations.

Dependence on Cellular Infrastructure

         The Company utilizes the existing cellular telephone infrastructure,
with certain enhancements, as the wireless segment of the HighwayMaster
network. In most cases, current terms of contracts between the Company and each
of its cellular carriers are for one year, with automatic one-year successive
renewal terms, unless either party elects to terminate the contract upon 30
days notice prior to the end of the term. The Company has recently executed new
contracts with certain of its cellular carriers that are substantially similar
to the existing contracts, except that they provide for an initial three-year
term. In order to continue to provide mobile communications services to its
customers, the Company must continue to renew its agreements with individual
cellular carriers. If the Company is unable to renew or replace its contracts
with cellular carriers at competitive rates, the Company may be forced to
absorb the costs of increased cellular air time rates, or increase rates to
customers where allowed by individual contracts. In general, a failure on the
part of the Company to renew or replace its contracts with cellular carriers on
favorable terms could have a material adverse effect on its business, financial
condition and results of operations.

         The HighwayMaster network relies on the continued technical
compatibility among its cellular service providers. Currently, cellular
carriers primarily utilize analog technology, with digital technology offered
in addition to analog in some service areas. If in the future cellular carriers
discontinue all service to analog telephones, the Company would be required to
dedicate financial resources and engineering staff to integrate a digital
cellular telephone transceiver into its products. Although cellular providers
have historically cooperated to maintain technical compatibility between
markets over time, if substantial changes to the methods of interconnection
utilized by cellular carriers occur, such as a discontinuance of the existing
out-of-area call clearing system or a decision by cellular carriers to
eliminate analog service and employ several diverse digital technologies rather
than a common digital technology, the Company may be required to undertake
costly system redesign or may encounter difficulty in providing nationwide
coverage. See "Other -- Infrastructure and Operations."

Dependence on Clearinghouse Services

         GTE-TSI performs certain "clearinghouse" functions for the Company,
which include, among other things, validation and verification of roaming
numbers and provision of certain call delivery information pursuant to a
service agreement dated January 15, 1999 with an initial term of three years.
The Company is guaranteed the right to renew the TSI Service Agreement for up 
to 10 one-year periods beyond the initial term, at a reasonable rate to be 
determined by GTE-TSI. A dispute has arisen relating to the interpretation of 
certain intellectual property provisions contained in the TSI Service Agreement 
and the inventorship of certain patents of the Company. The Company and TSI are 
currently engaged in good faith settlement discussions involving the execution 
of a new TSI Service Agreement which contains language more clearly defining 
the intellectual property rights of the parties and resolving the inventorship 
issues relating to at least one of the Company's patents. GTE-TSI and the
Company have reached a preliminary understanding regarding the resolution of
these issues and are working together to draft final agreements. Although there
can be no assurance that the dispute will be resolved promptly or favorably to
the Company, management believes that the Company is close to reaching final
resolution of this dispute. 

         EDS also performs certain "clearinghouse" functions for the Company
which include, among other things, the validation of roaming numbers and
routing of call delivery information. The agreement with EDS expires on October
24, 1999 with successive automatic one-year renewal terms thereafter, unless
terminated at the option of either party upon 60 days notice prior to any
expiration date. There can be no assurance that the EDS agreement will be
renewed upon expiration.

         If the Company is unable to renew its agreement with GTE-TSI or, to a
lesser extent, EDS, the Company may be required to make substantial and costly
design changes to the HighwayMaster network in order to ensure continued
availability of the Company's services. Because of the unique position of
GTE-TSI and EDS as industry-wide clearinghouses and the difficulty associated
with their replacement, there can be no assurance that full functionality of
the HighwayMaster system could be maintained if such a redesign were necessary.

         A separate subsidiary of GTE, GTE Wireless, Inc. ("GTE Wireless")
provides certain other services to the Company, principally the direct payment
of the Company's cellular service providers for cellular airtime through the
cellular clearing house process, under a contract which expired on March 20,
1999. As stated above, GTE Wireless has informed the Company that it does not
intend to renew its service agreement with the Company. The Company has executed
an Administrative Carrier Agreement with SBMS whereby SBMS will replace GTE


                                       15

<PAGE>   19


Wireless in providing the services. The Company is currently negotiating a
Transition Agreement with GTE Wireless to effectuate a smooth transition to
SBMS. The failure of the Company to enter into a Transition Agreement with GTE 
Wireless may have a material adverse effect on the Company's business, 
financial condition or results of operations. See "Other -- Infrastructure and 
Operations."

Costs Related to Billing Discrepancies

         The Company's ability to operate its business on a profitable basis
will depend in part upon whether it is able to monitor and control effectively
the direct costs of providing services to its customers, including cellular air
time charges. The Company periodically analyzes the charges billed to the
Company by GTE Wireless on behalf of cellular carriers in order to obtain the
appropriate amount of credit for any invalid air time usage charges billed to
the Company. Furthermore, the Company incurs certain valid airtime usage charges
that are not billable to customers under current billing practices. On at least
one past occasion, the Company has recorded an adjustment to increase cellular
airtime cost, a component of cost of service revenue, based on new billing data
received. There can be no assurance that the Company will not incur significant
costs in the future in connection with billing discrepancies, or that the costs
will not have an adverse impact on the Company's ability to achieve and maintain
satisfactory profit margins. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

No Long-Term Product Supply Arrangements

         The Company does not have the ability to manufacture or assemble its
products. To the extent that the Company is dependent on a single supplier to
manufacture and assemble the Series 5000 Mobile Units and the TrackWare(TM)
Units, the possibility exists that problems experienced by the suppliers could
adversely affect the Company. The Company has an agreement with K-Tec
Electronics Corporation ("K-Tec") for the assembly of the Series 5000 Mobile
Units. The Company has an agreement with Wireless Link, Inc. for the
manufacture of the TrackWare(TM) Units. The Company plans to continue to order
Series 5000 Mobile Units from K-Tec and TrackWare(TM) Units from Wireless Link.
Additionally, the Company subcontracts for the manufacture of various
components for the Series 5000 Mobile Units from various suppliers. All
transceivers for the Series 5000 Mobile Units are manufactured by Motorola, and
the Company believes that there is a limited number of suppliers who are
capable of manufacturing transceivers that meet the Company's requirements. In
general, the failure to maintain or establish satisfactory arrangements for the
production and assembly of Series 5000 Mobile Units or the TrackWare(TM) Units
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Control of the Company

         The Company, Southwestern Bell Wireless, Inc.("SBW"), the Erin Mills
Stockholders, the Carlyle Stockholders, the By-Word Stockholders and certain
other persons are parties to an Amended and Restated Stockholders' Agreement,
dated as of September 27, 1996 (the "Amended Stockholders' Agreement") which
amends and restates in its entirety the Stockholders' Agreement dated February
4, 1994. The parties to the Amended Stockholders' Agreement beneficially own an
aggregate of 17,417,411 shares of Common Stock, representing approximately
70.0% of the shares outstanding as of December 31, 1998.

         The Amended Stockholders' Agreement contains provisions relating to,
among other things, the election of members of the Company's Board of
Directors. In particular, this agreement provides that the parties will take
all action (including the voting of shares of Common Stock owned by them)
necessary to ensure that the Board of Directors of the Company consists of: (i)
two directors designated by the Erin Mills Stockholders; (ii) one director
designated by the Carlyle Stockholders; (iii) two directors designated by the
By-Word Stockholders; and (iv) two independent directors. Each of the parties
has designated the number of directors specified in the Amended Stockholders'
Agreement, except

                                       16

<PAGE>   20


that the Carlyle Stockholders have declined to exercise their right to
designate a director. Prior to the receipt of regulatory relief ("Regulatory
Relief") permitting SBW to provide landline, interLATA long-distance service
pursuant to the Communications Act of 1934, as amended by the
Telecommunications Act (as defined herein), SBW will not be entitled to
designate a director, but will have the right to designate a non-voting
delegate who will attend all meetings of the Board of Directors and receive all
materials distributed to directors of the Company. Upon the conversion of
Series D Preferred Stock (as defined herein) into Class B Common Stock (as
defined herein), which will occur upon receipt of Regulatory Relief, SBW will
be entitled to designate one member of the Board of Directors of the Company.
In addition, if SBW and its affiliates beneficially own 20% or more of the
outstanding common stock on a fully diluted basis (including shares issuable
upon conversion or exercise of outstanding options, warrants or rights, but
excluding shares issuable upon the conversion or exercise of the certain
warrants issued to SBW or of options, warrants or rights issued by any person
other than the Company), SBW will under certain circumstances be entitled to
designate a second member of the Board of Directors.

         As a result of the provisions of the Amended Stockholders' Agreement
and the number of shares of common stock owned by the stockholders who are
parties thereto, these stockholders, if they choose to act together, have the
ability to control the management and policies of the Company.

Repurchase of Senior Notes Upon Change of Control

         Under the terms of the Senior Notes, upon the occurrence of a change of
control, the Company will be required to offer to repurchase all of the
outstanding Senior Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any, to
the repurchase date. There can be no assurance that the Company would have
sufficient resources to repurchase the Senior Notes upon the occurrence of a
change of control. The failure to repurchase all of the Senior Notes tendered to
the Company would constitute an event of default under the Indenture.
Furthermore, the repurchase of the Senior Notes by the Company upon a change of
control might result in a default on the part of the Company in respect of
other future indebtedness of the Company, as a result of the financial effect
of such repurchase on the Company or otherwise. The change of control
repurchase feature of the Senior Notes may have anti-takeover effects and may
delay, defer or prevent a merger, tender offer or other takeover attempt. 

Competition and Technological Change

         The Company faces competition from numerous other suppliers of mobile
communications services. Currently, the Company's primary competitors in the
long-haul trucking market offer data-only, two-way communications via
satellite. Other companies that compete or are planning to compete with the
Company in its target markets also offer or plan to offer satellite-based voice
and data communication systems. The primary advantage of satellite-based
communication over the Company's cellular-based system is that satellite
coverage is available in certain remote areas and foreign countries that have
not developed cellular networks, enabling data transmissions in areas not
served by cellular systems. In addition, satellite-based communication systems
generally utilize a less complicated infrastructure than the Company's network
and may be able to make updates and changes to their system more quickly than
the Company.

         Certain technological advances and future product offerings could
substantially change the nature of the Company's competition. For example,
geo-stationary orbit, MEO and LEO satellite systems are expected to offer voice
and data communications that could compete directly with existing
cellular-based services, including the HighwayMaster system. One of the
Company's current competitors, AMSC, launched a geo-stationary satellite in 1995
and offers both data and voice communications. In addition, networks of MEO and
LEO satellites are in the early implementation stage, funded by consortiums of
companies that intend to provide worldwide voice communication capability. The
addition of voice capability to satellite systems may reduce the Company's
competitive advantage over certain of its competitors, and it is possible that
satellite owners may, at least on a temporary basis, offer rates at or below
the Company's rates.

         Certain conventional mobile radio and Enhanced SMR providers offer
digital services that are competitive with current cellular services, including
the HighwayMaster system. If Enhanced SMR providers expand coverage and

                                       17

<PAGE>   21


establish a significant degree of uniformity, through use of proprietary
digital technology or otherwise, Enhanced SMR providers could eventually
develop an integrated network to allow nationwide roaming. Enhanced SMR
operators also offer dispatching services, data transmission and other services
through their expanding networks that could compete with the Company's
services. One telecommunications company already has implemented a system of
nationwide roaming limited to densely populated urban areas where it has built
out its network. Several other cellular and PCS carriers are currently in
various stages of implementing similar systems.

         The cellular industry has developed a uniform standard for incoming
call delivery at a reduced cost. This inexpensive autonomous-registration
incoming call delivery system for cellular roamers reduces the competitive
advantages of the Company's system. Moreover, if cellular carriers were to
develop additional standard protocol and hardware for inexpensive data
transmission and fraud control or if the cost of roaming services were to
decline further, other competitive advantages of the Company's system would be
significantly reduced or lost.

         In general, technology in the wireless communications industry is in a
rapid and continuing state of change as new technologies and enhancements to
existing technologies continue to be introduced. The Company believes that its
future success will depend upon its ability to develop and market products and
services that meet changing customer needs and which anticipate or respond to
technological changes on a timely and cost-effective basis. There can be no
assurance that the Company will be able to keep pace with technological
developments.

         Other services are being proposed that could potentially compete with
the Company's products and services. The FCC currently is considering whether
to allocate 75 megahertz of spectrum in the 5.850-5.925 GHz band to establish
dedicated short range communications ("DSRC") systems for the deployment of
intelligent transportation systems to provide terrestrial wireless
communication links between vehicles traveling at highway speeds and roadside
systems. Current DSRC-based services include electronic toll payment and
commercial vehicle electronic clearance. Emerging DSRC services include
en-route driver information, freight mobility tracking, traffic control, and
automated roadside safety inspection, which may compete with the HighwayMaster
system.

         Certain of the Company's competitors, including Qualcomm have
significantly greater name recognition, financial and other resources than the
Company. Among other things, it appears that certain of these resources have
been or are being used by Qualcomm and other competitors of the Company to
subsidize initial hardware purchases and provide extended periods of free
services in an attempt to achieve rapid penetration of certain of the Company's
target markets. See "Business -- Competition."

         The failure of the Company to develop and market products and services
that meet changing customer needs and which anticipate or respond to
technological changes on a timely and cost-effective basis could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Uncertainty of Government Regulation

         The Company believes that the nature of its services does not require
the Company to be classified as a common carrier for either wireless or
long-distance regulatory purposes. This conclusion is based on several
alternative regulatory interpretations. Specifically, the FCC regulates
telecommunications service providers or common carriers requiring approval for
entry into the marketplace and regulating the service rates offered through
tariff filing requirements. Additionally, most state regulatory commissions
regulate rate and entry for telecommunications service providers. In order to
encourage growth within the information services segment of the
telecommunications industry, the FCC issued an order creating the enhanced
services exemption from regulation. Basically, providers of enhanced services
are not subject to regulation by the FCC or the various state regulatory
agencies. Generally, services qualify as enhanced services if data is
transmitted between the provider and customer so that the customer is able to
interact with or manipulate the data regardless of whether the services provided
include telecommunications transmission components such as cellular or long
distance services. The Company believes that the services it provides to its
customers in connection with the Series 5000 and TrackWare(TM) Units qualify as
enhanced services and are exempt from both FCC and state regulation.
Alternatively, the Company believes that its services may be characterized as a
private network

                                       18

<PAGE>   22


not offered to the public at large but offered to specific group of users which
also exempts the Company from FCC and state regulation. The Company relies on
its long-distance providers and cellular providers to comply with any
regulatory requirements. The reclassification of the Company's services as
telecommunications services could have a material adverse effect on the
Company's business, financial condition and results of operations.

         The wireless telecommunications industry currently is experiencing
significant regulatory changes which may require a re-examination of laws and
regulations applicable to the Company's operations. The Company's services may
be characterized by the FCC as CMRS. If the Company's services are classified
as CMRS, the Company would subject to FCC regulation as telecommunications
service provider. However, the FCC has decided to forbear from most regulation
of the CMRS marketplace, including regulation of the rates and terms of entry
for interstate services offered by CMRS providers. In addition, Congress has
preempted state regulation of CMRS entry and rates. Recent FCC decisions have
enhanced the development of CMRS, including requiring local telephone companies
to offer interconnection and access to their networks to CMRS providers and to
establish reciprocal compensation arrangements with CMRS providers for the
transportation and termination of calls at prices that are cost-based and just
and reasonable.

         If any services offered by the Company are determined to be
telecommunications services by the FCC, the revenues generated from these
services would be subject to the federal universal service fund contribution
tax. At this time, revenues generated from the Company's services which meet the
definition of enhanced services are not subject to FCC mandated universal
service fund contribution. However, based on a conservative interpretation the
Company has reported certain revenues generated by the personal calling plan
service offered by the Company as a telecommunications service for purposes of
federal universal service fund contribution filings. Various states have
instituted their own universal service fund mechanisms which may or may not
follow the federal statues in exempting revenues generated by enhanced services.
The Company cannot predict the impact of any requirement to contribute to state
and federal universal service mechanisms.

         Long-distance providers face regulatory schemes similar to cellular
carriers, with greater state involvement in requiring posting of bonds as
security against customer deposits and in other matters. The Company believes
current long-distance regulations apply to the companies providing
long-distance services directly to Company customers, without long-distance
regulatory involvement by the Company. The reclassification of the Company's
services as long distance services could have a material adverse effect on the
Company's business, financial condition and results of operations.

         In February 1996, the Telecommunications Act of 1996 was signed into
law. This is the most comprehensive set of telecommunications laws to be enacted
since the original Communications Act of 1934 was passed. The Telecommunications
Act encourages competition in virtually every arena of communications and
eliminates many regulatory barriers to new competitors by, in some instances,
preempting state and local restrictions. The Telecommunications Act requires the
FCC to extensively revise many of the rules and regulations under which the
telecommunications industry has been operating. To that end, the FCC has
completed approximately 80 different proceedings in connection with the
Telecommunications Act. At this time, it is unclear how the Telecommunications
Act will affect the activities of the Company, its strategic business
relationships with other communications companies, or its customers. There can
be no assurance that the relaxing of barriers to competition in the industry
will not hinder the Company's growth and viability in the marketplace.

Dependence on Key Personnel

         The Company is dependent on the efforts of Jana Bell, President and
Chief Executive Officer, Bill McCausland, Senior Vice President Operations,
Michael Smith, Executive Vice President and Chief Financial Officer, Todd
Felker, Senior Vice President Sales & Marketing and a group of employees with
technical knowledge regarding the Company's systems. The loss of services of
one or more of these individuals could materially and adversely affect the
business of the Company and its future prospects. The Company has employment
agreements with Ms. Bell, and Messrs. McCausland, Smith and Felker. Ms. Bell,
and Messrs. McCausland, Smith and Felker may each terminate their

                                       19

<PAGE>   23


employment agreements upon 90 days written notice. The Company does not
maintain key man life insurance on any of the Company's officers or employees.
The Company's future success will also depend on its ability to attract and
retain additional management and technical personnel required in connection
with the growth and development of its business.

Year 2000 Software Risk

         The Company has established a Year 2000 project team, which includes
employees with various functional responsibilities and outside consultants. The
project team has identified five phases in becoming Year 2000 compliant: (i)
awareness, locating, listing and prioritizing specific technology that is
potentially subject to Year 2000 challenges; (ii) assessment and determining
the element of risk that exists through inquiry, research and testing; (iii)
resolving Year 2000 related issues that were identified in previous phases by
repair in a testing environment; (iv) validation testing, monitoring, obtaining
certification and verifying the correct manipulation of dates and date related
data, including systems of material third parties; and (v) implementation,
installation, integration, and application of Year 2000 ready resolutions by
replacement, upgrade or repair of technology systems, including those of
material third parties.

         The Company is performing its Year 2000 analysis on all systems
located at the Company as well as some located at customer sites. In addition
to internally controlled operating systems, the Company relies on third parties
for services and/or goods that may be affected by Year 2000 challenges. The
Company is in the process of obtaining assurances from third parties that their
systems are or will be Year 2000 compliant in a timely manner.

         While the Company does not anticipate delays or postponements in
implementing Year 2000 resolutions in a timely manner, there can be no
certainty that implementation of solutions will be made in a timely manner
until the validation phase is completed. The inability to address all issues in
a timely and successful manner could have an adverse effect on the Company's
business and results of operations. The failure of third parties to provide
Year 2000 compliant products and/or services could have a material adverse
effect on the Company's financial condition and results of operations. Such
risks include, but are not limited to, inability to deliver or receive calls
and/or data, failure to accurately report and bill existing customers, accept
new orders and the inability to perform other customer care tasks.

         Management believes the cost of becoming Year 2000 compliant will be
approximately $650,000 during 1999. Although the Company does not expect the
cost to have a material adverse effect on its business or results of operations,
there can be no assurance that the Company will not be required to incur
significant unanticipated costs in relation to its readiness obligations. The
Company has not deferred any specific projects, goals or objectives relating
to its operations as a result of Year 2000 compliance efforts.

Expansion Risk

         To the extent that the Company is successful in implementing its
business strategy, the Company may experience periods of rapid expansion in the
future. In order to manage growth effectively in the complex environment in
which it operates, the Company will need to maintain and improve its operating
and financial systems and expand, train and manage its employee base. In
addition, the Company must carefully manage production and inventory levels to
meet product demand and facilitate new product introductions. Inaccuracies in
demand forecasts could result in insufficient or excessive inventories and
disproportionate overhead expenses. The Company must also expand the capacity
of its sales, distribution and installation networks in order to achieve
continued growth in its existing and future markets. In general, the failure to
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

Customer Concentration

         AmeriTruck Distribution Corporation, Burlington Motor Carriers,
Contract Freighters, Inc., the SBC Companies and Wal-Mart Stores East, Inc.
collectively accounted for approximately 40% of the Company's installed base of
mobile units as of December 31, 1998. The loss of any of these customers, or
any event, occurrence or development which

                                       20

<PAGE>   24


adversely affects the relationship between the Company and any of these
customers, could have a material adverse effect upon the Company's business,
financial condition and results of operations.

Product Liability

         Testing, manufacturing and use of the Company's products entail the
risk of product liability. Although management believes the Series 5000 Mobile
Unit offers safety advantages over conventional cellular telephones, it is
possible that operation of the product may give rise to product liability
claims. Product liability claims present a risk of protracted litigation,
substantial money damages, attorney's fees, costs and expenses, and diversion
of management attention. In addition, as the Company expands its business to
include the provision of alarm monitoring services in connection with the SBC
regional service vehicles contract, the Company is exposed to an increased risk
of litigation regarding various safety, performance and other matters. Product
liability claims which exceed policy limits applicable to the Company's
liability insurance or which are excluded from the policy coverage could have a
material adverse effect on the business or financial condition of the Company.

Common Stock Available for Purchase by SBW

         Pursuant to a Purchase Agreement dated September 27, 1996 (the
"Purchase Agreement"), and certain agreements and instruments related thereto,
the Company issued to SBW (i) 1,000 shares of Series D Preferred Stock and (ii)
the Warrants. The shares of Series D Preferred Stock issued to SBC are
initially convertible into an aggregate of 1,600,000 shares of Common Stock at
the option of SBW. The Warrants generally entitle SBW to purchase from the
Company (i) 3,000,000 shares of Common Stock at an exercise price of $14.00 per
share and (ii) 2,000,000 shares of Common Stock at an exercise price of $18.00
per share, in each case subject to adjustment to prevent dilution. If all of
the shares of Series D Preferred Stock were converted into Common Stock and all
the Warrants were exercised by SBW, SBW would hold approximately 21.0% of the
outstanding shares of Common Stock (based on the total number of shares of
Common Stock outstanding as of December 31, 1998).

Certain Rights of SBW

         The Purchase Agreement and certain of the other agreements and
instruments related thereto afford various rights to SBW that are not available
to the other stockholders of the Company. For example, the Company has granted
to SBW, as the holder of Series D Preferred Stock, the right to approve certain
actions on the part of the Company, including (i) mergers or consolidations
involving the Company that require stockholder approval under the General
Corporation Law of the State of Delaware (the "DGCL"); (ii) sales of all or
substantially all of the assets of the Company that require stockholder
approval under the DGCL; (iii) amendments to the Company's Certificate of
Incorporation; (iv) the dissolution of the Company; (v) the adoption,
implementation or acceptance by the Company of certain anti-takeover
provisions; (vi) the issuance by the Company of equity securities, including
securities convertible into equity securities (subject to specified
exceptions) and the incurrence by the Company of debt obligations in an amount
exceeding $5.0 million in any year; (vii) the Company entering into any line of
business other than its existing line of business or entering into joint
ventures, partnerships or similar arrangements which would require expenditures
of more than $3.0 million; (viii) the disposition by the Company in any
12-month period of assets (other than assets sold in the ordinary course of
business) of which the fair market value exceeds $3.0 million; and (ix) any
amendment, alteration or repeal of the terms of the Series D Preferred Stock.

Dividend Policy

         The Company has never paid cash dividends on its Common Stock and has
no plans to do so in the foreseeable future. The Company intends to retain
earnings, if any, to develop and expand its business.

Shares Eligible for Future Sale

         The Company had 24,898,986 shares of Common Stock outstanding as of
December 31, 1998. Approximately 11,641,449 shares of Common Stock are freely
tradable without restrictions or further registration under the Securities

                                       21

<PAGE>   25


Act. The remaining shares are deemed "restricted securities" within the meaning
of the Securities Act as a result of the issuance thereof in private
transactions prior to the Company's initial public offering in June 1995 and
pursuant to the Recapitalization Agreement entered into at the time of the SBC
transaction. These "restricted securities" may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as those provided by Rules 144 and 144A
promulgated under the Securities Exchange Act.

         The Amended Stockholder's Agreement provides for certain demand,
piggyback or other registration rights to the stockholders who are parties to
it. In particular, the agreement provides that, with respect to an aggregate of
1,818,018 shares of Common Stock issued to the Erin Mills Stockholders and
certain of the Carlyle Stockholders in connection with the Recapitalization
Transactions, the Company would register one-half each of such shares under the
Securities Act, for sale during the three-month periods beginning March 31,
1997 and September 27, 1997. The Erin Mills Stockholders have waived the right
to cause the Company to register such shares, although they have reserved the
right to revoke such waiver at any time. The Carlyle Stockholders executed a
waiver similar to the Erin Mills Stockholders' waiver; however, they then
exercised their piggyback rights in connection with the registration of
warrants and warrant shares that were issued in connection with the 1997 sale
of Senior Notes. The Carlyle Shareholders are offering all 2,723,468 shares
beneficially owned by them to the public under the warrant registration
statement filed on September 18, 1998. During 1998 none of the Carlyle
Stockholders' Company Common Stock was purchased pursuant to the offering. See
"Part II, Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters."

         The sale of a substantial number of shares of Common Stock or the
availability of a substantial number of shares for sale may adversely affect
the market price of the Common Stock and could impair the Company's ability to
raise additional capital through the sale of its equity securities.

Volatility of Stock Price

         Historically, the market prices for securities of emerging companies
in the telecommunications industry have been highly volatile. Future
announcements concerning the Company or its competitors, including results of
technological innovations, new commercial products, financial transactions,
government regulations, proprietary rights or product or patent litigation may
have a significant impact on the market price of the Company's Common Stock.
The Company's stock price has been highly volatile in recent periods.

ITEM 2.     PROPERTIES

REAL PROPERTY AND LEASES

         The Company does not own any real property. The Company leases
approximately 73,400 square feet of office space for its corporate headquarters
in Richardson, Texas, of which approximately 18,600 square feet is sub-leased to
another company. In addition, the Company leases approximately 15,000 square
feet of warehouse and office space in Dallas, Texas.

ITEM 3.     LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

         AT&T Litigation. On February 16, 1996, the Company filed a lawsuit
against AT&T, which operated an enhanced switching complex for the Company (the
"AT&T Complex") until December, 1997, in the U.S. District Court, Northern
District of Texas, Dallas Division. The Company sought preliminary and permanent
injunctive relief restraining AT&T from using and disclosing the Company's trade
secrets and proprietary information relating to its mobile communications
technology.

                                       22

<PAGE>   26
         In September 1996, the Company amended its pleadings and filed
additional claims related to breach of contract and various tortious activities.
The Company sought a declaration that the patents issued to AT&T using the
Company's proprietary information were invalid or, alternatively, should be
transferred from AT&T to the Company, and that certain actual or threatened AT&T
conduct infringed the Company's patents. The Company also brought claims against
AT&T pursuant to the Texas Deceptive Trade Practices Act ("DTPA") and sought
actual, punitive and treble damages and attorneys' fees in connection with its
claims. Additionally, the Company's amended complaint added another defendant,
Lucent Technologies, Inc. ("Lucent"), to which AT&T transferred certain of the
patents at issue in the lawsuit.

         In July and October 1996, AT&T filed counterclaims essentially
mirroring the Company's claims. AT&T sought an injunction preventing the Company
from using or disclosing AT&T's alleged trade secrets, a declaratory judgment
defining the parties' intellectual property rights, actual and punitive damages
and attorneys' fees in connection with its counterclaims. In November 1996, AT&T
filed a partial motion to dismiss the Company's DTPA claims, various tort claims
and the patent invalidity charges. Additionally, in November 1996, Lucent filed
a motion to dismiss all of the Company's claims against Lucent. The Court ruled
in December 1997 on the motions by granting the dismissal of one non-essential
tort claim against AT&T and the dismissal of the patent invalidity charges with
respect to Lucent only on the grounds that Lucent has expressed no intent to
enforce any of its patents against the Company.

         On February 25, 1999, the Company and AT&T engaged in a mediation in an
effort to resolve all claims between the parties asserted in the litigation. The
Company and AT&T resolved all disputes relating to the litigation in this
mediation. The Company and AT&T have executed a binding memorandum of settlement
which will be finalized in a formal Joint Compromise, Release and Settlement
Agreement. Additionally, on March 25, 1999, the Company and Lucent resolved all
disputes related to the litigation in a mediation. The Company and Lucent
executed a binding memorandum of settlement. The terms of the settlement with
AT&T and Lucent will not adversely impact the Company's results of operations or
financial position.

                                       23

<PAGE>   27


         Aeris. On February 23, 1999, Aeris Communications, Inc. filed an 
Original Complaint against the Company in the United States District Court for 
the Northern District of California alleging that the certain of the Company's 
products may infringe Aeris' United States Patent No. 5,594,740. Aeris has not 
served the lawsuit pursuant to a standstill agreement reached between the 
parties. The parties are currently in negotiations in an effort to resolve the 
disputes. However, there can be no assurance that the Company will be able to 
resolve these disputes. If it were determined that any of the Company's 
products infringed a valid patent held by Aeris, the Company may be required to 
cease marketing of such products, to obtain licenses (which might require the 
payment of past and future royalties) from Aeris or to redesign such products 
to avoid infringement. There can be no assurance that the Company would be able 
to obtain licenses on commercially reasonable terms, or that it would be able 
to design and incorporate alternative technologies, without a material adverse 
effect on the Company and its business, financial condition and results of 
operations. See "Risk Factors -- Uncertainty Regarding Patents and Proprietary 
Rights." 

         Other. The Company is also involved in various other claims and
lawsuits incidental to its business, primarily collections lawsuits in which
the Company is seeking payment of amounts owed to it by customers. In
connection with the Company's efforts to collect payments from a small number
of former customers, such former customers have on occasion alleged breaches of
contractual obligations under service agreements with the Company. The Company
does not believe that these claims and lawsuits will have a material adverse
affect on the Company's business, financial condition and results of
operations.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the year covered by this report through the solicitation of
proxies or otherwise.

                                    PART II

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

         The Company's Common Stock was initially offered to the public on June
22, 1995, and was quoted on the National Market ("Nasdaq NMS") through
close of business on February 1, 1999, after which time it began trading on the
Nasdaq SmallCap Market ("Nasdaq SmallCap") under the symbol "HWYM". The
following table sets forth the range of high and low trading prices on Nasdaq
NMS for the Common Stock for the periods indicated, as reported by Nasdaq NMS.
Such price quotations represent inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>

                                                       BID PRICES
                                                  HIGH             LOW
                                                 -------        --------
<S>                                              <C>            <C>     
1997
First Quarter................................... $21 1/8        $11  3/8
Second Quarter.................................. $17 1/4        $ 9  3/4
Third Quarter................................... $16            $ 7  1/2
Fourth Quarter.................................. $9  7/8        $ 5

1998
First Quarter                                    $8             $ 5  3/8
Second Quarter                                   $6  1/2        $ 2 5/16
Third Quarter                                    $4  1/2        $    7/8
Fourth Quarter.................................. $2  1/8        $  53/64
</TABLE>

                                      24

<PAGE>   28


         The Company had approximately 2,100 holders of common stock as of
March 22, 1999. The last sales price for the Company's Common Stock as reported
on March 22, 1999 was $1.875. The Company did not pay dividends on its Common
Stock for the year ended December 31, 1998 and has no plans to do so in the 
foreseeable future.

         On June 24, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") notified
the Company that it was not in compliance with the minimum bid price
requirement of $5.00 per share for listing on the Nasdaq NMS and that the
Company's securities would be delisted on September 28, 1998 unless it achieved
compliance by September 24, 1998. Additionally, on November 6, 1998, the
Company received notification from Nasdaq that it was not in compliance with
Nasdaq NMS' minimum market value of public float of $15 million and that the
Company's securities would be delisted on February 4, 1999 unless it achieved
compliance with this requirement by February 3, 1999. Delisting was stayed
pending a hearing before a Nasdaq Listing Qualifications Hearing Panel ("Nasdaq
Panel") held on November 19, 1998. At the hearing, the Company presented an
overview of its restructuring activities and results to date as well as a
compliance plan for correcting the bid price and public float market value
deficiencies. The Company requested continued inclusion via an exception to the
bid price through May 31, 1999. The Nasdaq Panel notified the Company on
January 28, 1999 that the Company's common stock listing would be moved from
Nasdaq NMS to Nasdaq SmallCap at the close of business February 1, 1999. The
Nasdaq Panel acknowledged the Company's progress in restructuring the business
and indicated that although the Company's stock would not be delisted, an
exception extension to May 31, 1999 was too long to remain out of compliance on
Nasdaq NMS. Since the Company met all maintenance criteria for Nasdaq SmallCap,
the Nasdaq Panel determined to move the Company's common stock listing to
Nasdaq SmallCap where it has been traded since February 1, 1999.

         On September 18, 1998, under the Securities Act of 1933, as amended,
the Securities and Exchange Commission ("SEC") declared effective the Company's
registration statement on Form S-3, as amended (the "Registration Statement").
The Company registered warrants and warrant shares as required pursuant to the
Warrant Registration Rights Agreement entered into as part of the Company's
1997 Debt Offering. Under the terms of the Warrant Registration Rights
Agreement, the Company is obligated to use its best efforts to keep the
Registration Statement continuously effective until the earlier of (i) the
expiration of the warrants or (ii) the time when all warrants have been
exercised; provided, however, that during any consecutive 365-day period, the
Company may suspend the effectiveness of the Registration Statement on up to
two occasions for a period of not more than 45 consecutive days in connection
with a possible acquisition, business combination or other development
affecting the Company if the Board of Directors determines that disclosure
thereof would not be in the best interests of the Company. The Company will not
receive any proceeds from the sale of the warrants by the selling warrant
holders. To the extent that any warrants are exercised, the Company will
receive the exercise price for the warrant shares. During 1998 no warrants were
sold and no warrant shares were exercised.

         Additionally, the Company registered shares required pursuant to the
Amended Stockholders' Agreement (the "Stockholders' Agreement"). The
Stockholders' Agreement grants piggyback registration rights to certain
stockholders who are parties thereto. Accordingly, whenever the Company
proposes to register any shares of Common Stock (or securities convertible into
or exchangeable for, or options, warrants or other rights to acquire Common
Stock) under the Securities Act of 1933 (other than registrations on Form S-4
or Form S-8), the eligible parties to the Stockholders' Agreement have the
right to include shares of Common Stock held by them in any such registration.
However, if the inclusion of shares of Common Stock pursuant to the piggyback
registration provisions is reasonably determined by the managing underwriter or
underwriters to materially adversely affect the success of the proposed
offering, the Company may exclude certain shares from the offering. All
eligible parties under the Stockholders' Agreement were given notice of their
opportunity to piggyback the offering of their Company Common Stock holdings on
the Registration Statement. The Carlyle Stockholders were the only eligible
parties who exercised their piggyback rights in connection with the
registration of warrants and warrant shares under the Registration Statement.
The Carlyle Shareholders are offering all 2,723,468 shares beneficially owned
by them to the public under the Registration Statement. During 1998 none of the
Carlyle Stockholders' Company Common Stock was purchased pursuant to the
offering.

                                      25

<PAGE>   29


ITEM 6.     SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth for each of the years 1994,
1995, 1996, 1997, and 1998 has been derived from audited financial statements,
including the consolidated balance sheets at December 31, 1998 and 1997 and the
related consolidated statements of operations, of cash flows and of changes in
stockholders' equity for each of the three years in the period ended December
31, 1998 and notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>

                                                       1998             1997             1996             1995             1994
                                                     --------         --------         --------         --------         --------
                                                     (In thousands, except per share and operating data)
<S>                                                  <C>              <C>              <C>              <C>              <C>     
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues:                                   
   Product                                           $ 16,832         $ 27,187         $ 14,645         $ 16,946         $ 11,075
   Service                                             46,463           27,445           16,056            9,908            2,436
                                                     --------         --------         --------         --------         --------
     Total revenues                                    63,295           54,632           30,701           26,854           13,511
                                                     --------         --------         --------         --------         --------
Cost of revenues:
   Product                                             12,991           22,133           15,099           17,730           11,867
   Service                                             32,419           21,397           11,489            9,172            2,099
   Writedown of inventory                                  --               --            1,943               --            1,658 
                                                     --------         --------         --------         --------         --------
     Total cost of revenues                            45,410           43,530           28,531           26,902           15,624
                                                     --------         --------         --------         --------         --------
   Gross profit (loss)                                 17,885           11,102            2,170              (48)          (2,113)
                                                     --------         --------         --------         --------         --------
Expenses:
   General and administrative                          22,748           11,872            7,997            6,488            5,752
   Customer service                                    10,844           11,493            8,089            5,727            4,587
   Sales and marketing                                  7,372            7,723            9,139            6,273            3,890
   Engineering                                          5,399            4,604            3,487            2,868            1,900
   Network services center                              1,992            1,416              607               --               --
   Severance and AutoLink(R) termination costs          5,357               --               --               --               --
   Depreciation and amortization                        5,829            2,684            1,482              811              825
                                                     --------         --------         --------         --------         --------
                                                       59,541           39,792           30,801           22,167           16,954
                                                     --------         --------         --------         --------         --------
   Operating loss                                     (41,656)         (28,690)         (28,631)         (22,215)         (19,067)
Interest income                                         4,827            2,500              809            1,041              279
Interest expense                                      (17,099)          (4,857)          (1,691)          (5,106)          (5,999)
Recapitalization costs                                     --               --               --               --             (733)
Other expense                                              --               --             (230)            (117)            (361)
                                                     --------         --------         --------         --------         --------
Loss before income taxes and
   extraordinary item                                 (53,928)         (31,047)         (29,743)         (26,397)         (25,881)
Income tax provision                                       --               --               --               --               --
                                                     --------         --------         --------         --------         --------
Loss before extraordinary item                        (53,928)         (31,047)         (29,743)         (26,397)         (25,881)
Extraordinary item                                     18,867               --             (317)          (6,980)              --
                                                     --------         --------         --------         --------         --------
   Net loss                                          $(35,061)        $(31,047)        $(30,060)        $(33,377)        $(25,881)
                                                     ========         ========         ========         ========         ========
Per share (1):
   Loss per share before extraordinary item          $  (2.17)        $  (1.25)        $  (1.39)        $  (1.43)        $  (1.61)
        Extraordinary item                               0.76               --            (0.01)           (0.35)              --
                                                     --------         --------         --------         --------         --------
   Basic and diluted net loss                        $  (1.41)        $  (1.25)        $  (1.40)        $  (1.78)        $  (1.61)
                                                     ========         ========         ========         ========         ========
Weighted average number of shares
   outstanding                                         24,899           24,864           22,763           19,813           17,040
                                                     ========         ========         ========         ========         ========
----------
(1)Pro forma (unaudited) for 1994

OTHER FINANCIAL AND OPERATING DATA(unaudited)

Units installed at December 31,                        47,657           33,122           20,354           14,751            6,131
Average monthly usage-minutes per unit                    121              121              130              136              135
Average monthly service revenue per unit             $  99.26         $  85.54         $  76.23         $  79.08         $  66.22
</TABLE>

                                      26

   
<PAGE>   30


<TABLE>
<CAPTION>

                                            DECEMBER 31,        DECEMBER 31,      DECEMBER 31,      DECEMBER 31,      DECEMBER 31,
                                                1998               1997              1996              1995              1994
                                             ----------         ----------        ----------        ----------        ----------
<S>                                          <C>                <C>               <C>               <C>               <C>       
CONSOLIDATED BALANCE SHEET DATA
Cash and short-term investments              $   26,169         $   46,486        $   19,725        $   23,969        $    4,158
Working capital                                  29,143             64,729            24,605            25,772             4,223
Network, equipment and software - net            20,649             15,482             8,629             5,020             1,772
Total assets                                    103,126            146,473            42,929            42,369            16,430
Notes payable                                    91,697            120,956                --            11,488            36,247
Redeemable preferred stock                           --                 --                --             8,126             6,149
Stockholders' equity (deficit)                  (26,791)             8,270            34,664            13,101           (34,773)

Capital expenditures                         $   10,520         $    9,499        $    5,139        $    4,076        $    1,613
</TABLE>


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

GENERAL

         The Company develops and implements mobile communications solutions,
including integrated voice, data and position location services, to meet the
needs of its customers. The initial application for the Company's wireless
enhanced services has been developed for, and is marketed and sold to,
companies which operate in the long-haul trucking market. The Company provides
long-haul trucking companies with a comprehensive package of mobile
communications and management control services at a fixed rate per minute,
thereby enabling its trucking customers to effectively monitor the operations
and improve the performance of their fleets. The Company is currently
developing additional applications for its network to expand the range of its
commercial dispatch and tracking services in broader market segments.

         The Company's revenues are derived primarily from the long-haul
trucking market from sales and installation of Mobile Communication Units
("mobile units") and charges for its services.

         During the third quarter of 1998 the Company announced that it was:
(i) halting the development of its AutoLink(R) service, and (ii) implementing a
number of key management and structural changes designed to more closely align
the Company's expenditures with its revenues. As a result of these
announcements, the Company reduced its workforce by approximately 25% and
recorded charges of $2,481,000 for obligations under employment contracts and
severance payments to terminated employees, and $2,431,000 to recognize asset
impairments and record estimated amounts to be incurred to extinguish
contractual obligations associated with the AutoLink(R) program.

         The Company's installed base of mobile units was 47,657 at December
31, 1998, compared to 33,122 at December 31, 1997, an increase of 44 percent.
Continuing increases in the installed base, which will generate greater service
revenues, are critical to achieving profitable operations and, therefore, key
to the ultimate success of the Company. Continuing operating losses and
negative cash flow are anticipated in 1999. However, based on the Company's
projected operating results, after considering the above changes, the Company
believes its existing capital resources will be sufficient to fund its
currently anticipated operating needs and capital expenditure requirements for
the next twelve months.

         Until the third quarter of 1996, the Company's service revenues were
generated from mobile communications units served exclusively by a switching
complex operated by AT&T Corporation (the "AT&T Complex"). The Company's
Network Services Center ("NSC") commenced service during the third quarter of
1996. During 1997, voice and data communication services were provided by both
the Company's NSC and the AT&T Complex while the provision of service was
transitioned from the AT&T Complex to the NSC. Since January 1, 1998, the
Company has provided voice

                                       27

<PAGE>   31


and data communication services for all of its customers exclusively through
the NSC together with related customer billing, credit and collection
activities. The amount of service revenues and related expenses recognized by
the Company varied significantly based upon whether a particular customer
received service through the AT&T Complex or the NSC. In the case of customers
served through the AT&T Complex, service charges were collected by AT&T. The
Company recognized as revenue the portion of service charges received from
AT&T, with the remainder of the service charges retained by AT&T as
compensation for its cost of providing services. In the case of customers
served by the NSC, the entire amount of the service charges to customers is
recognized by the Company as revenue and additional operating and service
expenses are borne by the Company. The operating expenses associated with the
NSC are reflected in the Company's financial statements as general and
administrative expenses (customer billing, credit, and collection activities),
network services center (other third party and internal operating expenses) and
depreciation. Because of the difference in the economic relationships described
above, as a greater proportion of customers have been served by the NSC, the
Company recognized increased service revenues, which are offset by additional
operating and service expenses.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         Total revenues increased to $63.3 million in 1998 compared to $54.6
million in 1997. Product revenues declined to $16.8 million in 1998 from $27.2
million in 1997, primarily as a result of a 45.5% decrease in mobile units
sold. Product shipments in 1998 were less than the Company's expectations
primarily as a result of the absence of any contribution from major new
contracts and the introduction of the Series 3000 mobile unit that did not
generate any significant sales volumes. After a reassessment of the market, the
Series 3000 product offering was discontinued. The Company signed one major new
contract during 1998; however, the 8,686 units shipped and placed in service in
connection with this contract are not reflected in product revenues because the
earnings process was not complete at December 31, 1998. Service revenues
increased to $46.5 million in 1998 as compared to $27.4 million in 1997 due to
the combined effect of (i) the increased installed base of mobile units and
(ii) increased service revenues per mobile unit. Average monthly revenue per
mobile unit in 1998 increased to $99.26 from $85.54 in 1997 because the entire
installed base of mobile units was served through the NSC in 1998, as compared
to the majority of the installed base being served through the AT&T Complex in
1997. See discussion under "General," above.

         Cost of revenues in 1998 was $45.4 million compared to $43.5 million
in 1997, reflecting a decrease in cost of product revenues, as a result of the
decrease in the number of units sold, offset by an increase in cost of service
revenues as a result of the increase in the installed base of mobile units in
service.

         Product gross profit margin was 22.8% in 1998 compared to 18.6% in
1997. The improvement in product gross profit margin is primarily attributable
to a lower provision for warranty costs.

         Service gross profit margin was 30.2% in 1998 compared to 22.0% in
1997. The Company incurs certain costs for airtime usage that are not billable
to customers under current billing practices. The improvement in service gross
profit margin in 1998 reflects the changed economic relationships described
above, and the effect of technical adjustments and modifications implemented to
reduce the amount of airtime costs incurred that are not billable to customers.
The Company continues to evaluate the components of its service gross profit
margin to attempt to identify additional technical adjustments and
modifications that may enable it to improve its service gross profit margin.

         General and administrative expenses increased to $22.7 million in 1998
compared to $11.9 million in 1997. Of this $10.8 million increase,
approximately $4.3 million represents a provision for bad debts related to the
Company's accounts receivable, and approximately $3.0 million represents a
charge to accrue an estimated liability for sales taxes and associated costs as
described in more detail in Note 8 to the accompanying consolidated financial
statements. Of the $4.3 million provision for bad debts, $1.5 million relates
to personal calling accounts activated in connection with a promotion designed
to increase minutes of airtime usage. As a result of the unfavorable experience
in connection with these personal account customers, during the second quarter
of 1998 the Company discontinued the promotion and changed the credit process
with respect to personal accounts in an attempt to reduce the Company's credit
risk. The Company recorded a $2.7 million provision as a result of a major
customer's filing for Chapter 11 bankruptcy protection. The remainder of the
increase in general and administrative expenses is represented primarily by:
(i) ordinary and customary costs associated with billing, credit and collection
activities for the NSC, (ii) growth in the average number

                                      28

<PAGE>   32


of employees and salary increases, (iii) consulting fees in connection with
evaluation of the Company's information systems and efforts to improve service
gross profit margin, and (iv) legal and professional fees.

         Customer service expenses decreased to $10.8 million in 1998 compared
to $11.5 million in 1997. This decrease is attributable to the reduction in the
number of employees pursuant to a reorganization announced in the second
quarter of 1998. The reduction in the number of employees primarily reflects
the elimination of redundancies that had been necessary as a result of having
customers served by both the AT&T Complex and the NSC.

         Sales and marketing expenses decreased to $7.4 million in 1998
compared to $7.7 million in 1997 primarily from cost savings realized in the
fourth quarter as a result of the reorganization announced during the third
quarter of 1998.

         Engineering expenses increased to $5.4 million in 1998 compared to
$4.6 million in 1997. This increase is primarily attributable to increases in
payroll related costs as a result of an increase in the number of engineering
personnel devoted to continuation engineering and new product development, and
other costs specifically related to the development of the AutoLink(R) service.

         Depreciation and amortization expense increased to $5.8 million in
1998 compared to $2.7 million in 1997 reflecting the additional depreciation
and amortization as a result of additions to network, equipment and capitalized
software during 1997 and 1998.

         Interest income was $4.8 million in 1998 compared to $2.5 million in
1997. Interest expense was $17.1 million in 1998 compared to $4.9 million in
1997. The change in these relationships reflects higher average outstanding
balances during 1998 in cash and short-term investments, temporary investments
and notes payable as a result of the issuance of $125,000,000 of Senior Notes
("Senior Notes") in September 1997.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

         Total revenues increased to $54.6 million in 1997 from $30.7 million
in 1996. Product revenues increased in 1997 to $27.2 million from $14.6 million
in 1996 primarily as a result of a 97.1% increase in mobile units sold. Average
sales price per mobile unit decreased primarily as a result of a larger
percentage of sales qualifying for the Company's most favorable tier pricing.
This decrease in average sales price was offset by a lower average cost per
mobile unit sold. The lower average cost per mobile unit is primarily
attributable to manufacturing and procurement economies. Service revenues
increased to $27.4 million in 1997 as compared to $16.1 million in 1996
primarily as a result of the increase in the installed base of mobile units.
Average monthly revenue per mobile unit in 1997 increased to $85.54 from $76.23
in 1996 as a result of proportionately more services being provided through the
NSC rather than the AT&T Complex.

         Cost of revenues in 1997 was $43.5 million compared to $28.5 million
in 1996. This increase is primarily as a result of the increase in the number
of mobile units sold and in service.

         Product gross profit margin was 18.6% in 1997 compared to a negative
16.4% in 1996. This improvement was primarily attributable to: (i) lower
charges associated with the migration of earlier generation mobile units to the
NSC, (ii) reduced charges for upgrade contracts and excess and obsolete
inventory, and (iii) the leverage obtained on the fixed portion of the Company's
installation costs as a result of the significant increase in shipments and
installations.

         Service gross profit margin was 22.0% in 1997 compared to 28.4% in
1996. The Company incurs certain costs for airtime usage that are not billable
to customers under current billing practices. Billing data received in 1997
indicated that the portion of airtime usage not billable to customers was
higher than previously believed by the Company and used as the basis for
recording accounting estimates. An increase in cost of cellular airtime paid
for by the Company in relation to airtime billable to customers caused the
decrease in service gross profit margin.

         General and administrative expenses increased to $11.9 million in 1997
from $8.0 million in 1996. These increased expenses reflect the costs
associated with billing, credit and collection activities for the NSC and a
general increase in expenses as a result of the growth in the number of
employees from 295 at the end of 1996 to 348 at the end

                                      29

<PAGE>   33


of 1997. The most significant expense increase was bad debt expense. The Company
records an allowance for doubtful accounts based on a percentage of sales.
Accordingly, bad debt expense increased because of: (i) the significant increase
in product revenues from 1996 to 1997, (ii) provision for bad debts on the NSC,
and (iii) a $1 million charge recorded to provide for loss on the sales-type
lease receivable due from a customer as a result of the customer's early
termination of the lease.

         Customer service expenses increased to $11.5 million in 1997 compared
to $8.1 million in 1996, attributable to the increasing emphasis on improving
response to customer needs, improvement in the technical operations of the
network and growth in the number of mobile units shipped and in service.

         Sales and marketing expenses decreased to $7.7 million in 1997 from
$9.1 million in 1996. This decrease was primarily related to a reduction in the
number of sales and marketing employees. During 1996, a significant number of
new employees were added to the sales force. During 1997, there was a
significant reduction in the number of sales employees in connection with the
realignment of the sales force to coincide with the Company's target markets.

         Engineering expenses increased to $4.6 million in 1997 compared to
$3.5 million in 1996. This increase was primarily attributable to increases in
payroll related costs as a result of an increase in the number of engineering
personnel devoted to continuation engineering and new product development.

         Network services center expense increased to $1.4 million in 1997 from
$0.6 million in 1996 reflecting an entire year of operations for the NSC in
1997 as compared to only a portion of the year in 1996.

         Depreciation and amortization expense increased to $2.7 million in
1997 compared to $1.5 million in 1996 reflecting an entire year of depreciation
for the NSC in 1997 as compared to only a portion of the year in 1996, and the
depreciation and amortization on other additions to equipment and capitalized
software during 1997.

         Interest income was $2.5 million in 1997 compared to $0.8 million in
1996. Interest expense was $4.9 million in 1997 compared to $1.7 million in
1996. The change in these relationships reflected higher average outstanding
balances during 1997 in cash and short-term investments, temporary investments
and notes payable as a result of the issuance of the Senior Notes.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash consumed by operating activities during 1998 was $35.6 million
due primarily to an operating loss of $41.7 million. The Company's cash and
short-term investments balance at December 31, 1998 was $26.2 million. During
the third quarter, the Company halted the development of the AutoLink(R) program
and made a number of key management and structural changes designed to more
closely align the Company's expenditures with its revenues. Based on the
Company's projected operating results, after considering these changes, the
Company believes its existing capital resources will be sufficient to fund its
currently anticipated operating needs and capital expenditure requirements for
the next twelve months. However, the Company's future cash flow from operations
and operating requirements may vary depending on a number of factors, including
the rate of installation of mobile units, the level of competition, success of
new products, general economic conditions and other factors beyond the Company's
control.

         The Company's capital resources may be insufficient to fund its
operating needs, capital expenditures and debt service requirements in the
long-term. The Company believes that, in order to address its long-term capital
requirements, it will need to take steps to: (i) increase the installed base of
mobile units in service and improve the efficiency of its operations, so as to
reduce or eliminate its operating losses, or (ii) obtain additional sources of
debt or equity financing. The Company's ability to obtain additional debt
financing is materially restricted under the terms of the Indenture governing
the Senior Notes. There can be no assurance that the Company would be able to
obtain additional debt or equity financing on satisfactory terms, if at all.

         In September 1997, the Company issued the Senior Notes in a Rule 144A
offering. The Company has placed in escrow funds (the "Pledged Securities")
which are sufficient to pay interest on the Senior Notes through

                                       30

<PAGE>   34


September 15, 2000. After such date, the Company will be required to pay
interest on the Senior Notes on a semi-annual basis at a rate of 13 3/4% per
annum. During the fourth quarter of 1998 the Company purchased and subsequently
retired $30,645,000 principal amount of the Senior Notes on the open market for
$9,885,000 plus accrued interest thereon, resulting in a gain on extinguishment
of debt of $18,867,000 after the write-off of associated debt discount and debt
issuance costs. The gain is reported as an extraordinary item in the
accompanying Consolidated Statements of Operations. Upon the retirement of the
Senior Notes, the allocable portion of the Pledged Securities related thereto,
in the amount of $8,063,000, was released to the Company. The Company may
continue to make purchases on the open market in the event conditions remain
favorable.

YEAR 2000

         The Company has established a Year 2000 project team, which includes
employees with various functional responsibilities and outside consultants. The
project team has identified five phases in becoming Year 2000 compliant: (i)
awareness, locating, listing, and prioritizing specific technology that is
potentially subject to Year 2000 challenges; (ii) assessment and determining
the element of risk that exists through inquiry, research and testing; (iii)
resolving Year 2000 related issues that were identified in previous phases by
repair in a testing environment; (iv) validation testing, monitoring, obtaining
certification, and verifying the correct manipulation of dates and date related
data, including systems of material third parties; and (v) implementation,
installation, integration and application of Year 2000 ready resolutions by
replacement, upgrade or repair of technology systems, including those of
material third parties.

         The Company is performing its Year 2000 analysis on all systems
located at the Company as well as some located at customer sites. In addition
to internally controlled operating systems, the Company relies on third parties
for services and/or goods that may be affected by Year 2000 challenges. The
Company is in the process of obtaining assurances from third parties that their
systems are or will be Year 2000 compliant in a timely manner.

         While the Company does not anticipate delays or postponements in
implementing Year 2000 resolutions in a timely manner, there can be no
certainty that implementation of solutions will be made in a timely manner
until the validation phase is completed. The inability to address all issues in
a timely and successful manner could have an adverse effect on the Company's
business and results of operations. The failure of third parties to provide
Year 2000 compliant products and/or services could have a material adverse
effect on the Company's financial condition and results of operations. Such
risks include, but are not limited to, inability to deliver or receive calls
and/or data, failure to accurately report and bill existing customers, accept
new orders, and the inability to perform other customer care tasks.

         Management believes the cost of becoming Year 2000 compliant will be
approximately $650,000 during 1999. Although the Company does not expect the
cost to have a material adverse effect on its business or results of operations,
there can be no assurance that the Company will not be required to incur
significant unanticipated costs in relation to its readiness obligations. The
Company has not deferred any specific projects, goals, or objectives relating
to its operations as a result of Year 2000 compliance efforts.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


         The Company's consolidated financial statements at December 31, 1997
and 1998, and for each of the three years in the period ended December 31, 1998
and the Report of PricewaterhouseCoopers LLP, independent accountants, are
included in this Annual Report on Form 10-K on pages F-1 through F-17.

                                       31

<PAGE>   35


ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
            FINANCIAL DISCLOSURE.

         None.

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information regarding Directors and Executive Officers is incorporated
by reference to the section entitled "Election of Directors" in the
Registrant's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Stockholders to be
held on May 25, 1999 (the "Proxy Statement").

ITEM 11.    EXECUTIVE COMPENSATION.

         The information required by this item is incorporated by reference
from the Proxy Statement under the heading "Executive Compensation."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this item is incorporated by reference
from the Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item is incorporated by reference
from the Proxy Statement under the heading "Certain Transactions."

                                      32

<PAGE>   36


                                    PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>

                                                                                                              Page
                                                                                                             Number
                                                                                                             -------
<S>      <C>                                                                                                 <C>
(a)      Documents filed as part of the report:

   (1)   Report of Independent Accountants......................................................................F-1
         Consolidated Balance Sheets as of December 31, 1998 and 1997...........................................F-2
         Consolidated Statements of Operations for the Years Ended
                  December 31, 1998, 1997 and 1996..............................................................F-3
         Consolidated Statements of Cash Flows for the Years Ended
                  December 31, 1998, 1997 and 1996 .............................................................F-4
         Consolidated Statements of Changes in Stockholders' Equity (Deficit)
                  for the Years Ended December 31, 1998, 1997 and 1996 .........................................F-5
         Notes to Consolidated Financial Statements.............................................................F-7

   (2)   Consolidated Financial Statement Schedule
         Schedule II Valuation and Qualifying Accounts .........................................................S-1
</TABLE>

Financial statement schedules other than those listed above have been omitted
because they are either not required, not applicable or the information is
otherwise included.

   (3)   Exhibits

EXHIBIT
NUMBER      TITLE
-------     -----
  3.1  -  Certificate of Incorporation of the Company, as amended.(1)(9) 

  3.2  -  Amended and Restated By-Laws of the Company.(13)

  4.1  -  Specimen of certificate representing Common Stock, $.01 par value,
          of the Company.(1)

  4.2  -  Warrant Certificate, dated September 27, 1996, issued to SBW.(7)

  4.3  -  Recapitalization Agreement, dated September 27, 1996, by and among
          the Company, the Erin Mills Stockholders, the Carlyle Stockholders
          and the other persons named therein.(7)

  4.4  -  Amended and Restated Stockholders' Agreement, dated September 27,
          1996, by and among the Company, SBW, the Erin Mills Stockholders,
          the Carlyle Stockholders, the By-Word Stockholders and the other
          persons named therein.(7)

  4.5  -  Indenture dated September 23, 1997 by and among the Company,
          HighwayMaster Corporation and Texas Commerce Bank, National
          Association.(12)

  4.6  -  Pledge Agreement dated September 23, 1997 by and among the
          Company, Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)

  4.7  -  Registration Rights Agreement dated September 23, 1997 by and
          among the Company, HighwayMaster Corporation, Bear, Stearns & Co.
          Inc. and Smith Barney Inc.(12)

  4.8  -  Warrant Agreement dated September 23, 1997 by and among the
          Company, Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)

  4.9  -  Warrant Registration Rights Agreement dated September 23, 1997 by
          and among the Company, Bear, Stearns & Co. Inc. and Smith Barney,
            Inc.(12)

                                       33

<PAGE>   37


  10.1 -  License Agreement, dated April 23, 1992, by and between Voice
          Control Systems and the Company (as successor to By-Word
          Technologies, Inc.).(1)

  10.2 -  Second Amendment to Employment Agreement, dated September 1, 1998,
          by and between HighwayMaster Corporation and William C. Saunders.
          (16)

  10.3 -  Agreement and General Release, dated September 30, 1998, by and
          between HighwayMaster Corporation and William C. Kennedy, Jr.(15)

  10.4 -  Release of HighwayMaster Communications, Inc. and HighwayMaster
          Corporation by William C. Saunders, dated December 15, 1998.(16)

  10.5 -  Release of William C. Saunders by HighwayMaster Communications,
          Inc. and HighwayMaster Corporation, dated December 15, 1998.(16)

  10.6 -  Amended and Restated 1994 Stock Option Plan of the Company, dated
          February 4, 1994, as amended.(1)(5)(6)

  10.7 -  Purchase Agreement, dated September 27, 1996, between the Company
          and SBW.(7)

  10.8 -  Mobile Communications (Voice and Data) Services Agreement, dated as
          of July 15, 1993, between the Company and EDS Personal
          Communications Corporation.(1)(2)

  10.9 -  Stock Option Agreement, dated June 22, 1998, by and between the
          Company and John Stupka.(16)

  10.10 - Services Agreement, dated March 20, 1996, between the Company and
          GTE-Mobile Communications Service Corporation.(3)(4)

  10.11 - Acknowledgment by William C. Saunders dated December 15, 1998.(16)

  10.12 - Amendment dated November 16, 1995 to that certain Mobile
          Communications (Voice and Data) Services Agreement, dated as of
          July 15, 1993, between the Company and EDS Personal Communications
          Corporation.(3)(4)

  10.13 - Mutual Separation and Release, dated December 22, 1998, by and
          between HighwayMaster Corporation and Gordon D. Quick.(16)

  10.14 - Product Development Agreement, dated December 21, 1995, between the
          Company and IEX Corporation.(3)(4)

  10.15 - Technical Services Agreement, dated September 27, 1996, between the
          HighwayMaster Corporation and SBW.(7)

  10.16 - Letter Agreement, dated February 19, 1996, between the Company and
          IEX Corporation.(3)

  10.17 - Form of Adoption Agreement, Regional Prototype Cash or Deferred
          Profit-Sharing Plan and Trust Sponsored by McKay Hochman Co., Inc.,
          relating to the HighwayMaster Corporation 401(k) Plan.(1)

  10.18 - February 27, 1997 Addendum to Original Employment Letter dated
          September 19, 1997 by and between the HighwayMaster Corporation and
          Robert LaMere.(16)

  10.19 - Software Transfer Agreement, dated April 25, 1997 between the
          Company and Burlington Motor Carriers, Inc.(9)(10)

  10.20 - Employment Agreement, dated June 3, 1998, by and between
          HighwayMaster Corporation and Todd A. Felker.(16)

  10.21 - Employment Agreement, dated June 3, 1998, by and between
          HighwayMaster Corporation and William McCausland.(16)

  10.22 - Employment Agreement, dated May 29, 1998, by and between
          HighwayMaster Corporation and Jana Ahlfinger Bell.(14)

  10.23 - Lease Agreement, dated March 20, 1998, between HighwayMaster
          Corporation and Cardinal Collins Tech Center, Inc.(15)

  10.24 - First Amendment to Employment Agreement, dated September 15, 1998,
          by and between HighwayMaster Corporation and Jana A. Bell.(16)

  10.25 - Employment Agreement, dated November 24, 1998, by and between
          HighwayMaster Corporation and Michael Smith.(16)

  10.26 - September 18, 1998 Amended and Restated Stock Option Agreement of
          May 29, 1998, by and between the Company and Jana Ahlfinger Bell.
          (16)


                                       34
<PAGE>   38


  10.27 - Stock Option Agreement, dated August 12, 1998, by and between the
          Company and Jana Ahlfinger Bell.(16)

  10.28 - Stock Option Agreement, dated September 18, 1998, by and between
          the Company and Jana Ahlfinger Bell.(16)

  10.29 - September 18, 1998 Amended and Restated Stock Option Agreement of
          February 29, 1996, by and between the Company and William H.
          McCausland.(16)

  10.30 - Stock Option Agreement, dated September 18, 1998, by and between
          the Company and William H. McCausland.(16)

  10.31 - September 18, 1998 Amended and Restated Stock Option Agreement of
          April 25, 1997, by and between the Company and Robert LaMere.(16)

  10.32 - September 18, 1998 Amended and Restated Stock Option Agreement of
          June 3, 1998, by and between the Company and Todd A. Felker(16)

  10.33 - Stock Option Agreement of November 24, 1998, by and between the
          Company and Michael Smith.(16)

  10.34 - Stock Option Agreement, dated April 4, 1995, by and between the
          Company and Terry Parker.(16)

  11    - Statement re: Computation of Per Share Earnings(16)

  21.1  - Subsidiaries of the Company(1)

  23.1  - Consent of PriceWaterhouseCoopers LLP, independent auditors.(16)

  24    - Powers of Attorney of directors and officers of the Company
          (included on signature pages to this Annual Report on Form 10-K).

  27    - Financial Data Schedule.(16)
---------------

   (1)   Filed in connection with the Company's Registration Statement on Form
         S-1, as amended (No. 33-91486) effective June 22, 1995.

   (2)   Certain confidential portions deleted pursuant to Order Granting
         Application for Confidential Treatment issued in connection with
         Registration Statement on Form S-1 (No. 33-91486) effective June 22,
         1995.

   (3)   Filed in connection with the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1995.

   (4)   Certain confidential portions deleted pursuant to Application for
         Confidential Treatment filed in connection with the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1995.

   (5)   Indicates management or compensatory plan or arrangement required to
         be identified pursuant to Item 14(a)(4).

   (6)   Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended June 30, 1996.

   (7)   Filed in connection with the Company's Current Report on Form 8-K
         filed on October 7, 1996.

                                       35
<PAGE>   39


   (8)   Filed in connection with the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1996.

   (9)   Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended March 31, 1997.

   (10)  Certain confidential portions deleted pursuant to Order Granting
         Application for Confidential Treatment issued in connection with the
         Company's Form 10-Q Quarterly Report for the quarterly period ended
         March 31, 1997.

   (11)  Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended June 30, 1997.

   (12)  Filed in connection with the Company's Registration Statement on Form
         S-4, as amended (No. 333-38361).

   (13)  Filed in connection with the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1997.

   (14)  Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended June 30, 1998.

   (15)  Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended September 30, 1998.

   (16)  Filed herewith.

(b)   Reports on Form 8-K

      None.

(c)   Exhibits

      The exhibits required by this Item are listed under Item 14(a)(3).

(d)   Financial Statements Schedules

      The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).


                                      36

<PAGE>   40


                                   SIGNATURES

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

March 30, 1999

                               HIGHWAYMASTER COMMUNICATIONS, INC.


                               By:      /s/JANA AHLFINGER BELL
                                  -------------------------------------
                                  Jana Ahlfinger Bell,
                                  President and Chief Executive Officer





                                      37

<PAGE>   41


Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10K for the fiscal year ended December 31, 1998, has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

               SIGNATURE                                    Title                                   Date
               ---------                                    -----                                   ----
<S>                                             <C>                                             <C>  
         /S/WILLIAM C. KENNEDY, JR.             Interim Chairman of the Board                   March 30, 1999 
        ----------------------------
          William C. Kennedy, Jr. 


            /S/JANA AHLFINGER BELL              President, Chief Executive Officer, and         March 30, 1999 
        ----------------------------            Director (Principal Executive Officer) 
            Jana Ahlfinger Bell                  


                                                
             /S/W. MICHAEL SMITH                Senior Vice President and                       March 30, 1999 
        ----------------------------            Chief Financial Officer        
              W. Michael Smith                  (Principal Financial Officer)       
                                                

                                                
             /S/STEPHEN P. TACKE                Vice President and Controller                   March 30, 1999 
        ----------------------------            (Principal Accounting Officer)
              Stephen P. Tacke                  


             /S/TERRY S. PARKER                 Director                                        March 30, 1999 
        ----------------------------
              Terry S. Parker 


            /S/STEPHEN L. GREAVES               Director                                        March 30, 1999 
        ----------------------------
             Stephen L. Greaves 


              /S/GERRY C. QUINN                 Director                                        March 30, 1999 
        ----------------------------
               Gerry C. Quinn 


              /S/JOHN T. STUPKA                 Director                                        March 30, 1999 
        ----------------------------
               John T. Stupka 
</TABLE>


                                       38
<PAGE>   42
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of HighwayMaster
Communications, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 33 present fairly, in all material
respects, the financial position of HighwayMaster Communications, Inc. and its
subsidiary (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.




PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 16, 1999, 
except as to Note 12,
which is as of March 29, 1999






























                                       F-1

<PAGE>   43



               HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except share information)

<TABLE>
<CAPTION>


                                     ASSETS

                                                                                                December 31,
                                                                                                ------------
                                                                                         1998                1997
                                                                                       ----------         ----------
<S>                                                                                    <C>                <C>       
Current assets:
  Cash and short-term investments                                                      $   26,169         $   46,486
  Accounts receivable, net of allowance for doubtful accounts
     of $9,528 and $2,148, respectively                                                    14,585             13,963
  Inventory                                                                                12,921              3,145
  Pledged securities - current portion                                                     12,974             17,187
  Other current assets                                                                        714              1,195
                                                                                       ----------         ----------
     Total current assets                                                                  67,363             81,976
Network, equipment and software, net of accumulated depreciation and
     and amortization of $10,202 and $5,463, respectively                                  20,649             15,482
Temporary investments                                                                          --             13,626
Pledged securities - long-term portion                                                     11,814             30,216
Other assets, net of accumulated amortization
     of $565 and $236, respectively                                                         3,300              5,173
                                                                                       ----------         ----------
     Total assets                                                                      $  103,126         $  146,473
                                                                                       ==========         ==========

                                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable                                                                     $   11,362         $    6,262
  Telecommunications costs payable                                                          5,920              2,192
  Accrued interest payable                                                                  3,784              4,679
  Advance payments from customers                                                           7,452                 --
  Other current liabilities                                                                 9,702              4,114
                                                                                       ----------         ----------
      Total current liabilities                                                            38,220             17,247
 Senior notes payable                                                                      91,697            120,956
                                                                                       ----------         ----------
      Total liabilities                                                                   129,917            138,203
                                                                                       ----------         ----------

 Stockholders' equity (deficit):
   Series D participating convertible preferred stock, $.01 par value,
      1,000 shares authorized; 1,000 shares issued and outstanding                             --                 --
   Common stock, $.01 par value, 50,000,000 shares authorized;
      25,210,983 issued; 24,898,986 shares outstanding                                        252                252
   Additional paid-in capital                                                             149,481            149,481
   Accumulated deficit                                                                   (175,977)          (140,916)
   Treasury stock, 311,997 shares, at cost                                                   (547)              (547)
                                                                                       ----------         ----------
      Total stockholders' equity  (deficit)                                               (26,791)             8,270
 Commitments and contingencies  (Note 12)
                                                                                       ----------         ----------
      Total liabilities and stockholders' equity (deficit)                             $  103,126         $  146,473
                                                                                       ==========         ==========
</TABLE>






          See accompanying notes to consolidated financial statements.

                                      F-2

<PAGE>   44


               HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                        (in thousands, except per share)

<TABLE>
<CAPTION>

                                                                    Year ended December 31,
                                                          ------------------------------------------
                                                            1998             1997             1996
                                                          --------         --------         --------
<S>                                                       <C>              <C>              <C>     
Revenues:
  Product                                                 $ 16,832         $ 27,187         $ 14,645
  Service                                                   46,463           27,445           16,056
                                                          --------         --------         --------
    Total revenues                                          63,295           54,632           30,701
                                                          --------         --------         --------
Cost of revenues:
  Product                                                   12,991           22,133           15,099
  Service                                                   32,419           21,397           11,489
  Write-down of inventory                                       --               --            1,943
                                                          --------         --------         --------
    Total cost of revenues                                  45,410           43,530           28,531
                                                          --------         --------         --------

Gross profit                                                17,885           11,102            2,170
                                                          --------         --------         --------
Expenses:
  General and administrative                                22,748           11,872            7,997
  Customer service                                          10,844           11,493            8,089
  Sales and marketing                                        7,372            7,723            9,139
  Engineering                                                5,399            4,604            3,487
  Network services center                                    1,992            1,416              607
  Severance and AutoLink termination costs                   5,357               --               --
  Depreciation and amortization                              5,829            2,684            1,482
                                                          --------         --------         --------
                                                            59,541           39,792           30,801
                                                          --------         --------         --------

Operating loss                                             (41,656)         (28,690)         (28,631)

  Interest income                                            4,827            2,500              809
  Interest expense                                         (17,099)          (4,857)          (1,691)
  Other (expense)                                               --               --             (230)
                                                          --------         --------         --------
  Loss before income taxes and extraordinary item          (53,928)         (31,047)         (29,743)
  Income tax provision                                          --               --               --
                                                          --------         --------         --------
  Loss before extraordinary item                           (53,928)         (31,047)         (29,743)
  Extraordinary item                                        18,867               --             (317)
                                                          --------         --------         --------
    Net loss                                              $(35,061)        $(31,047)        $(30,060)
                                                          ========         ========         ========

Per share:
  Basic and diluted loss before extraordinary item        $(  2.17)        $  (1.25)        $  (1.39)
  Extraordinary item                                          0.76               --            (0.01)
                                                          --------         --------         --------
  Basic and diluted net loss                              $(  1.41)        $  (1.25)        $  (1.40)
                                                          ========         ========         ========
Weighted average number of shares outstanding               24,889           24,864           22,763
                                                          ========         ========         ========
</TABLE>










          See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>   45

               HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                      Year ended December 31,
                                                                            ------------------------------------------- 
                                                                              1998             1997             1996
                                                                            --------         ---------         -------- 
<S>                                                                         <C>              <C>               <C>      
Cash flows from operating activities:
  Net loss                                                                  $(35,061)        $( 31,047)        $(30,060)
  Adjustments to reconcile net loss to cash used in
   operating activities:
     Depreciation and amortization                                             5,829             2,684            1,482
     Amortization of discount on notes payable                                   503               131              871
     Extraordinary item                                                      (18,867)               --              317
     (Increase) in accounts receivable                                          (622)           (5,426)          (2,588)
     (Increase) decrease in inventory                                         (9,776)              313              741
     (Increase) in pledged securities                                             --              (815)              --
     Increase (decrease) in accounts payable                                   5,100             2,812           (1,578)
     Increase in accrued expenses and other current liabilities               15,873             6,170              189
     Other                                                                     1,409               248              809
                                                                            --------         ---------         -------- 
          Net cash used in operating activities                              (35,612)          (24,930)         (29,817)
                                                                            --------         ---------         -------- 

Cash flows from investing activities:
     Additions to network and equipment                                       (9,202)           (7,072)          (4,877)
     Additions to capitalized software                                        (1,318)           (2,427)            (262)
     (Purchase of) liquidation of pledged securities                          14,553           (46,588)              --
     (Increase) decrease in temporary investments                             13,626           (13,626)              --
     (Increase) decrease in short-term investments                            10,001           (19,709)              --
                                                                            --------         ---------         -------- 
          Net cash provided by (used in) investing activities                 27,660           (89,422)          (5,139)
                                                                            --------         ---------         -------- 

Cash flows from financing activities:
      Purchase of senior notes                                               (10,427)               --               --
      Release of pledged securities allocable to retired senior notes          8,063                --               --
      Proceeds from issuance of senior notes, net                                 --           120,937               --
      Proceeds from issuance of common stock, net                                 --                --           10,000
      Proceeds from issuance of preferred stock and warrants, net                 --                --           19,688
      Proceeds from notes payable to related parties                              --                --            5,000
      Payments on loans from related parties                                      --                --           (5,000)
      Proceeds from exercise of stock options                                     --               467            1,024
                                                                            --------         ---------         -------- 
           Net cash provided by (used for) financing activities               (2,364)          121,404           30,712
                                                                            --------         ---------         -------- 
 Increase (decrease) in cash and cash equivalents                            (10,316)            7,052           (4,244)
 Cash and cash equivalents, beginning of year                                 26,777            19,725           23,969
                                                                            --------         ---------         -------- 
 Cash and cash equivalents, end of year                                       16,461            26,777           19,725
 Short-term investments                                                        9,708            19,709               --
                                                                            --------         ---------         -------- 
 Cash and short-term investments                                            $ 26,169         $  46,486         $ 19,725
                                                                            ========         =========         ======== 
 Supplemental cash flow information:
      Interest paid                                                         $ 16,806         $      --         $  1,056
                                                                            ========         =========         ======== 
</TABLE>









          See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>   46


              HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                    (in thousands, except share information)

<TABLE>
<CAPTION>

                                                                                                                     
                                                                                                                      
                                                                   Preferred Stock               Common Stock        Additional 
                                                                -----------------------      ---------------------     Paid-in  
                                                                 Shares          Amount        Shares      Amount     Capital   
                                                                ---------        ------      ---------     ------    --------- 
<S>                                                             <C>              <C>         <C>           <C>        <C>       
Stockholders' equity (deficit) at December 31, 1995                    -         $    -      22,333,661     $223      $90,560   
     Issuance of common stock                                                                 1,818,018       18       22,707   
     Issuance of Series D preferred stock                          1,000              -                                19,688   
     Exchange of Series B preferred stock for common stock                                      864,000        9       10,791   
     Accretion of discount -- Series B redeemable                                                                               
          preferred stock                                                                                                       
     Exercise of stock options                                                                  134,848        1        1,083   
     Net loss for year                                                                                                          
                                                                ---------        ------      ---------     ------    ---------  
Stockholders' equity (deficit) at December 31, 1996                1,000              -      25,150,527      251      144,829   
     Exercise of stock options                                                                   60,456        1          466   
     Issuance of warrants                                                                                               4,186   
     Net loss for year                                                                                                          
                                                                ---------        ------      ---------     ------    ---------  
Stockholders' equity (deficit) at December 31, 1997                1,000              -      25,210,983      252      149,481   
     Net loss for year                                                                                                          
                                                                ---------        ------      ---------     ------    --------   
Stockholders' equity (deficit) at December 31, 1998                1,000         $    -      25,210,983     $252     $149,481   
                                                                =========        ======      ==========    ======    =========  
</TABLE>

 



<TABLE>
<CAPTION>

                                                                      Treasury Stock                 
                                                                 --------------------      Accumulated 
                                                                   Shares      Amount        Deficit           Total   
                                                                 --------      ------        -------           -----   
<S>                                                              <C>           <C>           <C>              <C>        
Stockholders' equity (deficit) at December 31, 1995               311,997      ($547)        ($77,135)        $13,101    
     Issuance of common stock                                                                                  22,725    
     Issuance of Series D preferred stock                                                                      19,688    
     Exchange of Series B preferred stock for common stock                                       (843)          9,957    
     Accretion of discount -- Series B redeemable                                                                        
          preferred stock                                                                      (1,831)         (1,831)   
     Exercise of stock options                                                                                  1,084    
     Net loss for year                                                                        (30,060)        (30,060)   
                                                                  -------     ------        ---------        --------    
Stockholders' equity (deficit) at December 31, 1996               311,997       (547)        (109,869)         34,664    
     Exercise of stock options                                                                                    467    
     Issuance of warrants                                                                                       4,186    
     Net loss for year                                                                        (31,047)        (31,047)   
                                                                  -------     ------        ---------        --------    
Stockholders' equity (deficit) at December 31, 1997               311,997       (547)        (140,916)          8,270    
     Net loss for year                                                                        (35,061)        (35,061)   
                                                                 --------     ------        ---------        --------    
Stockholders' equity (deficit) at December 31, 1998               311,997      ($547)       ($175,977)       ($26,791)   
                                                                =========     ======        =========        ========  
</TABLE>
 
                                                                













         See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>   47


HIGHWAYMASTER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BUSINESS OVERVIEW

         The Company develops and implements mobile communications solutions,
including integrated voice, data and position location services, to meet the
needs of its customers. The initial application for the Company's wireless
enhanced services has been developed for, and is marketed and sold to,
companies which operate in the long-haul trucking market. The Company provides
long-haul trucking companies with a comprehensive package of mobile
communications and management control services at a fixed rate per minute,
thereby enabling its trucking customers to effectively monitor the operations
and improve the performance of their fleets. The Company is currently
developing additional applications for its network to expand the range of its
commercial dispatch and tracking services in broader market segments.

         The Company's revenues are derived primarily from the long-haul
trucking market from sales and installation of Mobile Communication Units
("mobile units") and charges for its services.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

         The consolidated financial statements include those of HighwayMaster
Communications, Inc. and HighwayMaster Corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Estimates Inherent in the Preparation of Financial Statements

         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.

Revenue Recognition

         Revenues from product sales and licensing of product software are
generally recognized at the time the mobile units are shipped to customers.
During the third quarter of 1998 the Company entered into a contract for
delivery of mobile units coupled with development and delivery of additional
features over the term of the installation period. The earning process on this
contract is not complete until all of the additional features have been
delivered and accepted by the customer. Accordingly, revenue has not been
recognized for the mobile units shipped in connection with this contract.
Mobile units shipped under this contract are reflected in inventory as
"equipment shipped not yet accepted" and payments received from the customer
for the equipment are classified in current liabilities as "advance payments
from customers."

         Revenues generated from voice and data communications services are
recognized upon customer usage. Until the third quarter of 1996, AT&T
Corporation ("AT&T") invoiced and collected payments from all of the Company's
customers for voice and data communication services associated with the
Company's equipment. The Company recorded as revenue an amount equal to the
payments received from AT&T, and the remainder of these service charges,
including amounts for call processing, enhanced long distance services and
customer collection fees, was retained by AT&T under the terms of the Company's
contract with AT&T. Beginning in the third quarter of 1996, the Company started
providing customer billing, credit and collection activities for voice and data
communication services. During 1997, voice and data

                                      F-6

<PAGE>   48



communication services were provided by both the Company and AT&T while the
provision of service was transitioned from AT&T to the Company. Since January
1, 1998, the Company has provided customer billing, credit and collection
activities for voice and data communication services for all of its customers.

Financial Instruments

         The Company considers all liquid interest-bearing investments with a
maturity of three months or less at the date of purchase to be cash
equivalents. Short-term investments generally mature between three months and
two years from the purchase date. All cash and short-term investments are
classified as available for sale. Cost approximates market for all
classifications of cash and short-term investments; realized and unrealized
gains and losses were not material.

         Temporary investments at December 31, 1997 consisted of high grade
debt securities. Amortized cost approximated market.

         Pledged securities consist of a portfolio of U. S. Government
securities, including interest earned thereon, which will provide funds
sufficient to pay in full when due the interest payments on the Senior Notes
through September 15, 2000. These securities are classified as held to
maturity. Amortized cost of pledged securities approximates market; realized
and unrealized gains and losses were not material.

         The carrying amount of cash and short term investments, temporary
investments, pledged securities, accounts receivable, accounts payable and
accrued liabilities approximates fair value because of their short-term
maturity.

Business and Credit Concentrations

         The majority of the Company's business activities and related accounts
receivable are with customers in the interstate trucking industry. The
receivables generated from equipment sales are generally secured by the
respective mobile units shipped to the customer. Allowances have been provided
for amounts which may eventually become uncollectible and to provide for any
disputed charges. During 1997, one customer accounted for approximately $6.7
million, or 12%, of total consolidated revenues. No customer accounted for more
than 10% of total consolidated revenues for either of the years ended December
31, 1998 or 1996.

Inventory

         Inventory consists primarily of component parts and finished products
which are valued at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.

Network, Equipment and Software

         Network, equipment and software are stated at cost and are depreciated
on a straight-line basis over the estimated useful lives of the various classes
of assets, which generally range from three to five years. Maintenance and
repairs are charged to operations while renewals or betterments are
capitalized.

Research and Development Costs

         The Company expenses research and development costs as incurred.
During 1998, 1997 and 1996, the Company expensed $2,286,000, $1,616,000 and
$1,294,000 in research and development costs for hardware and software that are
reflected in Engineering Expenses in the Consolidated Statements of Operations.
The 1998 and 1997 amounts are net of $324,000 and $526,000, respectively, of
research and development expenditures reimbursed by a third party.

                                      F-7

<PAGE>   49


Software Development Costs

         Costs related to the research, design and development of computer
software are charged to research and development expense as incurred. During
1998, 1997, and 1996, the Company expensed $1,236,000, $553,000, and $673,000,
respectively, in research and development costs that are reflected in
Engineering Expenses in the Consolidated Statements of Operations. The 1998 and
1997 amounts are net of $284,000 and $468,000, respectively, of research and
development expenditures reimbursed by a third party. Software development
costs that meet the capitalization requirements of Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed" are capitalized. Software development
costs are amortized using the straight line method over eighteen months or the
estimated economic life of the product, whichever is less.

Advertising Costs

         Advertising costs are expensed as incurred. During 1998, 1997, and
1996, the Company expensed $1,692,000, $1,511,000 and $1,637,000, respectively,
in advertising costs that are reflected in Sales and Marketing Expenses in the
Consolidated Statements of Operations.

Income Taxes

         The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes." Deferred
income taxes are calculated using an asset and liability approach wherein
deferred taxes are provided for the tax effects of basis differences for assets
and liabilities arising from differing treatments for financial and income tax
reporting purposes. Valuation allowances against deferred tax assets are
provided where appropriate.

Earnings Per Share

         The Company computes earnings per share in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Net
loss per share for the years ended December 31, 1998 and 1997 was computed by
dividing the net loss by the weighted average number of shares outstanding
during the year. Net loss per share for the year ended December 31, 1996 was
computed by dividing the net loss, increased by the accretion of discount on
the Series B Preferred Stock $(1,831,000), by the weighted average number of
shares outstanding during the year. Common stock equivalents have been excluded
form the weighted average number of shares outstanding since their effect would
be anti-dilutive.

Reclassifications

         Certain reclassifications have been made for consistent presentation.

3.       SEVERANCE AND AUTOLINK TERMINATION COSTS

         During the third quarter of 1998 the Company announced that it was
halting the development of its AutoLink service. As a consequence, the Company
recorded a charge of $2,431,000 to recognize asset impairments and record
estimated amounts to be incurred to extinguish contractual obligations
associated with the AutoLink program.

         During 1998 the Company recorded $2,926,000 in severance costs related
to two reorganizations. Severance costs of $445,000 relate to a reduction in
the number of employees, announced in the second quarter of 1998, primarily
reflecting the elimination of redundancies that had been necessary as a result
of having customers served by both the AT&T Complex and the NSC. During the
third quarter of 1998, the Company announced a number of key management and
structural changes designed to more closely align the Company's expenditures
with its revenues. As a result of this announcement and the AutoLink
announcement, the Company reduced its workforce by approximately 25% and
recorded charges of $2,481,000 for obligations under employment contracts and
severance payments to terminated employees.

                                      F-8

<PAGE>   50


         Through December 31, 1998, $3,329,000 of severance and AutoLink
termination costs had been incurred, of which $2,895,000 were cash payments for
severance and contractual obligations and $434,000 for asset write-offs.


4.       CASH AND SHORT-TERM INVESTMENTS

         Cash and short-term investments consisted of the following:

<TABLE>
<CAPTION>

                                                               December 31,
                                                               ------------
                                                         1998               1997
                                                      -----------        -----------
<S>                                                   <C>                <C>        
          Cash and commercial paper                   $ 3,039,000        $   339,000
          Corporate notes and bonds                     4,595,000         24,592,000
          Money market accounts                         8,827,000          1,846,000
                                                      -----------        -----------
                   Cash and cash equivalents           16,461,000         26,777,000
                                                      -----------        -----------

          Corporate notes and bonds                     7,688,000          8,710,000
          State, municipal and agency securities        2,020,000          2,801,000
          U.S. government and agency securities                --          8,198,000
                                                      -----------        -----------
                   Short-term investments               9,708,000         19,709,000
                                                      -----------        -----------
                                                      $26,169,000        $46,486,000
                                                      ===========        ===========
</TABLE>

5.       INVENTORY

         Inventory consisted of the following:

<TABLE>
<CAPTION>


                                                               December 31
                                                               -----------
                                                         1998               1997
                                                      -----------        -----------
<S>                                                   <C>                <C>        
          Complete systems                            $ 1,577,000        $ 1,370,000
          Component parts                                 826,000          1,775,000
          Equipment shipped not yet accepted           10,518,000                 -- 
                                                      -----------        -----------
                                                      $12,921,000        $ 3,145,000
                                                      ===========        ===========
</TABLE>


6.       NETWORK, EQUIPMENT AND SOFTWARE

<TABLE>
<CAPTION>

         Network, equipment and software consisted of the following:

                                                               December 31
                                                               -----------
                                                         1998               1997
                                                      -----------        -----------
<S>                                                   <C>                <C>        
          Network services center                     $13,310,000        $ 7,460,000
          Computers and office equipment                5,668,000          3,373,000
          Mobile units and equipment                    6,862,000          5,807,000
          Software                                      5,011,000          4,305,000
                                                      -----------        -----------
                                                       30,851,000         20,945,000
          Less: accumulated depreciation and
                   amortization                       (10,202,000)        (5,463,000)
                                                      -----------        -----------
                                                      $20,649,000        $15,482,000
                                                      ===========        ===========
</TABLE>


         Total depreciation expense charged to operations during 1998, 1997 and
         1996 was $4,753,000, $1,999,000, and $1,058,000, respectively.


                                      F-9

<PAGE>   51
  

         As of December 31, 1998 and 1997, the unamortized portion of software
         costs was $3,047,000 and $2,616,000, respectively. Amortization of
         such costs charged to expense during 1998, 1997, and 1996 was
         $584,000, $728,000, and $504,000, respectively.

7.       OTHER ASSETS

         Other assets consisted of the following:

<TABLE>
<CAPTION>


                                                         December 31
                                                         -----------
                                                  1998                1997
                                               -----------         -----------
<S>                                            <C>                 <C>        
         Debt issue costs                      $ 3,617,000         $ 4,797,000
         Long term receivables                          --             290,000
         Other                                     248,000             322,000
                                               -----------         -----------
                                                 3,865,000           5,409,000
         Less: accumulated amortization           (565,000)           (236,000)
                                               -----------         -----------
                                               $ 3,300,000         $ 5,173,000
                                               ===========         ===========
</TABLE>

         Debt issue costs related to the issuance of the Senior Notes are
         amortized on a straight-line basis over the debt term.


8.       OTHER CURRENT LIABILITIES

         Other current liabilities consisted of the following:

<TABLE>
<CAPTION>



                                                                         December 31
                                                                         -----------
                                                                    1998              1997
                                                                 ----------        ----------
<S>                                                              <C>               <C>       
         Deferred revenue                                        $ 1,475,000        $ 1,214,000
         Severance and AutoLink termination costs payable          2,028,000                 --
         Excise and sales taxes payable                            3,077,000            562,000
         Other                                                     3,122,000          2,338,000
                                                                 -----------        -----------
                                                                 $ 9,702,000        $ 4,114,000
                                                                 ===========        ===========
</TABLE>

         Deferred revenue at December 31, 1998 and 1997 represents amounts
invoiced to a customer for a new generation of mobile units which were expected
to be delivered during 1998. Pending delivery of the contracted units, the
customer installed current generation mobile units. At December 31, 1998, the 
ultimate resolution of this contract has not been determined.

         In late 1997 the Company retained experts to analyze and advise it
with respect to various taxation issues. This evaluation and analysis involved
the identification of exemptions from taxation for certain types of businesses
or services, the confirmation of taxes currently being passed through and the
identification of sales tax issues needing attention by the Company. Based on
estimates of possible exposure to sales taxes for current and prior periods,
the Company recorded a provision for taxes and other related costs in the
amount of $3,040,000 during 1998. Of this amount, $2,288,000 is included
in "excise and sales taxes payable" at December 31, 1998.






                                      F-10

<PAGE>   52
9.       SENIOR NOTES PAYABLE

         On September 23, 1997, the Company issued 125,000 Units comprised of
$125,000,000 of 13.75% Senior Notes due September 15, 2005 and warrants to
purchase 820,750 shares of common stock at $9.625 per share. Interest is payable
on the notes semi-annually on March 15 and September 15. The Company used
$46,588,000 of the proceeds from the issuance of the Units to purchase a
portfolio of U. S. Government securities which will provide funds sufficient to
pay in full when due the first six scheduled interest payments on the notes.
This amount, including interest earned thereon, is reflected in the accompanying
Consolidated Balance Sheets under the captions "pledged securities."

         The Indenture for the Senior Notes contains certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness, pay dividends or make other distributions, repurchase any capital
stock or subordinated indebtedness, make certain investments, create certain
liens, enter into certain transactions with affiliates, sell assets, enter into
certain mergers and consolidations, or enter into sale and leaseback
transactions. The Company may incur up to $15,000,000 of additional
indebtedness in the event certain conditions are satisfied.

         The Senior Notes are redeemable at any time on or after September 15,
2001 at redemption prices declining annually from 110.313% of principal amount
in 2001 to 100.000% of principal amount in 2004, plus accrued and unpaid
interest. Prior to September 15, 2001, the Company may redeem up to 35% in the
aggregate principal amount of the Senior Notes at a redemption price of 113.75%
of the principal amount thereof, plus accrued and unpaid interest with the net
proceeds of a qualifying equity offering (as defined).

         During the fourth quarter of 1998 the Company purchased and
subsequently retired $30,645,000 principal amount of its Senior Notes on the
open market for $9,885,000 plus accrued interest thereon, resulting in a gain
on extinguishment of debt of $18,867,000 after the write-off of associated debt
discount and debt issuance costs. The gain is reported as an extraordinary item
in the accompanying Consolidated Statement of Operations. Upon the retirement
of the Senior Notes, the allocable portion of the Pledged Securities related
thereto, in the amount of $8,063,000, was released to the Company.









                                      F-11



<PAGE>   53
10.      INCOME TAXES
  
         The components of the Company's net deferred tax asset were as
follows:

<TABLE>
<CAPTION>


                                                     December 31
                                                     -----------
                                               1998                1997
                                           ------------         ------------
<S>                                        <C>                  <C>         
Deferred tax assets
   Step-up of tax basis in assets          $  1,511,000         $  1,704,000
   Research and development credit              205,000              167,000
   Recapitalization costs                       167,000              164,000
   Allowance for doubtful accounts            3,240,000              730,000
   Accrued interest                           5,797,000              332,000
   Other accrued liabilities                    390,000              504,000
   Inventory                                    444,000              411.000
   Net operating loss carryforwards          46,206,000           41,864,000
                                           ------------         ------------
   Gross deferred tax assets                 57,960,000           45,876,000
   Valuation allowance                      (56,501,000)         (45,304,000)
                                           ------------         ------------
   Net deferred tax asset                     1,459,000              572,000
Deferred tax liability
   Depreciation                              (1,010,000)            (497,000)
   Other                                       (449,000)             (75,000)
                                           ------------         ------------
Net deferred tax asset                     $         --         $         --
                                           ============         ============
</TABLE>

         The following is a reconciliation of the provision for income taxes at
the U.S. federal income tax rate to the income taxes reflected in the
Consolidated Statements of Operations:


<TABLE>
<CAPTION>

                                                                                December 31
                                                                                -----------
                                                              1998                  1997                1996
                                                          ------------         ------------         ------------
<S>                                                       <C>                  <C>                  <C>          
Income tax benefit at Federal statutory rate              $(11,921,000)        $(10,556,000)        $(10,220,000)
Net operating losses not benefitted                         11,860,000           10,502,000           10,146,000
Other                                                           61,000               54,000               74,000
                                                          ------------         ------------         ------------
   Income tax benefit                                      $   ---             $   ---              $   ---
                                                          ============         ============         ============
</TABLE>


         At December 31, 1998, the Company had net operating loss carryforwards
aggregating approximately $135.9 million which expire in various years between
2007 and 2013. Due to the issuance of certain notes payable during 1994, there
was a change in ownership under the Internal Revenue Code which limits the
annual utilization of these carryforwards and will cause some amount of the
carryforwards to expire unutilized. Any additional changes in ownership could
also result in additional limitations of loss carryforwards.

11.      STOCKHOLDERS' EQUITY INSTRUMENTS AND RELATED MATTERS

Recapitalization

         On September 27, 1996, the Company and certain related parties holding
outstanding securities of the Company entered into a Recapitalization Agreement
(the "Recapitalization Agreement"), and consummated the Recapitalization
Transactions contemplated thereby. In particular, upon the terms and conditions
set forth in the Recapitalization Agreement, (i) the Company repaid in full the
principal amount of and interest accrued on certain promissory notes payable to
related parties in the aggregate principal amount of $5.0 million executed in
August and September 1996 to enable the Company to meet its short-term working
capital and other requirements, (ii) the Company issued an aggregate of 800,000
shares of Common Stock to two stockholders in exchange for aggregate cash
payments in the amount of $10.0 million, (iii) the Company issued an aggregate
of 864,000 shares of Common Stock in exchange for the surrender

                                      F-12



<PAGE>   54


to the Company for cancellation of all outstanding shares of Series B Preferred
Stock, (iv) the Company paid a portion of the accrued and unpaid interest on
certain promissory notes payable to related parties in the aggregate principal
amount of $12,662,000 (the "Related Party Notes") , and (v) the Company issued
an aggregate of 1,018,018 shares of Common Stock in exchange for the surrender
of the Related Party Notes for cancellation. In connection with the foregoing,
the unamortized balances of debt discount and debt issue costs associated with
the indebtedness retired, in the aggregate amount of $317,000, were charged to
expense and are reported in the accompanying Consolidated Statements of
Operations as an extraordinary item.

Issuance of Series D Preferred Stock

         On September 27, 1996, the Company and Southwestern Bell Wireless
Holdings, Inc. ("SBW"), a wholly owned subsidiary of SBC Communications Inc.,
consummated certain transactions, including but not limited to (i) the issuance
of 1,000 shares of a new series of preferred stock, par value $0.01 per share,
designated as Series D Participating Convertible Preferred Stock ("Series D
Preferred Stock") in consideration of a cash payment in the amount of $20.0
million and (ii) the issuance to SBW of certain Warrants.

         Each outstanding share of Series D Preferred Stock is convertible into
1,600 shares of Common Stock at the option of SBW. In addition, at such time as
SBW obtains certain regulatory relief required in order for it to offer
long-distance telephone services, all outstanding shares of Series D Preferred
Stock will automatically convert into an equal number of shares of a new series
of common stock designated as Class B Common Stock.

         Each outstanding share of Class B Common Stock will be convertible
into 1,600 shares of Common Stock at the option of SBW. The holders of Class B
Common Stock will be entitled to receive dividends and liquidating
distributions in an amount equal to the dividends and liquidating distributions
payable on or in respect of the number of shares of Common Stock into which
such shares of Class B Common Stock are then convertible. The holders of Common
Stock and Class B Common Stock will generally have identical voting rights and
will vote together as a single class, with the holders of Class B Common Stock
being entitled to a number of votes equal to the number of shares of Common
Stock into which the shares of Class B Common Stock held by them are then
convertible. In addition, the holders of Class B Common Stock will be entitled
to elect one director of the Company (or two directors if SBW and its
affiliates beneficially own at least 20% of the outstanding shares of Common
Stock on a fully diluted basis) and will have the right to approve certain
actions on the part of the Company.

         The Warrants issued to SBW entitle the holder thereof to purchase (i)
3,000,000 shares of Common Stock at an exercise price of $14.00 per share and
(ii) 2,000,000 shares of Common Stock at an exercise price of $18.00 per share.
The Warrants will expire on September 27, 2001.

Incentive Plan and Other

         Pursuant to a 1994 Stock Option Plan, as amended (the "Plan"), options
may be granted to employees for the purchase of an aggregate of up to 2,474,462
shares of the Company's common stock. The Plan requires that the exercise price
for each stock option be not less than 100% of the fair market value of common
stock at the time the option is granted. Both nonqualified stock options and
incentive stock options, as defined by the Internal Revenue Code, may be
granted under the Plan. Generally, options granted under the Plan vest 20% on
the date of grant and 20% on each of the following four anniversary dates of
the date of grants and expire six years from the date of grant.









                                      F-13

<PAGE>   55


         The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been recognized
for options issued under the Plan. Had compensation cost been determined based
on the fair market value at the grant dates for awards under the Plan
consistent with the method provided by Statement of Financial Accounting
Standards No 123, "Accounting for Stock-Based Compensation," the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>

                                                     For the Year Ended December 31,
                                                     -------------------------------
                                         1998                   1997                  1996
                                    --------------         --------------         -------------- 
<S>              <C>                <C>                    <C>                    <C>            
Net loss         As reported        $  (35,061,000)        $  (31,047,000)        $  (30,060,000)
                 Pro forma          $  (36,007,000)        $  (31,712,000)        $  (30,584,000)
Net loss
  per share      As reported        $        (1.41)        $        (1.25)        $        (1.40)
                 Pro forma          $        (1.45)        $        (1.28)                 (1.42)
</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 during the years as follows:

<TABLE>
<CAPTION>

                                 For the Year Ended December 31,
                                 -------------------------------
                                 1998         1997          1996
                                 ----         -----         ----- 
<S>                              <C>          <C>           <C>   
Dividend                           --            --            --
Expected volatility              59.8%        65.10%        74.02%
Risk free rate of return         4.96%         6.50%         6.24%
Expected life in years            4.9          6.00          6.00
</TABLE>

         A summary of the status of the Company's Plan as of December 31, 1998,
1997 and 1996, and changes during the years ended on those dates is presented
below:

<TABLE>
<CAPTION>

                                                 1998                             1997                                1996
                                                 ----                             ----                                ----
                                               Weighted                         Weighted                            Weighted
                                               Average                          Average                             Average
                                               Exercise                         Exercise                            Exercise
                                Shares          Price             Shares          Price             Shares          Price
                              ----------      ----------        ----------      ----------        ----------      ----------
<S>                            <C>            <C>               <C>             <C>               <C>             <C>       
Outstanding at                                                                                                   
   beginning of year           2,157,309      $     7.82         2,043,298            7.61         1,974,462      $     7.58

Granted                        1,481,490            1.34           227,000            9.75           266,000      $     7.73

Exercised                             --              --           (60,456)           7.64          (134,848)           7.59

Forfeited                     (1,692,209)           7.12           (52,533)           7.93           (62,316)           7.62
                              ----------      ----------        ----------      ----------        ----------      ----------

Outstanding at
   end of year                 1,946,590      $     3.50         2,157,309      $     7.82         2,043,298      $     7.61
                              ==========      ==========        ==========      ==========        ==========      ==========
   
Options exercisable
   at end of year              1,056,676      $     5.12         1,722,248      $     7.63         1,565,165      $     7.58
                              ==========      ==========        ==========      ==========        ==========      ==========
  
Weighted average
  value of options granted
  during the year                             $     0.74                        $     6.36                        $     5.51
                                              ==========                        ==========                        ==========
</TABLE>



                                      F-14


<PAGE>   56


The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:

<TABLE>
<CAPTION>

                              Options Outstanding                             Options Exercisable
                              -------------------                             -------------------
                        Number of     Weighted Average   Weighted Average  Number of     Weighted Average
Range of Option Price    Options       Remaining Life     Exercise Price    Options       Exercise Price
---------------------   ---------     ---------------    ---------------   ---------     ----------------
<S>                     <C>           <C>                <C>               <C>           <C>          
  $1.00 to $1.19        1,120,478          4.4             $    1.12         386,014         $    1.19    
  $1.56                   125,000          5.9                  1.56          25,000              1.56 
  $7.58 to $8.62          701,112          1.9                  7.67         645,662              7.61 
                        ---------     ---------------    ---------------   ---------     ----------------
                        1,946,590          3.6             $    3.50       1,056,676         $    5.12 
                        =========     ===============    ===============   =========     ================
</TABLE>

The Company has granted options outside of the Plan to directors of the Company
to purchase 7,596 shares of common stock. All of these options are exercisable
at December 31, 1998 at prices ranging from $2.50 to $7.58 per share.

Retirement Plan

         The Company sponsors a 401(k) Retirement Investment Profit-Sharing
Plan covering substantially all employees. The Company did not make matching
contributions to the Plan in 1998, 1997 or 1996.

12.      COMMITMENTS AND CONTINGENCIES

Litigation

In February 1996, the Company filed a lawsuit against AT&T which alleged various
contractual breaches in AT&T's construction and operation of the switching
complex (the "AT&T Complex") designed for the Company by AT&T. The lawsuit also
sought to restrain AT&T from using and disclosing the Company's trade secrets
and proprietary information relating to the Company's mobile communications
technology. The Company's claims requested injunctive relief and sought damages
relating to various contractual, deceptive trade practices and other tortious
claims asserted in relation to the ownership of the intellectual property and
with regard to the development and operation of the AT&T Complex on the
Company's behalf. The Company later amended the lawsuit to include Lucent
Technologies, Inc. ("Lucent") to which AT&T transferred certain patents at issue
in the suit. In response to the Company's lawsuit, AT&T counterclaimed and
asserted ownership of the trade secrets and proprietary information regarding
the design and function of the Company's mobile communications unit, dispatcher
software and certain methods developed to prevent fraudulent use of the system.
In December 1997, the Court ruled on partial motions to dismiss filed by AT&T
and Lucent by granting the dismissal of two of the Company's non-essential
claims against AT&T and Lucent.

         On February 25, 1999, the Company and AT&T engaged in a mediation in an
effort to resolve all claims between the parties asserted in the litigation. The
Company and AT&T resolved all disputes relating to the litigation in this
mediation. The Company and AT&T have executed a binding memorandum of settlement
which will be finalized in a formal Joint Compromise, Release and Settlement
Agreement. Additionally, on March 25, 1999, the Company and Lucent resolved all
disputes related to the litigation in a mediation. The Company and Lucent
executed a binding memorandum of settlement. The terms of the settlements with
AT&T and Lucent will not adversely impact the Company's results of operations or
financial position. 


                                      F-15

<PAGE>   57

         The Company is involved in other litigation matters that arise in the
normal course of conducting its business. These matters are not considered to
be of a material nature nor are they expected to have a material effect on the
business activities or continued operations of the Company.

Leases

         The Company leases certain office facilities and furniture and
equipment under noncancelable operating leases. The future minimum lease
payments associated with such leases were as follows as of December 31, 1998:

<TABLE>

                     <S>                         <C>
                     1999                        $  806,000
                     2000                           802,000
                     2001                           670,000
                     2002                           626,000
                     2003                           682,000
                     Thereafter                   4,314,000
                                                 ----------
                                                 $7,900,000
</TABLE>

         During 1998, 1997, and 1996, total rent expense charged to operating
expenses was approximately $1,606,000, $1,664,000, and $1,388,000,
respectively.

13.      RELATED PARTY TRANSACTIONS

         During the third quarter of 1998, one of the Company's shareholders,
SBC Communications, Inc. ("SBC") contracted to purchase 11,500 mobile units,
customized proprietary software and accompanying services. The contract requires
the Company to perform certain product modifications and software development.
The Company may be required to refund 100% of the purchase price if the product
modifications and software development are not completed in substantial
conformance with the technical specifications of the contract. Accordingly, the
earnings process on this contract is not complete, and revenues will not be
recognized, until final acceptance by SBC. As of December 31, 1998, 8,686 mobile
units had been installed by SBC. Mobile units shipped and payments received from
SBC on this contract through December 31, 1998 are reflected in the accompanying
Consolidated Balance Sheets as "equipment shipped not yet accepted" and "advance
payments from customers," respectively.

         The Company procures certain advertising services pursuant to an
"Agency Agreement." During 1998, 1997, and 1996, the Company paid $1,105,000,
$579,000, and $435,000, respectively, under the Agency Agreement, which
includes the pass-through of actual third-party expenses incurred by the Agency
on the Company's behalf. The Agency Agreement provides that in consideration
for its advertising services, the Agency will receive a 5% profit based on the
Agency's internal costs on all services provided to the Company, subject to
future negotiation, in addition to actual third-party media, production and
other reasonable expenses. The Agency Agreement may be terminated, with or
without

                                      F-16

<PAGE>   58
  

cause, at any time by either party, with 90 days' notice. A former officer of
the Company was a principal stockholder and officer of the Agency until January
1, 1997 at which time his equity interest was sold. The former officer
continues to participate in the revenues of the Agency until certain
contractual obligations from the sale of the officer's equity interest in the
Agency are discharged. The former officer resigned from the Company in
December, 1998.

         The Company leased office space from an affiliate of a stockholder
until September 30, 1998. Total rent paid under this agreement during 1998,
1997 and 1996 was approximately $729,000, $817,000, and $699,000, respectively.

         The Company had a management consulting arrangement with a member of
its Board of Directors. During 1998 and 1997, the Company paid approximately
$69,000 and $286,000, respectively, under this consulting arrangement, which
amounts include reimbursed expenses.

         Interest expense to related parties was $1,691,000 in 1996.

14.      QUARTERLY RESULTS OF OPERATIONS  (UNAUDITED)

         Unaudited consolidated quarterly results of operations for 1998 and
1997 are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                           First          Second           Third          Fourth
                                          Quarter         Quarter         Quarter         Quarter
                                          -------         -------         -------         -------
1998
----
<S>                                       <C>             <C>             <C>             <C>    
Total revenues                            $15,723         $17,693         $15,194         $14,685
Gross profit                                3,261           4,979           4,364           5,281
Operating loss                             (8,491)        (11,100)        (15,265)         (6,800)
Loss before
   extraordinary item                     (11,589)        (14,067)        (18,484)         (9,788)
Extraordinary item                             --              --              --          18,867
Net income (loss)                         (11,589)        (14,067)        (18,484)          9,079
Income (loss) per share: (1)
   Before extraordinary item              $ (0.47)        $ (0.57)        $ (0.74)        $ (0.39)
   Extraordinary item                          --              --              --            0.76
   Basic and diluted income (loss)        $ (0.47)        $ (0.57)        $ (0.74)        $  0.37
Weighted average shares
   outstanding                             24,899          24,899          24,899          24,899

1997
----

Total revenues                            $10,890         $14,365         $16,172         $13,205
Gross profit                                2,285           2,151           3,316           3,350
Operating loss                             (7,537)         (6,928)         (6,414)         (7,811)
Net loss                                   (7,374)         (6,643)         (6,591)        (10,439)
Loss per share: (1)
   Basic and diluted loss                 $ (0.30)        $ (0.27)        $ (0.27)        $ (0.42)
Weighted average shares
   outstanding                             24,844          24,858          24,868          24,896
</TABLE>

(1)  Net loss per share is computed independently for each of the quarters
     presented. Therefore, the sum of the quarterly net loss per share amounts
     will not necessarily equal the total for the year.




                                      F-17

<PAGE>   59


                                                                    SCHEDULE II


                       HIGHWAYMASTER COMMUNICATIONS INC.
                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                             Additions
                                           Balance at        Charged to
                                          Beginning of       Costs and                                            Balance at
Description                                 Period            Expenses         Deductions          Other         End of Period
-----------                               -----------        ----------        ----------         -------        -------------
<S>                                       <C>                <C>               <C>                <C>            <C>        
Year ended December 31, 1996
   Allowance for doubtful accounts        $   815,000           160,000          (201,000)              0        $   774,000
   Inventory reserves                         430,000         2,223,000          (405,000)              0          2,248,000
   Valuation allowance against
     deferred tax asset                    21,551,000        12,816,000                 0         378,000         34,745,000

Year ended December 31, 1997
   Allowance for doubtful accounts
     Accounts receivable                      774,000         1,427,000           (53,000)              0          2,148,000
     Other receivable                               0           900,000                 0               0            900,000
   Inventory reserves                       2,248,000           892,000        (1,931,000)              0          1,209,000
   Valuation allowance against
     deferred tax asset                    34,745,000        10,501,000                 0          58,000         45,304,000

Year ended December 31, 1998
   Allowance for doubtful accounts
     Accounts receivable                    2,148,000         6,650,000           (38,000)        768,000          9,528,000
     Other receivable                         900,000                 0          (900,000)              0                  0
   Inventory reserves                       1,209,000           332,000          (234,000)              0          1,307,000
   Valuation allowance against
       deferred tax asset                 $45,304,000        11,197,000                 0               0        $56,501,000
</TABLE>



                                      S-1
<PAGE>   60
                               INDEX TO EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                              DESCRIPTION
-------                             -----------
<S>       <C>
  3.1  -  Certificate of Incorporation of the Company, as amended.(1)(9) 

  3.2  -  Amended and Restated By-Laws of the Company.(13)

  4.1  -  Specimen of certificate representing Common Stock, $.01 par value,
          of the Company.(1)

  4.2  -  Warrant Certificate, dated September 27, 1996, issued to SBW.(7)

  4.3  -  Recapitalization Agreement, dated September 27, 1996, by and among
          the Company, the Erin Mills Stockholders, the Carlyle Stockholders
          and the other persons named therein.(7)

  4.4  -  Amended and Restated Stockholders' Agreement, dated September 27,
          1996, by and among the Company, SBW, the Erin Mills Stockholders,
          the Carlyle Stockholders, the By-Word Stockholders and the other
          persons named therein.(7)

  4.5  -  Indenture dated September 23, 1997 by and among the Company,
          HighwayMaster Corporation and Texas Commerce Bank, National
          Association.(12)

  4.6  -  Pledge Agreement dated September 23, 1997 by and among the
          Company, Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)

  4.7  -  Registration Rights Agreement dated September 23, 1997 by and
          among the Company, HighwayMaster Corporation, Bear, Stearns & Co.
          Inc. and Smith Barney Inc.(12)

  4.8  -  Warrant Agreement dated September 23, 1997 by and among the
          Company, Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)

  4.9  -  Warrant Registration Rights Agreement dated September 23, 1997 by
          and among the Company, Bear, Stearns & Co. Inc. and Smith Barney,
            Inc.(12)
</TABLE>


<PAGE>   61
<TABLE>
<S>       <C>
  10.1 -  License Agreement, dated April 23, 1992, by and between Voice
          Control Systems and the Company (as successor to By-Word
          Technologies, Inc.).(1)

  10.2 -  Second Amendment to Employment Agreement, dated September 1, 1998,
          by and between HighwayMaster Corporation and William C. Saunders.
          (16)

  10.3 -  Agreement and General Release, dated September 30, 1998, by and
          between HighwayMaster Corporation and William C. Kennedy, Jr.(15)

  10.4 -  Release of HighwayMaster Communications, Inc. and HighwayMaster
          Corporation by William C. Saunders, dated December 15, 1998.(16)

  10.5 -  Release of William C. Saunders by HighwayMaster Communications,
          Inc. and HighwayMaster Corporation, dated December 15, 1998.(16)

  10.6 -  Amended and Restated 1994 Stock Option Plan of the Company, dated
          February 4, 1994, as amended.(1)(5)(6)

  10.7 -  Purchase Agreement, dated September 27, 1996, between the Company
          and SBW.(7)

  10.8 -  Mobile Communications (Voice and Data) Services Agreement, dated as
          of July 15, 1993, between the Company and EDS Personal
          Communications Corporation.(1)(2)

  10.9 -  Stock Option Agreement, dated June 22, 1998, by and between the
          Company and John Stupka.(16)

  10.10 - Services Agreement, dated March 20, 1996, between the Company and
          GTE-Mobile Communications Service Corporation.(3)(4)

  10.11 - Acknowledgment by William C. Saunders dated December 15, 1998.(16)

  10.12 - Amendment dated November 16, 1995 to that certain Mobile
          Communications (Voice and Data) Services Agreement, dated as of
          July 15, 1993, between the Company and EDS Personal Communications
          Corporation.(3)(4)

  10.13 - Mutual Separation and Release, dated December 22, 1998, by and
          between HighwayMaster Corporation and Gordon D. Quick.(16)

  10.14 - Product Development Agreement, dated December 21, 1995, between the
          Company and IEX Corporation.(3)(4)

  10.15 - Technical Services Agreement, dated September 27, 1996, between the
          HighwayMaster Corporation and SBW.(7)

  10.16 - Letter Agreement, dated February 19, 1996, between the Company and
          IEX Corporation.(3)

  10.17 - Form of Adoption Agreement, Regional Prototype Cash or Deferred
          Profit-Sharing Plan and Trust Sponsored by McKay Hochman Co., Inc.,
          relating to the HighwayMaster Corporation 401(k) Plan.(1)

  10.18 - February 27, 1997 Addendum to Original Employment Letter dated
          September 19, 1997 by and between the HighwayMaster Corporation and
          Robert LaMere.(16)

  10.19 - Software Transfer Agreement, dated April 25, 1997 between the
          Company and Burlington Motor Carriers, Inc.(9)(10)

  10.20 - Employment Agreement, dated June 3, 1998, by and between
          HighwayMaster Corporation and Todd A. Felker.(16)

  10.21 - Employment Agreement, dated June 3, 1998, by and between
          HighwayMaster Corporation and William McCausland.(16)

  10.22 - Employment Agreement, dated May 29, 1998, by and between
          HighwayMaster Corporation and Jana Ahlfinger Bell.(14)

  10.23 - Lease Agreement, dated March 20, 1998, between HighwayMaster
          Corporation and Cardinal Collins Tech Center, Inc.(15)

  10.24 - First Amendment to Employment Agreement, dated September 15, 1998,
          by and between HighwayMaster Corporation and Jana A. Bell.(16)

  10.25 - Employment Agreement, dated November 24, 1998, by and between
          HighwayMaster Corporation and Michael Smith.(16)

  10.26 - September 18, 1998 Amended and Restated Stock Option Agreement of
          May 29, 1998, by and between the Company and Jana Ahlfinger Bell.
          (16)
</TABLE>


<PAGE>   62
<TABLE>
<S>       <C>
  10.27 - Stock Option Agreement, dated August 12, 1998, by and between the
          Company and Jana Ahlfinger Bell.(16)

  10.28 - Stock Option Agreement, dated September 18, 1998, by and between
          the Company and Jana Ahlfinger Bell.(16)

  10.29 - September 18, 1998 Amended and Restated Stock Option Agreement of
          February 29, 1996, by and between the Company and William H.
          McCausland.(16)

  10.30 - Stock Option Agreement, dated September 18, 1998, by and between
          the Company and William H. McCausland.(16)

  10.31 - September 18, 1998 Amended and Restated Stock Option Agreement of
          April 25, 1997, by and between the Company and Robert LaMere.(16)

  10.32 - September 18, 1998 Amended and Restated Stock Option Agreement of
          June 3, 1998, by and between the Company and Todd A. Felker(16)

  10.33 - Stock Option Agreement of November 24, 1998, by and between the
          Company and Michael Smith.(16)

  10.34 - Stock Option Agreement, dated April 4, 1995, by and between the
          Company and Terry Parker.(16)

  11    - Statement re: Computation of Per Share Earnings(16)

  21.1  - Subsidiaries of the Company(1)

  23.1  - Consent of PriceWaterhouseCoopers LLP, independent auditors.(16)

  24    - Powers of Attorney of directors and officers of the Company
          (included on signature pages to this Annual Report on Form 10-K).

  27    - Financial Data Schedule.(16)
</TABLE>

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

   (1)   Filed in connection with the Company's Registration Statement on Form
         S-1, as amended (No. 33-91486) effective June 22, 1995.

   (2)   Certain confidential portions deleted pursuant to Order Granting
         Application for Confidential Treatment issued in connection with
         Registration Statement on Form S-1 (No. 33-91486) effective June 22,
         1995.

   (3)   Filed in connection with the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1995.

   (4)   Certain confidential portions deleted pursuant to Application for
         Confidential Treatment filed in connection with the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1995.

   (5)   Indicates management or compensatory plan or arrangement required to
         be identified pursuant to Item 14(a)(4).

   (6)   Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended June 30, 1996.

   (7)   Filed in connection with the Company's Current Report on Form 8-K
         filed on October 7, 1996.

<PAGE>   63


   (8)   Filed in connection with the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1996.

   (9)   Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended March 31, 1997.

   (10)  Certain confidential portions deleted pursuant to Order Granting
         Application for Confidential Treatment issued in connection with the
         Company's Form 10-Q Quarterly Report for the quarterly period ended
         March 31, 1997.

   (11)  Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended June 30, 1997.

   (12)  Filed in connection with the Company's Registration Statement on Form
         S-4, as amended (No. 333-38361).

   (13)  Filed in connection with the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1997.

   (14)  Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended June 30, 1998.

   (15)  Filed in connection with the Company's Form 10-Q Quarterly Report for
         the quarterly period ended September 30, 1998.

   (16)  Filed herewith.