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

                                   FORM 10-KSB
                                   (Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 or

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

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


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

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

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

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

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

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

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

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

The issuer's revenues for its most recent fiscal year were $4,748,304.

The  aggregate  market value of the voting and non voting  common equity held by
non-affiliates  of the  registrant  as of  March  31,  1999,  was  approximately
$428,100.

The issuer had issued and  outstanding  3,891,819  shares of its Common Stock on
March 31, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

Those  sections of portions of the  registrant's  1999 Proxy  Statement  for its
Annual Meeting of Shareholders  to be held on June 7, 1999, are  incorporated by
reference into Part III hereof.


<PAGE>
 

                                    PART I

Item 1. Business

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

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

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

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

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

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

General
-------

     TELS'  products and services  are divided  into two  different  product and
service  sectors:  first,  and the most typical products for the Company for the
last 18  years,  telecommunications  products  are used to  provide  management,
accounting,  and  billing  information  to  various  business,   education,  and
government entities, but primarily to the lodging industry; and second, contract
manufacturing  and  assembly  operations,  provide  comprehensive  full  service
turnkey or consignment contract  manufacturing  services.  The Company's segment
information is provided in Note 14 of the financial statements.

<PAGE>



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

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

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

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

     The  INN-FORM/XL  and  WIN-SENSETM  products  account for a majority of the
Company's  telecommunications  sector sales,  followed by the INN-SURETM,  which
provides   answer    detection   and   verification   for   phone   calls.   The
telecommunication division accounted for 54% of consolidated sales for 1998. The
manufacturing  and  assembly  operation   accounted  for  approximately  45%  of
consolidated sales for 1998.

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

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

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

     ISO 9002 Quality  Services.  TELS,  through its  subsidiary  HTI,  provides
electronics  production  services for companies  needing high quality turnkey or
consignment contract manufacturing.  HTI utilizes state-of-the-art equipment and
ISO 9002  certified  quality  control  systems to provide  services to companies
needing  circuit  board  manufacturing,   cable  assembly,  chassis  wiring  and
electro-mechanical  assembly  services.  When  coupled  with  the  research  and
development  capabilities  of  MICROMEGA,   TELS  provides  a  complete  service
opportunity,  from  research  and  development  to  final  assembly,  under  the
management  of  one  company.   HTI  had  one  customer   which   accounted  for
approximately 12% of consolidated net sales for 1998.

<PAGE>




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

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

     Management  believes  computer  technology will continue to evolve and be a
dominant  element in the  telecommunications  industry.  TELS  recognizes  major
telecommunications  industry  changes ahead as a result of changes in the "NANP"
(North American  Numbering Plan) and "NADP" (North American Dialing Plan), which
went into effect in 1995. The Company  expects its  telecommunications  products
and/or  enhancements  will  need to be  further  developed  to meet the  changes
expected in 1999 and beyond.  The Company  expects a  continuing  demand for its
products as these future changes occur.

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

     The Company spent  approximately  $160,000 and $184,000,  including certain
capitalized expenses, on research and development  activities in the years ended
December 31, 1998 and 1997, respectively.  All research and development expenses
for the Company originated from MICROMEGA.

     TELS formed and operates  MICROMEGA as a wholly-owned  subsidiary to create
an environment where engineering  personnel are part of a larger entity and also
to solicit outside contracts with entities other than TELS. The Company believes
that this  arrangement  improves  the  efficiency  and quality in  research  and
development. MICROMEGA carried out all research and development for TEL in 1998.

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

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

     The Company  competes with many printed  circuit  board and cable  assembly
operations,  many  who  have  a  longer  operating  history,  greater  financial
strength,  and larger manufacturing  capabilities.  In addition,  many companies
provide  their  own  manufacturing  capabilities  internally  within  their  own


<PAGE>



operations.  There can be no assurance  that the Company will be able to compete
successfully  with these  companies in the future.  Since 1995,  in an effort to
modernize its operation,  the Company continues to spend considerable effort and
resources in maintaining its ISO 9002  certification.  The ISO 9002 is a quality
standard adopted by the  international  business  community to assure consistent
quality manufacturing  standards throughout the world.  Management believes that
the ISO 9002  certification  for HTI should  continue to enhance  the  Company's
ability to compete in a changing manufacturing environment.

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

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

     The  manufacturing  and assembly  marketplace  is ever changing to meet the
demands  of newer and more  sophisticated  products.  The  Company  will need to
continue to purchase more sophisticated equipment and will also need to continue
its development of quality manufacturing processes in order to meet the needs of
its customers in a rapidly changing  technology and product-driven  marketplace.
There can be no assurance that the Company's contract  manufacturing  operations
will be able to compete in its  marketplace  or to provide  services  which will
generate a profitable level of sales for the Company.

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

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

     TELS'  stand-alone  telephone  call  accounting  products  are  designed to
include advanced features,  to occupy a minimum amount of space, to be very easy
to use,  and to sell at  competitive  prices.  The small  physical  product size


<PAGE>



(smaller than an average size telephone)  provides a competitive  advantage over
the larger and more bulky equipment marketed by many competitors.

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

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

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

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

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

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

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

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

     The FCC has adopted  regulations  with  respect to the  interconnection  of
communications  equipment with telephone lines and  regulations  with respect to
radiation  emanations  of  certain  equipment.  TELS  has  complied  with  these

<PAGE>



regulations and received all necessary FCC approvals for its  telecommunications
products,   or  has  submitted   products  for  testing  and  certification  for
compliance,  and is  submitting  all new  products  for such testing as they are
completed.  TELS anticipates  that the new products will be approved,  but there
can be no assurance that such approvals will be obtained. Products purchased for
resale,  such as printers,  computers,  etc.,  include  original  manufacturer's
certifications of compliance with FCC regulations.

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

Employees
---------

As of December 31, 1998, the Company had 60 full-time employees.

Item 2. Properties

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

Item 3. Legal Proceedings

     Ameriquest  Technologies,  Inc. v. Microstation  Corporation and Stephen M.
Nelson,  (11th Judicial Circuit Court, Dade County,  Florida,  Case No. 97-11878
CA20, filed May 28, 1997). The Complaint  alleges causes of action for breach of
contract,  account stated, open account, and unjust enrichment/breach of implied
contract.  Plaintiff  alleges that  Defendant  Stephen M. Nelson,  President and
Director  of the  Company,  executed a personal  guarantee  guaranteeing  to pay
Plaintiff for any indebtedness  incurred by Defendant Micro Station  Corporation
(purchaser  of certain  assets from D. J.  GunTEL,  Inc.  dba Micro  Station,  a
wholly-owned  subsidiary  of the Company) in favor of Plaintiff  and that Nelson
has breached the alleged personal guarantee in that he has failed and refused to
pay for the goods sold.  Plaintiff  also alleges  that it agreed with  Defendant
Micro Station  Corporation to a resulting balance of $37,000 before  instituting
this action and that Defendants have not made any payment toward the outstanding
amount  due.  Plaintiff  requests   compensatory   damages,   costs,   expenses,
prejudgment  interest,  reasonable attorney's fees, and other appropriate relief
of an unspecified amount.

     Defendant  Nelson filed his Answer denying the allegations and responded to
Plaintiff's  Motion for Summary  Judgment and filed a  Cross-Motion  for Summary
Judgment.  On August 25, 1998, the Court granted  Plaintiff's Motion for Summary
Judgment and denied Nelson's  Cross-Motion for Summary Judgment.  On October 21,
1998,  Nelson filed a Notice of Appeal,  challenging the trial court's denial of
Nelson's  Cross-Motion  for Summary  Judgment and the trial court's  decision to
grant Plaintiff's Motion for Summary Judgment and deny Nelson's Cross-Motion for
Summary  Judgment.  The appellate  case has been assigned to the Third  District
Court of Appeals.

     Ameriquest has attempted to  domesticate  its judgment in Utah by filing an
action in Third District Court for Salt Lake County, purportedly for purposes of
pursuing Nelson's assets in Utah. Nelson has answered the Complaint. The Company

<PAGE>



has agreed to  indemnify  Nelson for any damage  awards  that  become  final and
nonappealable.  In view of the uncertainties inherent in litigation, the Company
is unable to express any judgments as to the outcome of this matter.

Market Listing
--------------

     Effective  September 30, 1998, pursuant to a hearing on July 23, 1998, by a
Nasdaq Listing Qualifications Panel, a decision was made to delist the Company's
securities  from the Nasdaq Small Cap Market.  The hearing by the Panel was held
at the  Company's  request to consider the issues  pertaining  to the  Company's
common stock not being in compliance  with the minimum bid price  requirement of
$1.00. Subsequent to this decision by Nasdaq, the Company is currently listed on
the OTC Bulletin Board with the symbol "TELS".  The OTC Bulletin Board is run by
the National  Association  of Securities  Dealers  ("NASD") and is maintained by
Nasdaq as an electronic trade-and-quote-reporting forum.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of fiscal year 1998.








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<PAGE>



                                     PART II

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

Price Range of Common Stock

     Until  September 30, 1998, the Company's  common stock traded on the Nasdaq
SmallCap  Market.  Effective  September  30, 1998,  the  Company's  common stock
started  trading on The NASD OTC  Bulletin  Board under the symbol  "TELS".  The
following  table sets forth the range of high and low sales  prices per share of
the Company's  common stock for the calendar  quarters  indicated,  as reported.
Quotations  represent actual  transactions in NASD and Nasdaq's quotation system
but do not include retail markup, markdown, or commission.


1998               High     Low           1997                High      Low
----               ----     ---           ----                ----      ---

First Quarter    $  .50  $  .34           First Quarter     $  .75   $  .50
Second Quarter      .58     .41           Second Quarter       .56      .25
Third Quarter       .59     .25           Third Quarter        .38      .22
Fourth Quarter      .31     .06           Fourth Quarter       .44      .25


Approximate Number of Equity Security Holders:

     As of March  31,  1999,  there  were  1,031  shareholders  of record of the
Company's  common stock.  Included in the number of  shareholders  of record are
shares held in "nominee" or "street" names. Because many of such shares are held
by brokers  and other  institutions  on behalf of  shareholders,  the Company is
unable to estimate  the total  number of  shareholders  reported by these record
holders.

Dividends:

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







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<PAGE>




Item 6. Management's Discussion and Analysis of Financial Condition
        and Results of Operations

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

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

     Consolidated net sales for 1998 decreased 23% to $4,748,304,  a decrease of
$1,446,756 when compared to  consolidated  net sales of $6,195,060 for 1997. The
decrease in sales is due primarily to a significant  decrease of sales  activity
in the contract manufacturing  division where sales decreased by $1,351,581.  In
1998 the Company had one major  customer in the contract  manufacturing  segment
who reduced its orders with the Company by over 60%, or approximately  $900,000,
compared to 1997. This reduction  occurred in the last half of 1998. The Company
was materially  dependent on its business with this customer and other customers
who were closely aligned with the computer chip industry. This reduction has had
a major  impact on the revenues and  profitability  of the Company.  Efforts are
being made to replace  revenues  attributable to this customer by developing new
customers.  The  Company  expects it will take at least nine  months to generate
sufficient replacement revenues.

     In addition to the decrease in sales in the manufacturing  division,  sales
of the Company's call  accounting  products also  decreased.  In 1998,  sales of
telecommunications  products decreased 4% or $102,420 to $2,595,053  compared to
$2,697,473 for 1997.  This decrease in sales in the  telecommunications  product
sector is attributable to decreased sales from the Company's dealer distribution
channel and national accounts, and was offset somewhat by increased sales of the
business call  accounting  products.  Due to planned product  enhancements,  the
Company  anticipates that sales to national  accounts and dealers,  and sales of
business  call  accounting  systems,  will  increase in 1999 and account for the
majority of sales in the telecommunications division in 1999.

     Consolidated  gross profit decreased 30% or $999,102 in 1998, when compared
to 1997. The gross profit of $2,294,130 for 1998,  represented  48% of sales. In
1997, gross profit of $3,293,232 represented 53% of sales. The decrease in gross
profit as a percentage  of sales is due to the change in the sales mix from 1997
to 1998 and reductions in sales in the manufacturing business. In 1998, sales in
the telecommunications  sector accounted for 55% of total sales, compared to 44%
of total sales for 1997.  Because the  telecommunication  products have a higher
gross  profit  margin than  products in the  manufacturing  sector,  the Company
believes that its consolidated  gross profit margin will normally be higher when
sales  from  the   telecommunication   products   increase  over  those  in  the
manufacturing  sector.  However,  due to the major  decline  in net sales in the
manufacturing sector,  including the loss of higher margin customers,  the gross
profit in the manufacturing sector also decreased by 77% or $985,317 causing the
overall  consolidated  gross  margin  to  decrease.  The  gross  profit  for the
manufacturing sector of $302,497 for 1998, represented 14% of sales, whereas, in
1997, gross profit of $1,287,814  represented 37% of sales. In 1999, the Company
anticipates  that the  consolidated  gross profit  percentage will be consistent
with 1998 results.

     Consolidated  research and  development  expenditures  consisted of several
components in 1998.  The  consolidated  expense of $155,727 for 1998 consists of
$1,182 for current expenses and $154,545 for amortization of projects which were
capitalized in prior years. In addition to these costs currently being expensed,
the Company  also spent  $89,800 in 1998 and  $115,705 in 1997,  which have been
capitalized as software development costs. The Company is continuing its efforts
in research and  development on products which will primarily be introduced into
the  telecommunications  marketplace.  As it looks for  opportunities to improve
existing  products and identify areas for new products,  the Company may need to
increase research and development activity in the near future.

<PAGE>




     Consolidated selling,  general and administrative  expenses increased 7% to
$3,164,502 for 1998, when compared to $2,970,693 for 1997. This increase in 1998
is  attributable  to  non-recurring  activities  related to legal  expenses  and
investment  banking  services.  In 1998 the  Company  expended  funds to procure
funding  for  acquisitions  and  legal  fees  involving  litigation.  Management
anticipates  that it will need to make a concerted  effort to reduce expenses in
1999 in certain  operations  of the Company as it continues to focus its efforts
toward  increased  profitability.  As a percentage  of  consolidated  net sales,
selling,  general and administrative  expenses were 66% in 1998, compared to 48%
in 1997.

     For 1998, the Company  reported a net loss from  operations of $(1,993,963)
or $(.51) per share,  compared  to a net income from  operations  of $96,659 for
1997,  or $.02 per share.  This  significant  decrease in earnings is  primarily
attributable to the decline in sales related to contract  manufacturing  as well
as to increases in the administrative expenses,  primarily legal and acquisition
expenses.  Additionally,  as of December 31, 1998, the Company decreased its net
deferred tax asset to zero by increasing the valuation allowance to fully offset
the net  deferred  tax asset of  $840,886  in 1999.  The  deferred  tax asset is
primarily the result of net operating loss carry forwards.  The Company believes
that it is more  likely than not that it will not be able to realize the benefit
of the net deferred tax asset.

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

     At December 31, 1998,  the Company  reported  that current  liabilities  of
$1,477,807 exceeded current assets of $1,346,000 by $131,807. This is a decrease
in working  capital of $683,897 when compared to working  capital of $552,090 at
the end of 1997.  This  decrease  in  working  capital  is due to  decreases  in
accounts receivable of $162,382, and inventories of $349,539 and to increases in
accounts payable of $125,626 and increases in accrued  expenses of $68,102.  The
Company also used cash provided from long-term debt of $156,907,  and redemption
of investments of $72,198,  to purchase equipment of $63,214 and for capitalized
software development costs of $90,252.

     The Company  decreased its borrowing on a line of credit by $14,563 in 1998
and increased  its long-term  debt by $156,907 from $843,726 at the end of 1997.
In 1998 the Company made an  adjustment to inventory of $210,000 to decrease its
inventory  level  to  reflect  the  lower  of cost or  market  of its  remaining
inventory.  The Company has violated certain requirements of its debt agreements
relating to  maintaining  minimum cash flow  levels.  The  Company's  lender has
declared the Company in default,  but has granted a  forbearance  on the default
and has allowed the Company to remain in violation of the covenants.  The lender
has put the  Company  on notice  that its  $750,000  line of credit  will not be
renewed in July, 1999, when the current loan matures. If the Company is not able
to find replacement financing,  the Company may not be able to repay the line of
credit.  Recently  the Company has not been able to make timely  payments to its
trade  creditors,  predominantly  in the contract  manufacturing  division.  The
Company has past due  payables in the amount of $148,000.  Certain  vendors have
suspended parts  deliveries to the  manufacturing  division.  Nevertheless,  the
Company  has been able to make its  deliveries  on time and no orders  have been
canceled.  The Company is currently seeking sources of working capital financing
sufficient to fund delinquent balances and meet ongoing trade obligations and to
find additional  financing through investment equity or subordinated debt, which
will be needed to fund operations, future acquisitions and final development and
marketing of new products under  consideration.  If additional funding cannot be
obtained from these sources,  the Company believes it can mortgage assets and/or
factor  receivables  to obtain  funding  necessary to pay its ordinary  business
obligations.

<PAGE>




     The telecommunications industry is experiencing drastic changes which could
limit the Company's ability to meet sales projections in this industry and there
can be no assurance that the Company will be able to generate a profitable level
of sales.

Year 2000 (Y2K) Computer Systems Compliance
-------------------------------------------

     Many  older  computer  software  programs  refer to years in terms of their
final two digits only.  Such  programs may  interpret  the year 2000 to mean the
year 1900 instead.  If not corrected,  those  programs could cause  date-related
transaction  failures.  The Company is  continuing  its efforts to address  this
concern.  A project team is  performing  assessments  of all  internal  computer
systems and developing and implementing plans to correct the problems. We expect
these projects to be successfully completed during the second and third quarters
of 1999.  External and internal  costs  specifically  associated  with modifying
internal  use  software for Year 2000  compliance  are expensed as incurred.  To
date, we have spent approximately $25,000 on this project. Remaining costs to be
incurred  in 1999 to fix Year  2000  problems  are  estimated  at  approximately
$40,000.  We do not expect the costs relating to Year 2000 remediation to have a
material effect on our results of operations or financial condition. The Company
has evaluated its existing accounting software for compliance with the year 2000
and has  determined  that an upgrade to the existing  accounting  system will be
required.  This upgrade has been  purchased  and will be installed in the second
quarter of 1999.

     Our  Proprietary  Call  Accounting  Products  (INN-FORMXL,  INN-FORMPlus,
INN-FORM Express  and  TEL-SENSE)  are  Year  2000  compliant.   The  hardware,
operating  system and software are all unconcerned  with the year portion of the
date in that they do not store the year nor  perform any  computations  based on
year. Our PC-based products  (TEL-SENSE PCS,  WIN-SENSE and INN-SURE) are also
Year  2000  complaint  for the same  reasons  as given  above:  they do not base
computations on the year. However, the PC that they may be running on may or may
not be compliant.  PCs are composed of various components (CPU, real time clock,
BIOS,  etc.)some of which may use dates as part of their basic  functioning  and
may be vulnerable to the Y2K problem.

     Year 2000  problems  could  affect  research and  development,  production,
distribution,  financial,  administrative and communication operations.  Systems
critical to our business  which have been  identified as non-Year 2000 compliant
are either being replaced or corrected  through  programming  modifications.  In
addition to our in-house  efforts,  we intend to continue asking vendors,  major
customers,  service suppliers,  communications providers and banks whose systems
failures potentially could have a significant impact on our operations to verify
their Year 2000 readiness and test such systems where appropriate and possible.

     As part of our  contingency  plan, we are developing  plans for those areas
that are  critical  to TELS'  business  such as  scheduling  and/or  purchase of
critical inventory parts, developing relationships with multiple vendor sources,
implementing  additional  backup  procedures  and printing and storing  critical
documentation.  Based on our current  plans and efforts to date,  we  anticipate
that our  contingency  plan will be completed  in the third  quarter of 1999 and
that the Year 2000  problems  will not have a material  effect on our results of
operations or financial condition.

     The above expectations are subject to uncertainties. For example, if we are
unsuccessful  in  identifying  or fixing all Year 2000  problems in our critical
operations,  or if we are  affected  by the  inability  of  suppliers  or  major
customers  to  continue  operations  due  to  such a  problem,  our  results  of
operations or financial condition could be materially impacted.

<PAGE>




     The total  costs that we incur in  connection  with the Year 2000  problems
will be  influenced by our ability to  successfully  identify Year 2000 systems'
flaws,  the  nature  and  amount of  programming  required  to fix the  affected
problems,  the related labor and/or consulting costs for such  remediation,  and
the  ability  of third  parties  with  whom we have  business  relationships  to
successfully  address their own Year 2000 concerns.  These and other  unforeseen
factors  could have a material  adverse  effect on our results of  operations or
financial condition.

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

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

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

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

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

     The Company's net sales of telephone call accounting  systems have improved
in the  first  quarter  of 1999,  increasing  approximately  15% over the  first
quarter of 1998, and  management  believes that this trend will continue for the
foreseeable  future.  The expense  reductions  implemented in the latter part of
1998 and the first quarter of 1999,  particularly in the manufacturing division,
coupled with the increased sales in telephone call  accounting,  are expected to
improve  the  Company's  operating  results in the first and second  quarters of
1999.

<PAGE>




     The  Company's  net  sales  decreased  by over 23% from net  sales in 1997.
Additionally,  the Company has incurred a  significant  loss in the current year
creating  negative  cash  flows  from  operating  activities  for 1998 and has a
working capital deficit at December 31, 1998. A significant  portion of the loss
for  1998  is   attributable   to  the  decline  in  revenues  in  the  contract
manufacturing  division  where the  company  was  reliant  on  revenue  from one
customer which reduced its orders with the Company by over 60% or  approximately
$900,000.  Additionally,  the Company's line of credit which is due July,  1999,
contains  cash flow  covenants  that,  if not complied  with,  may result in the
acceleration of repayment. The Company has been notified that it is in violation
of its debt covenants and no waiver has been obtained.  Replacement of this line
of credit by another financial institution cannot be assured. As of December 31,
1998, the Company's Certifying  Accountants have stated that these factors raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Failure  to  accomplish  management's  plans  in 1999 and to  generate  positive
operating cash flow could result in further  erosion of the Company's  financial
condition and failure to meet its financial obligations.

     The Company's business and products may be significantly  influenced by the
constantly changing body of regulatory laws and regulations,  which require that
certain  regulatory  standards  be met and impose  liability  for the failure to
comply  with  such  standards.  While  the  Company  endeavors  at  each  of its
facilities to assure compliance with regulatory laws and regulations,  there can
be no assurance  that the  Company's  operations  or  activities,  or historical
operations  by others at the  Company's  locations,  will not result in civil or
criminal  enforcement  actions  or  private  actions  that could have a material
adverse effect on the Company.

     The Company's future  operating  results depend in part upon its ability to
retain and attract qualified engineering,  manufacturing,  technical, sales, and
support personnel for its operations. Competition for such personnel is intense,
and there can be no assurance  that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons could
materially adversely affect the Company's business and results of operations.

     The Company's  success will depend in  significant  part upon the continued
contributions of its officers and key personnel, many of whom would be difficult
to replace.  The loss of any key person could have a material  adverse effect on
the business, financial condition, and results of operations of the Company.

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

     The Accounting  Standards  Executive  Committee (AcSEC) issued Statement of
Position  No. 98-1 (SOP  98-1),  Accounting  for the Cost of  Computer  Software
Development  or  Obtained  for  Internal  Use.  The SOP was  issued  to  address
diversity in practice  regarding  whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company is currently
evaluating the impact SOP 98-1 will have on its financial statements, if any.

     The Company has reviewed all other  recently  issued,  but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial  position of the Company.  Based on that review,  the
Company  believes  that none of these  pronouncements  will  have a  significant
effect on current or future earnings or operations.

<PAGE>




Item 7. Financial Statements and Supplementary Data.

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

                  Report of Independent Accountants.
                  Consolidated Balance Sheet as of December 31, 1998.
                  Consolidated Statements of Operations for the years ended
                         December 31, 1998 and 1997.
                  Consolidated Statements of Changes in Stockholders' Equity
                         for the years ended December 31, 1998 and 1997.
                  Consolidated Statements of Cash Flows for the years ended
                         December 31, 1998 and 1997.
                  Consolidated Notes to Financial Statements for the years ended
                         December 31, 1998 and 1997.

Item 8. Disagreements on Accounting and Financial Disclosures.
         None.





                      (THIS SPACE INTENTIONALLY LEFT BLANK)

<PAGE>


                        Report of Independent Accountants


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

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows present fairly, in all material  respects,  the financial position of TELS
Corporation and its  subsidiaries  (the "Company") at December 31, 1998, and the
consolidated  results of their  operations  and their cash flows for each of the
two 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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion  expressed
above.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements, the Company suffered a significant loss from operations in
1998, has an  accumulated  deficit and has a net working  capital  deficit that,
along with other factors, raises substantial doubt about its ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 2. The  financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.



PricewaterhouseCoopers LLP
Salt Lake City, Utah
April 14, 1999

<PAGE>
<TABLE>
<CAPTION>

                        TELS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                December 31, 1998


          ASSETS                                                           1998
          ------                                                           ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Current assets:
    Cash and cash equivalents ..................................    $    63,326
    Trade accounts receivable, less allowance for doubtful
       accounts of $81,586 .....................................        608,802
    Employee and other receivables .............................         65,514
    Inventories, net ...........................................        446,416
    Prepaid expenses ...........................................        161,942
                                                                        -------
             Total current assets ..............................      1,346,000

Property and equipment, net ....................................        627,085
Software development costs, net ................................        124,922
Intangible assets, net .........................................         40,974
Other assets ...................................................        208,495
                                                                        -------
                                                                    $ 2,347,476
                                                                    ===========

          LIABILITIES AND STOCKHOLDERS' EQUITY
          ------------------------------------

Current liabilities:
    Trade accounts payable .....................................    $   420,270
    Accrued expenses ...........................................        180,308
    Accrued vacation ...........................................        131,887
    Current portion of long-term debt ..........................        601,069
    Deposits and advances ......................................        144,273
                                                                        -------
             Total current liabilities .........................      1,477,807
                                                                      ---------

Long-term debt, less current portion ...........................        385,000
                                                                        -------

Commitments and contingencies (Notes 7 and 13)

Stockholders' equity
    Common stock, $.02 par value,
       Authorized 50,000,000 shares; issued and
       outstanding 3,891,819 shares ............................         77,835
    Additional paid-in capital .................................      4,226,532
    Accumulated deficit ........................................     (3,819,698)
                                                                     ---------- 
             Stockholders' equity ..............................        484,669
                                                                        -------
                                                                    $ 2,347,476
                                                                    ===========


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

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                        TELS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 for the years ended December 31, 1998 and 1997




                                                          1998           1997
                                                          ----           ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Net sales ........................................   $ 4,748,304    $ 6,195,060

Cost of goods sold ...............................     2,454,174      2,901,828
                                                       ---------      ---------

Gross profit .....................................     2,294,130      3,293,232

Research and development expenses ................       155,727        140,448
Selling, general and administrative expenses .....     3,164,502      2,970,693
                                                       ---------      ---------

  Operating income (loss) ........................    (1,026,099)       182,091
                                                      ----------      ---------

Other income (expense):
  Interest income ................................         4,838         17,934
  Interest expense ...............................      (124,616)      (122,060)
  Other, net .....................................          --           50,895
                                                       ---------      ---------
                                                        (119,778)       (53,231)
                                                       ---------      --------- 

Income (loss) before income tax provision ........    (1,145,877)       128,860

Income tax provision .............................      (848,086)       (32,204)
                                                       ---------      --------- 

    Net income (loss) ............................   $(1,993,963)   $    96,656
                                                     ===========    ===========

Net income (loss) per share:
  Basic earnings (loss) per share (Note 12) ......   $      (.51)   $       .02
                                                     ===========    ===========

  Diluted earnings (loss) per share (Note 12) ....   $      (.51)   $       .02
                                                     ===========    ===========

Basic and diluted weighted average number
  of shares outstanding ..........................     3,891,819      3,891,819
                                                     ===========    ===========

</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
                        TELS CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 for the years ended December 31, 1998 and 1997



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

Balance at December 31, 1996      $ 77,835   $ 4,226,532   $(1,922,391)   $   (50,675)   $ 2,331,301

Net income .................                        --          96,656          --            96,656
Amortization of deferred
  compensation .............          --            --            --           40,500         40,500
                                    ------     ---------     ---------         ------         ------
Balance at December 31, 1997        77,835     4,226,532    (1,825,735)       (10,175)     2,468,457

Net loss ...................          --            --      (1,993,963)          --       (1,993,963)
Amortization of deferred
  compensation .............          --            --            --           10,175         10,175
                                    ------     ---------     ---------         ------         ------
Balance at December 31, 1998      $ 77,835   $ 4,226,532   $(3,819,698)   $      --      $   484,669
                                  ========   ===========   ===========     ==========     ==========

</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>
                        TELS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                 for the years ended December 31, 1998 and 1997




                                                                            1998            1997
                                                                            ----            ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Cash flows from operating activities:
   Net income (loss)                                                   $(1,993,963)   $    96,656
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
        Depreciation and amortization ..............................       426,866        396,311
        Deferred income taxes ......................................       840,886         12,191
        Stock bonuses and amortization of deferred compensation ....        10,175         40,500
        Changes in operating assets and liabilities:
          Receivables ..............................................       162,383         17,766
          Inventories ..............................................       349,539        (45,528)
          Prepaid expenses .........................................        44,181        (22,164)
          Trade accounts payable and accrued expenses ..............       193,728       (263,647)
          Other assets and liabilities .............................       (40,556)        (6,264)
                                                                           -------         ------ 

            Net cash provided by (used in) operating activities ....        (6,761)       225,821
                                                                            ------        -------

Cash flows from investing activities:
   Redemption of investments .......................................        72,198           --
   Purchases of investments ........................................        (4,834)        (4,965)
   Capital expenditures ............................................       (63,214)       (70,028)
   Proceeds from disposal of equipment .............................          --            7,000
   Software development costs ......................................       (90,252)      (159,675)
                                                                           -------       -------- 

            Net cash used in investing activities                          (86,102)      (227,668)
                                                                           -------       -------- 

Cash flows from financing activities:
   Net borrowings (repayments) under line of credit agreement ......       (14,563)        65,679
   Payments on long-term debt ......................................      (276,821)       (81,967)
   Principal borrowings on long-term debt ..........................       433,728           --
                                                                           -------        -------     

            Net cash provided by (used in) financing activities ....       142,344        (16,288)
                                                                           -------        ------- 
</TABLE>

                                  - Continued -


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



<PAGE>
                        TELS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
                 for the years ended December 31, 1998 and 1997





                                                           1998        1997
                                                           ----        ----

Net increase (decrease) in cash and cash equivalents   $  49,481   $ (18,135)

Cash and cash equivalents at beginning of year .....      13,845      31,980

Cash and cash equivalents at end of year ...........   $  63,326   $  13,845


Supplemental disclosure of cash flow information:
   Cash paid during the year for interest ..........   $ 130,675   $ 122,060
   Cash paid during the year for income taxes ......   $   4,800   $   4,000


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

<PAGE>

                        TELS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Summary of Significant Accounting Policies:

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

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

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

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

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

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

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

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

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

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

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

                                   Continued
<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.   Summary of Significant Accounting Policies, Continued:

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

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

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

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

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

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

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

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

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

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

     Basic net income  (loss) per share is computed  by dividing  the net income
     (loss) by the weighted average number of common shares outstanding. Diluted
     net income  (loss) per share is computed by dividing the net income  (loss)
     by the sum of the weighted  average  number of common shares and the effect
     of dilutive  unexercised  stock  options.  Options to purchase  746,250 and
     748,875  shares of common  stock at prices  ranging from $0.45 to $1.59 per
     share were outstanding at December 31, 1998 and 1997 respectively, but were
     not included in the  computation of diluted  earnings per share because the
     effect would have been antidilutive.


                                   Continued
<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.   Summary of Significant Accounting Policies, Continued:

     Estimates
     ---------

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

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

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

2.   Basis of Presentation:

     The Company's 1998 net sales decreased by over 23% from net sales for 1997.
     Additionally,  the Company has incurred a  significant  loss in the current
     year creating  negative cash flows from  operating  activities for 1998 and
     has a working capital  deficit at December 31, 1998. A significant  portion
     of the loss for 1998 is  attributable  to the  decline in  revenues  in the
     contract  manufacturing  division  where the company was reliant on revenue
     from one customer  which reduced its orders with the Company by over 60% or
     approximately  $900,000.  The loss was further increased as a result of the
     Company  decreasing  its net deferred tax asset to zero by  increasing  the
     valuation  allowance to fully offset the  Company's net deferred tax asset.
     The  Company  believes  that it is more likely than not that it will not be
     able to realize the benefit of the net deferred tax asset.

     Additionally,  the  Company's  line of credit  which is due in July,  1999,
     contains cash flow covenants  that, if not complied with, may result in the
     acceleration  of  repayment.  The Company has been  notified  that it is in
     violation  of  its  debt   covenants  and  no  waiver  has  been  obtained.
     Replacement of this line of credit by another financial  institution cannot
     be assured.  As of December 31, 1998, these factors raise substantial doubt
     about the Company's ability to continue as a going concern.

     The  Company's  plans with respect to 1999 are to increase  revenues in the
     contract  manufacturing  division with a more diverse customer base, reduce
     operating expenses,  refinance its line of credit and increase sales in the
     telephone  call  accounting  division.  Failure to accomplish  management's
     plans in 1999 and to generate positive  operating cash flow could result in
     further  erosion of the Company's  financial  condition and failure to meet
     its financial obligations.


                                   Continued
<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

3.   Inventories:

     Inventories at December 31, 1998 consisted of the following:
          Finished goods                                            $    64,962
          Work-in-process                                                69,045
          Raw materials and supplies                                    573,369
          Reserve for obsolete inventory                               (260,960)
                                                                       -------- 
                                                                    $   446,416
                                                                       --------

4.   Property and Equipment:

     Property and equipment at December 31, 1998 consisted of the following:

          Land                                                      $    35,380
          Building and improvements                                     478,885
          Furniture and equipment                                     1,780,316
          Equipment under capital lease                                  89,126
                                                                    -----------
                                                                      2,383,707
          Less accumulated depreciation and
          amortization                                               (1,756,622)
                                                                    ----------- 
                                                                    $   627,085
                                                                    -----------

     Depreciation  expense  totaled  $194,278  and  $199,584 for the years ended
     December 31, 1998 and 1997, respectively.

5.   Software Development Costs:

     Capitalized  software  development  costs at December 31, 1998 consisted of
     the following:
     
          Software development costs                                $   382,856
          Less accumulated amortization                                (257,934)
                                                                    ----------- 
                                                                    $   124,922
                                                                    -----------

     Amortization  expense  totaled  $154,545  and  $116,601 for the years ended
     December 31, 1998 and 1997, respectively.

6.   Intangible Assets:

     Intangible  assets at December 31, 1998  consisted  of the  following:
     
          Non-compete  agreements                                   $   299,000
          Goodwill                                                       56,041 
          Organizational costs                                           41,398
          Other                                                          11,511
          Less accumulated amortization                                (366,976)
                                                                    ----------- 
                                                                    $    40,974
                                                                    -----------
     
     Amortization  expense  totaled  $78,043  and  $80,126  for the years  ended
     December 31, 1998 and 1997 respectively.


                                   Continued


<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


7.   Long-term Debt:

     Long-term  debt at December  31,  1998,  the  carrying  value of which
     approximates fair value, consisted of the following:

     Revolving line of credit payable to a financial institution,
     bearing interest at the institution's index rate plus 3.0%
     (11.5% at December 31, 1998), interest due monthly, principal
     due July, 1999, collateralized by trade accounts receivable
     and inventories.  The unused line of credit at December 31,
     1998 was $241,952.                                             $   508,048

     Mortgage note payable to a bank in monthly installments
     of $4,667, including interest at 9.875%,
     final payment of $357,343 due May, 2003; collateralized
     by real property.                                                  426,337

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

     Contract payable under legal settlement payable in
     quarterly installments of  $5,000, final payment due
     March, 2000.                                                        25,000

     Capital leases for equipment (Note 8)                               19,684
                                                                    -----------

          Total long-term debt                                          986,069

          Less current portion                                         (601,069)
                                                                    ----------- 

          Long-term debt, less current portion                      $   385,000
                                                                    -----------



     The  Company's  revolving  line of credit,  which  matures  in July,  1999,
     contains  various  covenants  and  restrictions  that  specify  the Company
     maintain certain reporting  requirements and minimum financial amounts with
     regard  to cash  flow.  The  Company  has been  notified  that it is not in
     compliance with these  covenants.  As the Company is unable to obtain a new
     line of credit with this lender, it intends to seek alternative  sources of
     debt or equity to repay this obligation.


                                   Continued

<PAGE>

 
                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.   Leases:

     The Company is obligated  under capital  leases for machinery and equipment
     that expire between April 1999 and February 2000. At December 31, 1998, the
     gross amount of machinery,  equipment and related accumulated  amortization
     recorded under capital leases were as follows:

          Equipment under capital lease                              $   89,126
          Less accumulated amortization                                 (62,956)
                                                                     ---------- 
                                                                     $   26,170
                                                                     ----------

     The Company leases office space and equipment under noncancelable operating
     lease  agreements.  Rent  expense was  $144,107  and $92,308 for  the years
     ended December  31,  1998 and  1997,  respectively.  Future  minimum rental
     payments required  under  capital  leases  and  operating leases that  have
     initial or remaining  noncancelable lease terms in excess of one year as of
     December 31,1998 are as follows:


                                                    Capital           Operating
                                                    leases              leases
                                                    ------              ------

     Year ending December 31:
                 1999                            $   18,662          $   83,409
                 2000                                 2,711              11,153
                 2001                                     -               5,184
                 ----                             ---------           ---------

         Total minimum lease payments                21,373          $   99,746
                                                                     ==========

         Less amount representing interest
         (at rates ranging from 5.5% to 20%)         (1,689)
                                                  --------- 

         Present value of net minimum
         capital lease payments                      19,684

         Less current installments of
         obligations under capital leases           (17,017)
                                                  --------- 

         Obligations under capital leases,
         excluding current installments          $    2,667
                                                 ==========



                                   Continued

<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

9.   Income Taxes:

     Income tax benefit (expense) for the years ended December 31, 1998 and 1997
     consists of:


                                                          1998             1997
                                                          ----             ----
     Current:
        Federal                                      $       -        $       -
        State                                           (7,200)         (20,013)
                                                        ------          ------- 
                                                        (7,200)         (20,013)
                                                        ------          ------- 
     Deferred:
        Federal                                       (878,052)          (7,945)
        State                                           37,166           (4,246)
                                                        ------           ------ 
                                                      (840,886)         (12,191)
                                                      --------          ------- 
           Total                                     $(848,086)       $ (32,204)
                                                     ---------        --------- 

     
     The income tax benefit  (expense) for the years ended December 31, 1998 and
     1997 differs from the expected tax benefit  (expense)  computed by applying
     the U.S. federal corporate income tax rate of 34 percent to earnings (loss)
     before income taxes as follows:


                                                          1998             1997
                                                          ----             ----

     Computed expected tax benefit (expense)         $  389,598      $  (43,812)
     Increase(decrease)in income taxes
     resulting from:
        Change in valuation allowance                (1,246,920)         19,500
        Effect of expiring tax credits                  (14,758)        (18,994)
        Officers' life insurance                              -            (645)
        State income taxes, net of    
          federal income tax benefit                     29,966           1,054
        Meals and entertainment                          (5,848)              -
        Other, net                                         (124)         10,693
                                                      ----------     ----------

        Total income tax benefit (expense)           $ (848,086)     $  (32,204)
                                                      ----------     ---------- 

                                   Continued

<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


9.   Income Taxes, Continued:

     The tax effects of  temporary  differences  that give rise to deferred  tax
     assets and liabilities at December 31, 1998, are presented below:

       Deferred tax assets:
         Accounts receivable                                       $     30,431
         Inventories                                                     97,338
         Accrued liabilities                                             75,311
         Deferred revenue                                                44,557
         Intangible assets                                               81,377
         General business tax credits                                    94,658
         AMT tax credit                                                   4,039
         Net operating loss carry forwards                            1,015,477
                                                                      ---------
           Deferred tax assets                                        1,443,188
           Less valuation allowance                                  (1,356,320)
                                                                     ---------- 
           Total deferred tax assets                                     86,868
         Deferred tax liability:
           Property and equipment                                       (86,868)
                                                                     ---------- 
         Net deferred tax asset                                    $          -
                                                                    =========== 


     Based on the recent history of net operating  losses,  management  believes
     that it is more  likely  than not that the  Company  will not  realize  the
     benefit  of  the  deferred  tax  assets.  Consequently,   the  Company  has
     established  a valuation  allowance for the current and deferred tax asset,
     net of any deferred tax liability at December 31, 1998.


                                   Continued


<PAGE>
<TABLE>
<CAPTION>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

9.   Income Taxes, Continued:

     As of December 31, 1998,  the Company has net operating loss carry forwards
     and general  business  tax credit  carry  forwards  for federal  income tax
     purposes which expire as follows:
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                               Net                          General
                Expiration               operating loss                 business credit
                  date                   carry forwards                 carry forwards

                 1999                     $         -                   $     2,800
                 2000                               -                         6,200
                 2001                         380,900                         6,000
                 2002                               -                        14,500
                 2003                               -                        23,700
                 2004                               -                        19,700
                 2005                          60,100                             -
                 2006                               -                        11,300
                 2007                           5,800                        10,700
                 2008                         648,400                             -
                 2009                               -                             -
                 2010                         151,000                             -
                 2011                         638,000                             -
                 2012                               -                             -
                 2013                               -                             -
                 2014                               -                             -
                 2015                               -                             -
                 2016                               -                             -
                 2017                               -                             -
                 2018                         840,400                             -
                 ----                      ----------                    ----------          
                                          $ 2,724,600                   $    94,900
                                          ===========                   ===========
</TABLE>

10.  Capital Stock:

     Stock Option and Bonus Plans

     On June 7, 1993, the Board of Directors  approved the 1993 TELS Corporation
     Stock  Option  and  Incentive  Plan  (the 1993  Plan)  which  replaced  the
     Company's 1984 Stock Option and Bonus Plan (the 1984 Plan). The Company had
     reserved  1,237,500  shares of its common stock for issuance under the 1984
     Plan, of which 464,000  remained  available for grant. The Company will not
     make any  further  grants  under the 1984  Plan.  Under the 1993  Plan,  as
     amended  on  June 6,  1994,  the  maximum  number  of  shares  issuable  to
     employees,  non employees,  and consultants  totals 2,000,000  shares.  The
     exercise price of options granted is not less than the fair market value on
     the date of grant as determined by the Compensation  Committee  (Committee)
     appointed by the Board of Directors.  The options become exercisable over a
     three-year period, in equal annual increments  beginning one year after the
     date of grant, and expire ten years after the date of grant.


                                   Continued

<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

10.  Capital Stock, Continued:

     Stock Option and Bonus Plans, Continued

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

     The Company  applies APB  Opinion  No. 25 and  related  interpretations  in
     accounting  for options  granted  under  either  plan and for other  option
     agreements.  Consistent with FASB Statement 123, the Company calculated the
     options'  fair  value  based on the grant  dates and  determined  that FASB
     Statement 123 would have the following impact on reported net income (loss)
     and earnings (loss) per share:

                                     1998                        1997
                           -----------------------    -------------------------
                                         Loss per                  Earnings per
                                       share basic                  share basic
                           Net loss    and diluted     Net income   and diluted
                           --------    -----------     ----------   -----------
       As Reported       $(1,993,963)     $(.51)     $    96,656       $ 0.02
       Pro Forma         $(1,993,963)     $(.51)     $    95,964       $ 0.02

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

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

                                                1998                1997
                                         -----------------   -----------------

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


   Outstanding at beginning of year     748,875     $0.87   746,250     $0.95
   Granted                                    -         -    79,000      0.59
   Exercised                                  -         -         -         -
   Forfeited                            151,625      1.47    76,375      0.59
   Outstanding at end of year           597,250      0.77   748,875      0.87
   Options exercisable at year end      547,247      0.77   585,510      0.90


                                   Continued

<PAGE>
<TABLE>
<CAPTION>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                         Number        Weighted       Weighted        Number        Weighted
         Range of    outstanding at     average        average    exercisable at     average
         exercise     December 31,     remaining      exercise     December 31,     exercise
          prices         1998       contractual life    price         1998            price
      -------------   ------------  ----------------  --------     -------------    ---------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     $0.45 to $0.66    397,250         4.79 years       $0.48       358,913           $0.45
     $0.86 to $1.11     40,000         7.16 years       $0.93        28,334           $0.94
     $1.21 to $1.59    160,000         5.94 years       $1.45       160,000           $1.45
                       -------                                      -------
                       597,250                          $0.77       547,247           $0.77
                       =======                                      =======

</TABLE>

     At December 31, 1998,  2,573,901  shares of the Company's  common stock are
     authorized for issuance under the stock option and bonus plans.
     
     In April,  1993, stock bonus awards were made to officers  totaling 450,000
     shares that vested over a five-year period commencing in 1993. Compensation
     expense of $40,500 was  recognized in 1997 with respect to this grant.  The
     remaining deferred compensation expense of $10, 175 was recognized in 1998.

11.  Related Party Transactions:

     Included in employee  and other  receivables  at December  31,  1998,  is a
     $39,302  uncollateralized  note receivable due from the CEO of the Company.
     The note bears interest at eight percent and is due on demand.

     Included  in  selling,  general and  administrative  expense  are  payments
     totaling $12,756 in 1998 to the CEO of the Company for the Company's use of
     vehicles and property owned by the CEO.

12.  Employees' Profit Sharing Plan:

     The  Company  has  an  employees'   401(k)  profit  sharing  plan  covering
     substantially all employees who have attained age 21 with service in excess
     of six months.The plan provides for Company contributions at the discretion
     of the Board of  Directors.  Company contributions  begin vesting after the
     first full year in which eligible  employees complete 501 hours of service,
     with full vesting  occurring after seven years.  Contributions to the plan
     during  the years ended  December 31, 1998 and 1997, totaled $20,000 and $0
     respectively.

                                   Continued


<PAGE>
 

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

13.  Contingencies:
     
     The Company is involved in  litigation  and disputes  arising in the normal
     course of business.  After  evaluation of matters known to be  outstanding,
     management is of the opinion that adequate  liabilities have been recorded,
     and that the ultimate disposition of these matters will not have a material
     adverse  affect  on  the  Company's   financial   position  or  results  of
     operations.

14.  Activity of Business Segments:

     In 1998 the Company adopted Statement of Financial Accounting Standards No.
     131,  Disclosures About Segments of an Enterprise and Related  Information,
     (SFAS  No.  131),  which  governs   disclosures   relating  to  a  business
     enterprises' operating statements.  The accounting policies of the segments
     are the same as those  described in the "Summary of Significant  Accounting
     Policies." The Company's  reportable  segments are strategic business units
     that offer  different  products and services.  They are managed  separately
     because  each  business   requires   different   technology  and  marketing
     strategies. Substantially all of the Company's continuing operations are in
     telecommunications and contract  manufacturing and assembly.  Total revenue
     by industry  segment  includes  both sales to  unaffiliated  customers,  as
     reported  in  the  Company's  consolidated  statement  of  operations,  and
     intersegment  sales,  which are accounted  for based on the estimated  fair
     market value of the products. Intersegment sales are not material.

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

     Identifiable  assets  by  industry  are those  assets  that are used in the
     Company's  operations  in  each  business  segment.  One  customer,  in the
     contract  manufacturing and assembly industry,  accounted for approximately
     12% of the Company's sales in 1998. The same customer  accounted for 26% of
     the  sales  in 1997.  Identifiable  assets  are  principally  property  and
     equipment, capitalized software development costs and other assets.

<PAGE>



                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

14.  Segment Information:

     Financial information by segments is as follows:



                                                          1998          1997
                                                          ----          ----

     Net sales:
       Telecommunications                             $ 2,595,053   $ 2,697,473
       Contract manufacturing and assembly              2,144,101     3,495,682
       Corporate and other                                  9,150         1,905
                                                      -----------   -----------
                                                      $ 4,748,304   $ 6,195,060
                                                      -----------   -----------

     Operating income (loss):
       Telecommunications                             $   150,105   $   138,562
       Contract manufacturing and assembly               (918,530)       73,822
       Corporate and other                               (257,674)      (80,293)
                                                      -----------   ----------- 
                                                      $(1,026,099)  $   182,091
                                                      -----------   -----------

         Identifiable assets:
           Telecommunications                         $   953,942   $   949,315
           Contract manufacturing and assembly            603,498     1,219,669
           Corporate and other                            790,036     1,791,252
                                                      -----------   -----------
                                                      $ 2,347,476   $ 3,960,236
                                                      -----------   -----------

         Depreciation and amortization expense:
           Telecommunications                         $   195,018   $   189,795
           Contract manufacturing and assembly            166,743       153,020
           Corporate and other                             65,105        53,496
                                                      -----------   -----------
                                                      $   426,866   $   396,311
                                                      -----------   -----------

         Capital expenditures:
           Telecommunications                         $     4,109   $    17,814
           Contract manufacturing and assembly             31,677        39,913
           Corporate and other                             27,428        12,301
                                                      -----------   -----------
                                                      $    63,214   $    70,028
                                                      -----------   -----------

         Interest expense:
           Telecommunications                         $    34,221   $    35,892
           Contract manufacturing and assembly             45,778        62,323
           Corporate and other                             44,617        23,845
                                                      -----------   -----------
                                                      $   124,616   $   122,060
                                                      -----------   -----------

<PAGE>
 


                                   PART III

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

     Information regarding directors and officers of the Company is incorporated
by  reference  from  "Information  Relating to  Directors,  Nominees,  Executive
Officers,  Promoters,  and Control  Persons" in the 1999 Proxy  Statement  to be
delivered to  shareholders in connection with the Annual Meeting of Shareholders
to be held on June 7, 1999.

     Information  required by item 401 and 405 of Regulation S-B is incorporated
by reference from "Compliance with section 16(a) of the Securities  Exchange Act
of 1934"  in the  1999  Proxy  Statement  to be  delivered  to  shareholders  in
connection with the Annual Meeting of Shareholders to be held on June 7, 1999.

Item 10.  Executive Compensation

     Information   regarding  this  item  is   incorporated  by  reference  from
"Executive  Compensation"  in  the  1999  Proxy  Statement  to be  delivered  to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 7, 1999.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

     Information regarding this item is incorporated by reference from "Security
Ownership  of  Certain  Beneficial  Owners  and  Management"  in the 1999  Proxy
Statement to be delivered to  shareholders in connection with the Annual Meeting
of Shareholders to be held on June 7, 1999.

Item 12.  Certain Relationships and Related Transactions

     Information  regarding this item is incorporated by reference from "Certain
Transactions"  in the 1999 Proxy  Statement to be delivered to  shareholders  in
connection with the Annual Meeting of Shareholders to be held on June 7, 1999.










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<PAGE>



                                     PART IV

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

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

     1.Financial Statements - Included in Part II,
          Report on Audit of  Financial Statements.
       Report of Independent Accountants.
       Consolidated Balance Sheet as of December 31, 1998.
       Consolidated Statements of Operations for the years ended
              December 31, 1998 and 1997.
       Consolidated Statement of Changes in Stockholders' Equity
              for the years ended December 31, 1998 and 1997.
       Consolidated Statements of Cash Flows for the years ended
              December 31, 1998 and 1997.
       Consolidated Notes to Financial Statements for the years ended
             December 31, 1998 and 1997.

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

     3. Exhibits - Exhibit number and description

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

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

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

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

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

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

<PAGE>




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


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

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

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

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

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

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

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

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

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

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

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

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

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




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

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

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

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

     27.1 Article 5 Financial  Data  Schedule for year ended  December 31, 1998,
          Form 10-KSB.

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

   (c) Financial Statement Schedules:  See (a) 2 above.










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<PAGE>



                                   SIGNATURES

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



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

April 14, 1999                                     By:         /s/John L. Gunter
--------------                                                 -----------------
Date                                                         John L. Gunter, CEO


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


/s/John L. Gunter            Chairman of the Board of             April 14, 1999
-----------------            Directors, and CEO                   --------------
John L. Gunter              (Principal Executive Officer)


/s/Stephen M. Nelson         Director, President, Treasurer       April 14, 1999
--------------------         and Acting Secretary                 --------------
Stephen M. Nelson


/s/Ronald A. Haller          Controller                           April 14, 1999
-------------------          (Principal Accounting Officer)       --------------
Ronald A. Haller


/s/David K. Doyle            Director                             April 14, 1999
-----------------                                                 --------------
David K. Doyle


/s/Ming-Tzong Chen           Director                             April 14, 1999
------------------                                                --------------
Ming-Tzong Chen


<PAGE>



                       Consent of Independent Accountants


     We consent to the incorporation by reference in the registration  statement
of Tels Corporation on Form S-8, (File No. 333-17149,  333-17163,  333-17169) of
our report dated April 14, 1999,  on our audit of the  financial  statements  of
TELS  Corporation  as of December  31, 1998 and for each of the two years in the
period ended  December 31, 1998,  which report is included in this Annual Report
on Form 10-K.




PricewaterhouseCoopers LLP

Salt Lake City, Utah
April 14, 1999


<PAGE>



                                TELS CORPORATION

                                   Exhibit 21

                            Wholly Owned Subsidiaries


       Name               State of Incorporation          Business Name

TEL electronics, inc.              Utah                   TEL electronics, inc.
MICROMEGA CORPORATION              Utah                   MICROMEGA
MedTech, Inc.                      Utah                   MedTech, Inc.
D.J.GunTEL, Inc.                   Utah                   Micro Station or
                                                          Computer Express
Hash Tech, Inc.                    Utah                   HTI