<PAGE>




                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One) [X] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Transition Period from         to
            
                          Commission File No. 0-12993
                          ---------------------------

                                TELS Corporation
             (Exact name of Registrant as specified in its charter)

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


406 West South Jordan Parkway, Suite 250, South Jordan, Utah            84095
------------------------------------------------------------        -----------
(Address of principal executive offices)                             (Zip Code)

        Registrant's telephone number, including area code: (801)571-1182

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

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

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained to the best of Registrant's  knowledge,  in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of March 31, 1997, was approximately $ 1,627,145.

The Registrant had issued and outstanding  3,891,820  shares of its common stock
on March 31, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

Those  sections of portions of the  Registrant's  1997 Proxy  Statement  for its
Annual Meeting of Shareholders  to be held on June 2, 1997, are  incorporated by
reference into Part III hereof.


<PAGE>


                                     PART I
Item 1. Business
----------------

Introduction
------------
         TELS Corporation, ("TELS", the "Company" or "Registrant"-NASDAQ:"TELS")
is a Utah  Corporation,  incorporated  in  February,  1981,  with its  principal
executive  offices at 406 West South Jordan  Parkway,  Suite 250,  South Jordan,
Utah 84095, telephone number (801) 571-1182.

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

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

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

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

General
-------

         TELS products and services are divided into two  different  product and
service  sectors:  first,  and the most typical products for the Company for the
last 15 years, the  telecommunications  products are used to provide management,
accounting,  and  billing  information  to  various  business,   education,  and
government  entities,  but primarily to the lodging  industry;  and second,  the
manufacturing and assembly operation,  which provides comprehensive full service
turnkey or consignment contract manufacturing services. The Company's continuing
segment information is provided in Note 14 of the financial statements.


         The  INN-FORM/XL(R)  product continues to account for a majority of the
Company's  telecommunications  sector sales,  followed by the INN-SURETM,  which
provides   answer    detection   and   verification   for   phone   calls.   The
telecommunication division accounted for 35% of consolidated sales for 1996. The
manufacturing  and  assembly  operation   accounted  for  approximately  65%  of
consolidated sales for 1996.


<PAGE>


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

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

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

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

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

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

         WIN-SENSETM. This Windows(R)-based business call accounting PC software
system,   released  in  1996,  has  been  designed  to  compete  favorably  with
competitive  products in the telephone  call  accounting  business  applications
market.  WIN-SENSE has graphical  representations  in full color, with intuitive
commands and processes.

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

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

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


<PAGE>


         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 17% its of consolidated net sales for 1996.

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

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

         Management  believes computer technology will continue to evolve and be
a dominant  element in the  telecommunications  industry.  TELS recognizes major
telecommunications  industry  changes ahead as a result of changes in the ?NANP"
(North American  Numbering Plan) and ?NADP" (North American Dialing Plan), which
went into effect in 1995.  These  changes in the  numbering  plan and method for
making  telephone  calls in the  United  States  created  strong  demand for the
Company's  telecommunications  products  in the first half of 1995 as  customers
upgraded  older systems.  The Company  expects its  telecommunications  products
and/or  enhancements  will  need to be  further  developed  to meet the  changes
expected in 1997, and beyond.

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

         The  Company  spent  approximately  $172,000,  $481,000  and  $328,000,
including certain capitalized expenses,  on research and development  activities
in the years ended December 31, 1996, 1995 and 1994, respectively.  All research
and development expenses originated from MICROMEGA.

         TELS  formed  and  operates  MICROMEGA  CORPORATION  as a  wholly-owned
subsidiary to create an environment  where  engineering  personnel are part of a
larger entity and also to solicit  outside  contracts  with entities  other than
TELS.  The Company  believes that this  arrangement  improves the efficiency and
quality in research  and  development.  MICROMEGA  carried out all  research and
development for TEL in 1996.

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

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


<PAGE>


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

Changing Telecommunications Marketplace
---------------------------------------

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

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

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

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

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


<PAGE>


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

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

Employees
---------

         As of December 31, 1996, the Company had 85 full-time employees, with 8
in administration,  17 in its telecommunications  sector business, 4 in research
and development and 56 in the manufacturing sector business.

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

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

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

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

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

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

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

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

<PAGE>

Item 2. Properties
------------------

         The Company  currently owns and occupies a facility with  approximately
15,000  square feet of space in American  Fork,  Utah,  which was  purchased  on
August 15,  1984,  and  includes a 4,800 square foot  addition  plus  renovation
completed  in 1988.  The  Company  leases  5,700  square  feet of space  for its
administrative  and  research  and  development  offices  in an office  building
located  in South  Jordan,  Utah.  HTI  leases a 15,000  square  foot space in a
building  located in Santa Clara,  California.  Management  believes  that these
facilities  are  adequate  for  operations  and  production   needs  at  current
production levels.

Item 3. Legal Proceedings
-------------------------

         On February 2, 1996, the former owners of Hash Tech (Plaintiffs)  filed
a complaint  in the Superior  Court for the County of Santa  Clara,  California,
against  the  Company  and  several  of its  officers  and  directors  in  their
individual and representative  capacities,  and also against HTI, a wholly owned
subsidiary  of the Company.  The  Plaintiffs  have alleged  causes of action for
recision of a certain "Asset  Purchase  Agreement"  dated March 31, 1994,  civil
conspiracy,  fraud,  violation of California  securities laws, common law gender
discrimination,  and intentional  infliction of emotional distress.  The Company
and its officers  deny any  wrongdoing  in regard to the above  allegations.  On
April 15, 1996,  the Company  filed a complaint in the Third  Judicial  District
Court of Salt Lake City, Utah, against the Plaintiffs for breach of "non compete
agreements" and breach of a "Severance Agreement" between the Plaintiffs and the
Company  and on  February  24,  1997,  the  company  filed a Motion for  Summary
judgment in this matter,  which is awaiting  oral  argument.  In  addition,  the
Company has filed a complaint with the American Arbitration  Association,  which
is being held pending the outcome of certain legal  hearings.  On April 9, 1996,
the Superior  Court of Santa Clara,  California,  heard and denied the Company's
motion to compel  arbitration.  In July,  1996,  the Company  filed an appeal to
reverse this decision with the Sixth  Appellate  District in the Court of Appeal
of the State of California. On February 18, 1997, this appeal was denied.

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 1996.



<PAGE>


                                    PART II

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

Price Range of Common Stock
---------------------------

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



   1996                 High      Low    1995                High         Low
-------------          -------  -------  -------------      -------     -------
First Quarter ........$   1.32  $   .59  First Quarter      $   1.44  $   1.06
Second Quarter .......    1.28      .50  Second Quarter         1.63      1.10
Third Quarter ........     .97      .56  Third Quarter          1.69      1.13
Fourth Quarter .......     .69      .41  Fourth Quarter         1.11       .41


Approximate Number of Equity Security Holders:
----------------------------------------------

         As of March 31, 1997,  there were 1,065  shareholders  of record of the
Companies  Common Stock.  Included in the number of  shareholders  of record are
shares held in "nominee" or "street" names. Because many of such shares are held
by brokers  and other  institutions  on behalf of  shareholders,  the Company is
unable to estimate  the total  number of  shareholders  reported by these record
holders.

Dividends:
----------

         The  Company has not paid  dividends  to date and intends to retain its
future earnings to finance the  development and growth of its business.  Under a
loan agreement dated April 5, 1996, 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.

<PAGE>


Item 6. Selected Financial Data
-------------------------------

         The following  financial data for the years ended December 31, 1996 and
1995,  have been  derived from the  Company's  financial  statements  audited by
Coopers  &  Lybrand,  L.L.P.,  independent  certified  public  accountants.  The
financial data for the years ended December 31, 1994,  1993, and 1992, have been
derived from the  Company's  financial  statements  audited by KPMG Peat Marwick
LLP,  independent  certified public accountants.  The financial statements as of
December  31,  1996 and 1995 and for each year in the three  year  period  ended
December 31, 1996, and the reports thereon are included under Item 8 below.
<TABLE>
<CAPTION>

                                                                          YEAR ENDED DECEMBER 31,
                                                            ------------------------------------------------------------------------
Selected Operating Data:                                         1996            1995           1994           1993          1992

----------------------------------------------------        --------------  -------------  -------------  -------------  -----------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Net sales ................................................  $ 6,728,816    $ 7,826,114    $ 6,275,779    $ 2,495,648    $ 2,775,404
Cost of sales ............................................    3,842,466      3,870,004      2,300,232        715,046        743,503
                                                                                                                                   
                                                            -----------      -----------    -----------    -----------    ----------
Gross profit .............................................    2,886,350      3,956,110      3,975,547      1,780,602      2,031,901
                                                            -----------      -----------    -----------    -----------    ----------

Income (loss) from continuing
     operations before income taxes ......................     (378,074)       (28,084)       614,857       (299,889)        70,974

Income tax (benefit) provision (1) .......................      (29,379)       (17,563)       (54,666)        (7,017)       (21,026)
                                                             -----------     -----------    -----------    -----------    ----------
Income (loss) from continuing operations                                                                                 
     before extraordinary item and
     cumulative effect of change in
     accounting principle ................................     (348,695)       (10,521)       560,191       (306,906)        49,984

Loss from discontinued operations ........................      (78,486)      (327,018)      (133,951)       (87,385)          --

Loss on disposal of discontinued operations ..............         --         (192,939)          --             --             --

Extraordinary item - income tax benefit from
      operating loss carryforward (1) ....................         --             --             --             --           21,026

Cumulative effect at January 1, 1993, of .................                                                                         
     change in accounting for income taxes ...............         --             --             --          384,166           --
                                                             -----------    -----------    -----------    -----------     ----------
                                                             ===========    ===========    ===========    ===========     ==========
Net income (loss) ........................................  ($  427,181)   ($  530,478)   $   426,240    ($   10,125)   $    70,974
                                                             ===========    ===========    ===========    ===========     ==========
                                                             ===========    ===========    ===========    ===========     ==========

Net income (loss) per common and common equivalent share:
   From continuing operations ............................  $      (.09)   $      (.01)   $       .14    $      (.14)   $     .03(1)
   Discontinued operations ...............................         (.02)          (.13)          (.03)          (.04)          --
   Extraordinary item ....................................         --             --             --             --            .01
   Cumulative effect of accounting change ................         --             --             --              .18           --
                                                             ===========    ===========    ===========    ===========     ==========
                                                            $     (0.11)   $     (0.14)    $   0 . 11     $      . -     $   0.04
                                                             ===========    ===========    ===========    ===========     ==========
</TABLE>


(1)  Extraordinary  item  consists  of the income tax  benefit of $21,026 , from
operating tax loss carryforwards for the year ended December 31, 1992.




<PAGE>
<TABLE>
<CAPTION>



                                                      YEAR ENDING DECEMBER 31,
                                  --------------------------------------------------------------
Selected Balance Sheet Data:          1996         1995        1994          1993         1992
--------------------------------  ------------  ----------  -----------   ----------   ----------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Total current assets ...........   $2,053,004   $3,306,466   $2,902,347   $1,407,525   $  948,496
Total current liabilities ......   $1,545,337   $2,209,966   $1,587,563   $  788,892   $  499,199
Working capital ................   $  507,667   $1,096,500   $1,314,784   $  618,633   $  449,297
Total assets ...................   $4,112,377   $5,259,168   $5,043,333   $3,082,256   $2,135,600
Long-term debt excluding current
installments ...................   $  235,739   $  346,195   $  463,712   $  457,456   $  218,125
Net Shareholders' equity .......   $2,331,301   $2,703,007   $2,992,058   $1,835,908   $1,418,278

</TABLE>

<PAGE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations
-------------

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

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

Continuing Operations 1996
--------------------------
         Consolidated net sales for 1996 decreased 14% to $6,728,816, a decrease
of $1,097,298  when compared to  consolidated  net sales of $7,826,114 for 1995.
The  decrease  in sales is  partially  due to  decreased  sales  activity in the
manufacturing  division where sales decreased by $194,348.  Throughout the first
half of 1997 the  Company  anticipates  that sales  levels in the  manufacturing
sector will remain  constant as a result of increased  competition  from smaller
competitors,  lower  demands  from  customers  outsourcing  their  manufacturing
operations,  and  decreases  in demand  for  computer  and  electronics  related
products.
         The decrease in sales in the manufacturing  division was coupled with a
decrease in sales of the Company's call accounting  products.  In 1996, sales of
telecommunications  products decreased 27% or $844,840 to $2,326,640 compared to
$3,171,480 for 1995.  This decrease in sales in the  telecommunications  product
sector is  attributable  to a slowdown  beginning in the third  quarter of 1995.
This slow  down is the  result of a  decrease  in  customer  demand  after  they
purchased  new  systems or  upgraded  their  older  systems in order to meet the
requirements of the NANP changes.  The Company  anticipates  some uncertainty in
the telecommunications industry for the foreseeable future as companies continue
to compete  for market  share and  product  innovations.  However,  the  Company
believes that sales to its existing  core of dealers and national  accounts will
continue to account for the majority of sales in the telecommunications division
in 1997.
         Consolidated gross profit decreased 27% in 1996, when compared to 1995.
The gross profit of  $2,886,350  for 1996,  represented  43% of sales.  In 1995,
gross  profit of  $3,956,110  represented  51% of sales.  The  decrease in gross
profit as a percentage  of sales is due to the change in the sales mix from 1995
to 1996. In 1995,  sales in the  telecommunications  sector accounted for 41% of
total   sales,   compared  to  35%  of  total   sales  for  1996.   Because  the
telecommunication  products  have a higher gross profit  margin than products in
the manufacturing sector, the Company's consolidated gross profit margin will be
lower  when  sales  from the  manufacturing  sector  increase  and become a more
significant factor for overall operations. In 1997, the Company anticipates that
the gross profit percentage will be consistent with 1996 results.
         Research and  development  expenditures  for 1996  consisted of current
expense  of $31,937  and  amortized  expenditures  of  $66,969  for  development
projects  which were  capitalized  in prior  years.  In  addition to these costs
currently being  expensed,  the Company also spent $73,031 in 1996, and $118,321
in 1995, 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 decreased 16%
to $3,097,796 for 1996,  when compared to $3,666,076 for 1995.  This decrease in
1996 is  attributable  to  management's  efforts  to  control  costs and  reduce
expenses to meet lower sales levels in 1996. Management anticipates that it will
continue to reduce  expenses in 1997 in certain  operations of the Company as it
continues  to  focus  its  efforts  toward  profitability.  As a  percentage  of
consolidated net sales, selling, general and administrative expenses were 46% in
1996, when compared to 47% in 1995.
         For 1996, the Company reported a net loss from continuing operations of
$348,695 or $.09 per share, compared to a net loss from continuing operations of
$10,521 for 1995,  or $.01 per share.  This  decrease in earnings is a result of
reduced sales  related to  telecommunications  products,  where the gross profit
contribution  is  significantly  higher  than  other  sectors  of  the  Company.
Management  of the Company  expects that this trend will continue into the first
quarter of 1997, due to some uncertainty in the telecommunications  industry. As
of December 31, 1996, the Company has a net deferred tax asset (net of valuation
allowance  of  $128,850)  of  $853,077  which is  primarily  the result of prior
operating  losses.  The  Company  believes  that it is more likely than not that
through the generation of taxable income, it will be able to realize the benefit
of the net deferred tax asset in the future.

Discontinued operations 1996
----------------------------
         In January 1996,  the Board of Directors  approved a plan to dispose of
the Company's P.C. reseller business (See Note 15 of the Financial  Statements).
Accordingly, the results of operations of the P.C. reseller operations have been
classified  as  discontinued   operations  for  all  periods  presented  in  the
consolidated  statements of operations.  The  discontinued  operations had a net
loss after tax of $78,486  in 1996,  (in  addition  to the  operating  loss from
disposal of discontinued  operations  during the phase-out period) compared to a
net loss of $327,018 in 1995. In 1996,  the Company  finalized all  discontinued
operations  and  believes  that the losses  from  discontinued  operations  have
ceased.

Continuing Operations, 1995
---------------------------
         Consolidated  net sales for 1995 increased to $7,826,114 an increase of
$1,550,335  compared  to  consolidated  net sales of  $6,275,779  for 1994.  The
increase in sales was primarily attributable to the acquisition of the assets of
Hash Tech,  Inc.,  in March of 1994,  and a 37% sales growth in this division in
1995.  The  increased  revenue  from HTI was offset by a  reduction  in sales of
telecommunications products, where sales decreased $680,665 or 18% when compared
to sales for 1994. Many of the Company's  telecommunications  customers upgraded
their  telecommunications  equipment  in 1994,  and early 1995,  and this fueled
strong sales growth in this division during that period of time.
         Consolidated  gross profit amounts did not change  materially from 1994
to 1995. The gross profit of $3,956,110 for 1995,  represented  51% of sales. In
1994,  gross profit of $3,975,547  represented  63% of sales.  The change in the
gross  profit is a result of the sales mix where the  Company  benefited  from a
gross  profit of 74% on  telecommunications  products  and 33% on  manufacturing
products in 1995.
         Consolidated research and development expenditures consisted of several
components in 1995. The consolidated  expense of $362,698 for 1995,  consists of
$213,799 for current  expenses and $148,899 for  amortization  of projects which
were  capitalized in prior years. In addition to the  consolidated  research and
development  costs  expensed in 1995, the Company also  capitalized  $118,321 in
1995, and $72,155 in 1994, of research and development expenditures.
         Consolidated selling,  general and administrative expenses increased to
$3,666,076  for 1995,  compared  to  $3,030,423  for 1994.  As a  percentage  of
consolidated  net  sales,  this  expense  represented  47% of net sales in 1995,
compared to 48% in 1994.  The increase in total expense was due primarily to the
acquisition  of Hash Tech,  Inc.  which added  $999,742 in 1995, and $846,724 in
1994.
         The Company  recorded a net loss from continuing  operations of $10,521
or $.01 per share for 1995, compared to net income from continuing operations of
$560,191 or $.14 per share in 1994. This decrease in earnings is a reflection of
decreases in sales in the telecommunications division in the last half of 1995.

Discontinued Operations 1995
----------------------------

         For the year ended December 31, 1995,  the Company  reported a net loss
of $327,018  compared to a net loss of $133,951 in 1994.  The increased  loss is
primarily  due to  expanded  P.C.  reseller  activities  in the third and fourth
quarter of 1995.


<PAGE>


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

1996
----
         At December 31, 1996, the Company reported current assets of $2,053,004
and current liabilities of $1,545,337, resulting in working capital of $507,667.
This is a decrease  in working  capital of  $588,833  when  compared  to working
capital of $1,096,500 at the end of 1995.  This reduction in working  capital is
due to the use of cash in discontinued operations, reductions in long-term debt,
and  purchases  of property  and  equipment.  Accounts  receivable  decreased by
$307,357 and inventories decreased by $349,617 as a result of lower sales levels
in 1996.
         The Company  reduced its  borrowing  on a line of credit by $624,057 in
1996,  as a result of lower sales  activity  when  compared to 1995. In 1996 the
Company reduced its long term debt by $110,456 from $346,195 at the end of 1995.
In January,  1996, the Company made a strategic decision to divest itself of its
P.C.  reseller  operations.  In 1996 and 1995, the Company suffered  significant
losses from these discontinued  operations which impacted the working capital of
the Company. This impact has resulted in TELS being in violation of certain debt
covenants  under  the  terms of its loan  agreements.  Though  the  Company  has
obtained  waivers of these  violations for the year ended December 31, 1996, the
Company  will  not  pursue  the  appropriate  waivers  for  expected  violations
subsequent  to  December  31,  1996,  from the lending  institution  because the
Company has been  notified  that this line of credit will not be renewed in May,
1997.  The Company  expects to refinance  this line of credit by entering into a
new line of credit with similar terms with a different lender. If the Company is
unable to obtain a new line of credit with another lender,  it would not be able
to  continue  to operate at its current  level.  The  Company  has entered  into
negotiations  with  lending  institutions  to replace this line of credit and is
considering various alternatives,  including the refinancing of real property to
raise additional funds. The Company is continuing its efforts to find additional
financing  through  investment  equity  which may be needed to fund  operations,
future  acquisitions  and final  development and marketing of new products under
consideration. The Company is evaluating its existing system for compliance with
the year 2000 and has not  determined  the  modifications,  if any, that will be
required. 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.

1995
----
         At December 31, 1995, the Company reported current assets of $3,306,466
and  current  liabilities  of  $2,209,966,   resulting  in  working  capital  of
$1,096,500.  This is a decrease in working  capital of $218,284 when compared to
working  capital of  $1,314,784  at the end of 1994.  This  reduction in working
capital  is due to the use of cash in  discontinued  operations,  reductions  in
long-term  debt,  and purchases of property and equipment.  Accounts  receivable
decreased by $135,381 , but this decrease was  partially  offset by increases in
inventory levels of $288,979. To finance the uses of cash, the Company increased
its  borrowing  on a line of credit by  $518,244  to  $1,080,989  in 1995,  from
$562,745 in 1994.  The Company  received  $148,160  from the  exercise of common
stock  warrants  and options.  In 1995,  the Company was able to reduce its long
term debt by $110,456  from $463,712 at the end of 1994.  The Company  purchased
property and equipment of $264,846 in 1995, and incurred $118,321 in capitalized
software  development  costs.  The  purchase  of  equipment  in  1995,  was  for
production  machinery and office furniture and computer equipment needed to keep
the Company competitive and efficient.

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

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


<PAGE>


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

         In February,  1997,  the Financial  Accounting  Standards  Board issued
Statement on Financial  Accounting  Standards No. 128,  Earnings Per Share. This
statement  establishes standards for computing and presenting earnings per share
("EPS") and applies to entities  with  publicly-held  common  stock or potential
common  stock.  This  statement  simplifies  the standards for computing EPS and
makes  them  comparable  to  international  EPS  standards.  This  statement  is
effective for financial  statements  for both interim and annual  periods ending
after December 15, 1997.  The company is currently  evaluating the impact of the
recently issued  statement and will adopt the  requirements  for the year ending
December 31, 1997.

         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.

Item 8. Financial Statements and Supplementary Data.
----------------------------------------------------

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

                  Reports of Independent Accountants.
                  Consolidated Balance Sheets as of December 31, 1996 and 1995.
                  Consolidated Statements of Operations for the years ended
                           December 31, 1996, 1995 and 1994.
                  Consolidated Statements of Changes in Stockholder's Equity for
                           the years ended December 31, 1996, 1995 and 1994.
                  Consolidated  Statements  of Cash  Flows for the  years  ended
                           December 31, 1996, 1995 and 1994.
                  Consolidated Notes to Financial Statements for the years ended
                           December 31, 1996, 1995 and 1994.

Item 9. Disagreements on Accounting and Financial Disclosures.
--------------------------------------------------------------

         Not applicable.

<PAGE>









                        Report of Independent Accountants


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

We have audited the 1996 and 1995 consolidated financial statements and the 1996
and 1995 financial  statement  schedule of TELS  Corporation and Subsidiaries as
listed in Item 14(a) of the Form 10-K. These financial  statements and financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of TELS Corporation
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated  results
of their  operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.  In addition, in our opinion, the
financial  statement  schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.


COOPERS & LYBRAND L.L.P.

Salt Lake City, Utah
April 10, 1997

           


<PAGE>
                        Independent Auditors Report
                        ---------------------------


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

We  have  audited  the  accompanying   consolidated   statements  of  operation,
stockholder's equity and cash flows of TELS Corporation and Subsidiaries for the
year ended December 31, 1994. In connection  with our audit of the  consolidated
financial  statements,  we also audited the financial statement schedule for the
year ended  December 31,  1994.  These  consolidated  financial  statements  and
financial statement schedule are the responsibility of the Company's management.
Our  responsibility  is to express an opinion on these financial  statements and
financial statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the consolidated  financial  statements of TELS Corporation and
subsidiaries  referred to above present fairly,  in all material  respects,  the
results of their operations and their cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting  principles.  Also in our
opinion,  the related financial statement schedule,  when considered in relation
to the basic  financial  statements  taken as a whole,  present  fairly,  in all
material respects, the information set forth therein.

                                   KPMG Peat Marwick L.L.P.

Salt Lake City, Utah
March 6, 1995

           


<PAGE>
<TABLE>
<CAPTION>

                       TELS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995


       ASSETS                                                       1996             1995
       ------                                                       ----             ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Current assets:
    Cash and cash equivalents .............................   $     31,980    $     28,075
    Investments ...........................................         62,399          56,617
    Trade accounts receivable, less allowance for doubtful
       accounts of $127,852 in 1996 and $105,788 in 1995 ..        736,771       1,044,128
    Employee and other receivables ........................        117,692         121,863
    Inventories, net ......................................        750,427       1,100,044
    Prepaid expenses ......................................        158,367          79,089
    Deferred income taxes .................................        195,368         118,900
    Net assets - discontinued operations ..................           --           757,750
                                                              ------------    ------------
             Total current assets .........................      2,053,004       3,306,466
                                                              
Property and equipment, net ...............................        894,705       1,087,778
Software development costs, net ...........................        146,142         140,080
Intangible assets, net ....................................        199,144         279,162
Deferred income taxes .....................................        657,709         314,850
Other assets ..............................................        161,673         130,832
                                                              ------------    ------------
                                                              $  4,112,377    $  5,259,168
-----------------------------------------------------------   ============    ============

       LIABILITIES AND STOCKHOLDERS' EQUITY
       ------------------------------------
Current liabilities:
    Trade accounts payable ................................   $    401,433    $    313,002
    Accrued expenses ......................................        308,233         382,016
    Accrued vacation ......................................         92,716         115,404
    Current portion of long-term debt .....................        624,276       1,283,962
    Deposits and advances .................................        118,679         115,582
                                                              ------------    ------------
             Total current liabilities ....................      1,545,337       2,209,966
                                                              ------------    ------------
Long-term debt, less current portion ......................        235,739         346,195
                                                              ------------    ------------
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
    Common  stock,  $.02 par value,  
       Authorized 10,000,000 shares; issued and
       outstanding 3,891,774 shares in 1996
       and 3,892,274 shares in 1995 .......................         77,835          77,825
    Additional paid-in capital ............................      4,226,532       4,231,567
    Accumulated deficit ...................................     (1,922,391)     (1,495,210)
    Deferred compensation .................................        (50,675)       (111,175)
                                                              ------------    ------------
             Stockholders' equity .........................      2,331,301       2,703,007
                                                              ------------    ------------
                                                              $  4,112,377    $  5,259,168
-----------------------------------------------------------   ============    ============

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                       TELS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              for the years ended December 31, 1996, 1995 and 1994



                                                                1996            1995          1994
-----------------------------------------------------------------------------------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Net sales ...............................................   $ 6,728,816    $ 7,826,114    $ 6,275,779
Cost of goods sold ......................................     3,842,466      3,870,004      2,300,232
                                                            -----------    -----------    -----------
Gross profit ............................................     2,886,350      3,956,110      3,975,547
Research and development expenses .......................        98,906        362,698        255,804
Selling, general and administrative expenses ............     3,097,796      3,666,076      3,030,423
                                                            -----------    -----------    -----------
  Operating income (loss) ...............................      (310,352)       (72,664)       689,320
Other income (expense):
  Interest income .......................................        10,765          6,876         24,919
  Interest expense ......................................      (104,297)       (36,193)      (102,105)
  Other, net ............................................        25,810         73,897          2,723
                                                            -----------    -----------    -----------
                                                                (67,722)        44,580        (74,463)
                                                            -----------    -----------    -----------
Income (loss) from continuing operations before
  income tax benefit (provision) ........................      (378,074)       (28,084)       614,857

Income tax benefit (provision) ..........................        29,379         17,563        (54,666)
                                                            -----------    -----------    -----------
Income (loss) from continuing operations ................      (348,695)       (10,521)       560,191
Discontinued operations (Note 15):
  Loss from discontinued operations (less applicable
    income tax benefit of  $44,148, $168,464 and
    $69,051 respectively) ...............................       (78,486)      (327,018)      (133,951)
  Loss on disposal of discontinued operations
    including provision of $294,158 for operating
    losses during phase-out period (less applicable
    income tax benefit of $99,393 in 1995) ..............          --         (192,939)          --
                                                            -----------    -----------    -----------
Loss from discontinued operations .......................       (78,486)      (519,957)      (133,951)
                                                            -----------    -----------    -----------
    Net income (loss) ...................................   $  (427,181)   $  (530,478)   $   426,240
                                                            ===========    ===========    ===========
Net income (loss) per common and common equivalent share:
  Income (loss) per share from continuing operations ....   $      (.09)   $      (.01)   $       .14
  Loss per share from discontinued operations ...........          (.02)          (.13)          (.03)
                                                            -----------    -----------    -----------
  Net income (loss) .....................................   $      (.11)   $      (.14)   $       .11
                                                            ===========    ===========    ===========
</TABLE>




<PAGE>
<TABLE>
<CAPTION>

                       TELS CORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
                  EQUITY for the years ended December 31, 1996,
                                  1995 and 1994



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

Balances at December 31, 1993 .........   $    57,126    $ 3,372,254    $(1,390,972)   $  (202,500)   $ 1,835,908

Net income ............................          --             --          426,240           --          426,240
Amortization of deferred
  compensation ........................          --             --             --           70,825         70,825
Issuance of 50,000 shares for
  Hash Tech acquisition ...............         1,000        106,500           --             --          107,500
Issuance of 764,500 shares upon
  exercise of warrants, net of
  expenses ............................        15,290        533,145           --             --          548,435
Issuance of 7,000 shares upon
  exercise of options .................           140          3,010           --             --            3,150
                                           -----------    -----------    -----------     -----------    -----------
Balances at December 31, 1994 .........        73,556      4,014,909       (964,732)      (131,675)     2,992,058

Net loss ..............................          --             --         (530,478)          --         (530,478)
Amortization of deferred
  compensation ........................          --             --             --           40,500         40,500
Grant of 58,974 shares for stock
  bonuses .............................         1,159         71,608           --          (20,000)        52,767
Issuance of 135,500 shares upon
  exercise of warrants, net of
  expenses ............................         2,710        132,790           --             --          135,500
Issuance of 20,000 shares upon
  exercise of options .................           400         12,260           --             --           12,660
                                           -----------    -----------    -----------     -----------    -----------
Balances at December 31, 1995 .........        77,825      4,231,567     (1,495,210)      (111,175)     2,703,007
                                           -----------    -----------    -----------     -----------    -----------

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

<PAGE>
<TABLE>
<CAPTION>


                        TELS CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF CASH FLOWS for
                the years ended December 31, 1996, 1995 and 1994




                                                                           1996        1995           1994
                                                                       ---------    ---------    ---------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Cash flows from operating activities:
   Net income (loss) ...............................................   $(427,181)   $(530,478)   $ 426,240
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
        Depreciation and amortization ..............................     392,012      544,307      384,906
        Impairment of assets .......................................        --        172,253         --
        Deferred income taxes ......................................      35,479       17,563      (24,666)
        Stock bonuses and amortization of deferred compensation ....      62,775       93,267       70,825
        Cancellation of stock ......................................     (10,000)        --           --
        Loss on disposal of equipment ..............................      (4,328)      (1,864)      (1,885)
        Changes in operating assets and liabilities:
          Receivables ..............................................     313,044      135,381     (306,948)
          Inventories ..............................................     349,617     (288,979)    (146,860)
          Prepaid expenses, deposits and advances ..................     (76,181)      73,277      (38,985)
          Trade accounts payable and accrued expenses ..............     (11,906)      59,264      170,380
          Other assets and liabilities .............................     (29,312)    (104,082)     (19,512)
        Noncash charges and working capital changes
          of discontinued operations ...............................     329,177     (204,447)      (4,797)
                                                                       ---------    ---------    ---------
                 Net cash provided by (used in) operating activities     923,196      (34,538)     508,698
                                                                       ---------    ---------    ---------

Cash flows from investing activities:
   Net purchase of investments .....................................      (5,782)      (2,467)      (2,046)
   Capital expenditures ............................................     (74,936)    (264,846)    (152,488)
   Proceeds from disposal of equipment .............................       1,900        9,200        7,650
   Software development costs ......................................     (73,031)    (118,321)     (72,155)
   Net cash paid for purchase of assets of Micro Station ...........        --           --         (1,471)
   Net cash paid for purchase of assets of Hash Tech ...............        --           --       (173,823)
                                                                       ---------    ---------    ---------
                 Net cash used in investing activities .............    (151,849)    (376,434)    (394,333)
                                                                       ---------    ---------    ---------

Cash flows from financing activities:
   Net borrowings (repayments) under line of credit agreement ......    (624,057)     518,244      (81,127)
   Principal payments on long-term debt ............................    (146,085)    (217,940)    (608,133)
   Proceeds from issuance of common stock ..........................       2,700      148,160      551,585
   Financing activities of discontinued operations .................        --          4,050         --
                                                                       ---------    ---------    ---------
                 Net cash provided by (used in) financing activities    (767,442)     452,514     (137,675)
                                                                       ---------    ---------    ---------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



                       TELS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
              for the years ended December 31, 1996, 1995 and 1994




                                                                 1996         1995        1994
                                                                 ----         ----        ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Net increase (decrease) in cash and cash equivalents ......   $   3,905   $  41,542   $ (23,310)

Cash and cash equivalents at beginning of year ............      28,075     172,399     195,709
                                                                 ------     -------     -------
                                                                                               

   Total cash and cash equivalents at end of year .........   $  31,980   $ 213,941   $ 172,399
                                                              =========   =========   =========
Cash and cash equivalents at end of year
   Continuing operations ..................................      31,980      28,075      77,372
   Discontinued operations ................................        --       185,866      95,027
                                                                -------     -------      ------
                                                                 31,980     213,941     172,399
Supplemental disclosure of cash flow information:
   Cash paid during the year for interest .................   $ 128,408   $ 114,434   $ 127,108

Supplemental schedule of noncash investing and
   financing activities:
     Acquisition of equipment for capital lease obligations   $    --     $  83,126        --

     Long-term debt issued to acquire equipment ...........        --         5,400        --
</TABLE>

During 1994, the Company acquired Hash Tech, Inc. and Micro Station,  Inc. for a
net cash payment of $175,294.  The fair value of assets acquired and liabilities
assumed in conjunction with these acquisitions were as follows:
<TABLE>
<CAPTION>
                                                                                          1994
                                                                                          ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Current assets ......................................                            $ 1,021,260
     Long-term assets ....................................                                610,943
     Current liabilities .................................                               (919,145)
     Long-term liabilities ...............................                               (382,058)
                                                                                       -----------

     Net purchase price ...................................                               331,000
     Purchase price paid with note payable and common stock                              (135,000)
     Cash acquired in acquisition .........................                               (20,706)
                                                                                       -----------
     Net cash paid for acquisition ........................                           $   175,294
                                                                                       ===========
</TABLE>


<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Summary of Significant Accounting Policies:
--       -------------------------------------------

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

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

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

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

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

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

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

         Investments
         -----------

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

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

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


<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


         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.
         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.

         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.

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

          Net income (loss) per common and common  equivalent  share is computed
          based on the weighted average number of shares  outstanding during the
          period. For purposes of this computation, stock options and stock
          warrants are treated as common stock  equivalents  at issuance.  Stock
          options  and  stock  warrants  are not  included  in the 1996 and 1995
          calculations  because  they are  antidilutive.  The  weighted  average
          number of outstanding common and common equivalent shares used in this
          computation was 3,888,564,  3,838,459,  and 3,949,748 for 1996,  1995,
          and 1994, respectively.
<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                        
   
1.       Summary of Significant Accounting Policies, Continued:
--       ------------------------------------------------------

         Estimates
         ---------

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

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

         Approximately  16% of the Company's  trade accounts  receivable are due
         from two customers in the computer  production  and assembly  industry.
         The Company does not anticipate the termination of these relationships.

         The majority of the Company's cash and cash  equivalents  are held by a
         single  financial  institution  in Salt Lake  City,  Utah which is also
         responsible for the Company's line of credit.


2.       Inventories:
--       ------------

         Inventories  of  continuing  operations  at December  31, 1996 and 1995
         consisted of the following:

                                     1996           1995
                                     ----           ----

Finished goods ...............   $    52,795    $   129,355
Work-in-process ..............       235,483        283,937
Raw materials and supplies ...       584,013        746,684
Reserve for obsolete inventory      (121,864)       (59,932)
                                 -----------    -----------

                                 $   750,427    $ 1,100,044
                                 ===========    ===========

         Inventories  of  discontinued  operations  consisted of finished  goods
         totaling  $0 and  $297,837,  which  is net of a  reserve  for  obsolete
         inventory  of  $0  and   $55,000,   at  December  31,  1996  and  1995,
         respectively.


3.       Property and Equipment:
--       -----------------------

         Property and  equipment of  continuing  operations at December 31, 1996
         and 1995 consisted of the following:

                                                       1996             1995
                                                       ----             ----
                                                                               
              Land                              $       35,380 $       35,380
              Building and improvements                477,855        475,975
              Furniture and equipment                1,556,672      1,474,207
              Equipment under capital lease            195,835        195,202
                                                   ------------   ------------
                                                     2,265,742      2,180,764
              Less accumulated depreciation and
                amortization                        (1,371,037)    (1,092,986)
                                                    ----------     ----------

                                                 $     894,705    $ 1,087,778
                                                  ============     ==========


         During  the  year  ended  December  31,  1995,  the  Company  wrote-off
         equipment with a net book value of $53,253.
<PAGE>

3.       Property and Equipment, Continued:
--       ----------------------------------

         Property and equipment of discontinued  operations at December 31, 1996
         and 1995 consisted of the following:

                                                            1996         1995
                                                            ----         ----

         Buildings and improvements ....................   $   --     $  5,040
         Furniture and equipment .......................       --       63,710
                                                           ------       ------
                                                               --       68,750
         Less accumulated depreciation and  amortization       --      (55,605)
                                                           ------       ------
                                                           $   --     $ 13,145
                                                           ========   ========


4.       Software Development Costs:
--       ---------------------------

         Capitalized  software  development  costs at December 31, 1996 and 1995
         consisted of the following:

                                            1996          1995
                                            ----          ----

         Software development costs ..   $ 402,835    $ 424,544
         Less accumulated amortization    (256,693)    (284,464)
                                          ---------    ---------
                                         $ 146,142    $ 140,080
                                          =========    =========


         Amortization  expense,  totaled $66,969,  $148,899 and $127,403 for the
         years ended December 31, 1996, 1995 and 1994, respectively.


5.       Intangible Assets:
--       ------------------

         Intangible  assets of  continuing  operations  at December 31, 1996 and
         1995 consisted of the following:

                                   1996         1995
                                   ----         ----

Non-compete agreements ......   $ 308,000    $ 308,000
Goodwill ....................      56,041       56,041
Organizational costs ........      41,398       41,398
Other .......................      12,511        9,715
Less accumulated amortization    (218,806)    (135,992)
                                ---------    ---------
                                $ 199,144    $ 279,162
                                =========    =========

         Intangible  assets of discontinued  operations at December 31, 1996 and
         1995 consisted of the following:

                                  1996       1995
                                  ----       ----

Non-compete agreements ......   $   --     $ 34,167
Goodwill ....................       --        8,053
Organizational costs ........       --          226
Customer list ...............       --       18,100
Trademarks ..................       --        6,786
Less accumulated amortization       --      (66,332)
                                           --------
                                $   --     $  1,000
                                ========   ========

         In  accordance  with its policy of evaluating  impairment,  the Company
         wrote-off   $107,256  of  intangible  assets  related  to  discontinued
         operations during the year ended December 31, 1995.








<PAGE>


6.       Long-term Debt:
--       ---------------

         Long-term  debt related to  continuing  operations at December 31, 1996
         and  1995,  the  carrying  value  of  which  approximates  fair  value,
         consisted of the following:
<TABLE>
<CAPTION>

                                                                                          1996               1995
                                                                                          ----               ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

         Revolving  line of credit  payable to a bank,  bearing  interest at the
         bank's index rate plus 2.0% (10.25% at December 31, 1996), interest due
         monthly, principal due May 1997, collateralized by trade accounts
         receivable and inventories.                                                $  456,932       $  1,080,989

         Mortgage  note  payable  to a bank in monthly  installments  of $3,063,
         including  interest  at the  bank's  index  rate  plus  1.5%  (9.75% at
         December 31, 1996), final payment of $184,898 due May 1998; collater-
         alized by real property.                                                      229,688            269,500

         Note  payable  under  non  compete  agreement,   payable  in  quarterly
         principal installments of $4,833, plus accrued
         interest at 7%, remaining principal paid July 1996.                                 -             19,333

         Note  payable  under  non  compete  agreement,   payable  in  quarterly
         principal installments of $8,333, plus accrued
         interest at 7%, remaining principal paid July 1996.                                 -              33,333

         Installment note payable to a bank in 36 monthly principal  payments of
         $2,500,  plus accrued  interest at a variable rate (10% at December 31,
         1995), final payment paid April 1996; collateralized by
         equipment.                                                                          -              7,500

         Installment  note payable to a corporation in monthly  installments  of
         $335 through January 1999, plus accrued
         interest at 7.9%, collateralized by an automobile.                              7,355             10,655

         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              7,000

</TABLE>
<PAGE>

6.       Long-term Debt, Continued:
--       --------------------------
<TABLE>
<CAPTION>
                                                                                          1996               1995
                                                                                          ----               ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

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

         Capital leases for equipment (Note 7)                                          84,040            126,847
                                                                                    ----------       ------------

                 Total long-term debt                                                  860,015          1,630,157

              Less current portion                                                    (624,276)        (1,283,962)
                                                                                      --------         ----------

                 Long-term debt, less current portion                               $  235,739      $     346,195
                                                                                     =========       ============
</TABLE>


         The Company's  revolving line of credit contains various  covenants and
         restrictions  that  specify the Company  maintain  specified  ratios or
         minimum  financial  amounts with regard to current ratio,  tangible net
         worth,  and  earnings.  As of  December  31,  1996 the  Company  was in
         compliance  with all debt  covenants or had  obtained  the  appropriate
         waivers from the lending institution. The Company does not expect to be
         in compliance with these covenants as of March 31, 1997. If the Company
         is unable to obtain a new line of credit with this lender, it will seek
         alternative sources of debt or equity to repay this obligation.

         The aggregate principal  maturities of long-term debt excluding capital
         leases, for the years following December 31, 1996 are as follows:

              Year ending December 31:
                          1997            $579,253
                          1998              40,533
                          1999             156,189

         Long-term debt relating to discontinued operations at December 31, 1996
         and 1995 consisted of the following:

                                                               1996      1995
                                                               ----      ----

         Note payable to a corporation, payable in monthly  
         installments of $450 through September 1996.        $      -  $ 4 ,050
                                                              ========  =======

<PAGE>

7.       Leases:
--       -------

         Continuing Operations
         ---------------------

         The  Company  is  obligated  under  capital  leases for  machinery  and
         equipment  that  expire  between  August  1997 and  December  1999.  At
         December 31, 1996 and 1995,  the gross amount of  machinery,  equipment
         and related accumulated amortization recorded under capital leases were
         as follows:
                                                   1996                 1995
                                                   ----                 ----
              Equipment under capital lease     $  195,202             $195,202
              Less accumulated amortization       (116,828)             (76,767)
                                                  --------             --------
                                               $    78,374             $118,435
                                                ==========              =======

         The Company  leases  office  space and  equipment  under  noncancelable
         operating  lease   agreements.   Rent  expense  charged  to  continuing
         operations  was  $181,397,  $189,967,  and $102,462 for the years ended
         December 31, 1996, 1995, and 1994, 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, 1996 are:

                                                    Capital     Operating
                                                     leases       lease
         Year ending December 31:                  ---------    ---------
                 1997                             $  56,024    $ 243,953
                 1998                                23,452      219,467
                 1999                                18,662      195,567
                 2000                                 2,711       69,106
                                                   ---------    ---------

                 Total minimum lease payments       100,849    $ 728,093
                                                   ---------    =========
          
                 Less amount representing interest
                  (at rates ranging from 5.5% to    (16,809)
                                                   ---------

                 Present value of net minimum
                  capital lease payments             84,040

                 Less current installments of 
                 obligations under capital leases   (45,022)

                 Obligations under capital leases,
                  excluding current installments  $  39,018
                                                   =========

         Rental expense charged to  discontinued  operations was $0, $53,564 and
         $38,944  for  the  years  ended  December  31,  1996,  1995  and  1994,
         respectively.
<PAGE>

8.       Income Taxes:
--       -------------

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

                    1996        1995        1994
                    ----        ----        ----
Current:
    Federal ..   $   --      $   --      $(10,000)
    State ....     (6,100)       --       (20,000)
                  --------    --------   --------
                     --          --       (30,000)
                  --------    --------   --------
Deferred:
    Federal ..     32,879      10,832     (19,733)
    State ....      2,600       6,731      (4,933)
                  --------    --------   --------
                   35,479      17,563     (24,666)
                  --------    --------   --------

         Total   $ 29,379    $ 17,563    $(54,666)
                 ========    ========    ========

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

                                                1996       1995        1994
                                             ---------  ---------   ---------
Computed expected tax benefit (expense) ..   $ 128,545 $   9,549    $(209,051)
Increase (decrease) in income 
taxes resulting from:
  Change in valuation allowance ..........        --      35,963      193,554
  Graduated rate effect ..................        --        --          1,900
  Effect of tax credits ..................        --      (4,039)      (4,760)
  Officers' life insurance ...............      (1,646)   (1,945)      (1,945)
  State income taxes,    
  net of federal income tax benefit ......     (24,197)   (3,253)      (7,340)
  Prior year taxes .......................     (53,944)     --           --
  Other, net .............................     (19,379)  (18,712)     (27,024)
                                              ---------  ---------   ---------
               Total income tax expense      $  29,379 $  17,563    $ (54,666)

<PAGE>

8.       Income Taxes, Continued:
--       ------------------------

         The tax effects of temporary differences that give rise to deferred tax
         assets and  liabilities  at December 31, 1996 and 1995,  are  presented
         below:

         Continuing operations
         ---------------------
                                             1996           1995
                                             ----           ----
Deferred tax assets:
   Deferred revenue ................   $    40,400    $      --
   Accounts receivable .............        65,200         40,300
   Inventories .....................        45,500         34,700
   Accrued liabilities .............        42,200         43,900
   Intangible assets ...............        47,200         27,100
   General business tax credits ....       124,000        124,500
   AMT tax credit ..................         4,000          4,000
   Jobs credit .....................         4,400          4,400
   Net operating loss carry forwards       702,527        338,000
                                       -----------    -----------
     Deferred tax assets ...........     1,075,427        616,900
     Less valuation allowance ......      (128,850)      (128,850)
                                       -----------    -----------
     Total deferred tax assets .....       946,577        488,050
Deferred tax liability:
   Property and equipment ..........       (93,500)       (54,300)
                                       -----------    -----------
Net deferred tax asset .............   $   853,077    $   433,750
                                       ===========    ===========

         Discontinued operations
         -----------------------
                                                       1996          1995
                                                       ----          ----
Deferred tax assets:
   Accounts receivable ...................   $            --     $   9,400
   Inventories ...........................                --         8,200
   Accrued liabilities ...................                --        10,300
   Intangible assets .....................                --         6,400
   Accrued loss on discontinued operations                --       119,070
   Net operating loss carry forward ......                --       168,464
                                                   ---------      --------
     Total deferred tax assets ...........                --       321,834
Deferred tax liability:
   Property and equipment ................                --       (12,700)
                                                   ---------      ---------

Net deferred tax asset ...................   $            --     $ 309,134
                                                      =======    =========


<PAGE>


8.       Income Taxes, Continued:
--       ------------------------

         The net  deferred  tax  asset  as of  December  31,  1996  and  1995 is
         reflected in the consolidated balance sheet as follows:

         Continuing operations
         ---------------------

                                                    1996          1995
                                                  ---------    ---------

           Current deferred tax asset .........   $ 195,368    $ 118,900
           Long-term deferred tax asset .......     751,209      369,150
           Long-term deferred tax liability ...     (93,500)     (54,300)
                                                  ---------    ---------

                                                  $ 853,077    $ 433,750
                                                  =========    =========


         Discontinued operations
         -----------------------
                                                 1996         1995
                                               ---------    ---------
            Current deferred tax asset .....   $    --     $ 315,434
            Long-term deferred tax liability        --        (6,300)
                                               ---------    ---------

                                               $    --     $ 309,134
                                               =========    =========


         Based on the level of current taxable income and projections for future
         taxable  income over the periods in which the  deferred  tax assets are
         expected to be  realized,  management  believes  that it is more likely
         than not that the Company  will realize the benefit of the deferred tax
         assets in the future, net of the existing valuation allowance.





<PAGE>


8.       Income Taxes, Continued:

         As of December  31,  1996,  the Company  has net  operating  loss carry
         forwards,  investment  tax  credit  carry  forwards  and  research  and
         experimentation  credit carry  forwards for federal income tax purposes
         which expire as follows:

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

               1997          $       -       $  3,000    $  16,000
               1998                  -          1,500       13,000
               1999                  -          1,800        1,000
               2000                  -          6,200            -
               2001            486,000              -        6,000
               2002                  -              -       14,500
               2003                  -              -       21,500
               2004                  -              -       19,000
               2005             62,000              -            -
               2006                  -              -       10,000
               2007              6,000              -       10,500
               2008            391,500              -            -
               2009              3,500              -            -
               2010            540,600              -            -
               2011            387,000              -            -
                               -------         -------      -------            
              
                            $1,876,600        $12,500     $111,500
                            ===========      =========     =======


9.       Capital Stock:
--       --------------

         Stock Option and Bonus Plans
         ----------------------------

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


<PAGE>


9.       Capital Stock, Continued:
--       -------------------------

         Stock Option and Bonus Plans, Continued
         ---------------------------------------

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

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

         A summary of  activity  related to stock  options is  indicated  in the
         following table:
<TABLE>
<CAPTION>

                                                1996               1995                1994
                                                ----               ----                ----
                                                   Weighted           Weighted           Weighted
                                           Number  average   Number   average  Number    average
                                           of      exercise  of       exercise of        exercise
                                           shares  price     shares   price    shares    price
                                           ---------------------------------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Outstanding at beginning of year          875,000 $  0.95   897,500 $  0.93   616,000  $ 0.47
Granted ...............................    65,000    0.78   241,000    1.37   404,000    1.48
Exercised .............................     6,000    0.45    20,000    0.63     7,000    0.45
Forfeited .............................   188,250    1.23   243,000    0.82   115,500    0.45
Outstanding at end of year ............   746,250    0.87   875,500    0.95   897,500    0.93
Options exercisable at year end           536,518           517,268           505,432
</TABLE>


<TABLE>
<CAPTION>

                                Number              Weighted         Weighted          Number           Weighted
            Range of        outstanding at          average          average       exercisable at        average
            exercise         December 31,          remaining         exercise       December 31,        exercise
             prices              1996           contractual life      price             1996              price
         ----------------   ----------------    -----------------  -------------   ----------------    ------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
         
         $.45 to $.66               421,250           6.22 years          $0.46            314,850           $0.45
         $.86 to $1.11               45,000           9.19 years          $0.92              1,668           $1.11
         $1.21 to $1.59             280,000           7.84 years          $1.48            220,000           $1.54
                            ----------------                       -------------   ----------------    ------------
          
                                    746,250                               $0.87            536,518           $0.90


</TABLE>

         At December 31, 1996,  1,298,151  shares of the Company's  common stock
         are authorized for issuance under the stock option and bonus plans.


<PAGE>


9.       Capital Stock, Continued:
--       -------------------------

         Stock Option and Bonus Plans, Continued
         ---------------------------------------

         In May 1995,  the Company  granted  stock  bonuses  aggregating  48,000
         common shares to three outside directors of the Company. Shares granted
         to one of the  directors  were  fully  vested on the date of the grant.
         Shares  granted  to the other two  directors  vested  equally  over two
         years,  beginning  on the date of the  grant.  Compensation  expense of
         $20,000 was recognized in 1996 with respect to this grant. During 1996,
         one of the directors returned the 8,000 shares he received. The Company
         canceled  those  shares.  Also,  in August of 1995 the Company  granted
         stock  bonuses  aggregating  10,974  common  shares to key officers and
         managers of the Company for which  compensation  expense of $12,767 was
         recorded in the Consolidated Statement of Operations.

         In April 1993,  stock bonus  awards  were made to  officers  totaling
         450,000  shares that vest over a five-year  period  commencing in 1993.
         Compensation expense of $40,500,  $40,500 and $40,500 was recognized in
         1996,  1995 and 1994,  respectively,  with  respect to this grant.  The
         remaining  deferred  compensation  expense will be recognized  over the
         vesting period.


10.      Related Party Transactions:
---      ---------------------------

         Included in employee  and other  receivables  at December  31, 1996 and
         1995, is a $39,302 uncollateralized note receivable due from the CEO of
         the  Company.  The note bears  interest at eight  percent and is due on
         demand.

         Included in employee  and other  receivables  at December  31, 1996 and
         1995,  are  expense  advances  to the CEO of the Company of $34,097 and
         $32,229  respectively.  These expense advances bear no interest and are
         due on demand.

         Included in selling  general and  administrative  expense are  payments
         totaling  $12,756 in 1996 and $12,756 in 1995 to the CEO of the Company
         for the Company's use of vehicles and property owned by the CEO.


11.      Employees' Profit Sharing Plan:
---      -------------------------------

         The  Company  has  an   employees'   profit   sharing   plan   covering
         substantially  all  employees  who have attained age 21 with service in
         excess of six months.  The plan provides for Company  contributions  at
         the discretion of the Board of Directors.  Company  contributions begin
         vesting after the first full year in which eligible  employees complete
         501 hours of service,  with full vesting  occurring  after seven years.
         Contributions to the plan during the year ended December 31, 1996, 1995
         and 1994 totaled $15,000, $15,000 and $21,000, respectively.


<PAGE>


12.      Acquisitions:
---      -------------

         On March 1, 1994,  the  Company  acquired  the assets and  assumed  the
         liabilities of Micro Station, Inc. (Micro Station).  Micro Station is a
         computer systems integrator located in San Antonio,  Texas. The Company
         issued Micro Station 80,000 options to purchase shares of the Company's
         restricted  common stock at the fair market value of shares on the date
         of grant,  and a $27,500  promissory  note payable as settlement of the
         purchase  price.  In addition,  the Company  entered into a $12,000 non
         compete agreement with the former President of Micro Station to be paid
         in  quarterly   payments  of  $1,000   beginning  June  30,  1994.  The
         acquisition was accounted for by the purchase method of accounting and,
         accordingly,  the  results of  operations  of Micro  Station  have been
         included in the Company's  consolidated  financial  statements from the
         date of acquisition (see Note 15).

         On March 31,  1994,  the  Company  acquired  the assets and assumed the
         liabilities of Hash Tech, Inc. (Hash Tech). Hash Tech is based in Santa
         Clara,  California  and offers  full  service  turnkey  or  consignment
         contract  manufacturing  of printed  circuit  boards.  The Company paid
         $196,000 in cash and issued 50,000  shares of the Company's  restricted
         common stock for the net assets of Hash Tech. In addition,  the Company
         entered into a $299,000 non compete  agreement  with Hash Tech's former
         owners to be paid as follows:  an initial  payment of  $95,000,  twelve
         monthly  payments  of  $2,000  beginning  April  1,  1994,  and  twelve
         quarterly  payments of $15,000  beginning July 1, 1994. The acquisition
         was   accounted  for  by  the  purchase   method  of  accounting   and,
         accordingly,  the results of operations of Hash Tech have been included
         in the Company's  consolidated  financial  statements  from the date of
         acquisition.


13.      Contingencies:
---      --------------

On  February  2,  1996,  the  former  owners  of Hash Tech  (Plaintiffs)filed  a
complaint  in the  Superior  Court for the  County of Santa  Clara,  California,
against  the  Company  and  several  of its  officers  and  directors  in  their
individual and representative  capacities,  and also against HTI, a wholly owned
subsidiary  of the Company.  The  Plaintiffs  have alleged  causes of action for
recision of a certain "Asset  Purchase  Agreement"  dated March 31, 1994,  civil
conspiracy,  fraud,  violation of California  securities laws, common law gender
discrimination,  and intentional  infliction of emotional distress.  The Company
and its officers  deny any  wrongdoing  in regard to the above  allegations.  On
April 15, 1996,  the Company  filed a complaint in the Third  Judicial  District
Court of Salt Lake City, Utah, against the Plaintiffs for breach of "non compete
agreements" and breach of a "Severance Agreement" between the Plaintiffs and the
Company  and on  February  24,  1997,  the  company  filed a Motion for  Summary
judgment in this matter,  which is awaiting  oral  argument.  In  addition,  the
Company has filed a complaint with the American Arbitration  Association,  which
is being held pending the outcome of certain legal  hearings.  On April 9, 1996,
the Superior  Court of Santa Clara,  California,  heard and denied the Company's
motion to compel  arbitration.  In July,  1996,  the Company  filed an appeal to
reverse this decision with the Sixth  Appellate  District in the Court of Appeal
of the State of California. On February 18, 1997, this appeal was denied.

<PAGE>


13.      Contingencies, Continued:
---      -------------------------

         In addition to the aforementioned legal matter, the Company is involved
         in various claims and legal actions  arising in the ordinary  course of
         business. In the opinion of management, the ultimate disposition of all
         legal matters will not have a material  adverse effect on the Company's
         financial position, liquidity or results of operations.


14.      Segment Information:
---      --------------------

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

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

         Identifiable  assets by industry  are those assets that are used in the
         Company's  operations in each business  segment.  One customer,  in the
         contract  computer  production  and assembly  industry,  accounted  for
         approximately  17% of the  Company's  sales in 1996.  The same customer
         accounted  for 17% of the sales in 1995. No single  customer  accounted
         for more than 10% of sales in 1994.  Corporate  assets are  principally
         fixed assets,  capitalized  software  development  costs,  deferred tax
         assets and other assets.


<PAGE>



14.      Segment Information, Continued:
---      -------------------------------

         Financial information by segments is as follows:

                                                      1996               1995
                                                      ----               ----

         Net sales:
           Telecommunications                       $ 2,326,640    $ 3,171,480
           Computer production and assembly           4,393,965      4,588,313
           Corporate and other                            8,211         66,321
                                                  -------------   ------------
                                                    $ 6,728,816    $ 7,826,114
                                                     ==========     ==========

         Operating income (loss):
           Telecommunications                      $    786,517   $    900,112
           Computer production and assembly             123,910        570,086
           Corporate and other                       (1,220,779)    (1,542,862)
                                                     ----------     -----------
                                                   $   (310,352)  $    (72,664)
                                                    ===========    ============

         Identifiable assets:
           Telecommunications                      $    574,079   $    829,906
           Computer production and assembly           1,039,365      1,429,594
           Corporate and other                        2,498,933      2,241,918
                                                     ----------     ----------
                                                    $ 4,112,377    $ 4,501,418
                                                     ==========     ==========

         Depreciation and amortization expense:
           Telecommunications                      $    186,344   $    287,574
           Computer production and assembly             147,531        139,822
           Corporate and other                           58,137        116,911
                                                   ------------    -----------
                                                   $    392,012   $    544,307
                                                    ===========    ===========

         Capital expenditures:
           Telecommunications                     $      16,307  $      21,447
           Computer production and assembly              24,401        141,852
           Corporate and other                           33,688        101,547
                                                   ------------    -----------
                                                  $      74,396  $     264,846
                                                   ============    ============







<PAGE>

15.      Discontinued Operations:
---      ------------------------

         The  Company's  product and  marketing  strategies  were  refocused  in
         January  1996,  on marketing  its core  business  products  through its
         existing  dealer  channels,  and the  Company  has  withdrawn  from its
         efforts to add a second P.C.  distribution  channel, by the divestiture
         of its P.C. reseller division. Accordingly,  subsequent to December 31,
         1995 the Company  formalized a plan to  discontinue  the  operations of
         Computer  Express  and Micro  Station.  On April 3, 1996,  the  Company
         entered into an agreement to sell the net assets of Micro  Station to a
         former   employee  for  a  $60,792   note  (the  Note).   The  Note  is
         collateralized by a security  agreement  covering non-real property and
         bears  interest at 12%.  One-third  of the  purchase  price was due and
         payable 30 days from the contract  date,  one-third was due and payable
         60 days from the  contract  date and the  remaining  amount was due and
         payable 80 days from the contract  date.  As of December 31, 1996,  the
         receivable had been either collected or fully reserved.

         During the first quarter of 1996,  substantially all assets of Computer
         Express were  liquidated for cash proceeds of  approximately  $682,000.
         Substantially all remaining liabilities were paid from such proceeds.

         The results for the P.C. reseller  subsidiaries have been classified as
         discontinued  operations for all periods  presented in the Consolidated
         Statements  of   Operations.   The  assets  and   liabilities   of  the
         discontinued  operations  have  been  classified  in  the  Consolidated
         Balance Sheets as "Net assets  discontinued  operations".  Discontinued
         operations have also been  segregated for all periods  presented in the
         Consolidated Statements of Cash Flows.

         Net  assets  of  the  Company's   discontinued   operations  (excluding
         intercompany  balances which have been eliminated against the equity of
         the discontinued operations) are as follows:

                                        As of               As of
                                  December 31, 1996    December 31, 1995
                              ----------------------  ----------------------
Assets:
  Current assets:
    Cash and cash equivalents.....   $          --     $   185,866
    Accounts receivable ..........              --         247,973
    Employee and other receivables              --          26,974
    Inventories ..................              --         297,837
    Deferred income taxes ........              --         315,434
    Prepaid expenses .............              --         168,121
                                        -----------     -----------
       Total current assets ......              --       1,242,205

Net property, plant and equipment               --          13,145
Other noncurrent assets ..........              --           9,741
                                        -----------     -----------

       Total assets ..............   $          --      $1,265,091
                                       ============      =========



  Current liabilities:
Accounts payable .................   $          --     $ (92,070)
Accrued expenses .................              --       (96,955)
Accrued vacation .................              --       (11,201)
Deposits and advances ............              --        (4,433)
Accrued loss on disposal .........              --      (292,332)
Current portion of long-term debt               --        (4,050)
                                                       ---------
   Total current liabilities .....              --      (501,041)

       Deferred income taxes .....              --        (6,300)
                                                       ---------

            Total liabilities ....              --      (507,341)
                                      -------------    ---------

Net assets - discontinued operations $          --     $ 757,750
                                      =============    =========


         Revenues  of  the  discontinued  operations  were  $0,  $3,312,300  and
         $2,916,231  for the  years  ended  December  31,  1996,  1995 and 1994,
         respectively.


<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.
------------------------------------------------------------

         Information   regarding  directors  and  officers  of  the  Company  is
incorporated by reference from "Information Relating to Directors, Nominees, and
Executive  Officers" in the 1997 Proxy Statement to be delivered to shareholders
in  connection  with the Annual  Meeting of  Shareholders  to be held on June 2,
1997.

         Information  required by item 405 of Regulation S-K is  incorporated by
reference from "Compliance with section 16(a) of the Securities  Exchange Act of
1934" in the 1997 Proxy  Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 2, 1997.

Item 11. Executive Compensation
-------------------------------

         Information  regarding  this item is  incorporated  by  reference  from
"Executive  Compensation"  in  the  1997  Proxy  Statement  to be  delivered  to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 2, 1997.

Item 12.  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 1997
Proxy  Statement to be delivered to  shareholders  in connection with the Annual
Meeting of Shareholders to be held on June 2, 1997.

Item 13.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         Information  regarding  this item is  incorporated  by  reference  from
"Certain   Transactions"  in  the  1997  Proxy  Statement  to  be  delivered  to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 2, 1997.





<PAGE>


                                    PART IV

Item 14. Exhibits, Financial Statements, 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, Item 8 of this report.
     --------------------------------------------------------------------
       Reports of Independent Accountants.
       Consolidated Balance Sheets as of December 31, 1996 and 1995.
       Consolidated  Statements of Operations  for the years ended
           December 31, 1996, 1995 and 1994.  
       Consolidated Statements of Changes in Stockholders'Equity for the years
           ended December 31, 1996, 1995 and 1994.
       Consolidated Statements of Cash Flows for the years ended 
           December 31, 1996,  1995 and 1994.
       Consolidated Notes to Financial Statements for the years ended
           December 31, 1996, 1995 and 1994.

     2. Financial Statements Schedules - Included in Part IV of this report:
     -----------------------------------------------------------------------
       Schedule II - Valuation and Qualifying Accounts.

       Schedules  other  than  those  listed  above 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 - Included in Part IV of this report.
     -------------------------------------------------

       No reports on Form 8-K were filed in the 4th quarter of 1996.


<PAGE>
<TABLE>
<CAPTION>


                        TELS CORPORATION AND SUBSIDIARIES

                                                                     SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
                           (of Continuing Operations)
                  Years ended December 31, 1996, 1995 and 1994

                                                                                  Other
                                                                                additions
                                                                Additions       reserves      Deductions -
                                                Balance,       charged to         from          doubtful         Balance,
                                               beginning        costs and       acquired        accounts          end of
    Allowance for doubtful receivables          of year         expenses        companies      written off         year
-------------------------------------------   -------------   --------------   ------------   --------------    ------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

         Years ended December 31:
                   1996                           $105,788         $ 10,196        $     -          $35,130       $  80,854
                                              -------------   --------------   ------------   --------------    ------------
                   1995                           $122,502         $ 13,331        $     -          $30,045        $105,788
                                              -------------   --------------   ------------   --------------    ------------
                   1994                           $ 59,930         $ 65,242        $19,032          $21,702        $122,502
                                              -------------   --------------   ------------   --------------    ------------

</TABLE>
<TABLE>
<CAPTION>



                                                                                  Other
                                                                                additions
                                                                Additions       reserves      Deductions -
                                                Balance,       charged to         from          warranty         Balance,
                                               beginning        costs and       acquired         repair           end of
             Warranty reserve                   of year         expenses        companies      written off         year
-------------------------------------        --------------    ------------   --------------   -------------   -------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

         Years ended December 31:
                   1996                            $17,976         $  2,400     $        -          $     -         $20,376
                                              -------------   --------------   ------------   --------------   -------------
                   1995                            $10,000         $  7,976     $        -          $     -         $17,976
                                              -------------   --------------   ------------   --------------   -------------
                   1994                            $16,752         $      -     $        -          $ 6,752         $10,000
                                              -------------   --------------   ------------   --------------   -------------

</TABLE>
<TABLE>
<CAPTION>



                                                                                  Other
                                                                                additions
                                                                Additions       reserves
                                                Balance,       charged to         from        Deductions -      Balance,
                                               beginning        costs and       acquired        inventory        end of
            Inventory reserve                   of year         expenses        companies      written off        year
-------------------------------------------   -------------   --------------   ------------   --------------   ------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

         Years ended December 31:
                   1996                           $ 59,932          $61,932     $        -      $         -       $121,864
                                              -------------   --------------   ------------   --------------   ------------
                   1995                           $ 52,932         $  7,000     $        -      $         -       $ 59,932
                                              -------------   --------------   ------------   --------------   ------------
                   1994                          $   6,500          $46,432     $        -      $         -       $ 52,932
                                              -------------   --------------   ------------   --------------   ------------

</TABLE>


<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, 1997                                  By: /s/John L.     Gunter
------------------                              ------------------------------
     Date                                         John L. Gunter, CEO


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


/s/John L. Gunter       Chairman of the Board of            April 14, 1997
-----------------       Directors, and CEO
John L. Gunter          (Principal Executive Officer)

/s/Willard H. Gardner   Director and Secretary              April 14, 1997
---------------------   
Willard H. Gardner

/s/Stephen M. Nelson    Director, President and             April 14, 1997
--------------------    Treasurer
Stephen M. Nelson

/s/Deborah Walford      Controller                          April 14, 1997
------------------      
Deborah Walford




<PAGE>

(C) Exhibits

     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.

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

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

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

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

     10.1 1984  Executive  Stock bonus Plan,  filed as Exhibit 10.1 to the  
     Company's Registration  Statement on Form S-18, SEC File No.  2-93915-D,
     and incorporated herein by this reference.
     
     10.2 1984 Incentive Stock Option Plan, filed as Exhibit 10.2 to the 
     Company's Registration Statement on Form S-18,
     SEC File No. 2-93915-D, and incorporated herein by this reference.

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

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

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

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

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

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

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

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

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

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

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

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

     23.1 Consent of Certifying Accountants 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.

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

     27.1  Article 5 Financial Data Schedule for year ended December 31, 1996, 
     Form 10-K
<PAGE>
                                   Exhibit 23
 
                      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 10,  1997,  on our audit of the  financial  statements  and
financial  statement  schedule of TELS  Corporation  as of December 31, 1996 and
1995, and for each of the two years in the period ended December 31, 1996, which
report is included in this Annual Report on Form 10-K.



COOPERS & LYBRAND L.L.P.

Salt Lake City, Utah
April 14, 1997



                        ACCOUNTANTS' CONSENT
                        --------------------
                       
We consent to the  incorporation by reference in the  registration  statement of
Tels Corporation on Form S-8 of the TEL electronics, Inc. 1994 Outside Directors
Plan, the 1993 TEL  electronics,  Inc. Stock Option and Incentive Plan, the 1984
Incentive  Option Plan for Key Employees,  the 1984  Non-Qualified  Stock Option
Plan, and the 1984 Executive Stock Bonus Plan of our report dated March 6, 1995,
related to the consolidated  statements of operation,  stockholders' equity, and
cash flows of TELS  Corporation and subsidiaries for the year ended December 31,
1994, and related schedule, which report appears in the December 31, 1996 annual
report on Form 10-K of TELS Corporation.


                                        KPMG Peat Marwick L.L.P.

Salt Lake City, Utah
April 14, 1997