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

                                   FORM 10-KSB

(Mark One)

[X] ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000, or

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


                           Commission File No. 0-12993

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

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

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

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

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

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

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

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

The issuer's revenues for its most recent fiscal year were $2,557,755.

The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 31, 2001, was approximately $461,100.

The issuer had issued and outstanding 4,191,819 shares of its Common Stock on
March 31, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

Those sections of portions of the registrant's 2000 Proxy Statement for its
Annual Meeting of Shareholders to be held on June 4, 2001, are incorporated by
reference into Part III hereof.

                                       1
<PAGE>

                                     PART I
Item 1. Business

Introduction

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

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

General

         TELS' telecommunications products are used to provide management,
accounting, and billing information to various business, education, and
government entities, but primarily to the lodging industry.

Products and Services

         The Company's subsidiary, TEL electronics, inc., distributes its
proprietary telecommunication and other products through dealers, distributors,
management companies and national account organizations throughout the United
States.

         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 and
is ideal for larger hotels and motels with gift or other shops, or other
business needs.

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

         The INN-FORM/XL(R), INN-FORM PLUS(R) and WIN-SENSETM products account
for a majority of the Company's telecommunications sector sales.


                                       2
<PAGE>

         The TEL-SENSE(R) and TEL-SENSE/K(R) products track business phone usage
and record time and charges for telephone calls. They are automatic, reducing
clerical errors and accounting effort. TEL-SENSE/K is for smaller key telephone
systems.

         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-FORM/PCTM. This new product, introduced in late 2000, is a PC
software call accounting system, which has benefits, and capacities, which are
significantly improved over other Company products and other competitor
products. The current release of this product is designed only to be used and
seamlessly interface with other PC software products, such as property
management systems in lodging applications or general accounting or other
management applications. INN-FORM/PC provides the capability to work with
essentially any telephone system with call accounting interfaces and provide
tariff and locally defined criteria to price and charge for calls worldwide. A
new ancillary product, the INN-FORM/PC Front Desk module, will provide lodging
and other applications with multiple reports and screens using the basic
INN-FORM/PC. The Front Desk module was in alpha and limited beta testing at the
time of this report. Both products are expected to provide revenue opportunities
in the future, but the products both will take time to be introduced and will
require special dealers to sell and support such PC software products.

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

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

         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


                                       3
<PAGE>

went into effect in 1995. The Company expects its telecommunications products
and/or enhancements will need to be further developed to meet the changes
expected in 2000 and beyond. The Company expects a continuing demand for its
products as these future changes occur.

Research and Development

         The Company spent $159,224 and $153,108 on research and development
activities in the years ended December 31, 2000 and 1999, respectively.

Competition

         The telecommunications and computer industries are highly competitive.
The Company competes with a number of manufacturers and distributors of similar
telecommunications products, some of which have a longer operating history and
greater financial strength, manufacturing capabilities and name recognition in
the marketplace. Also, 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. Further, 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.

         There can be no assurance that the Company will be able to compete
successfully with these companies or other telecommunications competitors in the
future.

Changing Marketplace

         As a result of governmental actions, AT&T was divided into independent
public companies, each with a separate and distinct charter. Each of these
companies has a major impact on the telecommunications industry. AT&T and each
RBOC aggressively pursue independent activities. Evolving technologies create
new opportunities for wireless, cable and utilities companies in the
telecommunications marketplace. As a result of these changes, there can be no
assurance that the Company's products will continue to find a receptive
marketplace. These changes have adversely affected manufacturers, dealers, and
distributors in the telecommunications industry. With new technologies perhaps
tending 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, or, if such exists, that it will
consist of enough dealers and distributors committed to products of the
Company's subsidiary, TEL electronics, inc., sufficient to generate a profitable
level of sales.

                                       4
<PAGE>

Competitive Strategy

         Management believes that the products of the Company's subsidiary, TEL
electronics, inc., 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.
Proprietary 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' products without sacrificing
profit margin. Management believes that the wholesale prices of its
telecommunications products are competitive relative to their features, thereby
allowing the end-user's price to be lower than or close to that of its
competitors. The Company has seen a general reduction in the retail prices of
certain competitors' telecommunications products, and thus the Company cannot
predict at present whether its subsidiary will continue to enjoy its current
pricing advantage. Moreover, there can be no assurance that the price of the
Company's subsidiary's telecommunications products will not increase.

         The stand-alone telephone call accounting products of TEL electronics,
inc., 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.

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's subsidiary designs its
own printed circuit boards and software for use in its telecommunications
products. Proprietary telecommunications software is either imbedded in machine
code, in microprocessor memories or is available on protected, but standard, PC
discs. Management believes that the circuit boards and the software would be
difficult to "reverse engineer". The Company continues to take steps to protect
its trade names and trademarks and the products and software it develops through
licensing or other approaches designed to contractually protect TELS'
proprietary information. There can be no assurance that competitors may not
independently develop the same or similar technology or obtain access to the
Company's proprietary technology. TELS has no proprietary rights to products
previously marketed in its computer sector or contract manufacturing businesses.



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                                       5
<PAGE>

Manufacturing and Supply

          Telecommunications products of TEL electronics, inc., are assembled
from components manufactured by unaffiliated suppliers and designed for modular
assembly. This approach permits efficient use of the subsidiary's production
staff in the assembly and testing of these purchased items and the end products.
TEL electronics, inc., has designed its own printed circuit boards for its
telecommunications business, which are manufactured to the subsidiary's
specifications by subcontractors. Telecommunications products are generally
designed to permit multiple source procurement, and it is the subsidiary's
policy to develop multiple sources of supply for components it uses. There have
been occasional shortages of the electronic components included in
telecommunications products, and, during such periods, suppliers have rationed
the available components among their customers. TELS' subsidiary 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

         Telecommunications products of the Company's subsidiary, TEL
electronics, inc., are serviced by TEL's dealers, with assistance as required
from TEL employees. It has been the subsidiary's 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 and its subsidiaries have
complied with these regulations and received all necessary FCC approvals for its
telecommunications products, or have submitted products for testing and
certification and is submitting all new products that the Company believes
should be submitted for such testing as they are completed. It is anticipated
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.



                                       6
<PAGE>

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

Employees:  As of December 31,  2000,  the Company and its  subsidiaries  had 25
full-time employees.
---------

Item 2. Properties

         The Company's subsidiary, TEL electronics, inc., currently owns and
occupies a facility with approximately 15,000 square feet of space in American
Fork, Utah, which was purchased on August 15, 1984, and includes a 4,800 square
foot addition completed in 1988. This facility houses the Company's and its
subsidiaries' telecommunication, administrative and research and development
offices. Management believes that the American Fork facility is adequate for
operations and production needs at current and the near future anticipated
production levels.

Item 3. Legal Proceedings

         None.

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 2000.










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                                       7
<PAGE>


                                     PART II

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

Market Listing

         The Company is currently listed on the OTC Bulletin Board with the
symbol "TELS". The OTC Bulletin Board is run by the National Association of
Securities Dealers ("NASD") and is maintained by Nasdaq as an electronic
trade-and-quote-reporting forum.

Price Range of Common Stock

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

2000                        High      Low       1999           High       Low
----                       -----    -----       -----          -----      ---
First Quarter              $ .53    $ .12    First Quarter    $  .14   $  .06
Second Quarter               .34      .17    Second Quarter      .30      .08
Third Quarter                .22      .13    Third Quarter       .52      .18
Fourth Quarter               .20      .06    Fourth Quarter      .41      .11

Approximate Number of Equity Security Holders:

         As of March 31, 2001, there were approximately 1,000 shareholders of
record of the Company's common stock. Included in the number of shareholders of
record are shares held in "nominee" or "street" names. Because many of such
shares are held by brokers and other institutions on behalf of shareholders, the
Company is unable to estimate the total number of shareholders reported by these
record holders.

Dividends:

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




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                                       8
<PAGE>

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

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

         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
selling, general and administrative 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 acquisitions/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
accounting and call management industry; (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.

Results of Operations

         Consolidated net sales decreased fifteen percent (15%) from $3,010,025
in 1999 to $2,557,755 in 2000. Sales decreased primarily because the Company
consolidated its efforts on core business practices and continued to reorganize
operations. The new PC software call accounting product engine, the INN-FORM/PC
("IFPC") engine, was formally announced at trade shows in late 2000 and
underwent extensive beta testing at customer sites in the US and Canada in late
2000 and early 2001. This product allows major lodging organizations and
software companies to add expert call accounting capabilities into their PC
software for reservations, accounting, and other applications, so call
accounting becomes a seamless and integral part of their software. Although the
sales time on such private label products is much longer than with the Company's
other products, it is expected that IFPC will add sales volumes in late 2001.
The Front Office ("FO") module, which allows IFPC to operate as a standalone
system, is in alpha testing at the writing of this report. Sales are expected in
2001 from this IFPC-FO product combination, as well.


                                       9
<PAGE>

         Gross profit decreased 11% from $2,270,245 in 1999 to $2,021,006 in
2000. In 1999, gross profit represented 75% of sales, while in 2000 gross profit
increased to 79% of sales primarily due to the focus on higher margin core
business.

         Total research and development expenses increased 4% from $153,108 in
1999 to $159,224 in 2000.

         Selling, general and administrative expenses decreased by 24% in 2000
to $1,833,739, compared to $2,416,398 in 1999, as management tightened spending
to improve operations. In 1999, selling, general and administrative expense was
about 80% of sales, while in 2000 it dropped to 72% of sales, in keeping with
lower sales.

         Management's efforts to reduce costs were offset somewhat by larger
than normal legal, interest and related expenses resulting from discontinued
operations and higher interest on the Company's line of credit due to prior year
losses. Management is continuing its efforts to bring expenses in line with core
business revenues.

         The Company reported a profit from operations of $28,045 in 2000,
compared to a loss from operations in 1999 of $(299,261). The Company reported a
net loss for 2000 of $(98,765) or $(.02) per share, as compared to a net loss in
1999 of $(1,118,385) or $(.12) per share. The profit from operations and the
significantly reduced net loss are due to the Company's focus on core business
and winding down certain activities resulting from discontinued operations. The
Company has reached the point where continuing improvements in standard
operations are now expected. The Company has continued its decision to keep a
valuation allowance at a level to fully offset its net deferred tax asset. Based
upon further evaluation and consultation with the Company's auditors, the
Company wrote off all software development costs for the year 2000; an expense
that contributed significantly to the net loss for the year 2000.

Liquidity and Capital Resources

         As of December 31, 2000, the Company reported current assets of
$524,648 and current liabilities of $1,022,762, resulting in net working capital
of $(498,114). This is a 42% increase compared to net working capital of
$(865,349) at December 31, 1999.

         The Company is seeking to renegotiate its line of credit, which expires
in September of 2001, since its current asset-based line costs well over 30%,
due to high interest, no reductions in rates despite the current interest
climate, loan and quarterly audit fees. During 2000, the Company paid $163,000
in cash for interest. Previous loss years make this renegotiation challenging,
but management is convinced that, with the improved operational results in 2000,
much better financing can be found.

         At December 31, 2000, the Company owed $149,510 on its line of credit.



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                                       10
<PAGE>

         The telecommunications industry, financial markets, the general
business climate and the lodging industry continue to experience major changes
that could limit the Company's ability to meet sales projections. There can be
no assurance that the Company will be able to generate a profitable level of
sales in the future.

Effects of Inflation

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

Outlook and Uncertainties

         The Company's sales of telephone call systems continue at levels below
1999 and management believes this trend will continue as telephone calling costs
decline and as most existing lodging businesses, in particular, have already
purchased such systems. The Company has invested in newer call accounting
systems and especially in business call accounting systems, and management is
striving to expand its sales to professional and financial businesses,
government, education and other selected businesses, markets where the Company
has been somewhat successful in the past.

         The Company incurred significant losses in 1998 and 1999, and posted a
small loss for 2000, creating working capital deficits. The net loss for 2000 is
attributable to the decline in call accounting revenues, extraordinary expenses
due to certain ongoing discontinued operations matters, the Company's high
interest expenses due to its previous inability to negotiate a more favorable
line of credit and to the Company's decision to expense all research and
development costs, a decision representing a major change from the Company's
financial reporting over the past fifteen years.

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

         The Company's future operating results depend in large part, at its
current level of operation, upon its ability to retain and attract qualified
engineering, technical, sales, support, and production personnel for its
operations. Competition for such personnel is intense and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The failure to attract or retain such personnel could have a material
adverse affect on the Company's business and results of operation.


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                                       11
<PAGE>

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

Item 7.Financial Statements and Supplementary Data.

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

                  Independent Auditors' Report.
                  Consolidated Balance Sheet as of December 31, 2000.
                  Consolidated Statement of Operations for the years ended
                           December 31, 2000 and 1999.
                  Consolidated Statement of Stockholders' Deficit for the years
                  ended December 31, 2000 and 1999. Consolidated Statement of
                  Cash Flows for the years ended
                           December 31, 2000 and 1999.
                  Notes    to Consolidated Financial Statements for the years
                           ended December 31, 2000 and 1999.


<PAGE>

TELS CORPORATION
Consolidated Financial Statements
December 31, 2000 and 1999




<PAGE>



                                                                TELS CORPORATION
                                      Index to Consolidated Financial Statements

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





                                                                         Page
                                                                         ----

Independent Auditors' Report                                             F-2


Consolidated Balance Sheet                                               F-3


Consolidated Statement of Operations                                     F-4


Consolidated Statement of Stockholders' Deficit                          F-5


Consolidated Statement of Cash Flows                                     F-6


Notes to Consolidated Financial Statements                               F-8



--------------------------------------------------------------------------------
                                                                             F-1

<PAGE>



                                                    INDEPENDENT AUDITORS' REPORT





To the Board of Directors and Stockholders of
TELS Corporation


We have audited the accompanying  consolidated balance sheet of TELS Corporation
as of December 31, 2000, and the related consolidated  statements of operations,
stockholders'  deficit, and cash flows for the years ended December 31, 2000 and
1999. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of TELS Corporation as
of December 31, 2000,  and the results of their  operations and their cash flows
for the years ended  December  31, 2000 and 1999 in  conformity  with  generally
accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  As discussed in Note 2, the
Company has an accumulated  deficit, a deficit in working capital and net losses
in 2000 and 1999.  These  issues  raise  substantial  doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also described in Note 2. The accompanying  consolidated financial statements do
not  include  any  adjustment  that  might  result  from  the  outcome  of  this
uncertainty.

                              TANNER+CO.

Salt Lake City, Utah
March 9, 2001

                                                                             F-2

<PAGE>


                                                                TELS CORPORATION
                                                      Consolidated Balance Sheet

                                                               December 31, 2000
--------------------------------------------------------------------------------



              Assets
              ------

Current asset:
     Cash and cash equivalents                               $           45,076
     Accounts receivable, net                                           302,478
     Inventories, net                                                   151,942
     Prepaid expenses                                                    25,152
                                                             ------------------

                  Total current assets                                  524,648

Property and equipment, net                                             380,609
Cash surrender value of life insurance                                   98,995
Other assets                                                              7,500
                                                             ------------------

                                                             $        1,011,752
                                                             ------------------

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

              Liabilities and Stockholders' Deficit
              -------------------------------------

Current liabilities:
     Accounts payable                                        $          188,709
     Accrued expenses                                                   268,576
     Note payable                                                       149,510
     Notes payable - related parties                                    272,660
     Current portion of long-term debt                                   24,764
     Deferred income                                                    118,543
                                                             ------------------

                  Total current liabilities                           1,022,762

Long-term debt                                                          687,262
                                                             ------------------

                  Total liabilities                                   1,710,024
                                                             ------------------

Commitments and contingencies                                                -

Stockholders' deficit:
     Common stock, $.02 par value, authorized
      50,000,000 shares; issued and
      outstanding 4,191,819 shares                                       83,835
     Additional paid-in capital                                       4,318,741
     Accumulated deficit                                             (5,036,848)
     Deferred compensation                                              (64,000)
                                                             ------------------

                  Total stockholders' deficit                          (698,272)
                                                             ------------------

                                                             $        1,011,752
                                                             ------------------

--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                             F-3

<PAGE>

<TABLE>
<CAPTION>


                                                                                          TELS CORPORATION
                                                                      Consolidated Statement of Operations

                                                                                  Years Ended December 31,
----------------------------------------------------------------------------------------------------------

                                                                              2000              1999
                                                                       -----------------------------------

<S>                                                                    <C>                 <C>
Net sales                                                              $       2,557,755   $     3,010,025
Cost of goods sold                                                               536,749           739,780
                                                                       -----------------------------------

                  Gross profit                                                 2,021,006         2,270,245

Operating expenses:
     Selling, general and administrative expenses                              1,833,737         2,416,398
     Research and development expenses                                           159,224           153,108
                                                                       -----------------------------------

                  Income (loss) from operations                                   28,045          (299,261)
                                                                       -----------------------------------

Other income (expense):
     Interest income                                                               1,366                 -
     Interest expense                                                           (146,598)          (80,211)
     Other, net                                                                   18,853           (69,891)
                                                                       -----------------------------------

                                                                                (126,379)         (150,102)
                                                                       -----------------------------------

                  Loss before benefit for income taxes
                  and discontinued operations                                    (98,334)         (449,363)

Benefit for income taxes                                                               -                 -
                                                                       -----------------------------------

                  Loss before discontinued operations                            (98,334)         (449,363)
                                                                       -----------------------------------

Discontinued operations:
     Loss from operations, net of income tax
       benefit of $14,000 in 2000                                                (29,786)         (669,022)
     Gain from disposal, net of income tax
       expense of $14,000 in 2000                                                 29,355                 -
                                                                       -----------------------------------

                                                                                    (431)         (669,022)
                                                                       -----------------------------------

                  Net loss                                             $         (98,765)  $    (1,118,385)
                                                                       -----------------------------------

Loss per share - basic and diluted:
     Continuing operations                                             $            (.02)  $          (.12)
     Discontinued operations                                                        (.00)  $          (.17)
                                                                       -----------------------------------

                                                                       $            (.02)  $          (.29)
                                                                       -----------------------------------

Weighted average shares - basic and diluted                                    4,012,000         3,892,000
                                                                       -----------------------------------

----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                                       F-4
</TABLE>



<PAGE>


                                                                TELS CORPORATION
                                 Consolidated Statement of Stockholders' Deficit

                                          Years Ended December 31, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                 Common Stock            Additional                                    Stockholders'
                                          ---------------------------      Paid-in         Accumulated     Deferred        Equity
                                              Shares         Amount        Capital           Deficit      Compensation   (Deficit)
                                          ------------------------------------------------------------------------------------------

<S>                                           <C>         <C>           <C>             <C>               <C>           <C>
Balance, January 1, 1999                      3,891,819   $    77,835   $  4,226,532    $  (3,819,698)    $          -  $   484,669

Grant of stock options                                -             -          2,209                -                -        2,209

Net loss                                              -             -              -       (1,118,385)               -   (1,118,385)
                                          ------------------------------------------------------------------------------------------

Balance, December 31, 1999                    3,891,819        77,835      4,228,741       (4,938,083)               -     (631,507)

Stock bonus                                     300,000         6,000         90,000                -          (96,000)           -

Amortization of deferred compensation                 -             -              -                -           32,000       32,000

Net loss                                              -             -              -          (98,765)               -      (98,765)
                                          ------------------------------------------------------------------------------------------

Balance, December 31, 2000                    4,191,819   $    83,835   $  4,318,741    $  (5,036,848)    $    (64,000) $  (698,272)
                                          ------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
                                                                                                                                 F-5
</TABLE>

<PAGE>

<TABLE>
<CAPTION>



                                                                                          TELS CORPORATION

                                                                      Consolidated Statement of Cash Flows

                                                                                  Years Ended December 31,
----------------------------------------------------------------------------------------------------------



                                                                                2000            1999
                                                                           -------------------------------
<S>                                                                        <C>               <C>

Cash flows from operating activities:
     Net loss                                                              $       (98,765)  $  (1,118,385)
     Loss from discontinued operations                                                 431         669,022
     Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
         Non-cash compensation for services and
           use of equipment                                                         56,987               -
         Provision for losses on inventory                                           1,686               -
         Provision for losses on accounts receivable                                (7,172)              -
         Depreciation and amortization                                             149,035         234,343
         Loss on disposal of assets                                                      -           2,868
         Stock compensation                                                         32,000           2,209
         (Increase) decrease in:
              Accounts receivable                                                   31,982         124,243
              Inventories                                                          (20,207)         76,363
              Prepaid expenses                                                      55,833          71,165
              Other assets                                                           1,019          84,293
         Increase (decrease) in:
              Accounts payable                                                     (91,569)        124,903
              Accrued expenses                                                     (31,922)         67,356
              Deferred income                                                      (27,193)         26,284
                                                                           -------------------------------

         Net cash provided by continuing operations                                 52,145         364,664
         Net cash used in discontinued operations                                        -        (208,881)
                                                                           -------------------------------

                  Net cash provided by
                  operating activities                                              52,145         155,783
                                                                           -------------------------------

Cash flows from investing activities:
     Purchases of property and equipment                                           (12,471)        (25,905)
     Decrease in cash surrender of life insurance                                    8,965               -
     Software development costs                                                          -        (102,911)
                                                                           -------------------------------

         Net cash used in continuing operations                                     (3,506)       (128,816)
         Net cash provided by (used in) discontinued operations                         10            (812)
                                                                           -------------------------------

                  Net cash used in
                  investing activities                                              (3,496)       (129,628)
                                                                           -------------------------------


----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                                       F-6

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                                                                          TELS CORPORATION

                                                                      Consolidated Statement of Cash Flows
                                                                                                 Continued

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



                                                                                2000            1999
                                                                           -------------------------------
<S>                                                                        <C>               <C>

Cash flows from financing activities:
     (Decrease) increase in cash overdraft                                         (22,252)         22,252
     Net decrease in note payable                                                 (101,943)        (16,225)
     Payments on long-term debt                                                    (18,895)        (37,416)
     Proceeds from issuance of notes payable - related party                       136,050          79,623
                                                                           -------------------------------

         Net cash (used in) provided by continuing operations                       (7,040)         48,234
         Net cash used in discontinued operations                                        -        (134,248)
                                                                           -------------------------------


                  Net cash provided by (used in)
                  financing activities                                              (7,040)        (86,014)
                                                                           -------------------------------

                  Net increase (decrease) in cash                                   41,609         (59,859)

Cash at beginning of year                                                            3,467          63,326
                                                                           -------------------------------

Cash at end of year                                                        $        45,076   $       3,467
                                                                           -------------------------------


Supplemental disclosure of cash flow information:                                  2000            1999
                                                                           -------------------------------

Cash paid during the year for:
     Interest                                                              $       163,000   $     118,000
                                                                           -------------------------------

     Income taxes                                                          $           100   $       4,800
                                                                           -------------------------------



----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                                       F-9

</TABLE>

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements

                                                      December 31, 2000 and 1999
--------------------------------------------------------------------------------


1.   Organization        Organization
     and                 TELS Corporation and its wholly-owned  subsidiaries TEL
     Significant         Electronics,  Inc., DJ GunTEL, Inc., Medtech, Inc., and
     Accounting          Micromega    Corporation   (the   Company),    designs,
     Policies            manufactures  and  sells  telecommunications  and  call
                         accounting   products  to  hotels,   motels  and  small
                         businesses  throughout  the United  States.  During the
                         year ended December 31, 1999, the Company  discontinued
                         the  operations  of Hash  Tech,  Inc.  (see  Note  17).
                         Discontinued operations consisted primarily of contract
                         production  and  assembly  services  for  computer  and
                         electronics companies located mainly in California.

                         Principles of Consolidation
                         The  consolidated   financial  statements  include  the
                         accounts   of  the   Company   and  its  wholly   owned
                         subsidiaries. All significant intercompany balances and
                         transactions have been eliminated in consolidation.

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

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

                         Property and Equipment
                         Property  and  equipment  are  recorded  at cost,  less
                         accumulated depreciation. Depreciation and amortization
                         on  capital  leases  and  property  and  equipment  are
                         determined  using  the  straight-line  method  over the
                         estimated  useful  lives of the  assets or terms of the
                         lease.  Expenditures  for  maintenance  and repairs are
                         expensed when incurred and betterments are capitalized.
                         Gains and losses on sale of property and  equipment are
                         reflected in the statement of operations.

                         Cash Surrender Value of Life Insurance
                         The Company  accounts for the cash  surrender  value of
                         life insurance  policies held by recording the premiums
                         paid for the  policies  less the  mortality  costs plus
                         interest earned.


--------------------------------------------------------------------------------
                                                                             F-9

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



1.   Organization        Revenue Recognition
     and                 Revenues were derived primarily from sales of telephone
     Significant         call accounting products.  Revenues are recorded at the
     Accounting          time  of  shipment  of  products  or   performance   of
     Policies            services.   Revenues   from   service   contracts   are
     Continued           recognized in earnings over the terms of the contract.

                         Advertising
                         Advertising costs are expensed as incurred. Advertising
                         expense totaled $38,345 and $80,604 for the years ended
                         December 31, 2000 and 1999, respectively.

                         Income Taxes
                         The Company  accounts  for income taxes using the asset
                         and  liability  method.  Under the asset and  liability
                         method,   deferred  tax  assets  and   liabilities  are
                         recognized for future tax consequences  attributable to
                         differences  between the financial  statement  carrying
                         amounts of existing  assets and  liabilities  and their
                         respective   tax   bases.   Deferred   tax  assets  and
                         liabilities   are  measured  using  enacted  tax  rates
                         expected  to apply to  taxable  income  in the years in
                         which those  temporary  differences  are expected to be
                         recovered or settled. The effect on deferred tax assets
                         and  liabilities of a change in tax rates is recognized
                         in income in the period  that  includes  the  enactment
                         date.

                         Impairment of Long-Lived Assets
                         The   Company   reviews  its   long-lived   assets  for
                         impairment  whenever events or changes in circumstances
                         indicate that the carrying amount of the assets may not
                         be recoverable through  undiscounted future cash flows.
                         If  it  is  determined  that  an  impairment  loss  has
                         occurred  based on expected  cash  flows,  such loss is
                         recognized in the statement of operations.

                         Earnings (Loss) Per Common Share
                         The  computation  of basic  earnings  (loss) per common
                         share is based on the weighted average number of shares
                         outstanding during each year.


--------------------------------------------------------------------------------
                                                                            F-11

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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


1.   Organization        Earnings (Loss) Per Common Share - Continued
     and                 The computation of diluted earnings per common share is
     Significant         based  on  the  weighted   average   number  of  shares
     Accounting          outstanding  during  the year,  plus the  common  stock
     Policies            equivalents that would arise from the exercise of stock
     Continued           options  outstanding,  using the treasury  stock method
                         and the average market price per share during the year.
                         Options  to  purchase  554,500  and  628,500  shares of
                         common  stock at prices  ranging from $.13 to $1.59 per
                         share were  outstanding  at December 31, 2000 and 1999,
                         respectively,  but were  not  included  in the  diluted
                         earnings  (loss)  per  share  calculation  because  the
                         effect would have been antidilutive.

                         Concentration of Credit Risk and Significant Customer
                         Financial  instruments  which  potentially  subject the
                         Company  to   concentration   of  credit  risk  consist
                         primarily of trade receivables. In the normal course of
                         business,  the  Company  provides  credit  terms to its
                         customers.  Accordingly,  the Company  performs ongoing
                         credit  evaluations  of  its  customers  and  maintains
                         allowances  for possible  losses which,  when realized,
                         have   been   within   the   range   of    management's
                         expectations.

                         The  Company's  customer base consists of businesses in
                         the telecommunications and lodging industries. Although
                         the Company is directly  affected by the  well-being of
                         this industry,  management does not believe significant
                         credit risk exists at December 31, 2000.

                         The Company maintains its cash in bank deposit accounts
                         which, at times, may exceed  federally  insured limits.
                         The  Company  has not  experienced  any  losses in such
                         accounts   and  believes  it  is  not  exposed  to  any
                         significant credit risk on cash and cash equivalents.

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

                         Reclassifications
                         Certain  amounts in the 1999 financial  statements have
                         been  reclassified  to conform  with the  current  year
                         presentation.

--------------------------------------------------------------------------------
                                                                            F-13

<PAGE>


                                                                TELS CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



2.   Going               At December 31, 2000, the Company has a working capital
     Concern             deficit,  a  stockholders'  deficit,  and has  incurred
                         losses  during the years  ended  December  31, 2000 and
                         1999. These conditions  raise  substantial  doubt about
                         the  ability  of the  Company  to  continue  as a going
                         concern.  The consolidated  financial statements do not
                         include  any  adjustments  that might  result  from the
                         outcome of this uncertainty.

                         The   Company's   plan  with  respect  to  2001  is  to
                         restructure   debt,   reduce  operating   expenses  and
                         increase  lodging and general  business call accounting
                         sales. Failure to accomplish  management's plan in 2001
                         and to  generate  positive  operating  cash flow  could
                         result in further  erosion of the  Company's  financial
                         condition   and   failure   to   meet   its   financial
                         obligations.  There is no assurance that the Company or
                         management will be successful.


3.   Detail of           Additional  information regarding certain balance sheet
     Certain             accounts are presented below:
     Balance
     Sheet               Accounts Receivable
     Accounts            -------------------

                         Trade accounts receivable                   $  328,791
                         Less allowance for doubtful accounts           (26,313)
                                                                     -----------

                                                                     $  302,478
                                                                     -----------


                         Inventories
                         -----------
                         Finished goods                              $   35,725
                         Work-in-process                                 38,970
                         Raw materials                                   92,713
                        Reserve for obsolete inventory                  (15,466)
                                                                     -----------

                                                                     $  151,942
                                                                     ----------


--------------------------------------------------------------------------------
                                                                            F-13

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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

3.   Detail of           Accrued Expenses
     Certain             ----------------
     Balance
     Sheet               Accrued vacation                           $    90,329
     Accounts            Payroll, payroll taxes and benefits             62,120
     Continued           Accrued interest                                38,741
                         Deposits                                        18,864
                         Other                                           58,522
                                                                    -----------

                                                                    $   268,576
                                                                    -----------

4.   Property            Property and equipment consists of the following:
     and
     Equipment           Land                                      $     35,380
                         Building and improvements                      488,037
                         Furniture and equipment                      1,448,787
                                                                   -------------

                                                                      1,972,204

                         Less accumulated depreciation
                            and amortization                         (1,591,595)
                                                                   -------------

                                                                   $     380,609
                                                                   -------------

                         Depreciation and  amortization  expense totaled $74,260
                         and $157,022 for the years ended  December 31, 2000 and
                         1999, respectively.


5.   Note                The Company has a  revolving  line-of-credit  agreement
     Payable             with a financing institution. A maximum of $350,000 was
                         available  under  the line of credit  at  December  31,
                         2000.  The loan bears  interest  at the  greater of the
                         institution's prime rate plus 2.75% (12.25% at December
                         31, 2000), or $4,000 per month and is due September 10,
                         2001.  The loan is secured by all Company assets and is
                         guaranteed  by  an  officer.  The  Company  is  out  of
                         compliance with certain financial  covenants related to
                         the  agreement.  In addition,  in  accordance  with the
                         terms of the agreement,  the Company may not declare or
                         pay  dividends  or  acquire  any of its own  stock.  At
                         December 31, 2000, the balance due totaled $149,510.






--------------------------------------------------------------------------------
                                                                            F-15

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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

6.   Notes
     Payable -
     Related
     Parties

                         Notes   payable-related   parties   consists   of   the
                         following:


                         Notes payable to officers, including
                         interest at 0% - 12%, due on demand,
                         secured by real property.                 $    197,660

                         Revolving line-of-credit agreement
                         with an officer of the Company to
                         borrow a maximum amount of $75,000 at
                         an interest rate of 15%. The line of
                         credit matures on September 28, 2001,
                         and is secured by real property.                75,000
                                                                   ------------

                                                                   $    272,660
                                                                   ------------


7.   Long-Term           Long-term debt consists of the following:
     Debt

                         Mortgage note payable to a bank in
                         monthly installments of $4,397,
                         including interest at 9.875%, final
                         payment of $377,033 due May, 2003;
                         secured by real property and
                         guaranteed by an officer.                 $    402,026

                         Note payable to an entity owned by
                         an officer (see note 17) due in
                         monthly installments of $7,393,
                         beginning April 1, 2001, with
                         interest at 12%.  The note is
                         unsecured.                                     310,000
                                                                   ------------

                                                                        712,026

                         Less current portion                           (24,764)
                                                                   -------------

                                                                   $    687,262
                                                                   -------------



--------------------------------------------------------------------------------
                                                                            F-14

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



7.   Long-Term           Future maturities of long-term debt are as follows:
     Debt
     Continued
                         Years Ending December 31:                   Amount
                         -------------------------                  -------

                         2001                             $          24,764
                         2002                                        70,514
                         2003                                       442,567
                         2004                                        71,674
                         2005                                        80,764
                         Thereafter                                  21,743
                                                          -----------------

                                                          $         712,026
                                                          -----------------

8.   Income              The income tax  benefit  (provision)  differs  from the
     Taxes               amount computed at federal statutory rates as follows:

                                                   Years Ended
                                                    December 31,
                                         ----------------------------------
                                               2000             1999
                                         ----------------------------------

Income tax benefit (provision) at
  federal statutory rate                 $          33,000  $       148,000
State income tax                                     4,000           22,000
Other                                              (11,000)         (71,000)
Change in valuation allowance                      (26,000)         (99,000)
                                         ----------------------------------

                                         $               -  $            -
                                         ----------------------------------


--------------------------------------------------------------------------------
                                                                            F-15

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



8.   Income              Deferred tax assets  (liabilities) are comprised of the
     Taxes               following:
     Continued
                         Depreciation                              $    (60,000)
                         Deferred revenue                                40,000
                         General business tax credits                    92,000
                         Non-deductible accruals                         50,000
                         NOL carryforwards                            1,307,000
                                                                   ------------

                                                                      1,429,000

                         Valuation allowance                         (1,429,000)
                                                                   ------------

                                                                   $         -
                                                                   -------------

                         As of December 31, 2000,  the Company has net operating
                         loss carry  forwards  (NOL) and  general  business  tax
                         credit  carry  forwards  (GB) for  federal  income  tax
                         purposes which expire as follows:


                         Expiration Date          NOL                 GB
                         ----------------------------------------------------

                         2001               $    380,000        $     6,000
                         2002                          -             14,000
                         2003                          -             24,000
                         2004                          -             20,000
                         2005                     60,000                  -
                         2006                          -             11,000
                         2007                      6,000             11,000
                         2008                    648,000                  -
                         2010                    151,000                  -
                         2011                    638,000                  -
                         2018                    840,000                  -
                         2019                    927,000                  -
                         2020                          -                  -
                         2021                     94,000              6,000
                                            ---------------------------------

                                            $  3,744,000        $    92,000
                                            ---------------------------------



--------------------------------------------------------------------------------
                                                                            F-18

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



8.   Income              A valuation allowance has been established that offsets
     Taxes               the net  deferred tax asset due to the  uncertainty  of
     Continued           realization  caused by the Company's  recurring losses,
                         working capital deficiency and accumulated deficit.






9.   Capital Stock       The Company has established a series of preferred stock
                         with a total of 10,000,000  authorized shares and a par
                         value of $1, and one series of common  stock with a par
                         value  of $.02  and a total  of  50,000,000  authorized
                         shares.




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

                         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.



--------------------------------------------------------------------------------
                                                                            F-17

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



10.  Stock Option        Information regarding the Option Plans is as follows:
     Plans
     Continued
                                              Number of      Option Price
                                               Options        Per Share
                                          ---------------------------------

Outstanding at January 1, 1999                      597,250  $   .45 - 1.59
     Granted                                         50,000             .14
     Exercised                                            -               -
     Expired                                        (18,750)            .45
                                          ---------------------------------

Outstanding at December 31, 1999                    628,500      .14 - 1.59
     Granted                                        255,000               -
     Exercised                                            -               -
     Forfeited                                     (329,000)     .13 - 1.59
     Expired                                              -               -
                                          ---------------------------------

Outstanding at December 31, 2000                    554,500  $   .13 - 1.11
                                          ---------------------------------



                         Options  exercisable and available for future grant are
                         as follows:


                                                    December 31,
                                                2000             1999
                                          ---------------------------------

Options exercisable                                 324,500         613,496
Options available for grant                       2,616,651       2,542,651



--------------------------------------------------------------------------------
                                                                            F-19

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



11.  Stock-Based         The Company has adopted the disclosure-only  provisions
     Compensation        of Statement of Financial  Accounting  Standards (SFAS)
                         No.  123,  Accounting  for  Stock-Based   Compensation.
                         Accordingly,  no compensation  cost has been recognized
                         in the financial statements.  Had compensation cost for
                         the Company's stock option plans been determined  based
                         on the fair  value at the grant date for awards in 2000
                         and 1999,  consistent  with SFAS No. 123, the Company's
                         net  earnings  per share would have been reduced to the
                         pro forma amounts indicated below:

                                                    Years Ended
                                                    December 31,
                                          ---------------------------------
                                                2000             1999
                                          ---------------------------------

Net loss - as reported                    $         (98,765   $     (1,118,385)
Net loss - pro forma                      $        (119,036   $     (1,121,640)
Loss per share - as reported              $            (.02)  $           (.29)
Loss per share - pro forma                $            (.03)  $           (.29)
                                          ------------------------------------

                         The fair value of each option grant is estimated at the
                         date of grant using the  Black-Scholes  option  pricing
                         model with the following assumptions:


                                                     Years Ended
                                                    December 31,
                                          ---------------------------------
                                                2000             1999
                                          ---------------------------------

Expected dividend yield                   $              -    $          -
Expected stock price volatility                        116%            114%
Risk-free interest rate                                  6%              5%
Expected life of options                           10 years        10 years
                                          ---------------------------------


--------------------------------------------------------------------------------
                                                                            F-20

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



11. Stock-Based          The following table summarizes  information about stock
     Compensation        options outstanding at December 31, 2000:
     Continued

                  Number         Weighted     Weighted     Number     Weighted
   Range of   Outstanding at     Average      Average  Exercisable at  Average
   Exercise    December 31,     Remaining     Exercise  December 31,  Exercise
    Prices         2000      Contractual Life  Price        2000        Price
-------------------------------------------------------------------------------

$0.13 to $0.14    440,000     6.08 years      $   0.13     210,000    $  0.13
$0.45 to $0.60     34,500     4.93 years      $   0.55      34,500    $  0.55
$0.86 to $1.11     80,000     4.84 years      $   1.14      80,000       1.14
                  -------                                  -------

                  554,500                     $   0.30     324,500    $  0.42
                  -------                                  -------

                         The  weighted  average  fair  value of  options  issued
                         during 2000 was $.10.


12.  Supplemental        During the year ended December 31, 2000, the Company:
     Disclosure of
     Cash Flow           o  During  the year ended  December  31,  2000,  HTI, a
     Information            company  with  net   liabilities,   was  sold  to  a
                            shareholder. Prior to the sale the company increased
                            its  investment in HTI by $354,426 in exchange for a
                            note payable of $310,000 and accounts  receivable of
                            $44,426.

                         o  Issued  300,000 shares of stock valued at $96,000 to
                            an   officer   as    compensation    and    deferred
                            compensation.

                         o  Issued a note  payable to an officer  for $16,042 in
                            exchange for services.

                         o  Issued a note  payable to an officer  for $15,945 in
                            exchange for the use of equipment.

                         o  Sold  its  investment  in HTI for  $10 to an  entity
                            owned by an officer of the Company.

                         o  Issued a note  payable to an officer  for $25,000 in
                            exchange  for the  officer's  personal  guarantee of
                            debt.



--------------------------------------------------------------------------------
                                                                            F-21

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



13.  Employees'          The Company has an employee  401(k) profit sharing plan
     Profit Sharing      covering  substantially all employees who have attained
     Plan                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. No  contributions
                         were made to the plan during the years  ended  December
                         31, 2000 and 1999.


14.  Commitments         Leases
     and                 The Company  leases  office space and  equipment  under
     Contingencies       noncancelable operating lease agreements.  Rent expense
                         was  approximately  $199,000 and $123,000 for the years
                         ended December 31, 2000 and 1999, respectively.

                         Future minimum rental payments required under operating
                         leases  that have  initial or  remaining  noncancelable
                         lease  terms in excess of one year as of  December  31,
                         2000 are as follows:


                         Years Ending December 31:                  Amount
                         -------------------------              ----------------

                               2001                             $        233,526
                               2002                                      234,305
                               2003                                      150,912
                                                                ----------------

                         Total minimum lease payments           $        618,743
                                                                ----------------

                         The   Company    subleases   office   space   under   a
                         noncancelable  sublease.  Future minimum lease payments
                         to be received are as follows:

                         Years Ending December 31:                  Amount
                         -------------------------              ----------------

                               2001                              $       214,963
                               2002                                      226,368
                               2003                                      150,912
                                                                 ---------------

                                                                 $       592,243
                                                                 ---------------



--------------------------------------------------------------------------------
                                                                            F-22

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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

14.  Commitments         Employment And Bonus Agreements
     and                 The Company has entered  into an  employment  agreement
     Contingencies       with an  officer/shareholder  that expires December 31,
     Continued           2003.  The  agreement is  automatically  extended  each
                         December for one additional  year,  unless either party
                         gives written notice 6 months in advance of the renewal
                         date. The agreement provides the officer with an annual
                         base salary,  business expense  reimbursement,  certain
                         employee benefits or equivalent compensation,  vacation
                         and paid holidays, office space and eligibility for: 1)
                         bonuses; 2) other benefit programs which may be offered
                         by  the  Company  to  its  employees;  3)  a  lump  sum
                         termination  payment  ranging  from 100% to 299% of the
                         officer/shareholder's   gross   income   for  the  year
                         preceding    termination.     In    the    event    the
                         officer/shareholder is terminated for other than cause,
                         the officer/shareholder will be entitled to receive all
                         or part of the items noted above; including a bonus, if
                         paid  in  the  year  preceding  termination,   for  the
                         remaining  term of the agreement as if  employment  had
                         not  terminated.  The  agreement  must be  assigned  to
                         acquiring or successor  entities and termination of the
                         officer/shareholder  must be  approved by a majority of
                         the directors of the Company.

                         During the year ended  December 31,  2000,  the Company
                         paid the  officer/shareholder  a stock bonus of 300,000
                         shares of the Company's common stock.  This bonus vests
                         over three years,  beginning in 2000,  and requires the
                         Company to pay the officer/shareholder  cash amounts of
                         $20,000 per year through 2002 to offset tax liabilities
                         associated with the stock bonus.

                         Litigation
                         The Company may become or is subject to investigations,
                         claims or  lawsuits  ensuing  out of the conduct of its
                         business,  including  those  related  to  environmental
                         safety  and  health,   product  liability,   commercial
                         transactions,  etc. The Company is  currently  aware of
                         certain items  involving  potential  litigation  with a
                         former employee, but does not believe such claims could
                         have  a  material   adverse  affect  on  its  financial
                         position.   No  amounts   have  been   accrued  in  the
                         accompanying  consolidated financial statements related
                         to litigation.



--------------------------------------------------------------------------------
                                                                            F-18

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



15.  Fair Value of       The Company's  financial  instruments  consist of cash,
     Financial           receivables,  payables, and notes payable. The carrying
     Instruments         amount of cash, receivables,  and payables approximates
                         fair value  because of the short-  term nature of these
                         items.   The   carrying   amount   of   notes   payable
                         approximates  fair value as the  individual  borrowings
                         bear interest at market interest rates.


16.  Recent              In June 1999, the FASB issued SFAS No. 137, "Accounting
     Accounting          for  Derivative  Instruments  and Hedging  Activities -
     Pronounce-          Deferral of the  Effective  date of FASB  Statement No.
     ments               133." SFAS 133  establishes  accounting  and  reporting
                         standards  for  derivative   instruments  and  requires
                         recognition of all derivatives as assets or liabilities
                         in the statement of financial  position and measurement
                         of those  instruments  at fair  value.  SFAS 133 is now
                         effective  for fiscal  years  beginning  after June 15,
                         2000.  The Company  believes  that the adoption of SFAS
                         133 will not have any material  effect on the financial
                         statements of the Company.

                         SFAS No. 140, Accounting for Transfers and Servicing of
                         Financial  Assets and  Extinguishments  of Liabilities,
                         was  issued  in  September  2000.  SFAS  No.  140  is a
                         replacement  of SFAS No. 125,  Accounting for Transfers
                         and Servicing of Financial  Assets and  Extinguishments
                         of Liabilities.  Most of the provisions of SFAS No. 125
                         were   carried   forward  to  SFAS  No.   140   without
                         reconsideration by the Financial  Accounting  Standards
                         Board (FASB), and some were changed only in minor ways.
                         In issuing SFAS No. 140, the FASB  included  issues and
                         decisions that had been addressed and determined  since
                         the original  publication of SFAS No. 125. SFAS No. 140
                         is  effective  for  transfers  after  March  31,  2001.
                         Management does not expect the adoption of SFAS No. 140
                         to have a significant  impact on the financial position
                         or results of operations of the Company.


17.  Discontinued        During the year ended  December 31, 1999,  in an effort
     Operations          to increase cash flow and reduce expenses,  the Company
                         discontinued  the Hash Tech,  Inc. (HTI) segment of its
                         operations,  which provided contract  manufacturing and
                         assembly services to the Company. On September 7, 2000,
                         the Company sold HTI, a company  with net  liabilities,
                         to   shareholder.   Prior  to  the  sale,  the  Company
                         increased its investment in HTI by $354,426 in exchange
                         for a note payable of $310,000 and accounts  receivable
                         of $44,426.





--------------------------------------------------------------------------------
                                                                            F-19

<PAGE>


                                                                TELS CORPORATION
                                      Notes to Consolidated Financial Statements
                                                                       Continued

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


17.  Discontinued        Condensed discontinued operations are as follows:
     Operations
     Continued
                                              Years Ended December 31,
                                         ----------------------------------
                                               2000             1999
                                         ----------------------------------

Revenue                                  $               -   $    1,186,113
Costs and expenses                                  43,786        1,849,135
                                         ----------------------------------

Net loss before income taxes                       (43,786)        (663,022)
Income taxes                                        14,000           (6,000)
                                         ----------------------------------

Net loss                                 $         (29,786)  $     (669,022)
                                         ----------------------------------





--------------------------------------------------------------------------------
                                                                            F-20

<PAGE>






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

















                      (THIS SPACE INTENTIONALLY LEFT BLANK)



                                       12
<PAGE>

                                    PART III

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

         Information regarding directors and officers of the Company is
incorporated by reference from "Information Relating to Directors, Nominees,
Executive Officers, Promoters, and Control Persons" in the 2000 Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on June 4, 2001.

         Information required by item 401 and 405 of Regulation S-B is
incorporated by reference from "Compliance with section 16(a) of the Securities
Exchange Act of 1934" in the 2000 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 4, 2001.

Item 10.  Executive Compensation

         Information regarding this item is incorporated by reference from
"Executive Compensation" in the 2000 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 4, 2001.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         Information regarding this item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" in the 2001
Proxy Statement to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 4, 2001.

Item 12.  Certain Relationships and Related Transactions

         Information regarding this item is incorporated by reference from
"Certain Transactions" in the 2001 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 4, 2001.










                      (THIS SPACE INTENTIONALLY LEFT BLANK)




                                       13
<PAGE>


                                     PART IV

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

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

     1. Financial Statements - Included in Part II, Report on Audit of Financial
        --------------------
        Statements.
       Independent Auditors' Report.
       Consolidated Balance Sheet as of December 31, 2000.
       Consolidated Statement of Operations for years ended December 31, 2000
       and 1999. Consolidated Statement of Stockholders' Deficit for the years
       ended December 31,
              2000 and 1999.
       Consolidated Statement of Cash Flows for years ended December 31, 2000
       and 1999. Notes to Consolidated Financial Statement for years ended
       December 31, 2000 and 1999.

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

     3. Exhibits - Exhibit number and description

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

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

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


                                       14
<PAGE>

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

     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,
     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,
     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,
     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,
     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.

     10.13 Severance Agreement between the Company and Stephen M. Nelson dated
     July 1, 1999, filed herein as exhibit to the Company's 1999, form 10-K.

     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.

                                       15
<PAGE>

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

     21. Wholly-owned Operating Subsidiaries of TELS Corporation: TEL
     electronics, inc.

     23.1 Consent of Certifying Accountant filed as Exhibit 23.1 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.

     23.2 Consent of Certifying Accountant filed as Exhibit 23.2 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.

     23.3 Consent of Certifying Accountant filed as Exhibit 23.3 in connection
     to the Company's Registration Statements on Form S-8, SEC File No.'s
     333-17149, 333-17163, and 333-17169, effective December 2, 1996 and
     incorporated herein by reference.

     27.1 Article 5 Financial Data Schedule for year ended December 31, 2000,
     Form 10-KSB.

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

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




SIGNATURES

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


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

     March 31, 2001                             By:/s/
     --------------                             ------------------------
       Date                                     John L. Gunter, CEO

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

Chairman of the Board of Directors, President  March 31, 2000 /s/_______________
and CEO (Principal Executive Officer)                         John L. Gunter

Director, Secretary, Treasurer                 March 31, 2000 /s/_______________
                                                              P. Diane Gunter

Principal Accounting Officer                   March 31, 2000 /s/_______________
                                                              Kristie Hall

                                       16
<PAGE>