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, 1997 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 pursuant to Section 12 (b) of the Act:
                                     "None"

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

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

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

The issuer's  revenues for its most recent fiscal year were $6,195,060.

The  aggregate  market value of the voting and non voting  common equity held by
non-affiliates  of the registrant as of February 28, 1998, was  approximately
$1,290,494.

The issuer had issued and  outstanding  3,891,819  shares of its common stock on
February 28, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Those  sections of portions of the  registrant's  1998 Proxy  Statement  for its
Annual Meeting of Shareholders  to be held on June 1, 1998, are  incorporated by
reference into Part III hereof.


<PAGE>


                                     PART I
Item 1. Business

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

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

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

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

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

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

General
-------

         TELS products and services are divided into two  different  product and
service  sectors:  first,  and the most typical products for the Company for the
last 17 years, the telecommunications  products, are used to provide management,
accounting,  and  billing  information  to  various  business,   education,  and
government  entities,  but primarily to the lodging  industry;  and second,  the
manufacturing and assembly operation,  which provides comprehensive full service
turnkey or consignment contract manufacturing services. The Company's continuing
segment information is provided in Note 14 of the financial statements.

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

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

         The  INN-FORM/XL(R)  product continues to account for a majority of the
Company's  telecommunications  sector sales,  followed by the INN-SURETM,  which
provides   answer    detection   and   verification   for   phone   calls.   The
telecommunication division accounted for 44% of consolidated sales for 1997. The
manufacturing  and  assembly  operation   accounted  for  approximately  56%  of
consolidated sales for 1997.


<PAGE>


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

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

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

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

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

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

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

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

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

         ISO 9002 Quality Services.  TELS,  through its subsidiary HTI, provides
electronics  production  services for companies  needing high quality turnkey or
consignment contract manufacturing.  HTI utilizes state-of-the-art equipment and
ISO 9002  certified  quality  control  systems to provide  services to companies
needing  circuit  board  manufacturing,   cable  assembly,  chassis  wiring  and
electro-mechanical  assembly  services.  When  coupled  with  the  research  and
development  capabilities  of  MICROMEGA,   TELS  provides  a  complete  service
opportunity,  from  research  and  development  to  final  assembly,  under  the
management  of  one  company.   HTI  had  one  customer   which   accounted  for
approximately 26% of consolidated net sales for 1997.


<PAGE>


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

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

         Management  believes computer technology will continue to evolve and be
a dominant  element in the  telecommunications  industry.  TELS recognizes major
telecommunications  industry  changes ahead as a result of changes in the "NANP"
(North American  Numbering Plan) and "NADP" (North American Dialing Plan), which
went into effect in 1995.  These  changes in the  numbering  plan and method for
making  telephone  calls in the  United  States  created  strong  demand for the
Company's  telecommunications  products  in the first half of 1995 as  customers
upgraded  older systems.  The Company  expects its  telecommunications  products
and/or  enhancements  will  need to be  further  developed  to meet the  changes
expected in 1998 and beyond.

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

         The Company  spent  approximately  $184,000,  and  $172,000,  including
certain  capitalized  expenses,  on research and  development  activities in the
years  ended  December  31,  1997  and  1996,  respectively.  All  research  and
development expenses originated from MICROMEGA.

         TELS  formed  and  operates  MICROMEGA  CORPORATION  as a  wholly-owned
subsidiary to create an environment  where  engineering  personnel are part of a
larger entity and also to solicit  outside  contracts  with entities  other than
TELS.  The Company  believes that this  arrangement  improves the efficiency and
quality in research  and  development.  MICROMEGA  carried out all  research and
development for TEL in 1997.

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

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

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


<PAGE>


Year 2000
---------

         The Company is in the process of identifying  operating and application
software  problems  related  to the  "Year  2000"  issue,  both  internally  and
externally.  The Company expects to resolve its  internal  Year 2000  compliance
issues substantially  through replacement and upgrades of software and hardware.
The Company  estimates it will spend  approximately  $20,000 to modify  existing
systems.  However, there can be no assurance that there will not be interruption
of operating or other  limitations of system  functionality  or that the Company
will not incur  substantial  costs to avoid  such  limitations.  Any  failure to
effectively monitor, implement, or improve the Company's operational, financial,
management and technical support systems could have a material adverse effect on
the Company's business and consolidated results of operations.

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

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

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

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

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

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


<PAGE>


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

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

Employees
---------

         As of December 31, 1997, the Company had 71 full-time employees.

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

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

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

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

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

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

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

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


<PAGE>


Item 2. Properties

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

Item 3. Legal Proceedings

         Diane Neuenswander and Harold  Neuenswander vs. TEL electronics,  inc.,
Hash Tech Inc., R. James Taylor,  John L. Gunter, and Stephen M. Nelson,  et.al.
(Superior  court of the State of  California,  County of Santa  Clara,  Case No.
CV755710, filed February 5, 1996). In the Complaint, the Plaintiffs have alleged
causes of action for the following:  (1) rescission,  (2) civil conspiracy,  (3)
fraud, (4) violation of California securities laws, (5) intentional interference
with economic advantage,  (6) common law gender discrimination,  (7) intentional
infliction of emotional distress,  and (8) breach of fiduciary duty. The essence
of each of  Plaintiffs'  claims is that the Company  induced  Plaintiffs to sell
their  interest in a business  referred to as "HTI" by  allegedly  making  false
statements  relating  to  employment  security,   stock  options,  and  bonuses.
Plaintiffs  claim that they have not received  the  employment  security,  stock
options, and bonuses because their employment has been terminated.
         Plaintiffs seek general  damages,  special damages and punitive damages
in an  unspecified  amount.  In  addition,  Plaintiffs  seek  entry  of an order
rescinding the Asset Purchase  Agreement  entered into between TEL  electronics,
inc. and Hash Tech, Inc. on March 16, 1994 and the Employment Agreements entered
into by Hash Tech, Inc. and the Neuenswanders on March 31, 1994. Plaintiffs also
seek recovery of their attorney's fees and costs.
         The company  denies the  allegations  of the  Complaint  and intends to
vigorously  defend  the  matter.  On  October  7,  1997,  the  company  filed  a
cross-complaint in the Superior Court for the County of Santa Clara, against the
Plaintiffs for breach of non-compete agreements, breach of severance agreements,
and intentional and negligent  misrepresentations.  In the cross-complaint,  the
Company requests  compensatory and punitive damages and other appropriate relief
of an  unspecified  amount.  On December 10, 1997,  the  Plaintiffs  filed their
answer to the cross-complaint  denying generally and specifically each and every
allegation in the cross-complaint and asserted various affirmation defenses. The
parties mediation to resolve this matter was unsuccessful.
         In view of the  uncertainties  inherent in  litigation,  the Company is
unable to express any judgements as to the outcome of this matter.

NASDAQ Market Listing
---------------------

         NASDAQ, on August 22nd, 1997, with SEC approvals, announced new listing
requirements  for  maintaining  NASDAQ Small Cap stock  listings.  To maintain a
NASDAQ Small Cap listing of a company's stock,  effective February 23rd, 1998, a
company must, at a minimum:  be registered under Section 12(g) of the Securities
and Exchange Act of 1934 or equivalent;  have Net Tangible Assets of $2 million,
or Market Capitalization of $35 million, or Net Income in the latest fiscal year
of $500,000;  have 500,000  shares of stock in the Public  Float;  have a market
value of $1 million  for the Public  Float  shares;  have a minimum Bid Price of
$1.00; have 2 Market Makers;  have 300  shareholders;  and comply with Corporate
Governance  requirements.  The Company complies with all new NASDAQ requirements
except the minimum Bid Price of Company  Stock.  On March 2nd, 1998, the Company
was notified by NASDAQ that it was not in compliance  with the minimum Bid Price
requirement.  As a result,  the Company was  provided  90 calendar  days,  which
expires May 28, 1998, to regain  compliance with this standard.  The Company may
regain  compliance if its securities  trade at or above the minimum  requirement
for at  least  10  consecutive  trade  days.  If the  securities  do not  regain
compliance  within 90 days,  NASDAQ  will issue a  delisting  letter  which will
identify the review procedures available to the Company. The Company may request
a review at that time,  which will generally stay delisting.  The Company cannot
provide any assurance that it will meet the bid price by this  deadline.  If the
Company  ceases to be listed on the NASDAQ Small Cap Market,  it may continue to
be listed on the OTC Bulletin Board.

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 1997.


<PAGE>


                                     PART II

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

Price Range of Common Stock

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



   1997              High       Low         1996          High     Low
   ----              ----       ---         ----          ----     ---

First Quarter      $  .75     $  .50    First Quarter   $ 1.32   $  .59
Second Quarter        .56        .25    Second Quarter    1.28      .50
Third Quarter         .38        .22    Third Quarter      .97      .56
Fourth Quarter        .44        .25    Fourth Quarter     .69      .41


Approximate Number of Equity Security Holders:

         As of February 28, 1998 there were 1,210  shareholders of record of the
Companies  Common Stock.  Included in the number of  shareholders  of record are
shares held in "nominee" or "street" names. Because many of such shares are held
by brokers  and other  institutions  on behalf of  shareholders,  the Company is
unable to estimate  the total  number of  shareholders  reported by these record
holders.

Dividends:

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







                      (THIS SPACE INTENTIONALLY LEFT BLANK)


<PAGE>


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

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

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

         Consolidated net sales for 1997 decreased 8% to $6,195,060,  a decrease
of $533,756 when compared to consolidated  net sales of $6,728,816 for 1996. The
decrease  in  sales  is  due  primarily  to  decreased  sales  activity  in  the
manufacturing   division  where  sales   decreased  by  $898,283.   The  Company
anticipates that sales levels in the manufacturing  sector will remain constant,
throughout  the first half of 1998,  as a result of increased  competition  from
smaller  competitors  and from lower demands from  customers  outsourcing  their
manufacturing  operations.  However, the manufacturing  division implemented the
"O.S.C.R.",  On Site Customer Rework, program in the first quarter of 1998. This
service includes; on site rework or limited assembly for all R&D, prototype, and
manufacturing  departments  at the  customer's  facility;  reserved work area at
HTI's  facility for jobs  requiring  additional  resources;  and on-call  pager,
weekend,  and after hours service.  Initial response has been very positive from
those customers who have taken advantage of this new program.
         The  decrease  in sales in the  manufacturing  division  was  partially
offset by an increase in sales of the Company's  call  accounting  products.  In
1997,  sales  of  telecommunications  products  increased  16%  or  $370,833  to
$2,697,473  compared  to  $2,326,640  for 1996.  This  increase  in sales in the
telecommunications  product sector is  attributable  to increased sales from the
Company's  dealer  distribution   channel,   increased  sales  through  national
accounts,  and through the new WIN-SENSE product.  The Company  anticipates that
sales to national accounts and dealers will continue to increase and account for
the majority of sales in the telecommunications division in 1998.
         Consolidated  gross  profit  increased  14% or $406,882  in 1997,  when
compared to 1996.  The gross profit of $3,293,232 for 1997,  represented  53% of
sales.  In 1996,  gross  profit of  $2,886,350  represented  43% of  sales.  The
increase in gross  profit as a  percentage  of sales is due to the change in the
sales mix from 1996 to 1997 and  reductions in  manufacturing  costs,  primarily
labor  costs,  in the contract  manufacturing  business.  In 1997,  sales in the
telecommunications  sector accounted for 44% of total sales,  compared to 35% of
total sales for 1996. Because the telecommunication products have a higher gross
profit margin than products in the  manufacturing  sector,  the Company believes
that its  consolidated  gross  profit  margin will be higher when sales from the
telecommunication products increase over those in the manufacturing sector. Even
though net sales in the  manufacturing  sector decreased by $898,283,  the gross
profit in the  manufacturing  sector  increased  by 12% or  $138,094.  The gross
profit for the manufacturing  sector of $1,287,814 for 1997,  represented 37% of
sales, whereas, in 1996, gross profit of $1,149,720 represented 26% of sales. In
1998,  the  Company  anticipates  that  the  gross  profit  percentage  will  be
consistent with 1997 results.
         Consolidated research and development expenditures consisted of several
components in 1997.  The  consolidated  expense of $140,448 for 1997 consists of
$67,817 for current expenses and $72,631 for amortization of projects which were
capitalized in prior years. In addition to these costs currently being expensed,
the Company  also spent  $115,705  in 1997 and $73,031 in 1996,  which have been
capitalized as software development costs. The Company is continuing its efforts
in research and  development on products which will primarily be introduced into
the  telecommunications  marketplace.  As it looks for  opportunities to improve
existing  products and identify areas for new products,  the Company may need to
increase research and development activity in the near future.
         Consolidated selling,  general and administrative expenses decreased 4%
to $2,970,693 for 1997,  when compared to $3,097,796 for 1996.  This decrease in
1997 is  attributable  to  management's  continued  efforts to control costs and
reduce expenses. Management anticipates that it will continue to reduce expenses
in 1998 in  certain  operations  of the  Company  as it  continues  to focus its
efforts toward  increased  profitability.  As a percentage of  consolidated  net
sales, selling,  general and administrative  expenses were 48% in 1997, compared
to 46% in 1996.
         For 1997, the Company  reported  income from  continuing  operations of
$96,656 or $.02 per share,  compared  to a loss from  continuing  operations  of
$348,695 for 1996, or $(.09) per share. This significant increase in earnings of
$445,351 is a result of increased sales related to telecommunications  products,
where the gross profit  contribution is significantly  higher than other sectors
of the Company as well as an increase in the gross  margin in the  manufacturing
sector.  As of December 31, 1997,  the Company has a net deferred tax asset (net
of valuation allowance of $109,400) of $840,886 which is primarily the result of
net operating  loss carry forwards. The Company  believes that it is more likely
than not that  through  the  generation  of taxable  income,  it will be able to
realize the benefit of the net deferred tax asset in the future.


<PAGE>


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

         At December 31, 1997, the Company reported current assets of $2,024,186
and current liabilities of $1,472,096, resulting in working capital of $552,090.
This is an  increase  in working  capital of $44,423  when  compared  to working
capital of $507,667 at the end of 1996.  This increase in working capital is due
to reductions in accounts payable of $106,789 and reductions in accrued expenses
of  $158,703.  These  reductions  to  increase  working  capital  were offset by
increases  in the  current  portion  of  long-term  debt of  $199,767.  Net cash
provided by operating  activities was also used to purchase equipment of $70,028
and for capitalized software development costs of $159,675.

         The Company  increased  its borrowing on a line of credit by $65,679 in
1997 and reduced its long-term debt by $81,967 from $403,083 at the end of 1996.
The Company  refinanced  its line of credit by entering into a new inventory and
accounts  receivable  financing  agreement  with a lender on July 1, 1997.  This
agreement is for twenty-four months, with interest at prime plus 3%. The Company
is continuing its efforts to find additional financing through investment equity
which  may  be  needed  to  fund  operations,   future  acquisitions  and  final
development and marketing of new products under  consideration.  The Company has
evaluated  its  existing  system  for  compliance  with  the  year  2000 and has
determined that an upgrade to their existing accounting system will be required.
This  upgrade  was  purchased  in 1997 for the  telecommunications  sector.  The
telecommunications  industry is  experiencing  drastic changes which could limit
the Company's  ability to meet sales  projections in this industry and there can
be no assurance that the Company will be able to generate a profitable  level of
sales.

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

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

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

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

         These  forward-looking  statements  are based  largely on the Company's
current  expectations  and are  subject to a number of risks and  uncertainties.
Actual results could differ  materially from these  forward-looking  statements.
Important  factors to consider in  evaluating  such  forward-looking  statements
include  (i) delays in the release of new  products or new  versions of existing
products; (ii) the shortage of reliable market data regarding the telephone call
management  and  contract  manufacturing  industries  market;  (iii)  changes in
external  competitive  market  factors 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.

         In  January,  1998,  TELS  signed a non  binding  letter  of  intent to
purchase  K. S.  Telecom,  Inc.,  dba Key  Systems U. S. Key Systems has offered
competitively  priced,  fully  featured,  proprietary  telephone  and voice mail
systems for small to  medium-sized  businesses  for 10 years under the Atlas and
Salta brands.  Key Systems also offers "InnFONE",  a telephone system especially
designed  for  lodging  properties  with up to 400  rooms,  with a PC front desk
system and an integrated  voice mail system.  Key Systems provides OEM telephone
systems products to Cortelco (formerly ITT Telecom) under the Odyssey brand. The
acquisition  is being  carried  out  with  the  assistance  of  Travis  Capital,
financial advisor to TELS. However, in view of uncertainties inherent with these
types of non binding agreements,  the Company is unable to express an opinion as
to the ultimate outcome of this matter.


<PAGE>


         The Company's business and products may be significantly  influenced by
the constantly  changing body of regulatory laws and regulations,  which require
that certain regulatory standards be met and impose liability for the failure to
comply  with  such  standards.  While  the  Company  endeavors  at  each  of its
facilities to assure compliance with regulatory laws and regulations,  there can
be no assurance  that the  Company's  operations  or  activities,  or historical
operations  by others at the  Company's  locations,  will not result in civil or
criminal  enforcement  actions or private  actions  that could have a materially
adverse effect on the Company.
         The Company's future operating  results depend in part upon its ability
to retain and attract qualified engineering,  manufacturing,  technical,  sales,
and support  personnel for its  operations.  Competition  for such  personnel is
intense,  and there can be no assurance  that the Company will be  successful in
attracting or retaining  such  personnel.  The failure to attract or retain such
persons could materially  adversely affect the Company's business and results of
operations.
         The  Company's  success  will  depend  in  significant  part  upon  the
continued contributions of its officers and key personnel, many of whom would be
difficult to replace.  The loss of any key person could have a material  adverse
effect on the business,  financial  condition,  and results of operations of the
Company.

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

         In 1997,  the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  No. 130 ("SFAS  130"),  Reporting
Comprehensive  Income,  which prescribes  standards for reporting  comprehensive
income and its components.  Comprehensive  income consists of net income or loss
for the current period and other comprehensive income (income,  expenses,  gains
and losses that currently bypass the income statement and are reported  directly
in a separate  component  of  equity).  SFAS 130  requires  that  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence as other  financial  statements.  SFAS 130 is effective for
financial  statements  issued for periods beginning after December 15, 1997. The
new  standard  is a  disclosure  change  only and  will  have no  effect  on the
Company's financial condition or results of operations.
         Also in June 1997, the FASB issued Statement No. 131 "Disclosures about
Segments of an Enterprise and Related  Information" ("SFAS 131"), which requires
publicly-held  companies to report financial and descriptive  information  about
its  operating  segments in  financial  statements  issued to  shareholders  for
interim and annual periods.  The statement also requires additional  disclosures
with respect to products and services,  geographical  areas of  operations,  and
major customers. SFAS 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented. The new standard
is a disclosure  change only and will have no effect on the Company's  financial
condition or results of operations.
         In addition,  the  Accounting  Standards  Executive  Committee  (AcSEC)
issued  Statement  of Position No. 98-1 (SOP 98-1),  Accounting  for the Cost of
Computer  Software  Development or Obtained for Internal Use. The SOP was issued
to address diversity in practice regarding whether and under what conditions the
costs of internal-use software should be capitalized.  SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The Company is
currently evaluating the impact SOP 98-1 will have on its financial  statements,
if any.
         The  Company  has  reviewed  all  other  recently  issued,  but not yet
adopted,  accounting  standards in order to determine their effects,  if any, on
the results of  operations or financial  position of the Company.  Based on that
review,  the  Company  believes  that none of these  pronouncements  will have a
significant effect on current or future earnings or operations.


<PAGE>


Item 7. Financial Statements and Supplementary Data.

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

                  Report of Independent Accountants.
                  Consolidated Balance Sheet as of December 31, 1997
                  Consolidated Statements of Operations for the years ended
                           December 31, 1997 and 1996.
                  Consolidated Statements of Changes in Stockholder's Equity for
                           the years ended December 31, 1997 and 1996.
                  Consolidated  Statements  of Cash  Flows for the  years  ended
                           December 31, 1997 and 1996.
                  Consolidated Notes to Financial Statements for the years ended
                           December 31, 1997 and 1996.

Item 8. Disagreements on Accounting and Financial Disclosures.

         None.



<PAGE>






                        Report of Independent Accountants


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

We  have  audited  the  consolidated  financial  statements  of TELS Corporation
and Subsidiaries as listed in Item 13(a) of the Form 10-K SB.    These financial
statements are the  responsibility  of the Company's  management.
Our  responsibility  is to  express  an  opinion on these   financial statements
based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits 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 financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of TELS Corporation
and Subsidiaries as of December 31, 1997, and the consolidated  results of their
operations  and their cash flows for the two years in the period ended  December
31, 1997 in conformity with generally accepted accounting principles.





COOPERS & LYBRAND L.L.P.

Salt Lake City, Utah
March 25, 1998



<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                December 31, 1997


       ASSETS                                                              1997

Current assets:
    Cash and cash equivalents ..................................    $    13,845
    Cash investments ...........................................         67,364
    Trade accounts receivable, less allowance for doubtful
       accounts of $119,381 ....................................        719,260
    Employee and other receivables .............................        117,438
    Inventories, net ...........................................        795,955
    Prepaid expenses ...........................................        171,168
    Deferred income taxes ......................................        139,156
                                                                    -----------
             Total current assets ..............................      2,024,186

Property and equipment, net ....................................        758,149
Software development costs, net ................................        189,216
Intangible assets, net .........................................        119,017
Deferred income taxes ..........................................        701,730
Other assets ...................................................        167,938
                                                                    -----------
                                                                    $ 3,960,236

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Trade accounts payable .....................................    $   294,644
    Accrued expenses ...........................................        149,530
    Accrued vacation ...........................................         94,562
    Current portion of long-term debt ..........................        824,043
    Deposits and advances ......................................        109,317
                                                                    -----------
             Total current liabilities .........................      1,472,096
                                                                    -----------
Long-term debt, less current portion ...........................         19,683
                                                                    -----------
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
    Common stock, $.02 par value,
       Authorized 10,000,000 shares; issued and
       outstanding 3,891,819 shares ............................         77,835
    Additional paid-in capital .................................      4,226,532
    Accumulated deficit ........................................     (1,825,735)
    Deferred compensation ......................................        (10,175)
                                                                    -----------
             Stockholders' equity ..............................      2,468,457
                                                                    -----------
                                                                    $ 3,960,236
                                                                    ===========

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


<PAGE>
<TABLE>
<CAPTION>

                       TELS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 for the years ended December 31, 1997 and 1996



                                                                         1997             1996
                                                                         ----             ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Net sales .........................................................   $ 6,195,060    $ 6,728,816
Cost of goods sold ................................................     2,901,828      3,842,466
                                                                      -----------    -----------
Gross profit ......................................................     3,293,232      2,886,350

Research and development expenses .................................       140,448         98,906
Selling, general and administrative expenses ......................     2,970,693      3,097,796
                                                                      -----------    -----------
  Operating income (loss) .........................................       182,091       (310,352)
Other income (expense):
  Interest income .................................................        17,934         10,765
  Interest expense ................................................      (122,060)      (104,297)
  Other, net ......................................................        50,895         25,810
                                                                      -----------    -----------
                                                                          (53,231)       (67,722)
Income (loss) from continuing operations before                       -----------    -----------
  income tax benefit (provision) ..................................       128,860       (378,074)
Income tax benefit (provision) ....................................       (32,204)        29,379
                                                                      -----------    -----------
Income (loss) from continuing operations ..........................        96,656       (348,695)
Discontinued operations:
  Loss from discontinued operations (less applicable
    income tax benefit of $44,148) ................................          --          (78,486)
                                                                      -----------    -----------
    Net income (loss) .............................................   $    96,656    $  (427,181)
                                                                      ===========    ===========
Net income (loss) per common and common equivalent share:
Basic earnings (loss) per share from continuing operations (Note 12)  $       .02    $      (.09)
  Loss per share from discontinued operations (Note 12) ...........            --           (.02)
                                                                      -----------    -----------
Net income (loss) .................................................   $       .02    $      (.11)
                                                                      ===========    ===========

Diluted earnings (loss) per share (Note 12) .......................   $       .02    $      (.11)
                                                                      ===========    ===========

Basic and diluted weighted average number of shares outstanding ...     3,891,819      3,888,564
                                                                      ===========    ===========
</TABLE>

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


<PAGE>
<TABLE>
<CAPTION>

                       TELS CORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
                  EQUITY for the years ended December 31, 1997
                                    and 1996



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

Balances at December 31, 1995 .........   $    77,825    $ 4,231,567    $(1,495,210)   $  (111,175)   $ 2,703,007

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

Net income ............................            --             --         96,656             --         96,656
Amortization of deferred
  compensation ........................            --             --             --         40,500         40,500
                                          -----------    -----------    -----------    -----------     -----------
Balances at December 31, 1997 .........   $    77,835    $ 4,226,532    $(1,825,735)   $   (10,175)   $ 2,468,457
                                          ===========    ===========     ===========    ===========    ===========
</TABLE>
                  The accompanying notes are an integral part
                   of these consolidated financial statements

<PAGE>
<TABLE>
<CAPTION>


                        TELS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                 for the years ended December 31, 1997 and 1996




                                                                     1997           1996
                                                                     ----           ----

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

Cash flows from operating activities:
   Net income (loss) ..........................................   $  96,656    $(427,181)
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
        Depreciation and amortization .........................     396,311      392,012
        Deferred income taxes .................................      12,191       35,479
        Stock bonuses and amortization of deferred compensation      40,500       62,775
        Cancellation of stock .................................          --      (10,000)
        Loss on disposal of equipment .........................          --       (4,328)
        Changes in operating assets and liabilities:
          Receivables .........................................      17,766      313,044
          Inventories .........................................     (45,528)     349,617
          Prepaid expenses ....................................     (22,164)     (76,181)
          Trade accounts payable and accrued expenses .........    (263,647)     (11,906)
          Other assets and liabilities ........................      (6,264)     (29,312)
        Noncash charges and working capital changes
          of discontinued operations ..........................          --      329,177
                                                                   ---------   ---------
                 Net cash provided by operating activities ....     225,821      923,196
                                                                   ---------   ---------

Cash flows from investing activities:
   Net purchase of investments ................................      (4,965)      (5,782)
   Capital expenditures .......................................     (70,028)     (74,936)
   Proceeds from disposal of equipment ........................       7,000        1,900
   Software development costs .................................    (159,675)     (73,031)
                                                                  ---------    ---------
                 Net cash used in investing activities ........    (227,668)    (151,849)
                                                                  ---------    ---------

Cash flows from financing activities:
   Net borrowings (repayments) under line of credit agreement .      65,679     (624,057)
   Principal payments on long-term debt .......................     (81,967)    (146,085)
   Proceeds from issuance of common stock .....................          --        2,700
                                                                  ---------    ---------

                 Net cash used in financing activities ........     (16,288)    (767,442)
                                                                  ---------    ---------
</TABLE>


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


<PAGE>



                        TELS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
                 for the years ended December 31, 1997 and 1996




                                                          1997         1996
                                                          ----         ----

Net increase (decrease) in cash and cash equivalents   $ (18,135)   $   3,905

Cash and cash equivalents at beginning of year .....      31,980       28,075

Cash and cash equivalents at end of year ...........   $  13,845    $  31,980
                                                       =========    =========

Supplemental disclosure of cash flow information:
   Cash paid during the year for interest ..........   $ 122,060    $ 128,408
   Cash paid during the year for income taxes ......   $   4,000    $     618


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

<PAGE>

                        TELS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Summary of Significant Accounting Policies:

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

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

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

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

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

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

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

         Cash Investments
         ----------------

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

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

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


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

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

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


                                   Continued



<PAGE>


                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.       Summary of Significant Accounting Policies, Continued:

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

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

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

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

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

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

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

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

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

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

         In 1997, the Company adopted the provisions  of  Statement of Financial
         Accounting  Standards No. 128.,  Earnings Per Share ("SFAS 128"), which
         superseded  APB  Opinion  No. 15.  Earnings  per share for all  periods
         presented  has been  restated to reflect the adoption of SFAS 128. SFAS
         128 requires  companies  to present  basic  earnings per share,  and if
         applicable,  diluted  earnings per share,  instead of primary and fully
         diluted earnings per share.  Basic earnings per share excludes dilution
         and  is  computed  by  dividing  net   earnings   available  to  common
         stockholders   by  the  weighted   average   number  of  common  shares
         outstanding  for the period.  Diluted  earnings per share  reflects the
         potential  dilution  that could occur if options to issue  common stock
         were exercised into common stock.

                                   Continued


<PAGE>
                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.       Summary of Significant Accounting Policies, Continued:

         Estimates
         ---------

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

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

         Approximately  18% of the Company's  trade accounts  receivable are due
         from one customer in the computer production and assembly industry. The
         Company does not anticipate the termination of this relationship.

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

         In 1997,  the Financial  Accounting  Standards  Board  ("FASB")  issued
         Statement  of  Financial  Accounting  Standards  No. 130 ("SFAS  130"),
         Reporting   Comprehensive   Income,   which  prescribes  standards  for
         reporting comprehensive income and its components. Comprehensive income
         consists  of net  income  or loss  for the  current  period  and  other
         comprehensive income (income, expenses, gains and losses that currently
         bypass the income  statement  and are  reported  directly in a separate
         component  of  equity).   SFAS  130   requires   that   components   of
         comprehensive  income be  reported  in a  financial  statement  that is
         displayed with the same prominence as other financial statements.

         Also in June 1997, the FASB issued Statement No. 131 "Disclosures about
         Segments of an Enterprise and Related  Information" ("SFAS 131"), which
         requires  publicly-held  companies to report  financial and descriptive
         information about its operating segments in financial statements issued
         to  shareholders  for interim and annual  periods.  The statement  also
         requires additional  disclosures with respect to products and services,
         geographical  areas of operations,  and major  customers.  SFAS 130 and
         SFAS 131, which are effective for fiscal years beginning after December
         15, 1997,  expand or modify  disclosures and will have no impact on the
         Company's  consolidated  financial  position,  results of operations or
         cash flows.

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

                                   Continued


<PAGE>
                        TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.       Inventories:

         Inventories at December 31, 1997 consisted of the following:



              Finished goods                    $    49,362
              Work-in-process                       143,679
              Raw materials and supplies            653,875
              Reserve for obsolete inventory        (50,961)
                                                    -------

                                                 $  795,955
                                                 ==========


3.       Property and Equipment:

         Property and equipment at December 31, 1997 consisted of the following:



              Land                                $       35,380
              Building and improvements                  478,371
              Furniture and equipment                  1,619,184
              Equipment under capital lease              195,835
                                                    ------------
                                                       2,328,770
              Less accumulated depreciation and
                amortization                          (1,570,621)
                                                    ------------
                                                   $     758,149
                                                   =============

         Depreciation  expense  totaled  $199,584  and  $242,228  for the years
         ended December 31, 1997 and 1996, respectively.


4.       Software Development Costs:

         Capitalized  software  development costs at December 31, 1997 consisted
         of the following:



         Software development costs            $ 401,186
         Less accumulated amortization          (213,970)
                                                --------
                                               $ 189,216
                                               =========

         Amortization  expense totaled  $116,601 and $66,969 for the years ended
         December 31, 1997 and 1996, respectively.

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.       Intangible Assets:

         Intangible assets at December 31, 1997 consisted of the following:



         Non-compete agreements             $  308,000
         Goodwill                               56,041
         Organizational costs                   41,398
         Other                                  11,511
         Less accumulated amortization        (297,933)
                                              --------
                                            $  119,017
                                            ==========

         Amortization expense totaled $80,126 and $82,815 for the years ended
         December 31, 1997 and 1996 respectively.


6.       Long-term Debt:

         Long-term  debt at  December  31,  1997,  the  carrying  value of which
         approximates fair value, consisted of the following:



         Revolving line of credit payable to a financial
         institution, bearing interest at the institution's
         index rate plus 3.0% (11.5% at December 31, 1997),
         interest due monthly, principal due 1998,
         collateralized by trade accounts receivable
         and inventories.   The unused line of credit
         at December 31, 1997 was $227,389.                           $  522,611

         Mortgage  note  payable  to a bank in monthly
         installments of $3,063, including  interest
         at the  bank's  index  rate  plus  1.5%
         (10% at December 31, 1997), final payment
         of $184,898 due May 1998; collater-
         alized by real property.                                     $  192,937

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6.       Long-term Debt, Continued:


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

         Note  payable  under  non  compete  agreement
         payable  in (a)  monthly installments of $2,000,
         final payment due March 1995 and (b) quarterly
         installments  of  $15,000, final  payment  due
         July  1997.  Payments suspended by Company until
         resolution of contract terms.  (Note 13)                        75,000

         Capital leases for equipment (Note 7)                           46,178
                                                                      ----------

                 Total long-term debt                                   843,726

                 Less current portion                                  (824,043)
                                                                      ----------
                 Long-term debt, less current portion                $   19,683
                                                                       =========


         The Company's  revolving line of credit contains various  covenants and
         restrictions  that  specify  the  Company  maintain  certain  reporting
         requirements and minimum financial amounts with regard to cash flow and
         renews in July 1999.

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

7.       Leases:

         The  Company  is  obligated  under  capital  leases for  machinery  and
         equipment  that expire  between  September  1998 and February  2000. At
         December 31, 1997, the gross amount of machinery, equipment and related
         accumulated amortization recorded under capital leases were as follows:

              Equipment under capital lease     $  195,835
              Less accumulated amortization       (157,521)
                                                  --------
                                                $   38,314
                                                ==========

         The Company  leases  office  space and  equipment  under  noncancelable
         operating lease  agreements.  Rent expense was $92,308 and $181,397 for
         the  years  ended  December  31,  1997 and 1996,  respectively.  Future
         minimum  rental  payments  required  under capital leases and operating
         leases  that have  initial or  remaining  noncancelable  lease terms in
         excess of one year as of December 31, 1997 are as follows:

                                                      Capital          Operating
                                                       leases            leases
                                                       ------            ------
         Year ending December 31:
                         1998                       $  30,611           $116,544
                         1999                          18,662             70,723
                         2000                           2,711                  -
                                                    ---------           --------

               Total minimum lease payments            51,984           $187,267
                                                                         =======

               Less amount representing interest
               at rates ranging from 5.5% to 20%)     ( 5,806)
                                                    ----------

               Present value of net minimum
               capital lease payments                  46,178

               Less current installments of
               obligations under capital leases       (26,495)
                                                    ----------
               Obligations under capital leases,
               excluding current installments       $  19,683
                                                     ========

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.       Income Taxes:

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

                                        1997            1996
                                        ----            ----
           Current:
               Federal              $      -       $       -
               State                 (20,013)         (6,100)
                                     -------          ------
                                     (20,013)         (6,100)
                                     -------          ------
           Deferred:
               Federal                (7,945)         32,879
               State                  (4,246)          2,600
                                      ------           -----
                                     (12,191)         35,479
                                     -------          ------
                    Total           $(32,204)      $  29,379
                                    ========       =========


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

                                                             1997        1996
                                                             ----        ----


         Computed expected tax benefit (expense)          $ (43,812) $  128,545
         Increase (decrease) in income
         taxes resulting from:
           Change in valuation allowance                     19,500           -
           Effect of expiring tax credits                   (18,994)          -
           Officers' life insurance                            (645)     (1,646)
           State income taxes, net of
             federal income tax benefit                       1,054     (24,197)
           Prior year taxes                                       -     (53,944)
           Other, net                                        10,693     (19,379)
                                                           ---------   ---------

                 Total income tax benefit (expense)      $  (32,204)  $  29,379
                                                          ==========   =========


                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.       Income Taxes, Continued:

         The tax effects of temporary differences that give rise to deferred tax
         assets and liabilities at December 31, 1997 are presented below:

           Deferred tax assets:
              Deferred revenue                                     $     36,800
              Accounts receivable                                        44,500
              Inventories                                                19,000
              Accrued liabilities                                        38,800
              Intangible assets                                          64,500
              General business tax credits                              105,700
              AMT tax credit                                              4,000
              Jobs credit                                                 3,700
              Net operating loss carry forward                          702,886
                                                                      ----------
                Deferred tax assets                                   1,019,886
                Less valuation allowance                               (109,400)
                                                                       ---------
                Total deferred tax assets                               910,486

           Deferred tax liability:
              Property and equipment                                    (69,600)
                                                                      ----------
           Net deferred tax asset                                    $   840,886
                                                                      ==========

         The net  deferred tax asset as of December 31, 1997 is reflected in the
         consolidated balance sheet as follows:



           Current deferred tax asset                                  $139,156
           Long-term deferred tax asset                                 701,730
                                                                      ----------
                                                                       $840,886
                                                                      ==========
     Based on the level of current  taxable  income and  projections  for future
     taxable  income  over the  periods  in which the  deferred  tax  assets are
     expected to be realized,  management  believes  that it is more likely than
     not that the Company will realize the benefit of the deferred tax assets in
     the future, net of the existing valuation allowance.


                                    Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.       Income Taxes, Continued:

         As of December  31,  1997,  the Company  has net  operating  loss carry
         forwards,  investment  tax  credit  carry  forwards  and  research  and
         experimentation  credit carry  forwards for federal income tax purposes
         which expire as follows:

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

               1998      $       -          $  1,500         $  13,000
               1999              -             1,800             1,000
               2000              -             6,200                 -
               2001        380,900                 -             6,000
               2002              -                 -            14,500
               2003              -                 -            23,700
               2004              -                 -            19,700
               2005         60,100                 -                 -
               2006              -                 -            11,300
               2007          5,800                 -            10,700
               2008        648,400                 -                 -
               2009              -                 -                 -
               2010        151,000                 -                 -
               2011        638,000                 -                 -
               2012              -                 -                 -
                        ----------         ---------         ---------
                        $1,884,200            $9,500          $ 99,900
                        ==========         =========         =========


9.       Capital Stock:

         Stock Option and Bonus Plans

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

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

9.       Capital Stock, Continued:

         Stock Option and Bonus Plans, Continued

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

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

                                   1997                      1996
                                   ----                      ----

                                     Earnings per                 Earnings per
                                     share basic                  share basic
                        Net income   and diluted   Net (loss)     and diluted
                        ----------   ------------  -----------    ------------
            As Reported  $ 96,656       $0.02      $(427,181)        $(0.11)
            Pro Forma    $ 95,964       $0.02      $(427,520)        $(0.11)

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

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

                                             1997                 1996
                                             ----                 ----
                                                 Weighted             Weighted
                                         Number   average    Number    average
                                           of    exercise      of      exercise
                                         shares    price     shares     price
                                         ------    -----     ------     -----

     Outstanding at beginning of year    746,250   $0.95    875,500     $0.95
     Granted                              79,000    0.59     65,000      0.78
     Exercised                                 -    0.00      6,000      0.45
     Forfeited                            76,375    0.59    188,250      1.23
                                        ---------          ---------
     Outstanding at end of year          748,875    0.87    746,250      0.87
     Options exercisable at year end     585,510    0.90    536,518      0.90

                                   Continued
<PAGE>
<TABLE>
<CAPTION>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                         Number         Weighted         Weighted         Number      Weighted
         Range of    outstanding at      average         average     exercisable at    average
         exercise     December 31,      remaining       exercise      December 31,    exercise
          prices         1997        contractual life    price            1997          price
     --------------- --------------- ---------------- ------------  ---------------  -----------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

      $ .45 to $ .66     433,875        5.71 years        $0.48         325,509         $0.45
      $ .86 to $1.11      45,000        8.19 years        $0.92          16,668         $0.94
      $1.21 to $1.59     270,000        6.81 years        $1.49         243,333         $1.51
                     --------------                   ------------  ---------------  -----------
                         748,875                          $0.87         585,510         $0.90
                     ==============                                 ===============
</TABLE>


         At December 31, 1997,  2,422,276  shares of the Company's  common stock
         are authorized for issuance under the stock option and bonus plans.

         In May 1995,  the Company  granted  stock  bonuses  aggregating  48,000
         common shares to three outside directors of the Company. Shares granted
         to one of the  directors  were  fully  vested on the date of the grant.
         Shares  granted  to the other two  directors  vested  equally  over two
         years,  beginning  on the date of the  grant.  Compensation  expense of
         $20,000 was recognized in 1996 with respect to this grant. During 1996,
         one of the directors returned the 8,000 shares he received. The Company
         canceled those shares.

         In April  1993,  stock  bonus  awards  were made to  officers  totaling
         450,000  shares that vest over a five-year  period  commencing in 1993.
         Compensation  expense of $40,500 and $40,500 was recognized in 1997 and
         1996, respectively,  with respect to this grant. The remaining deferred
         compensation expense will be recognized in 1998.

10.      Related Party Transactions:

         Included in employee  and other  receivables  at December 31, 1997 is a
         $39,302  uncollateralized  note  receivable  due  from  the  CEO of the
         Company. The note bears interest at eight percent and is due on demand.

         Included in employee and other  receivables  at December 31, 1997,  are
         expense  advances to the CEO of the Company of $32,657.  These  expense
         advances bear no interest and are due on demand.

         Included in selling  general and  administrative  expense are  payments
         totaling  $12,756 in 1997 and $12,756 in 1996 to the CEO of the Company
         for the Company's use of vehicles and property owned by the CEO.

11.      Employees' Profit Sharing Plan:

         The  Company  has  an   employees'   profit   sharing   plan   covering
         substantially  all  employees  who have attained age 21 with service in
         excess of six months.  The plan provides for Company  contributions  at
         the discretion of the Board of Directors.  Company  contributions begin
         vesting after the first full year in which eligible  employees complete
         501 hours of service,  with full vesting  occurring  after seven years.
         Contributions  to the plan during the year ended  December 31, 1997 and
         1996 totaled $0 and $15,000, respectively.

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

12.      Net Income (Loss) Per Share:

         Options to  purchase  748,875  and  746,250  shares of common  stock at
         prices  ranging  from  $0.45 to $1.59  per share  were  outstanding  at
         December 31, 1997 and 1996, but were not included in the computation of
         diluted   earnings  per  share  because  the  effect  would  have  been
         antidilutive.


13.      Contingencies:

         On February 2, 1996, the former owners of Hash Tech (Plaintiffs)  filed
         a  complaint  in the  Superior  Court for the  County  of Santa  Clara,
         California,  against  the  company  and  several  of its  officers  and
         directors in their individual and representative  capacities,  and also
         against HTI, a wholly owned  subsidiary of the Company.  The Plaintiffs
         have alleged causes of action for recision of a certain "Asset Purchase
         Agreement" dated March 31, 1994, civil conspiracy,  fraud, violation of
         California  securities  laws,  common  law gender  discrimination,  and
         intentional  infliction  of  emotional  distress.  The  Company and its
         officers  deny any  wrongdoing in regard to the above  allegations.  On
         April 15, 1996,  the Company  filed a complaint  in the Third  Judicial
         District  Court of Salt Lake City,  Utah,  against the  Plaintiffs  for
         breach  of  "non  compete   agreements"  and  breach  of  a  "Severance
         Agreement"  between the  Plaintiffs and the Company and on February 24,
         1997,  the Company filed a Motion for Summary  judgment in this matter,
         which is awaiting oral argument.  In addition,  the Company has filed a
         complaint  with the American  Arbitration  Association,  which is being
         held pending the outcome of certain legal  hearings.  On April 9, 1996,
         the  Superior  Court of Santa Clara,  California,  heard and denied the
         Company's motion to compel arbitration. In July 1996, the Company filed
         an appeal to reverse this decision  with the Sixth  Appellate  District
         in the Court of Appeal of the State of California. On February 18, 1997
         this appeal was denied.  While the Company believes that the litigation
         will be resolved without a  materially adverse effect on the  Company's
         business or financial position,  there  can be no  assurance as  to the
         ultimate outcome of, or the costs incurred by the Company in  defending
         this litigation.

14.      Segment Information:

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

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

         Identifiable  assets by industry  are those assets that are used in the
         Company's  operations in each business  segment.  One customer,  in the
         contract  computer  production  and assembly  industry,  accounted  for
         approximately  26% of the  Company's  sales in 1997.  The same customer
         accounted  for  17% of the  sales  in  1996.  Identifiable  assets  are
         principally  property and equipment,  capitalized  software development
         costs, deferred tax assets and other assets.

                                   Continued
<PAGE>

                       TELS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

14.      Segment Information:

         Financial information by segments is as follows:

                                                     1997               1996
                                                     ----               ----

         Net sales:
           Telecommunications                    $ 2,697,473        $ 2,326,640
           Computer production and assembly        3,495,682          4,393,965
           Corporate and other                         1,905              8,211
                                                 -----------         ----------
                                                 $ 6,195,060        $ 6,728,816
                                                  ==========         ==========

         Operating income (loss):
           Telecommunications                   $    788,562       $    786,517
           Computer production and assembly          433,822            123,910
           Corporate and other                    (1,040,293)        (1,220,779)
                                                  ----------         -----------
                                                $    182,091       $   (310,352)
                                                 ===========       =============

         Identifiable assets:
           Telecommunications                   $    949,315       $    574,079
           Computer production and assembly        1,219,669          1,039,365
           Corporate and other                     1,791,252          2,498,933
                                                  ----------         ----------
                                                 $ 3,960,236        $ 4,112,377
                                                  ==========         ==========

         Depreciation and amortization expense:
           Telecommunications                   $    189,795       $    186,344
           Computer production and assembly          153,020            147,531
           Corporate and other                        53,496             58,137
                                                ------------         ----------
                                                $    396,311       $    392,012
                                                 ===========        ===========

         Capital expenditures:
           Telecommunications                  $      17,814      $      16,307
           Computer production and assembly           39,913             24,401
           Corporate and other                        12,301             33,688
                                                 -----------         ----------
                                               $      70,028       $     74,396
                                                ============        ===========


15.      Discontinued Operations:

         In  January  1996 the  Company  formalized  a plan to  discontinue  the
         operations of Computer Express and Micro Station. On April 3, 1996, the
         Company  entered  into an  agreement  to sell the net  assets  of Micro
         Station to a former employee for a $60,792 note (the Note). The Note is
         collateralized by a security  agreement  covering non-real property and
         bears  interest at 12%.  One-third  of the  purchase  price was due and
         payable 30 days from the contract  date,  one-third was due and payable
         60 days from the  contract  date and the  remaining  amount was due and
         payable 80 days from the contract  date.  As of December 31, 1997,  the
         receivable had been either  collected or fully  reserved.  Revenues for
         the year ended December 31, 1996 were not significant.

<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 1998 Proxy Statement
to be  delivered  to  shareholders  in  connection  with the  Annual  Meeting of
Shareholders to be held on June 1, 1998.

         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  1998  Proxy  Statement  to  be  delivered  to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 1, 1998.

Item 10. Executive Compensation

         Information  regarding  this item is  incorporated  by  reference  from
"Executive  Compensation"  in  the  1998  Proxy  Statement  to be  delivered  to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 1, 1998.

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 1998
Proxy  Statement to be delivered to  shareholders  in connection with the Annual
Meeting of Shareholders to be held on June 1, 1998.

Item 12.  Certain Relationships and Related Transactions

         Information  regarding  this item is  incorporated  by  reference  from
"Certain   Transactions"  in  the  1998  Proxy  Statement  to  be  delivered  to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 1, 1998.


<PAGE>


                                     PART IV

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

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

     1.Financial Statements - Included in Part II,
          Report on Audit of  Financial Statements.
       Report of Independent Accountants.
       Consolidated Balance Sheet as of December 31, 1997.
       Consolidated Statements of Operations for the years
              ended December 31, 1997 and 1996.
       Consolidated  Statements of Changes in Stockholders' Equity for the years
              ended December 31, 1997 and 1996.
       Consolidated  Statements of Cash Flows for the years
              ended December 31, 1997 and 1996.
       Consolidated Notes to Financial  Statements  for the years
              ended December 31, 1997 and 1996.

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

     3. Exhibits - Exhibit number and description

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

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

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

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

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

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

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

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

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

     10.4 1984  Non-Qualified  Stock  Option  Plan filed as Exhibit  10.4 to the
     Company's Registration Statement on Form S-18, SEC File No. 2-93915-D,  and
     incorporated  herein by this  reference.  10.5  Form of 1984  Non-Qualified
     Stock Option Agreement filed as Exhibit 10.5 to the Company's  Registration
     Statement on Form S-18, SEC File No. 2-93915-D,  and incorporated herein by
     this reference.

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

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

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

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

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

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

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

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

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

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

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

     27.1  Article 5 Financial Data Schedule for year ended December 31, 1997,
     Form 10-KSB.


<PAGE>


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

   (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.










                     (THIS SPACE INTENTIONALLY LEFT BLANK)



<PAGE>


                                   SIGNATURES

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






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

March 31, 1998                                   By:           /s/John L. Gunter
--------------                                                 -----------------
Date                                                         John L. Gunter, CEO


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


/s/John L. Gunter            Chairman of the Board of             March 31, 1998
-----------------            Directors, and CEO                   --------------
John L. Gunter               (Principal Executive Officer)


/s/Willard H. Gardner        Director and Secretary               March 31, 1998
---------------------                                             --------------
Willard H. Gardner


/s/Stephen M. Nelson         Director, President and              March 31, 1998
--------------------         Treasurer                            --------------
Stephen M. Nelson


/s/Melody J. Rasmussen       CFO and Controller                   March 31, 1998
----------------------                                            --------------
Melody J. Rasmussen
<PAGE>
                       Consent of Independent Accountants


     We consent to the incorporation by reference in the registration  statement
of Tels Corporation on Form S-8, (File No. 333-17149,  333-17163,  333-17169) of
our report dated March 25, 1998,  on our audit of the  financial  statements  of
TELS  Corporation  as of December  31, 1997 and for each of the two years in the
period ended  December 31, 1997,  which report is included in this Annual Report
on Form 10-K.



Coopers & Lybrand L.L.P.

Salt Lake City, Utah
March 31, 1998