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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                 Annual Report Pursuant to Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934

For the fiscal year ended 
December 31, 1997                                  Commission File No. 0-19437
- -----------------                                                     ---------

                    CELLULAR TECHNICAL SERVICES COMPANY, INC.
             ------------------------------------------------------ 
             (Exact Name of Registrant as Specified in Its Charter)

          Delaware                                    11-2962080
- -------------------------------           ---------------------------------
(State or Other Jurisdiction of           (IRS Employer Identification No.)
Incorporation or Organization)


                  2401 Fourth Avenue, Seattle, Washington 98121
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (206) 443-6400

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

           Securities registered pursuant to Section 12(g)of the Act:

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)

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

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

                  As of March 16, 1998,  there were 22,815,092  shares of Common
Stock, $.001 par value  outstanding.  As of March 16, 1998, the aggregate market
value of the Company's Common Stock, $.001 par value, held by non-affiliates was
approximately $42 million. The aggregate market value of the Company's stock was
calculated  using the average of the high  ($1.938) and low ($1.813)  sale price
for its Common  Stock on March 16, 1998 on NASDAQ as  reported  by the  National
Quotation Bureau.

                           Exhibit Index - see page 44



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                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                         TABLE OF CONTENTS FOR FORM 10-K



<TABLE>
<CAPTION>

<S>                                                                                              <C>

PART I ......................................................................................    3


ITEM 1. BUSINESS ............................................................................    3

ITEM 2. PROPERTIES ..........................................................................   16

ITEM 3. LEGAL PROCEEDINGS ...................................................................   17

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................   17



PART II .....................................................................................   18


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...............   18

ITEM 6. SELECTED FINANCIAL DATA .............................................................   19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .........................................   34

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    34



PART III ....................................................................................   35


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................................   35

ITEM 11. EXECUTIVE COMPENSATION .............................................................   38

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .....................   42

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................................   43



PART IV .....................................................................................   44


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ...................   44
</TABLE>





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                                     PART I



Item 1.           Business

The Company

The  Company's  mission is to be the premier  provider of real-time  information
processing  and  information   management  solutions  for  the  global  wireless
communications  industry.  Over the past nine  years,  the  Company has used its
extensive  experience with real-time technology to create advanced solutions for
this industry.  Today,  the Company develops both software and hardware for sale
as part  of its  integrated  systems  solutions  in the  areas  of  "user/device
authentication" and "service metering."

"User/device    authentication"   primarily    involves    various    forms   of
"pre-call"   verification  to  ensure  that the use of a wireless communications
device  (e.g.,   a  cellular  telephone)  is  legitimate   before  the device is
allowed  to   connect  to  a  wireless communications network. In this area, the
Company is a  leading provider  of  radio  frequency  ("RF") based solutions for
the prevention  of  "cloning  fraud,"  with  its Blackbird-Registered Trademark-
Platform,   PreTect-TM-  fraud   prevention  application,  and No Clone Zone-SM-
roaming  fraud   prevention  service.   "Cloning  fraud" is the term used by the
cellular   industry   to  describe   the  illegal   activity of using a cellular
telephone  that  has   had  its  electronic  serial  number and telephone number
altered   to   match    those   of    a    legitimate   subscriber's  telephone.
The   Cellular  Telecommunications    Industry   Association   ("CTIA")      has
estimated   that  in  1997  cellular  fraud,  the  majority of which is believed
to  be  cloning  fraud,  has resulted   in more than $500  million  in costs and
lost  revenues   to   the   United   States   cellular  industry,  down  from an
estimated  $1 billion  in  1996.  The Company   believes   that  in 1998 cloning
fraud    will   continue   to  decline.  The   Company's   Blackbird    Platform
provides    the    underlying   technology   for   the   Company's   application
products   for    user/device    authentication.    The     Company's    PreTect
application  product,  the first  application product on the Blackbird Platform,
is   designed   to    proactively   prevent   cloning  fraud in real-time.  The 
Company's   No   Clone   Zone    service   is designed  to  effectively  prevent
roaming-based     cloning    fraud  in  real-time    between  markets  using the
Blackbird   Platform   and   PreTect   application  product.  See "The Blackbird
Platform" below.

"Service  metering"  primarily  involves  the  collection  of  various    forms
of  "post-call"  information   (within   minutes  after the end of the call) to
ensure  that  a wireless communications carrier's subscriber has proper account
status   to   make   additional   calls.   The  Company's   Hotwatch-Registered
Trademark-   Platform    provides    the   underlying  technology for post-call
application    products   and   services   for  credit management  and  prepaid
billing    ("Hotwatch  Products").     See    "The    Hotwatch Platform" below.

The  Company's   current   activities  are  primarily  focused  on  the  further
development,  marketing,  and deployment of the Blackbird Platform,  the PreTect
fraud prevention application product, the No Clone Zone roaming fraud prevention
service,  and other products and services that may be developed on the Blackbird
Platform  (the  "Blackbird  Products").  During  1997,  the  Company  added  new
agreements  with SNET Mobility  ("SNET") and GTE Mobilnet  Service  Corp.  ("GTE
Corp.") to its existing  agreements with AirTouch  Cellular  ("AirTouch"),  Bell
Atlantic  Mobile  ("BAM"  -  formerly  known  as Bell  Atlantic  NYNEX  Mobile),
Ameritech  Mobile  Communications,  Inc.  ("Ameritech"),  and  GTE  Mobilnet  of
California  Limited  Partnership  ("GTE-California")  establishing terms for the
provision of the Blackbird  Products for use in over 2,000 cell sites throughout
the United States.

The Company's  products and services  currently are used  exclusively for analog
cellular networks.  The Company believes that, as of the end of 1997, there were
approximately  30,000 domestic cell sites of analog  cellular  networks in which
the Company's  products and services  currently can be used.  Additionally,  the
Company believes that the number of international  cell sites of analog cellular
networks  to which its  products  are  either  currently  adaptable  or could be
adaptable may be equal to or greater than the number of domestic cell sites. The


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Company  also  believes  that its  platform  and its  application  products  and
services may be adaptable for use in other wireless communications networks.

Recent Developments

The Company has incurred  significant  operating  losses during 1996 and 1997 in
its initial years of deployment of the Blackbird Products.  In January 1998, the
Company began implementation of a strategic plan that has included,  among other
initiatives,  streamlining  the Company's  operations to better balance expenses
and revenues,  and directing additional development efforts and resources toward
new products that can generate new sources of revenue.  By the end of the second
quarter of 1998,  the Company's  workforce will be reduced by  approximately  40
percent from December 31, 1997 levels. As of March 25, 1998, the majority of the
reduction  has already been  accomplished.  In addition,  in late 1997 and early
1998, the Company  completed the  consolidation of certain hardware assembly and
integration operations through the selected acquisition of assets, assumption of
leases, and hiring of employees from two former suppliers.

On March 2, 1998,  the Company and U.S.  Wireless  Corporation  ("US  Wireless")
announced  the signing of a letter of intent which  provides  for the  potential
combination  of the two companies.  If the proposed  transaction is completed on
the terms contemplated,  which includes  stockholder approval for both companies
and as to which no assurance can be given,  the  stockholders of the Company and
US Wireless will each own 50 percent of the shares of the resulting company, and
the board of  directors  of the  resulting  company  will be  controlled  by the
stockholders  of US Wireless.  The companies  have commenced a due diligence and
final agreement  negotiation  process. In connection with this transaction,  the
letter of intent calls for the companies to seek no less than $15 million in new
financing.  US Wireless  develops and manufactures  products designed to provide
value-added  services and features  for the  wireless  communications  industry,
including caller-location and tracking, autonomous network management, and other
applications.  Its  RadioCamera-TM-  caller-location  and  tracking  product  is
designed to meet the emergency 911  requirements  of the Federal  Communications
Commission  ("FCC").  In June 1996, the FCC issued a Report and Order  requiring
wireless  carriers to be able to identify  the  location of wireless  callers to
emergency 911 systems. This mandate requires that products designed to meet this
need must be  operational  and  accurate  to within 125  meters of the  wireless
caller not less than 67% of the time by October  2001.  Industry  analysts  have
estimated that the market for wireless  caller-location  and tracking technology
could reach $8 billion in revenues worldwide.

The Wireless Communications Industry

From  inception,  wireless  communications  service  has been one of the fastest
growing segments of the telecommunications industry. The CTIA has estimated that
the  number  of  cellular  subscribers  in  the  United  States  increased  from
approximately  340,000  subscribers in December 1985 to approximately 50 million
subscribers  in December  1997.  The Company  believes  the  worldwide  wireless
communications   market  exceeds  150  million  subscribers  at the end of 1997.
The Company expects significant growth in wireless communications to continue in
the United States as a result of the increased  demand for cellular  service and
the  emergence  of  personal  communications  service  ("PCS")  as a new form of
wireless  communications  service.  The Company also  expects  that  significant
growth will also occur in international  markets.  The Company believes that the
number of cellular  and PCS  subscribers  may grow to in excess of 90 million in
the United  States and more than 300 million  worldwide by the end of 2001.  The
Company also believes that the demand for its current  products and services may
increase as the Company  adapts its products and creates new products to service
an expanded wireless communications industry.

The FCC regulates the wireless  communications industry in the United States and
is  responsible  for  granting  the  licenses   required  to  operate   wireless
communications  systems.  The FCC has divided the United States into a number of
service (license) areas or markets.  In the near term,  wireless  communications
services are expected to be dominated by cellular services, PCS and, to a lesser
extent,  enhanced specialized mobile radio ("ESMR"). The introduction of PCS and
ESMR has added new service providers in many cellular markets creating increased


<PAGE>


competition,  additional  service features,  and a greater number of choices for
wireless communications subscribers.

Currently,  cellular service dominates  wireless  communication  services in the
United States.  At year end 1997,  there were  approximately 50 million cellular
subscribers in the United States. The Company believes that approximately 80% of
cellular  service  currently is provided in an analog mode but that the industry
is  undertaking  a shift to  digital  mode in the major  markets  due to certain
systems advantages in the digital mode,  including  expanded  capacity,  greater
privacy, and enhanced security (such as, for example, use of A-Key cryptographic
authentication).  Cellular  subscribers  are  serviced  by two  carriers in each
market (commonly referred to as "A Band" and "B Band" carriers). The markets are
defined as  Metropolitan  Service  Areas  ("MSAs"),  of which there are 306, and
Rural    Service   Areas   ("RSAs"),   of   which   there   are   428.   Service
is available on a nationwide basis and the major providers, through adherence to
industry standards,  offer interoperability to markets that they do not own. The
10 largest cellular carriers own or operate 180 of the largest 200 MSAs.

PCS systems are digital wireless communications networks,  operating on a higher
frequency  band than  cellular,  which compete  directly with existing  cellular
telephone,  paging, and specialized mobile radio services.  The Company believes
that PCS  providers  are the  first  direct  wireless  competitors  to  cellular
providers and the first to offer mass market all-digital wireless communications
networks.  In  addition,  PCS  providers  may be the first to offer mass  market
wireless local loop applications in competition with wired local  communications
services.  The FCC has auctioned PCS licenses to the public.  Service  resulting
from these licenses is currently  providing the primary  competition to cellular
service.  The  service  areas for PCS  differ  from those of  cellular.  The PCS
licenses are based on Major Trading Areas  ("MTAs"),  of which there are 51, and
Basic Trading Areas ("BTAs"),  of which there are 493. BTAs are a subset of MTAs
and are wholly contained within the MTA boundaries. As with cellular,  ownership
of the PCS licenses is concentrated.  Sprint  Telecommunications  Venture,  AT&T
Wireless  and PCS PrimeCo  (owned by  AirTouch  Communications,  Inc.,  and Bell
Atlantic) account for the majority of coverage of the PCS licenses in the United
States.

ESMR  service  in  the  United  States  is  dominated  by  one  carrier,  Nextel
Corporation,  which the Company  believes  will be  focusing  its  attention  on
commercial, rather than consumer, uses of wireless solutions.

Operation of Wireless Communications Networks

Operation of Analog and Digital Networks

The service areas of a wireless communications network, whether cellular or PCS,
are divided into multiple  cells.  Because  cellular  networks  operate at lower
frequencies,  their cells generally cover a wider area than PCS cells.  However,
cell size may be determined by the required system channel  capacity rather than
the physical limits of Radio Frequency ("RF") propagation.  In both cellular and
PCS  networks,  each cell  contains a base station  comprised  of  transmitting,
receiving,  and signaling equipment located at a cell site which is connected by
microwave or landline  telephone lines to a Mobile Switching Center ("MSC") that
controls the  operation of the  cellular  communications  network for the entire
service  area.  The MSC  controls  the  transfer of calls from cell to cell as a
subscriber's  telephone  travels,  coordinates  calls  to and  from  telephones,
allocates  calls among the cells  within the network and  connects  calls to the
local  landline  telephone  network  or to a long  distance  telephone  carrier.
Wireless communications carriers establish interconnection agreements with local
exchange  carriers  and   interexchange   (long  distance)   carriers,   thereby
integrating their network with the existing landline communications network.

A major  component  of any  wireless  communications  network  is the  switching
equipment,  commonly  known as a "Switch,"  located in the  carrier's  MSC.  The
Switch, which is owned and/or operated by the carrier,  manages the provision of
service,  the  interconnection  of  subscribers'   telephones  with  the  public
telephone  network,  and the  hand-off  from  cell  site to cell  site  within a
network.   The  Switch   maintains  a  database  of  the  carrier's   subscriber




<PAGE>

information,  such as phone  and  electronic  serial  numbers,  and call  option
features.  The  Switch  tracks  the  progress  of  calls  made to or  from  such
subscribers and records call detail for billing purposes.

While  analog and digital  cellular  networks and PCS digital  networks  utilize
similar  conceptual   technologies  and  hardware,  they  operate  on  different
frequencies  and may use  different  technical  and  network  standards.  Analog
cellular phones are functionally compatible with cellular networks in the United
States, Canada, and a number of other international  markets.  Cellular carriers
typically agree to provide service to subscribers  from other cellular  markets,
commonly known as "roamers," who are temporarily located in or traveling through
their service areas. Agreements among cellular carriers provide that the carrier
in the home market of the subscriber pays the serving carrier  (roaming  market)
at rates prescribed by the serving carrier. As a result,  analog cellular phones
generally can be used  wherever a subscriber  is located,  as long as a cellular
network is operational in the area.

PCS  networks  are  operating  under  one  of  three  principal  digital  signal
transmission  technologies:  Global  System for Mobile  ("GSM"),  Code  Division
Multiple  Access  ("CDMA") or Time Division  Multiple  Access  ("TDMA").  In the
United States,  digital  cellular and PCS networks are operating under primarily
the  TDMA or CDMA  standards,  with the CDMA  standard  expected  to be the more
widely adopted.  Outside of the United States, GSM is the most prevalent digital
wireless  technology,  with  approximately  250  systems  operating  in over 100
countries  serving  over 70 million  subscribers.  The TDMA and  CDMA-based  PCS
standards  are  higher  frequency  versions  of the  digital  cellular  standard
currently  in use by cellular  carriers in the United  States.  PCS networks are
believed to offer greater capacity,  call quality,  and hand-off advantages than
analog or digital  cellular  networks.  PCS networks have initially  offered the
same features and services offered by digital cellular networks.

GSM and TDMA are both variations of "time division multiplexing"  standards that
are not currently compatible with each other or with CDMA. Thus, a subscriber of
a wireless network that utilizes GSM, TDMA, or CDMA technology currently will be
unable to use a GSM, TDMA, or CDMA phone when traveling in an area not served by
the  same  digital  technology,  unless  the  subscriber  is  in a  market  with
compatible  technology or carries a multi-mode phone that permits the subscriber
to use the digital  technology  in another  frequency  or defaults to the analog
cellular network in that area. Such multi-mode phones are commercially available
today  and are  currently  required  for  digital  phones  to  effectively  roam
nationally,  as roaming  footprints for all digital  technologies  are presently
limited. The Personal Communications Industry Association ("PCIA") has projected
that the first digital  technology to achieve a footprint  that covers all major
metropolitan  areas in the United  States will be CDMA by the year 2000. At that
time it is  projected  that GSM will cover 80% to 85% and TDMA will cover 35% to
45% of the major  metropolitan  areas.  The Company  believes that carriers will
maintain an underlying  analog cellular  network as they expand their operations
to include digital networks, thereby allowing a continued use of analog cellular
networks. See also "Cloning Fraud When Roaming" below.

Emergence of A-Key Authentication

The  Company's  Blackbird  Products  currently are used  exclusively  for analog
cellular  networks,  although  the Company  believes  that its future  Blackbird
Products may be adaptable for use in digital  networks such as digital  cellular
and PCS  digital  networks.  The  technology  used in these  analog and  digital
networks  currently  enable  wireless  carriers to incorporate  various forms of
user/device  authentication to combat cloning fraud, including RF fingerprinting
(See "--PreTect Application" below) and cryptographic  authentication.  One form
of cryptographic authentication,  commonly known as "A-Key authentication," uses
a complex algorithm derived from a mathematical cryptographic process containing
a secret key (number) shared only by the phone and the carrier's network. Almost
all digital and analog  phones  currently  being  distributed  into the wireless
communications system are now equipped with the A-Key capability.  When a person
places or receives a call,  the network  asks the phone to "prove" its  identity
through a challenge-response  process,  which minimally delays the time it takes
to connect a legitimate  call. A-Key  authentication  is expected to be the most
widely adopted  cryptographic  authentication by wireless carriers in the United
States.  A-Key  technology  in the  digital  mode  (and to a  lesser,  but still
significant  extent in an analog mode) is now in extensive  use by several major
cellular 


<PAGE>


carriers in most major domestic markets. Through the American National Standards
Institute inter-switch signaling standard ANSI-41, A-Key  authentication can now
provide  roaming  protection between like-equipped vendors. The Company believes
that  such  cryptographic  authentication  has  been  effective and could become
increasingly  effective  in  reducing  cloning  fraud,  provided  that it is not
compromised

Cloning Fraud When Roaming

Both Analog and digital  phones will continue to be susceptible to cloning fraud
when  they  roam  on an  analog  cellular  network  which  does  not  use  A-Key
authentication.  In the roaming  environment,  a subscriber  of a GSM,  TDMA, or
CDMA-based  digital network currently will be unable to use a GSM, TDMA, or CDMA
phone when traveling in an area not served by a compatible  digital  technology,
unless the subscriber  carries a multi-mode phone that permits the subscriber to
default to the analog cellular  network in that area.  A-Key  authentication  is
capable of combating  cloning fraud in digital phones while roaming in an analog
mode;  however,  for  such  authentication  technology  to  be  implemented,  it
currently  must comply with the ANSI-41 network  service  standard.  The Company
believes that full deployment of A-Key authentication compliant with the ANSI-41
standard  could take a number of years to complete.  The Company  believes  that
extensive efforts and cooperation among the large market carriers,  small market
carriers,  wireless industry associations,  and wireless technology providers is
required to implement a fully-functional A-Key authentication system. Given such
factors, the Company believes that subscribers of digital wireless networks will
continue to be susceptible to cloning fraud while roaming in the analog mode.

Business Strategy

Deployment of Blackbird Products

The Company's immediate strategy is to achieve market penetration and deployment
of the Blackbird  Products.  To accomplish  this,  the Company will continue its
domestic  and  international  sales and  marketing  efforts.  After it  achieves
widespread  deployment of the Blackbird  Products,  the Company believes that it
will be able to leverage its relationships with carriers and its position at the
carriers' cell sites, as well as its underlying  platform  technology,  to offer
additional products and services. The Company plans to continue its research and
development efforts to enhance its existing products and services and to develop
new  value-added  products for the  Blackbird  Platform.  These new products may
include fraud  prevention  products which can be sold in connection with PreTect
or non-fraud prevention products integrated onto the Blackbird Platform.

Leverage Core Competencies

Through the development and deployment of the Blackbird and Hotwatch  Platforms,
the Company has developed several core  competencies.  The Company believes that
these core  competencies may facilitate its development of products and services
which  complement  its  existing  technology  and add value to its  current  and
potential customer base.

     Real-time  distributed  computing.   The  Company  believes  that  it  has
     developed unique expertise in the area of distributed  real-time computing.
     This capability allows the Company to acquire data and perform  information
     processing in the highly  distributed  environment  encountered in wireless
     infrastructures.  The Company's  Blackbird  Platform uses messaging methods
     running  on  TCP/IP  (Transmission  Control   Protocol/Internet   Protocol)
     networks to allow  communications  and data  exchange  between  distributed
     information processing elements with real-time response rates. For example,
     the  Company's  expertise in this area allowed the creation of the No Clone
     Zone service which processes RF "fingerprinting" information at call set-up
     time in a nationwide network.




<PAGE>

   - Ability to interface with carriers' cell sites and switches. The Company's
     proprietary  software and hardware products collect and utilize information
     resident at the  carrier's  cell site and/or  switch.  This  expertise  may
     facilitate  the  development  of future  products  and  services in both an
     analog and digital environment.

   - Real-time  database  expertise.  The Company has  developed the ability to
     optimize  database  performance  which enables systems to reach transaction
     decisions in very short time frames.  For  example,  PreTect can  determine
     whether or not to connect a call within a few seconds of call origination.

   - Real-time  rating  expertise.  The  Company has  developed  the ability to
     combine  streams of telephone  billing  information,  such as toll charges,
     discounts,  promotions,  and surcharges to mimic a carrier's billing system
     on a real-time basis, within minutes after the end of the call, rather than
     in a batch process for monthly customer billing.  This currently allows the
     Company to determine account  authorization for future telephone calls. The
     Company  believes  this  expertise  may be applicable to other systems that
     involve real-time charges.

   - Ability to interface with billing  systems.  The Company has developed the
     ability to  interface  with the systems  infrastructures  of major  billing
     service  companies  in  the  wireless  communications  industry.  As  these
     companies expand their customer base beyond telephone  carriers the Company
     believes  it can apply its  knowledge  to provide its  value-added  service
     metering technologies to this expanded customer base.

   - Real-time  system  monitoring.  The  Company  has  developed,  within  the
     Blackbird  Platform,  the ability to monitor the  performance  of its fraud
     prevention   network  to  provide   real-time   notification  of  condition
     exceptions  and  performance   degradations.   The  Company  believes  this
     technology is adaptable to monitor other devices on a distributed network.

System Design and Architecture

The Company's products  incorporate software designs that use the UNIX operating
system  and  TCP/IP  networking,   which  provides  customers  with  significant
flexibility  in their  choice of  computer  equipment  and is widely used in the
telecommunications industry. In addition, the Company uses database and advanced
messaging  technology  which  allows for  flexibility  in platform  and database
portability, particularly as the underlying computer infrastructure continues to
evolve.  The Company's  products also incorporate  industry  standard  hardware,
using  the  UNIX  operating  system,  for the  central  system  and  application
processing  functions for both the Blackbird and Hotwatch  Platforms.  While the
Cell Site Systems deployed with the Blackbird Platform contain industry standard
computer components, the Company designs and contracts manufacturing for certain
proprietary  printed  circuit  boards  and  other  subassemblies.  The  standard
components  and custom  manufactured  subassemblies  are then  integrated by the
Company for delivery to its customers.

The Blackbird Platform

The  Blackbird  Platform  provides  real-time  data  collection,   distribution,
storage,  and reporting of key  information  regarding  pre-call  activity.  The
Blackbird Platform was designed to deliver  centralized control and efficiencies
of  operation  based  on  industry  standards,   open  systems,   and  real-time
distributed messaging.  This platform approach makes it possible for the Company
to deliver a range of applications in a unique, modular fashion.  Enhancement of
the  Blackbird  Platform  product  line is expected to continue  during 1998 and
beyond.  Additionally,  the Company is researching other  applications using the
pre-call data that is collected by the Blackbird  Platform for potential  future
release.

PreTect Application

The PreTect application product employs patented RF "fingerprinting"  technology
to proactively prevent cloning fraud in real-time.  PreTect accomplishes this by
building RF  fingerprints of legitimate  subscribers'  cellular 



<PAGE>


phones  using  the  pre-call  data  collected  by  the Blackbird Platform. An RF
fingerprint  is  the  cellular  phone's  unique  electromagnetic signal waveform
characteristics  contained  in each phone, with no two RF fingerprints being the
same. PreTect compares RF fingerprints of incoming call requests to its database
of  RF fingerprints for validated legitimate subscriber phones and also examines
usage  characteristics  to  assist  in  verifying authenticity.  It then directs
automatic   call  "tear-down"  or  interdiction  of  a  fraudulent  call  before
connection  is  completed.  With  PreTect,  the  Company  offers its customers a
graphical user interface ("GUI") that is unique to RF user/device authentication
systems. The GUI makes PreTect easy to learn and use, automates most operations,
and  enables  fraud department personnel and customer service representatives to
become  productive in using Blackbird Products in a more effective and efficient
manner.

PreTect enables proactive  pre-call fraud prevention rather than post-call fraud
detection.  In 1996, the Company  recorded its first  commercial  sales from the
Blackbird  Products in over a dozen major markets under agreements with AirTouch
and BAM. In 1997, a number of additional  markets were covered under  agreements
with  Ameritech,  GTE-California  and SNET, as well as  additional  markets with
AirTouch and BAM. Currently, the Blackbird Products are operational and/or being
deployed in over forty of the largest markets  throughout the United States with
AirTouch,  BAM,  GTE-California,  Ameritech and SNET, including Los Angeles, San
Francisco,  San Diego, New York, Northern New Jersey, Detroit,  Chicago, Boston,
Atlanta, Milwaukee, Philadelphia, Pittsburgh, Baltimore, and Washington D.C.

The No Clone Zone Service

The Company has developed a roaming fraud  prevention  service,  known as the No
Clone Zone service, which provides seamless,  RF-based roaming fraud prevention.
The No Clone Zone service proactively and transparently prevents roaming cloning
fraud in markets which utilize the Blackbird  Platform and PreTect.  The service
delivers the same high performance  interdictions of fraudulent calls in roaming
markets as PreTect does in the home market. The service leverages the underlying
power of existing Blackbird Platform  deployments,  and the Blackbird Platform's
real-time  distributed  messaging  performance,  to quickly and seamlessly  link
participating  carrier systems nationwide,  into a private,  high-speed network.
The service also leverages the PreTect GUI,  delivering  real-time,  system-wide
data  visibility  with  PreTect's  superior  usability,   reporting,  and  query
capabilities.  This  service  is  currently  operational in the  majority of the
domestic markets where the Company's  Blackbird Platform and PreTect application
are deployed.

Traveler Service

The  Traveler  service,  which is being  readied for release in 1998,  will be a
service-bureau  type  offering  designed  to make RF  fingerprinting  protection
available to roaming small market cellular subscribers and PCS subscribers.  PCS
subscribers who roam outside of their networks and default to analog mode become
vulnerable to cloning fraud.  With Traveler,  the PCS or small cellular  carrier
leases  the  Traveler  roaming  protection  service  on a monthly  basis for its
roaming  subscribers.  The Company  will  install,  monitor,  and  maintain  the
Traveler system for the wireless carrier,  providing custom reports for analysis
on a scheduled basis.

Other Potential Applications for the Blackbird Platform

Existing  and  prospective  customers  have  indicated  an interest in potential
future applications,  either provided by the Company or by third parties,  being
integrated with the Company's Blackbird Platform. Potential applications such as
E911,  RF  Engineering  Applications,  and 411  Information  Services  have been
identified.  E911 is an FCC mandated  subscriber  service requiring  carriers to
phase in the ability to identify the physical  location of a wireless 911 caller
to within 125 meters of the exact  location  by the year  2001.  RF  Engineering
Applications  leverages  the  Company's  expertise in RF  technology  to provide
system engineering,  diagnostic and network performance  analysis  capabilities.
New  information  services for  subscribers  has been of interest to carriers in
their effort to maintain  customer  loyalty and prevent  churning.  One possible
service, 411, would allow carriers 



<PAGE>




to activate call centers staffed with service personnel who could, for instance,
provide driving directions based on the caller's current  geolocation  position.
The Company is evaluating the market   potential   for   such  products  and the
feasibility of  integration  into  the  Blackbird Platform. See "Recent Events".

The Hotwatch Platform

The Hotwatch Platform provides technological solutions primarily in the "service
metering"  area,  which involves  various forms of "post-call"  verification  to
ensure that a wireless  communications  subscriber  has proper account status to
make additional calls. The Company's Hotwatch Products provide prepaid real-time
credit limit  monitoring  and  solutions  for real-time  usage  metering.  These
real-time "post-call" products support call data acquisition and rating features
for the purpose of "service  metering."  Real-time "rating" means the ability to
calculate,  on a  real-time  basis,  local and long  distance  toll  charges and
cellular air time charges for each call made on a cellular telephone system. The
Company's  real-time rating supports  multiple long distance rating and multiple
airtime price plans.  The Company  believes that real-time data  acquisition and
rating on a call by call basis will enable  carriers  and  resellers  to improve
cash flow,  more  effectively  manage  their  credit,  collection,  and  billing
functions,  and  increase  their  subscriber  base by  allowing  them to provide
service to certain subscribers who might otherwise be deemed unacceptable credit
risks.  The  Company no longer  actively  markets  the  Hotwatch  Products  and,
accordingly, revenues from the Hotwatch Products have declined over the past two
years and are expected to continue to decline in future years.

Major Customer Agreements

AirTouch Cellular Agreements

In March 1996,  the Company  signed an agreement  with AirTouch  under which the
parties agreed that the Company will be the exclusive provider of cellular fraud
prevention   systems  using  RF  technology  to  AirTouch  and  its  affiliates.
AirTouch's cellular licenses include both A Band and B Band markets. The Company
and AirTouch have  installed or have agreed to install the  Company's  Blackbird
Products under this agreement in AirTouch's Atlanta,  Michigan and Ohio (A Band)
markets, as well as its Los Angeles, San Diego, and Sacramento (B Band) markets.
In addition,  AirTouch's  Bay Area  Cellular  Telephone  Company  affiliate  has
installed the Blackbird  Products  under this agreement in its San Francisco and
San Jose (A Band) markets. The five year agreement,  which establishes terms for
the purchase of the Company's  products in at least 1,000 cell sites,  scheduled
minimum  deployment  in a majority  of those cell  sites  during  1996 and 1997.
Concurrently, agreements were signed for the Company's support, maintenance, and
No Clone Zone services.  Approximately  $6.0 million of revenues were recognized
in 1997 from the AirTouch agreements.

BAM Agreements

In October 1996, the Company  signed an agreement with BAM to provide  Blackbird
Products  for use in BAM's  cellular  markets.  Deployment  in BAM's  New  York,
Northern New Jersey and  Philadelphia  B Band markets began in 1996.  Additional
deployments  of Blackbird  Products in these markets as well as  deployments  in
BAM's  Washington,  D.C.,  Baltimore,  Boston  and  Pittsburgh  B  Band  markets
continued  during  1997.  Concurrently,  agreements  were  signed  for  support,
maintenance,  and No Clone Zone services. System and service revenues recognized
from the BAM agreements in 1997 totaled approximately $5.7 million.

Ameritech Agreements

In October  1996,  the Company  signed an  agreement  with  Ameritech to provide
Blackbird  Products for use in  Ameritech's A Band and B Band cellular  markets.
Deployment in Ameritech's Illinois,  Michigan,  Ohio, and Wisconsin (B Band) and
Missouri (A Band)  markets  began in late 1996 and  continued  throughout  1997.
Concurrently, agreements were signed for the Company's support, maintenance, and
No Clone Zone  services were also signed.  There were no revenues  recognized in
1996 for the  deployment  of the  Company's  Blackbird  



<PAGE>


Products in Ameritech's markets. Systems and service revenues from the Ameritech
agreements totaled approximately $9.4 million in 1997.

GTE Mobilnet Agreements

In September  1996,  the Company  signed an  agreement  with  GTE-California  to
provide  Blackbird  Products  for  use in  GTE-California's  B Band  markets  in
California.  Concurrently,  agreements  were signed for the  Company's  support,
maintenance  and No Clone Zone services.  Deployment of the Company's  Blackbird
Products  began in late  1996 in  GTE-California's  San  Francisco  and San Jose
markets.  There were no revenues  recognized  in 1996 for the  deployment of the
Company's  Blackbird Products in  GTE-California's  markets.  In April 1997, the
Company and GTE-Corp. signed an agreement establishing terms under which certain
GTE Corp. affiliates can purchase Blackbird Products.  Concurrently, GTE Corp.'s
Virginia B Band affiliate signed an agreement to install the Company's Blackbird
Products.  Following the installation in the Virginia market,  GTE Corp. elected
to transfer the units to its  California  market,  where  cloning fraud was more
prevalent.   System  and  service  revenues  from  the  GTE  agreements  totaled
approximately $6.0 million in 1997.

SNET Mobility Agreements

In June 1997,  the Company  signed an agreement  with SNET to provide  Blackbird
Products for use in SNET's  Northeast B Band markets.  Concurrently,  agreements
were signed for the Company's support,  maintenance and  No Clone Zone services.
Deployment began during the last half of 1997.

Hotwatch Products Agreements

Revenues in 1997 were also  recognized  from Hotwatch  Products  agreements with
various  customers.  These  agreements  were with AT&T Wireless  Services,  Inc.
("AWS"),  360(Degree) Communications Company  ("360(Degree)CC"),  Ameritech, and
Houston Cellular Telephone Company ("Houston Cellular"),  an entity owned by AWS
and  BellSouth  Cellular.   Previously, Houston Cellular had been referred to as
part  of  the  LIN/ACC  entities  (LIN Broadcasting Company ("LIN") and American
Cellular Communications ("ACC"), subsidiaries of AWS and BellSouth Cellular. The
Hotwatch Products are no longer  being actively  marketed  by  the  Company  and
revenues from these customers in 1997 were less than 5% of total  revenues.  The
source  of  revenues   originates   primarily  from  maintenance  and   software
enhancements  from  360(Degree)CC,  Ameritech and Houston Cellular and also from
source code license fees generated  under the  Company's  Axys  Agreements  with
AWS.   The  Company  does  not  expect  revenues  from  Hotwatch  Products to be
significant in future years.

Revenue Generation

Overview

Revenues,  derived  primarily  from the Company's  Blackbird  Products are from:
system sales,  which  primarily  include the license of software and the sale of
hardware  products;  and service  fees,  which  primarily  include  maintenance,
software subscription  services,  roaming fraud prevention services,  and system
monitoring  services.  Prior to 1996 the  Company's  revenues  had been  derived
primarily from initial license fees,  fixed or variable monthly software license
fees and, to a lesser extent,  non-recurring  computer  equipment  sales for its
Hotwatch Platform and related products.

Revenue  recognition  for the  Company's  systems  vary by  customer  and/or  by
product.  The  significant  factors  used  in  determining  revenue  recognition
generally include physical hardware and software delivery, definitions of system
delivery, and customer acceptance. For those contracts which provide for payment
based upon meeting actual performance criteria, the Company may record a portion
of the systems  revenues  and the  majority  of the system  costs at shipment or
during the early  stages of a system  deployment.  In  certain  cases no systems
revenues or systems  costs may be recorded at time of  shipment,  while  certain
operating  costs may be recorded  



<PAGE>




during the deployment process. Accordingly, revenues and direct margins recorded
by  the Company can be expected to be lower in earlier periods of deployment and
inconsistent  from  quarter  to  quarter,  especially  during the initial market
deployments  under  new  agreements.   The  resulting  deferral  of  revenue  is
recognized in subsequent periods upon meeting the performance criteria specified
in  the  applicable  agreement.  Amounts  billed and received on sales contracts
before revenue is recognized are recorded as customer deposits. The Company does
not operate with a significant revenue backlog.

Revenue  recognition for the Company's  services are recognized ratably over the
period that  maintenance  coverage is provided,  whether bundled with the system
sale or contracted for separately. Prepaid or allocated maintenance and services
are recorded as deferred revenues.

During  the three  years  ended  December  31,  1997,  six  customers  and their
affiliates  accounted  for  substantially  all of the Company's  revenues.  Such
customers are AirTouch, BAM, Ameritech, the GTE affiliated companies,  360CC and
the AWS and LIN/ACC  affiliated  companies,  where such  entities  share  common
ownership  in some of the  markets  in which the  Company's  products  have been
deployed.  Each of these  customers  accounted  for 10% or more of the Company's
revenues during one or more of the three  years  ended  December  31, 1997 (none
accounted    for    more    than    10%    in    all    three   years). The high
percentage of revenues derived from a limited number of customers is principally
attributable to the Company's  relatively small number of customers during these
periods  and  the  fact  that  certain  of  these  customers  made   significant
non-recurring  purchases of computer equipment.  The Company's targeted customer
base is limited due to the concentrated  nature of ownership and/or  operational
control  of the most  populated  wireless  communications  markets in the United
States and limited to a lesser extent in the international  markets. The Company
expects  that certain of its cellular  carrier  customers  operating in multiple
cellular  markets will continue to account for a relatively  high  percentage of
the Company's total revenues.

Recurring Hardware and Software Support Services

Hardware maintenance,  software maintenance, software subscription services (for
software  upgrades  and new  releases),  the No Clone Zone  service,  and system
monitoring  are the primary  recurring  services  provided by the Company to its
customers. Support personnel diagnose and resolve problems, dispatch third party
hardware vendors,  forward  enhancement  requests to the Company's  research and
development  staff,  and coordinate with customers on software  upgrades and new
releases.  Software  troubleshooting,  maintenance,  and upgrades are  conducted
either  via the  Company's  public  data  network  or via modem  over a standard
telephone  line.  An on-line  customer  management  system  tracks  problems and
resolutions.  Support  is  available  24 hours  per day,  seven  days per  week.
Engineering  research  and  development  personnel  assist in  software  support
activities to the extent required.

Installation

Currently,  the Company  arranges to receive certain  third-party  vendor system
equipment at its facilities  where it integrates its  proprietary  software with
such  equipment  and  performs  preliminary  testing  prior to  shipment  to the
customer.  Typically,  the Company, its third-party vendors, and/or the customer
jointly perform  installation  services,  with each bearing  responsibility  for
different  aspects of installation.  The installation  process,  which commences
upon  execution of a customer's  order,  generally is completed  within 30 to 90
days depending upon the deployment  schedule agreed upon between the Company and
the customer.  The costs of installation  may be separately  charged or included
with system pricing.

Training and Documentation.

The Company's  personnel  provide  system  training  on-site or at the Company's
facilities in Seattle.  The training  programs consist primarily of presentation
materials,  hands-on exercises, and group demonstrations.  All of these training
costs are  factored  into  system  pricing.  Refresher  training  subsequent  to
completion of the initial  training is provided at negotiated fees. User manuals
relating  to the  Company's  products  and  other  materials  and  




<PAGE>



documentation produced by the Company are provided to training participants and
supervisory personnel. Third party computer equipment documentation typically is
provided by the computer equipment vendor.

Custom Programming

The Company  offers custom  software  development  work upon  customer  request.
Customers  are charged  hourly rates for such  services or may contract with the
Company for fixed fees where appropriate.

Professional Services

The Company provides system project planning, configuration, implementation, and
other professional services in connection with sales of its products.  Customers
are charged  hourly rates for such services or may contract with the Company for
fixed fees where appropriate.

Marketing

To date,  the Company has primarily  focused its  marketing  efforts on cellular
carriers operating  domestically in the most heavily populated MSAs. To a lesser
extent,  but increasingly so in the past two years, the Company has also focused
its efforts in developing  international  interest in its products.  The Company
will   continue   its  efforts  to  further   penetrate   significant   wireless
communications  markets,  both domestic and  international.  The Company's sales
force markets its products  directly to cellular  carriers through proposals and
presentations.  International  sales  activities are performed  through  agents,
distributors,  and/or  the  Company's  direct  sales  force.  The  Company  also
participates  at targeted  trade  shows,  conferences  and  industry  events and
selectively  advertises and uses direct  marketing.  The Company also meets with
its current and  prospective  customers to gather product  feedback that assists
the Company in  determining  product  direction.  Achieving  wide-spread  market
acceptance and penetration of the Company's  products will require,  in addition
to enhancing and improving such products,  increased  marketing  efforts and the
expenditure of significant funds to increase  customer  awareness of the Company
and to inform potential customers of the benefits of the Company's products.  At
March 18, 1998,  the Company  employed 10 sales,  sales  support,  and marketing
personnel.

Proprietary Rights

The  Company's  success  will  depend  in part on its  ability  to  protect  its
technology,   processes,   trade  secrets  and  other  proprietary  rights  from
unauthorized   disclosure  and  use  and  to  operate  without   infringing  the
proprietary  rights of third parties.  The Company's  strategy is to protect its
technology and other proprietary rights through patents, copyrights, trademarks,
nondisclosure agreements, license agreements, and other forms of protection. The
Company  has been  active in  pursuing  patent  protection  for  technology  and
processes  involving  its  Hotwatch  Products  and  Blackbird  Products  that it
believes to be proprietary and that offer a potential  competitive advantage for
the  Company's  products  and  services.  To date,  the Company has been granted
patents on certain features of the Hotwatch Products and Blackbird  Products and
has patents pending in the United States and in selected  foreign  countries for
certain features of the Blackbird  Products.  In addition,  the Company has also
licensed patents from third parties in an effort to maintain  flexibility in the
development and use of its  technology,  including  exclusive and  non-exclusive
rights to use patents in connection with the Blackbird Products.

Despite  these  efforts,  there can be no  assurance  that any pending or future
patent  application of the Company or its licensors will result in issuance of a
patent,  that the  scope of  protection  of any  patent  of the  Company  or its
licensors will be held valid if subsequently  challenged,  or that third parties
will not claim rights in or  ownership  of the  products  and other  proprietary
rights held by the Company or its  licensors.  In addition,  the laws of certain
foreign countries do not protect the Company's  intellectual  property rights to
the same extent as the laws of the United States.


<PAGE>



Although  the  Company  believes  that its  technology  has  been  independently
developed  and that its  products do not infringe  patents  known to be valid or
violate  other  proprietary  rights of third  parties,  it is possible that such
infringement  of existing or future patents or violation of  proprietary  rights
may  occur.  There  can be no  assurance  that  third  parties  will not  assert
infringement  claims in the  future  with  respect to the  Company's  current or
future  products  or that any such  claims  will not  result  in  litigation  or
regulatory  proceedings  or require the Company to modify its  products or enter
into  licensing   arrangements,   regardless  of  the  merits  of  such  claims.
See  "Legal Proceedings".  No assurance can be given that any necessary licenses
can be obtained in a timely manner,  upon  commercially  reasonable terms, or at
all,  and no  assurance  can  be  given  that  third  parties  will  not  assert
infringement claims with respect to any current licensing arrangements.

In addition to the foregoing methods of protection,  the Company employs various
physical security measures to protect its software source codes,  technology and
other  proprietary  rights.  However,  such  measures  may not  afford  complete
protection  and there can be no  assurance  that others  will not  independently
develop similar source codes,  technology or other proprietary  rights or obtain
access to the Company's software codes, technology, or other proprietary rights.
Furthermore, although the Company has and expects to continue to have agreements
with its employees and third parties which contain  restrictions  on disclosure,
use and transfer of proprietary information, there can be no assurance that such
arrangements will adequately  protect the Company's  proprietary  rights or that
the Company's  proprietary rights will not become known to third parties in such
a manner that the Company has no practical recourse.

Research and Development

For the years ended  December 31, 1997,  1996,  and 1995,  the Company  incurred
gross research and development  expenditures of $9.8 million,  $7.0 million, and
$5.8 million,  respectively,  prior to  capitalization  of software  development
costs during each period in the amounts of $1.8 million,  $1.4 million, and $1.7
million,  respectively.  The  Company's  research  and  development  efforts are
focused on new hardware and software products,  enhancing and improving existing
hardware and software products,  including developing new software  applications
and additional computer equipment  interfaces,  principally  associated with the
Hotwatch and Blackbird  Platforms.  These enhancements  and/or new products may,
when and if  developed,  enable the  Company  to expand the use of its  existing
products and perform a broad  variety of services and  functions  not  presently
being offered by the Company. Costs included in the Company's gross research and
development expenditures include costs for research, design, development, tests,
preparation of training and user documentation,  and fixing and refining new and
existing features (i.e., software and hardware maintenance) for inclusion in its
product line. At March 18, 1998, the Company employed 56 full-time  research and
development personnel and, from time to time, contracts with various independent
contractors  engaged  in  research  and  development  activities.   The  Company
anticipates  that  development  expenditures  will continue to be substantial in
1998 and beyond in  response to  increased  market  demand for new and  enhanced
products as technology  in the  telecommunications  industry  moves forward at a
rapid pace.

Competition

The market for the  Company's  products and services is highly  competitive  and
subject  to rapid  change.  A number of  companies  currently  offer one or more
similar products and services offered by the Company. In addition, many wireless
communications carriers are providing or can provide,  in-house,  certain of the
Hotwatch Products that the Company offers. Trends in the wireless communications
industry,   including   greater   consolidation   and   technological  or  other
developments  that  make  it  simpler  or  more   cost-effective   for  wireless
communications  carriers to provide certain  services  themselves,  could affect
demand for the Company's  products and services and could make it more difficult
for  the  Company  to  offer  a   cost-effective   alternative   to  a  wireless
communications  carrier's own  capabilities.  Current and potential  competitors
have  established  or may in the future  establish  collaborative  relationships
among  themselves or with third parties,  including  third parties with whom the
Company has a  relationship,  to increase  the  visibility  and utility of their
products and  services.  Accordingly,  it is possible  that new  competitors  or
alliances may emerge and rapidly acquire  significant market 




<PAGE>


share.  In  addition,  the  Company anticipates continued growth in the wireless
communications  industry  and,  consequently, the entrance of new competitors in
the future. An increase in competition could result in price reductions and loss
of  market  share  and  could  have  a  material adverse effect on the Company's
business, financial condition and results of operations.

The Company  believes that the principal  competitive  factors in the markets in
which the Company  competes  include factors such as product  effectiveness  and
quality,  ease  of  use,  technical  support,   customer  service,   price,  the
availability  of  real-time  information,  and the  financial  stability  of the
vendor.  An additional  factor in the  user/device  authentication  arena is the
compatibility  with user/device  authentication  products used by the carrier in
other  geographic  markets and by the carrier's  roaming  partners.  The Company
believes that carriers that purchase user/device authentication products tend to
purchase  products  from the vendor  that  supplies  user/device  authentication
products  to  other  carriers  with  whom the  purchasing  carrier  has  roaming
arrangements. Thus, the Company believes it will be more difficult to market its
Blackbird  Products to a carrier if the  carrier's  roaming  partners  are using
user/device authentication products supplied by a competitor.

The  Company is aware of various  competitors,  such as Corsair  Communications,
Inc.  ("Corsair"),  Signal  Sciences  (a  subsidiary  of  Allen  Telecom  Inc.),
Authentix   Network,   Inc.,   Brite   Voice   Systems,   T-Netix,   Inc.,   GTE
Telecommunications  Services,  Inc. and the  providers  of A-Key  authentication
technology, which currently or are expected to compete directly with the Company
in the user/device  authentication area. The A-Key authentication  technology is
provided by the combination of the telephone switch manufacturers (e.g., Lucent,
Ericcson,  and Motorola ) , the wireless telephone  manufacturers  (e.g., Nokia,
Motorola,  and Ericcson),  the  authentication  center providers (e.g.,  Synacom
Technology,  Inc.) or through IS-41C  software  component and service  providers
(e.g.,   Intellinet  Technologies  and  Trillium  Digital  Systems,  Inc.).  One
competitor,   Corsair,   competes   directly   with   the   Company's   RF-based
fingerprinting  user/device  authentication  products and services.  The Company
believes  that,  to date,  it has  installed  fewer  user/device  authentication
products in domestic and  international  markets than  Corsair.  In addition,  a
significant  factor  for the  Company's  competitive  environment  has  been the
adoption of A-key cryptographic authentication technology by many major wireless
carriers.    See "--Emergence of A-Key Authentication". Also, there are numerous
companies,  including wireless  communications  carriers,  hardware and software
development  companies  and  others  that  have  developed  or may  develop  the
expertise  which would  encourage them to attempt to develop and market products
that could render the Company's products obsolete or less marketable.

The  Company  is aware of  competitors  which  have  indicated  that  they  have
developed,  marketed and installed  commercially available products with respect
to post-call  real-time  software  technology.  These companies  include,  among
others,  IBM,  I-NET,  Inc.,  GTE  Telecommunications,  Services,  Inc.,  Boston
Communications Group, EDS Personal Communications  Corporation,  Cincinnati Bell
Information Systems, Inc.,  Lightbridge,  Inc., Subscriber Computing,  Inc., CSC
Intellicom,   and  Systems/Link   Corporation  as  well  as  cellular  carriers'
proprietary systems operating in some of the most populated cellular markets.

To remain  competitive,  the Company will need to continue to invest in research
and development, sales and marketing, customer service, manufacturing activities
and administrative systems. There can be no assurance that the Company will have
sufficient  resources to make such  investments or that the Company will be able
to make the technological advances necessary to remain competitive.  Many of the
Company's  current  and  potential   competitors  have   significantly   greater
financial,  marketing,  technical and other  competitive  resources,  as well as
greater  name  recognition,  than  the  Company.  As  a  result,  the  Company's
competitors  may be able to adapt more  quickly to new or emerging  technologies
and changes in customer  requirements or may be able to devote greater resources
to the  promotion  and sale of their  products  and  services.  There  can be no
assurance  that  the  Company  will be able to  compete  successfully  with  its
existing competitors or with new competitors.




<PAGE>


Suppliers

The Company has been and will  continue to be dependent on  third-party  vendors
for the computer equipment,  electronic components,  manufacturing services, and
certain software that is incorporated in its products. While these are generally
available  from  multiple  sources,  the Company  currently  obtains or licenses
certain equipment,  electronic components,  manufacturing services, and software
from a  limited  number of  suppliers.  The  Company's  software  programs  were
specifically designed to adhere to the UNIX operating systems standard which can
operate on  standard  computer  equipment  sold by  numerous  manufacturers  and
vendors. The Company currently purchases hardware from  Hewlett-Packard  ("HP"),
its primary system hardware  supplier,  under a Channel Partner Program ("CPP").
As an HP value  added  reseller  ("VAR")  within the CPP  program,  the  Company
qualifies for a number of services under HP's  marketing,  support and financial
programs. The Company also maintains  relationships with other hardware vendors.
The  Company  currently  purchases  hardware  components  from  its  vendors  at
discounts  from  list  prices.  These  hardware  components  then  become a cost
component  as the  Company's  systems are  generally  priced as bundled  turnkey
products  (system,  components,  installation  and  training).  The Company also
currently   maintains   various  software  license   arrangements  with  several
suppliers.  All of these  licenses  allow  the  Company's  customers  to use the
software in  perpetuity,  with the result that the loss of a  particular  source
would not affect any product already in use.

The Company  manufactures  its  proprietary  Blackbird  Cell Site  System  which
operates in connection with the system hardware described  above.  While certain
parts  and  components  of  this  system  are  industry  standard  and generally
available from many suppliers, the Company  designs and contracts  manufacturing
for certain proprietary  printed circuit boards and other  subassemblies.  These
standard components and custom manufactured  subassemblies  are then  integrated
and tested by the Company for delivery to the Company's customers.

Employees

As of  March  18,  1998,  the  Company  had  138  full-time  employees.  Of such
employees,  25  are  in  corporate,   administrative,  and  information  systems
positions, 10 are in sales, marketing,  and related support functions, 47 are in
customer support,  field operations,  and  manufacturing  functions,  and 56 are
engaged in  research  and  development.  As a result of a recent  reorganization
intended to balance  expense  levels  with  anticipated  revenues  (See  "Recent
Events"),  the Company's  full time  employees will be reduced to  approximately
120 during the second  quarter.  From time to time,  the Company  contracts with
consultants and other independent  contractors on its development projects. None
of the Company's employees are covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good.


I
tem 2.           Properties

The Company leases  approximately  45,000 square feet of general office space at
2401  Fourth  Avenue,   Seattle,   Washington  for  its  corporate  offices  and
approximately  1,200  square  feet of  space  at  2001  Sixth  Avenue,  Seattle,
Washington,  which it uses for  computer  operations.  Both of these  spaces are
under five year  non-cancelable  operating  lease  arrangements  that  expire in
September  and May 2000,  respectively.  Both leases  contain  five year renewal
options  and  provide  for the  pass-through  to the  Company  of  increases  in
operating and other costs.  The Company also leases  approximately  1,500 square
feet of executive  office space in Valley Stream,  New York with a term expiring
in August 1999.  The Company  recently  entered into a short term  sub-lease for
space in  Mukilteo,  Washington  for its assembly  and testing  operations.  The
sublease  expires in September  1998 and the Company is currently  negotiating a
multi-year term for the premises.  The annual aggregate rental expense under the
current leases is approximately $0.8 million. As a result of recent streamlining
efforts that began in early 1998, the Company is currently  initiating  plans to
sublease or return  approximately  17,000 square feet of it general office space
in Seattle, Washington.




<PAGE>



Item 3.           Legal Proceedings

In July 1996,  Reon  Corporation  and Reon  International  Corporation  filed an
action against the Company in the Superior Court of King County,  Washington, in
which the  plaintiffs  alleged  breach of  contract,  misappropriation  of trade
secrets,  and breach of other obligations by the Company.  On December 22, 1997,
the parties to the action entered into a settlement agreement, pursuant to which
the action was  dismissed by the court with  prejudice  without any admission of
liability or wrongdoing by any party.

Between July 1997 and September 1997, eight separate lawsuits were filed against
the Company,  its  Chairman of the Board and Chief  Executive  Officer,  and its
former  President and Chief  Operating  Officer.  The lawsuits were filed in the
United States District Court for the Western  District of Washington at Seattle,
and have now been consolidated.  A revised  consolidated  complaint was filed by
plaintiffs  on February 17, 1998.  The  complaint  purports to assert  claims on
behalf of the class of persons, other than defendants and their affiliates,  who
purchased  the Company's  common stock or call options on the  Company's  common
stock, or who sold put options on the Company's  stock,  during the period March
6, 1996 through July 30, 1997,  inclusive  (the "Class  Period").  The complaint
alleges that the  defendants  made false or misleading  statements and failed to
disclose  material  facts  during the Class  Period in  violation of the federal
securities  laws.  The plaintiffs in this lawsuit seek damages in an unspecified
amount.  The Company  believes  this lawsuit is without  merit and is vigorously
defending against it.

On January 13, 1998,  Communications  Information Services, Inc. filed an action
against the Company and AirTouch  Communications,  Inc. for alleged infringement
of United States Patent No.  5,329,591  ("the `591 patent") in the United States
District  Court for the Northern  District of Georgia at Atlanta.  The complaint
asserts  that the  plaintiff is the  exclusive  licensee of all rights under the
`591 patent.  The complaint alleges that the Company's  cellular telephone fraud
prevention   technology   infringes  the  `591  patent,  and  seeks  damages  in
unspecified  amounts.  The Company believes this lawsuit is without merit and is
vigorously defending against it.

Although no estimate of any outcome of the above lawsuits can currently be made,
an unfavorable  resolution of such suits could  materially  affect the Company's
financial position, liquidity or results of  operations.  The  Company is also a
party to other legal proceedings which arise from time  to time in the  ordinary
course of  business and/or  which management  believes will be resolved  without
a  material  adverse  effect  on  the  Company's financial position, liquidity
or results of operations.


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

There were no matters  submitted  to a vote of security  holders of the Company,
through  solicitation of proxies or otherwise,  during the fourth quarter of the
fiscal year covered by this Report.



<PAGE>



                                     PART II



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

The following table sets forth, for each quarter during fiscal 1996 and 1997 and
for the period from January 1, 1998 through  March 16, 1998,  the reported  high
and low sales prices of the Company's Common Stock on the Nasdaq National Market
(Symbol: "CTSC").


<TABLE>
<CAPTION>

                                                    Sales Price
                                                    -----------          
                                              High              Low
                                              ----              ---
      <S>                                     <C>               <C>     
      1996

      
      First Quarter                           $15.25            $10.56
      Second Quarter                           20.13             13.50
      Third Quarter                            21.25             11.25
      Fourth Quarter                           22.13             15.88

      1997

      First Quarter                            19.63              8.88
      Second Quarter                           15.75              8.81
      Third Quarter                             8.06              3.56
      Fourth Quarter                            6.31              1.44

      1998

      First Quarter through                     3.38              1.69
      March 16, 1998

</TABLE>


As of March 9, 1998 the  number of  holders  of record of the  Company's  Common
Stock was 211, and the number of beneficial  shareholders was estimated to be in
excess of 5,000.

There  were  no  dividends  paid or other distributions made by the Company with
respect to its Common Stock during 1997 or 1996.

Prices of the Company's  common stock have been  retroactively  adjusted to give
effect to the two-for-one stock split in 1996.




<PAGE>



Item 6.           Selected Financial Data


<TABLE>
<CAPTION>



Statement of Operations Data(1):                                            Year Ended December 31,
                                                                      (in 000's, except per share amounts)
                                                      ---------------------------------------------------------------------

                                                            1997          1996          1995          1994          1993
                                                            ----          ----          ----          ----          ----

<S>                                                   <C>           <C>           <C>           <C>           <C>        
Revenues                                              $    30,255   $    20,902   $    12,109   $     9,732   $     5,091

Gross Research & Development Expenditures(2)                9,814         7,010         5,819         4,088         2,019

Net Income (Loss)                                          (5,046)       (7,350)           63         1,550        (1,206)

Basic Earnings (Loss) Per Share(3)                          (0.22)        (0.33)         0.00          0.08         (0.07)

Diluted Earnings (Loss) Per Share(3)                        (0.22)        (0.33)         0.00          0.07         (0.07)

Weighted-Average Shares Outstanding:

     Basic                                                 22,728        21,999        20,398        19,091        17,364

     Diluted                                               22,728        21,999        22,775        21,937        17,364

Cash Dividends Declared                                         0             0             0             0             0

</TABLE>



<TABLE>
<CAPTION>



Balance Sheet Data:                                                               December 31,
                                                                                   (in 000's)
                                                      ---------------------------------------------------------------------

                                                            1997          1996          1995          1994          1993
                                                            ----          ----          ----          ----          ----

<S>                                                   <C>           <C>           <C>           <C>           <C>        
Working Capital                                       $     6,535   $    11,409   $    11,094   $     9,783   $     6,578

Cash                                                        3,448         4,854         9,448         9,042         5,158

Capitalized Software Development Costs, net                 3,391         3,599         3,347         2,606         1,431

Total Assets                                               20,721        32,352        18,371        15,477         9,863

Long Term Obligations                                           0             0             0             0             0

Total Stockholders' Equity                                 13,890        18,185        16,734        13,727         9,053

</TABLE>


(1)  Certain  reclassifications  have  been  made  to  the prior year financial
statements to conform to current period's presentation.

(2) Gross  research and development expenditures  presented in this Statement of
Operations  Data are higher than  research  and  development  costs and expenses
disclosed in the  Statements of Operations  due to the inclusion of  capitalized
software  development  costs and contract design and development  services costs
which are disclosed  elsewhere in the  financial  statements.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

(3) Per common share amounts and weighted average shares  outstanding  have been
retroactively  adjusted to give  effect to the two for one stock  splits in 1994
and 1996. In addition,  the Company  adopted  Statement of Financial  Accounting
Standards  ("SFAS") No. 128, "Earnings per Share" in 1997 and restated all prior
periods  presented  as  required  under the  SFAS.  In years  where the  Company
incurred  a net loss,  common  equivalent  shares  were not used in  calculating
Diluted EPS as the effect would be antidilutive. - See Notes B and J of Notes to
Financial Statements



<PAGE>



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



The following  discussion and analysis  provides  information  which  management
believes is relevant to an assessment and understanding of the Company's results
of  operations  and  financial  condition.  The  discussion  should  be  read in
conjunction with the financial statements and notes thereto.

Special Note Regarding Forward-Looking Statements

A number of statements  contained in this report are forward-looking  statements
within the meaning of the Private Securities  Litigation Reform Act of 1995 that
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those expressed or implied in the applicable  statements.  These
risks and uncertainties are more fully discussed in the "Business Risks" section
of this  discussion  and analysis and in the  Company's  other  filings with the
Securities and Exchange Commission.

Overview

The Company has  developed  the  Blackbird(R)  Platform and related  application
products  and   services   ("Blackbird   Products")   to  address  the  wireless
communications industry's need to more effectively combat cloning fraud, a major
industry  problem,  The  Blackbird  Platform  has been  engineered  with an open
architecture  design to allow the  Company  and  others to  develop  application
products which could run on or exchange  information with it. Prior to 1996, the
Company's  revenues had been  primarily  derived from the Company's  Hotwatch(R)
Platform and related application  products and services  ("Hotwatch  Products"),
which the Company no longer  actively  markets.  Revenues from sales of Hotwatch
Products have declined over the past two years,  and are expected to continue to
decline in future years

Since 1996, the Company has signed agreements with AirTouch Cellular and certain
affiliates  ("AirTouch"),  Bell Atlantic  Mobile ("BAM" - formerly known as Bell
Atlantic  NYNEX  Mobile),   GTE  Mobilnet  of  California  Limited   Partnership
("GTE-California"),  GTE Mobilnet Service Corp. ("GTE Corp."),  Ameritech Mobile
Communications,  Inc.  ("Ameritech")  and SNET  Mobility  ("SNET") to deploy and
support  the  Blackbird  Products.  During  the last half of 1996,  the  Company
recorded its first substantive Blackbird Product revenues from AirTouch and BAM.
During 1997, the Company has recorded  revenues from all of the customers  noted
above.  From  time-to-time,  the Company  participates in trials of its products
with the goal of gaining contracts with new customers.  In this connection,  the
Company is currently involved in a trial agreement in the Asia Pacific Region to
test  its  products.  The  ultimate  outcome  of  this  trial  is not  currently
determinable.

Revenue  recognition  for the  Company's  systems  vary by  customer  and/or  by
product.  The  significant  factors  used  in  determining  revenue  recognition
generally include physical hardware and software delivery, definitions of system
delivery, and customer acceptance. For those contracts which provide for payment
based upon meeting actual performance criteria, the Company may record a portion
of the systems  revenues  and the  majority  of the system  costs at shipment or
during the early  stages of a system  deployment.  In  certain  cases no systems
revenues or systems  costs may be recorded at time of  shipment,  while  certain
operating  costs may be recorded  during the  deployment  process.  Accordingly,
revenues and direct margins  recorded by the Company can be expected to be lower
in earlier  periods of  deployment  and  inconsistent  from  quarter to quarter,
especially  during the initial  market  deployments  under new  agreements.  The
resulting  deferral of revenue is recognized in subsequent  periods upon meeting
the performance criteria specified in the applicable agreement.
The Company does not operate with a significant revenue backlog.

In addition, the Company incurs substantial operating expenses during the system
deployment process, primarily in the areas of sales and marketing, installation,
customer support, and in research and development.  The Company expects that its
costs and expenses will be lower in 1998 as compared to 1997,  but will continue
to be  substantial  in  the  future,  due  to a  continual  need  to:  (i)  make
investments  in research and  development;  (ii) enhance its sales and marketing
activities; (iii) enhance its manufacturing processes; (iv) enhance its customer



<PAGE>


support  capabilities  needed to service the anticipated  product deployments in
both  domestic  and  international  markets;  and (v)  enhance  its  general and
administrative  activities to support the anticipated expansion of the Company's
business.  In  addition,  the  Company has  incurred,  and  anticipates  it will
continue to incur, increased legal fees in connection with pending litigation.

Recent Developments

1998 Strategic Plan

The Company has incurred  significant  operating  losses during 1996 and 1997 in
its initial years of deployment of the Blackbird Products.  In January 1998, the
Company began implementation of a strategic plan that has included,  among other
initiatives,  streamlining  the Company's  operations to better balance expenses
and revenues,  and directing additional development efforts and resources toward
new products that can generate new sources of revenue.  By the end of the second
quarter of 1998,  the Company's  workforce will be reduced by  approximately  40
percent   from   December  31, 1997.   As of March 25, 1998, the majority of the
reduction  has already been  accomplished.  In addition,  in late 1997 and early
1998, the Company  completed the  consolidation of certain hardware assembly and
integration  operations through the selected acquisition of assets,  assumptions
of leases, and hiring of employees from two former suppliers.

US Wireless

On March 2, 1998,  the Company and U.S.  Wireless  Corporation  ("US  Wireless")
announced  the signing of a letter of intent which  provides  for the  potential
combination  of the two companies.  If the proposed  transaction is completed on
the terms contemplated,  which includes  stockholder approval for both companies
and as to which no assurance can be given,  the  stockholders of the Company and
US Wireless will each own 50 percent of the shares of the resulting company, and
the board of  directors  of the  resulting  company  will be  controlled  by the
stockholders  of US Wireless.  The companies  have commenced a due diligence and
final agreement  negotiation  process. In connection with this transaction,  the
letter of intent calls for the companies to seek no less than $15 million in new
financing.  US Wireless  develops and manufactures  products designed to provide
value-added  services and features  for the  wireless  communications  industry,
including caller-location and tracking, autonomous network management, and other
applications.  Its  RadioCamera(TM)  caller-location  and  tracking  product  is
designed to meet the emergency 911  requirements  of the Federal  Communications
Commission  ("FCC").  In June 1996, the FCC issued a Report and Order  requiring
wireless  carriers to be able to identify  the  location of wireless  callers to
emergency 911 systems. This mandate requires that products designed to meet this
need must be  operational  and  accurate  to within 125  meters of the  wireless
caller not less than 67% of the time by October  2001.  Industry  analysts  have
estimated that the market for wireless  caller-location  and tracking technology
could reach $8 billion in revenues worldwide.

1997 compared to 1996

Total revenues increased 45% to $30.3 million in 1997 from $20.9 million in 1996
and the Company generated net losses of $5.0 million, or $0.22 per share in 1997
compared to net losses of $7.4 million,  or $0.33 per share in 1996. In light of
the  increased  revenues  in 1997 as compared  to 1996,  the  adverse  operating
results in 1997 are primarily attributed the Company's:(i) delays in gaining new
orders and  acceptances  beginning  in the latter part of the  Company's  second
quarter and  continuing  through the  remainder of 1997;  and (ii) an unbalanced
cost structure in relation to the 1997 revenues.  Revenues and operating results
have also been inconsistent since the beginning of the Company's introduction of
the Blackbird Products. Revenues for the six month periods ending June 30, 1996,
December 31, 1996, June 30, 1997 and December 31, 1997 were $3.7 million,  $17.2
million,  $24.1 million,  and $6.2 million  respectively.  Operating results for
those same periods were losses of ($4.5)  million,  ($2.9)  million,  profits of
$3.4 million and losses of ($8.5 million), respectively.


<PAGE>



The Company attributed the slowdown to: (i) slower than anticipated  roll-out of
Blackbird  Platform systems to existing customers and the continued uneven sales
cycle with potential new domestic and international  customers:  and (ii) delays
in the release and acceptance of a new version of its Blackbird Platform/PreTect
application  software during the second quarter of 1997. Beginning in the fourth
quarter of 1997,  issues  surrounding  the delayed release and acceptance of the
Company's software were resolved,  additional customer acceptances were received
for systems  shipped in previous  quarters,  and a small number of reorders were
made. However, the Company has not been able to generate a substantial number of
new orders for its systems that would result in  profitability  in the immediate
future.

Systems  revenues  are  generated  from  licensing  and  sales of the  Company's
proprietary  software  and  hardware  products,  from the  sale of  third  party
equipment sold in support of the  proprietary  systems,  and to a lesser extent,
fees earned  associated  with the  installation  and deployment of such systems.
Systems  revenues  increased  30% to $25.8 million in 1997 from $19.8 million in
1996 and represent revenues primarily from Blackbird Products from its customers
described above.  System revenues from Hotwatch  Products  decreased 58% to $1.3
million  in  1997  from $3.1 million in  1996 and originate from agreements with
AT&T  Wireless   Services,   Inc.  ("AWS"),  and   360  (Degree)  Communications
Company  ("360(degree)CC").  The  decrease  in  system  revenues  from  Hotwatch
Products  is  primarily  due to lower  non-recurring  revenues  from the AWS and
360(Degree)CC  agreements.  Revenues in 1998 from Hotwatch Products are expected
to  decrease  from those  recorded in 1997,  as the  Company no longer  actively
markets these products.

Service revenues are derived  primarily from hardware and software  maintenance,
software  upgrades  and  releases,  No Clone  ZoneSM  roaming  fraud  protection
services,  system  monitoring,  and related  professional  services  provided in
support  of the  Company's  currently  deployed  product  base.  These  revenues
increased  307%  to $4.5  million  in  1997  from  $1.1  million  in  1996  with
approximately  89% and 16% of the 1997 and 1996  revenues,  respectively,  being
derived from the Blackbird Products.  This increase is directly  attributable to
growing service revenues  originating from Blackbird Product deployments in late
1996 and during 1997. The Company anticipates that total service revenues during
1998 and  beyond  will  continue  to  increase  as a result  of the  anticipated
continued deployment of the Company's Blackbird Products.

Costs of systems and  services,  the majority of which  relate to the  Company's
Blackbird Products, increased 16% to $19.2 million in 1997 from $16.6 million in
1996. Costs of systems and services are primarily comprised of the costs of: (i)
equipment,  which primarily  includes both proprietary and third party hardware,
and to a lesser  extent,  manufacturing  overhead,  and related  expenses;  (ii)
amortization of capitalized software  development;  (iii) system integration and
installation,  (iv)  royalty  fees  related  to the  licensing  of  intellectual
property  rights  from  others;  (v)  customer  support;   and  (vi)  activities
associated  with the  evaluation,  rework and testing of  replacement  inventory
parts returned from the field in connection with the Company's  ongoing hardware
maintenance service activities.

Costs of systems and services, as a percent of total revenues,  were 63% and 79%
for  the  1997  and  1996  periods,  respectively.  The  improvement  in 1997 is
primarily  attributable  to: (i) an increased value of system sales that carried
higher direct variable margins; (ii) leveraging fixed overhead costs relating to
manufacturing,  installation and system integration; and (iii) increased service
revenues  that  benefited  from  leveraging  fixed  customer  support  operating
expenses.  However,  the results were negatively impacted by, (i) an increase in
the  amortization  of  capitalized  software  costs of products  being  replaced
earlier than anticipated in conjunction with the expected  commercial release of
new  software  in early 1998  (amortization  of  capitalized  software  was $2.0
million in 1997 as compared to $1.1 million in 1996.  As a result of analysis of
sales projections and future product releases,  the  lives used for amortization
were reduced effective January 1, 1998 from four years to two  years, which will
result   in   increased   amortization   in   future   years.);  and   (ii)   an
increase in the provision of obsolete and excess  inventory  from $.4 million in
1996 to $1.8  million  in  1997  for 



<PAGE>


the Company's resale and service parts inventories.  The  reserves were required
to address excess and obsolete items resulting from changes in technology of the
Company's cloning fraud  interdiction methods and from lower than expected sales
of  its  Blackbird Products in 1997.  The  Company believes that increased sales
volumes  and/or  an  increase in the number of acceptances of previously shipped
systems during  the  last  half of 1997  would  have  provided higher margins by
achieving   even   greater   leverage   of  its  fixed  overhead  costs  in  the
manufacturing, installation and customer support operations.

Sales and  marketing  expenses  increased  10% to $3.8 million in 1997 from $3.4
million in 1996 while total revenues increased 45% as explained above. Sales and
marketing expenses, as a percent of revenues,  decreased to 12% in 1997 from 16%
in 1996 and reflect the leveraging of its fixed  expenses  coupled with slightly
lower variable sales incentive compensation.

General and  administrative  expenses increased 51% to $4.5 million in 1997 from
$3.0  million in 1996.  The amounts for 1997 reflect : (i)  increased  legal and
related  expenses of $0.7 million in 1997 for costs  primarily  associated  with
legal proceedings during the period; and (ii) a bad debt expense in 1997 of $0.4
million  attributable  to the sale to a distributor  of certain parts which were
planned  to be used  for a  prospective  customer  in the  Pacific  Rim  region.
Subsequent to the sale date, certain governmental bidding requirements  changed,
thus rendering  these parts  previously  sold as obsolete.  The Company chose to
write off the value of this  receivable.  In 1996,  the  Company  incurred  $0.4
million of  non-recurring  expenses  related to the  Company's  proposed  public
offering  which was  subsequently  withdrawn  due to  unfavorable  stock  market
conditions.  Without  the  increased  legal and  related  expenses  and bad debt
expense in 1997 and the  non-recurring  expenses  associated  with the  proposed
public  offering in 1996,  general and  administrative  expenses would have been
$3.4 million in 1997 as compared to $2.6 million in 1996,  a 31%  increase.  The
increase was principally due to increased personnel and related costs associated
with the anticipated expansion of the Company's business.

Research and development  expenditures  include the costs for research,  design,
development, testing, preparation of training and user documentation, and fixing
and refining features for the software and hardware  components  included in the
Company's  current and future  product  lines.  Research and  development  costs
increased 46% to $8.1 million in 1997 from $5.5 million in 1996. The increase in
expenditures  was primarily  attributable  to the  enhancement  of the Company's
cloning fraud detection and prevention products, while some initial research was
undertaken  for the  investigation  of additional  application  products for the
Blackbird  Platform,  such as technology  to provide  enhanced 911 services that
have been mandated by the FCC for implementation by wireless carriers by October
2001. Software development costs of $1.8 million were capitalized in 1997, a 29%
increase over the $1.4 million that were capitalized  during 1996. and relate to
the  development  and  enhancement  of the Blackbird  Products.  The  percentage
increase in capitalized development costs was lower than the percentage increase
for research and development  costs since a greater portion of the  expenditures
were for  non-capitalizable  research  and design of  potential  new or enhanced
products, and for maintenance activities associated with the Blackbird Products.
A    significant    portion   of    the    Blackbird    Product     enhancements
are being  commercially  installed  during  the first  quarter of 1998 while the
balance are  scheduled  for  commercial  deployment  at a later date.  Including
capitalized  software  development  costs,  and  $0.2 million of contract design
and development costs recorded as costs of services in both 1997 and 1996, gross
research and development expenditures increased 40% to $9.8 million in 1997 from
$7.0 million  in  1996, with  the increase in expenditures being attributable to
the factors discussed above.

Interest  income  decreased  23%  to  $0.2 million in 1997 from $0.26 million in
1996. The decrease was  attributable to lower average cash balances  invested at
lower average interest rates during 1997 as compared to 1996.

1996 compared to 1995

Total revenues increased 73% to $20.9 million in 1996 from $12.1 million in 1995
and the Company incurred a net loss of $7.4 million,  or $0.33 per share in 1996
compared  to net  income of $0.1  million,  or $.00 per share in 


<PAGE>


1995.  While  the increase in revenues is directly attributable to the Company's
initial  deployment of its Blackbird Products,  the decline in operating results
was primarily the result of: (i) development of an expanded operating structure,
which impacted most functions within the Company,  that is designed to support a
higher  volume  of  sales,  (ii)  unrecognized revenues attributable to  systems
shipped in 1996 where some, but not all revenues associated with those shipments
were  recorded,  (iii) unrecognized revenues attributable to systems shipped  in
1996  with  no  revenues recorded but where substantial sales, customer support,
installation and research and development operating expenses were incurred,  and
(iv) lower initial average sales prices from the Company's initial contracts for
the Blackbird Products.

System  revenues  increased  108% to $19.8 million in 1996 from $9.54 million in
1995.  System  revenues  from  Blackbird  Products amounted to $16.7 million for
1996  and  were derived exclusively from sales under the agreements with BAM and
AirTouch. There were no corresponding revenues during 1995. System revenues from
Hotwatch  Products  decreased  64%  to $3.1 million in 1996 from $8.6 million in
1995 and were principally from AWS and 360(degree)CC.

Service revenues decreased 58% to $1.1 million in 1996 from $2.6 million in 1995
and were primarily  derived from Hotwatch  Products.  This decrease is primarily
due to $1.2 million of non-recurring  Hotwatch  programming  services associated
with the AWS Axys agreement and initial  Blackbird Product  evaluation  revenues
from an international customer recorded during the 1995 period. Service revenues
from Blackbird Products were minimal in 1996.

Costs of systems and services  increased 255% to $16.7 million in 1996 from $4.7
million in 1995. Costs of systems and services,  as a percent of total revenues,
were 79% and 39% for the 1996 and 1995  periods,  respectively.  The increase in
1996 is attributable to: (i) the higher hardware component costs of system sales
for  Blackbird  Products as compared to Hotwatch  Products,  (ii) lower  initial
average  sales prices from systems  deployed to the  Company's  first  Blackbird
Products  customers,  and (iii)  unrecognized  revenues  attributable to systems
where  some,  but not  all,  revenues  were  recorded  in 1996  and  which  were
recognized  in  future  periods  in  accordance   with  the  Company's   revenue
recognition practices discussed in the overview section above.

Sales and  marketing  expenses  increased  62% to $3.4 million in 1996 from $2.1
million in 1995.  This  increase is  primarily  attributable  to  personnel  and
related costs  incurred in connection  with the Company's  increased  efforts to
generate  demand for its  products and the costs  incurred  during both pre- and
post-sales  Blackbird contract  activities.  To a lesser extent,  variable sales
incentive compensation contributed to the 1996 increased expenses.

General and  administrative  expenses increased 43% to $3.0 million in 1996 from
$2.1  million in 1995  principally  due to  increased  personnel  related  costs
associated with the continued  expansion of the Company's  business and also due
to the  non-recurring  public  offering  expenses  incurred in 1996 as discussed
above.

Research and development expenditures increased 56% to $5.5 million in 1996 from
$3.5  million  in 1995.  Software  development  costs of $1.3  million  and $1.7
million  were  capitalized  during  1996 and  1995,  respectively,  and  related
primarily to the development of the Blackbird  Products.  In addition,  costs of
$0.2 million and $0.6 million, related to design and development  services under
the AWS and other Hotwatch customers  agreements were expensed in 1996 and 1995,
respectively,  as costs of services.  Capitalized  development costs declined in
1996 primarily due to an increase in  non-capitalizable  research,  design,  and
maintenance  activities  associated  with  the  Blackbird  Products.   Including
capitalized  software  development  costs,  and contract  design and development
costs recorded as costs of services, gross research and development expenditures
increased  23% to $7.0 million in 1996 from $5.7 million in 1995,  primarily due
to expanded investment in the Blackbird Products.

Interest  income  decreased  40% to $.3  million in 1996 from $.5  million.  The
decrease  was  attributable  to lower  average cash  balances  invested at lower
average interest rates during 1996 as compared to 1995.


<PAGE>


Liquidity and Capital Resources

The Company's capital  requirements have consisted primarily of funding software
and hardware  research and  development,  property and  equipment  requirements,
working capital and the Company's operating losses. The Company has historically
funded these requirements  through issuance of Common Stock (including  proceeds
from the exercise of warrants and options) and from operating profits in certain
periods.  On December  31, 1997 the  Company's  cash balance was $3.4 million as
compared to $4.9 million on December 31, 1996.  The  Company's  working  capital
decreased to $6.5  million at December  31, 1997 from $11.4  million at December
31, 1996.

Cash  provided by  operating  activities  amounted to $1.6  million in 1997,  as
compared to cash used by operating  activities of $10.3 million in 1996 and cash
provided by  operating  activities  of $0.8 million in 1995.  The major  factors
contributing  to the Company's  improved cash flow from operating  activities in
1997 are: (i) the $2.3 million  lower loss that was recorded in 1997 as compared
to   1996; (ii) an   increase   of $1.2 million   in  non-cash  depreciation and
amortization  expenses,  which  were  primarily  attributable  to (a)  increased
investments  in software  development  and property  and  equipment as discussed
below,  and (b)  increased  amortization  of  capitalized  software as discussed
above; and (iii) the significant benefit from the net changes in the balances of
the  major  working  capital  components  affecting  cash  flow  from  operating
activities that included:

(a)  accounts  receivable,  which  decreased as a result of: (I)  collection  of
     older 1996  receivables  during the first half of 1997 originating from the
     initial  deployments  of the Blackbird  Products;  and (II) more  favorable
     payment terms on 1997 system shipments as compared to the payment terms for
     the initial 1996 system shipments

(b)  inventories,  which decreased due to: (I) the Company's inventory balancing
     efforts  undertaken  after the  significant  inventory  build-up during the
     fourth quarter of 1996 (notwithstanding  these inventory balancing efforts,
     at December 31, 1997, the Company  had  received  more than $1.6 million of
     inventory  on more  than  $2.0 million  of purchase orders  for anticipated
     sales  to  prospective  international  customers  during  1998);  and  (II)
     inventory reserves of $1.8 million were recorded in 1997 as a provision for
     excess and obsolete  inventory, primarily  resulting from  delayed sales as
     discussed  above and to technology  changes in the Company's  cloning fraud
     interdiction methods;

(c)  accounts payable,  which decreased primarily due to  1997 payments made for
     fourth quarter 1996 inventory purchases;

(d)  customer  deposits,  which  decreased  primarily due to the  application of
     payments  received in 1996 (that  originated from 1996  shipments)  against
     related  revenues  recorded in 1997 in accordance with contract  acceptance
     and payment terms.

(e)  deferred  revenue,  which increased  primarily as a result of the growth of
     prepaid  maintenance and service  contracts  related to system sales of the
     Blackbird Products; and

Cash utilized by investing  activities  totaled $3.8  million,  $3.1 million and
$3.3  million  in 1997,  1996,  and 1995  respectively.  The  Company's  capital
requirements  during  such  periods  were for:  (i)  purchase  of  property  and
equipment,  primarily for furniture,  leaseholds,  and equipment associated with
expanding  the  Company's   business;   and  (ii)   capitalization  of  software
development of the Blackbird Products.  These expenditure levels are expected to
be at a lower rate during 1998 due to the recent streamlining of operations that
was  undertaken  to  better  balance  expenses and revenues of the Company  (see
"Overview").  At December 31, 1997,  the Company had no significant  commitments
for capital  expenditures.  The Company,  as part of its growth strategy,  would
consider the cost/benefit of purchasing  software and/or hardware  technology in
the event that an attractive opportunity arises.


<PAGE>

Cash provided by financing  activities  totaled $0.8  million,  $8.8 million and
$2.9  million  during  1997,  1996,  and 1995,  respectively.  Exercise of stock
options by the Company's directors, officers and employees totaled $0.8 million,
$2.4 million and $2.9  million  during 1997,  1996 and 1995  respectively.  Also
contributing  to available  cash for use in 1997 was the  November  1996 sale of
400,000 shares of common stock to investors in a private placement with proceeds
to the Company  approximating  $6.4  million  net  of  expenses.  A registration
statement for the resale of such shares was declared effective by the Securities
and  Exchange  Commission  in  April  1997.  Also  in November 1996, the Company
obtained  a  $5.0 million line of credit from a major  bank.  The line, which is
secured  by  all  personal property of the Company,  bears interest at the prime
rate plus .75%,  and is scheduled  to expire on June 30,  1998.  Borrowing under
the  line of credit is subject to the bank's receipt and continuing satisfaction
with  current  financial  information.  No  funds have been drawn on the line of
credit  as  of  this  date,  as  the  Company's  current financial condition may
impair its ability to borrow under the line.  The proceeds from  the  stock sale
have been used, and the line of credit,  if available, would be used, to provide
additional working capital and fund the Company's growth.

Historically,  the  Company  has  experienced  uneven  cash  flow and  operating
results,  and, during the past two years,  significant  operating  losses.  Cash
provided from (used in)  operating  activities  was $1.1  million,  $3.4 million
($3.4)  million,  and $.6 million in the first through fourth  quarters of 1997,
respectively, while the net income (loss) for each of the same quarters was $4.4
million, ($1.0) million, ($4.7) million and ($3.7) million, respectively.  These
uneven cash flows and operating  results  originate  primarily  from: (i) uneven
quarterly   sales;   (ii)  cash  receipts   associated  with  deferred   revenue
recognition;  (iii) varying payment terms contained in customer agreements;  and
(iv)  operating  losses  resulting  from a  combination  of lower than  expected
revenues and an unbalanced cost structure in relation to those revenues.  Delays
in achieving  profitability,  failure to convert  existing  inventory  into cash
and/or  significant  sales  growth  requiring  working  capital  beyond  current
amounts, and/or other changes in the Company's operating activities will require
additional  financing  during the  next  twelve  months.  See "--Business Risks"
below.

Business Risks

Need for Additional Financing.  Historically, the Company has experienced uneven
cash flow and operating  results,  and,  during the past two years,  significant
operating  losses.  Continued  delays in  achieving  profitability,  failure  to
convert  existing  inventory into cash,  and/or other events  requiring  working
capital beyond current amounts will require additional financing during the next
twelve  months.  In addition,  if the funds  currently  available to the Company
prove to be insufficient to fund operations, the Company may be required to seek
additional  financing  sooner than  currently  anticipated or may be required to
curtail its activities.  The Company has a $5.0 million line of credit, which is
subject to continuing satisfaction with current financial information  furnished
to the bank.  The line of credit is  scheduled  to expire on June 30, 1998,  and
all  outstanding  balances  under  the  line  must be  repaid  for a consecutive
30-day period before such expiration date. While no funds have been drawn on the
line of credit as of this date,  the  Company's current  financial condition may
impair  its ability to borrow under the line.  On March 2, 1998, the Company and
US Wireless announced the signing of a letter  of intent which  provides for the
potential  combination of the two  companies. (See  "--Overview"). The letter of
intent calls for the companies to seek no less than $15 million in new financing
in connection with  this  transaction.  There  can  be  no  assurance  that  the
potential  financing  described  above,  or any  additional financing,  will  be
available  on  acceptable  terms,  or at all,  or that the proposed  transaction
with US Wireless will be consummated.  Failure to obtain additional financing as
needed  would  have  a  material  adverse  effect  on  the  Company's  business,
financial condition and results of operations.

Dependence on Analog Cellular Networks;  Industry and Technological  Change. The
Company's  future  success will depend on the  continued and expanded use of its
existing products and services, its ability to develop new products and services
to meet the needs of the wireless  communications  industry,  and its ability to
adapt  existing  products and services to keep pace with changes in the wireless
communications  industry.  The Company's  


<PAGE>

Blackbird Products  currently are used exclusively for analog cellular networks,
although the  Company believes that its Blackbird Products may  be adaptable for
use in digital networks. The Company believes that over 80% of domestic wireless
telephone  service  currently  is  provided  in  the  analog mode,  but that the
industry  is  undertaking  a  shift  to digital mode in the major markets due to
certain  advantages  of  the digital mode,  including expanded capacity, greater
privacy  and  enhanced  security.  Technological  changes or developments in the
cellular   industry,   such  as  encryption  technology  for  enhanced  privacy,
cryptographic  authentication  (commonly  known  as  "A-Key authentication") for
enhanced security against cloning fraud, improved switching technologies, and/or
further  industry  consolidation,  could  reduce  or  eliminate  demand  for the
Company's  Blackbird  Products.  Industry  analysts  project  that the number of
analog cellular telephones will decline in the future.  This shift away from the
use  of  analog  cellular  telephones  in  favor  of digital cellular telephones
utilizing  A-Key  authentication  or to other digital wireless services, such as
Personal  Communications  Services  ("PCS") or Enhanced Specialized Mobile Radio
("ESMR"),  could  affect  demand  for the Company's Blackbird Products and could
require   the   Company   to   develop   modified   or  alternative  user/device
authentication  products.  There  can  be  no assurance that the Company will be
successful  in  modifying  or  developing  its  existing or future products in a
timely  manner,  or  at  all,  to  respond  to  changing  market,   customer  or
technological  requirements.   If  the  Company  is  unable,  due  to  resource,
technological  or  other  constraints,  to  adequately  anticipate or respond to
changing market, customer or technological requirements, the Company's business,
financial  condition  and  results  of  operations  will be materially adversely
affected. Further, there can be no assurance that products or services developed
by others will not render the Company's products and services non-competitive or
obsolete.

Dependence on Blackbird  Products;  Uncertainty of Widespread Market Demand. The
Company's  revenues have been and can be expected to continue to be derived from
a limited  number of products and services.  In 1997,  revenues  from  Blackbird
Products represented 94 percent of the Company's total revenues, and the Company
anticipates  that revenues from  Blackbird  Products will continue to  represent
substantially  all of the Company's  total revenue in 1998.  Thus, the Company's
future  operating  results will depend primarily on the continued demand for and
market  acceptance  of the  Blackbird  Products.  Currently,  a majority  of the
cellular  carriers  in the  largest  markets  in the  United  States  are  using
user/device  authentication products to some extent, and the Company anticipates
that the growth rate of demand for  user/device  authentication  products in the
United  States will slow and demand may  potentially  decline  over the next few
years. If not offset by growth in international markets, this trend would have a
material adverse effect on sales of Blackbird Products.  The Company anticipates
that this trend could also occur in  international  markets over time.  Although
the Company believes that the Blackbird  Products  present growth  opportunities
for its business,  there can be no assurance  that the  Blackbird  Products will
achieve   widespread  market   penetration  or  that  the  Company  will  derive
significant revenues from the sale of such products.

Dependence  New Product  Development  and Product  Enhancements.  The  Company's
future success will depend, in part, on its ability to timely develop, introduce
and gain  acceptance of new products and  enhancements  to existing  products to
meet  the  needs  of  the  wireless  communications  industry.  The  Company  is
continually  seeking  to  enhance  its  existing  products  and to  develop  new
products,  including  other  application  products  utilizing  the Blackbird and
Hotwatch  platforms.  However,  the Company  remains subject to all of the risks
inherent in product  development,  including  unanticipated  technical  or other
development   problems  which  could  result  in  material   delays  in  product
introduction  and acceptance or significantly  increased costs.  There can be no
assurance  that  the  Company  will  be able to  successfully  enhance  existing
products or develop new products,  or to timely introduce and gain acceptance of
such enhancements and new products in the marketplace.

Uncertainty  of Product  Performance.  It is common for hardware and software as
complex and  sophisticated  as that  incorporated  in the Company's  products to
experience errors or "bugs" both during development and subsequent to commercial
deployment.  In particular,  the Company has  encountered  certain  software and
hardware  errors in its Blackbird  Products and to date  corrected the majority,
but not all, of such errors  identified to date.  There can be no assurance that
any errors in the Company's existing or future products will be identified,  and
if identified,  corrected.  Any such errors could delay additional installations
of  products  and  require  modifications  in products  that have  already  been
installed. Remedying such errors has been and may continue to 


<PAGE>

be  costly  and  time  consuming.  Delays  in  remedying  any  such errors could
materially  adversely affect the Company's competitive  position with respect to
existing  or  new  products offered by its competitors. In particular, delays in
remedying  existing  or future errors in the Company's  Blackbird Products could
materially adversely affect the Company's  ability to achieve significant market
penetration prior to widespread use of A-Key authentication or other user/device
authentication  products.  Once  the Company's products are installed,  they are
subject   to   compliance   with  certain  contractual  requirements,  including
acceptance  testing to ensure that they are properly installed and performing in
accordance  with  contractual  specifications.  While  the  Company has achieved
acceptance  in  nearly all markets for the majority of products shipped to date,
there  can be no assurance that current or future installations of the Company's
products  will  satisfy all contractual requirements.  In addition, software and
hardware  warranties are generally included as part of the Company's contractual
obligations.  To the extent that the software and hardware maintenance fees from
its  products  are  not  adequate  to  cover  the  costs of making any necessary
modifications  or  meeting the Company's warranty obligations, the Company could
be  required  to  make  significant  additional expenditures, which could have a
material adverse effect on the Company.

Risk of Hardware  Manufacturing  Activities.  For the most part,  the  Company's
engineering  resources  historically  have been  devoted to software  design and
development. As a result, only a limited number of such resources were initially
used  in the  design  and  prototype  production  of the  Company's  proprietary
hardware.  In 1997, the Company added  significantly  to its hardware design and
development process;  however,  the Company continues to utilize  subcontractors
for hardware  design,  engineering,  manufacturing  and  integration  of certain
proprietary  printed  circuit boards,  radio  equipment and other  subassemblies
which are components of the Company's Blackbird  Products.  The Company's future
success will continue to depend on enhancing  and  expanding  its  manufacturing
activities with respect to the design and engineering of hardware, improving its
inventory  control systems,  maintaining  effective  quality control,  procuring
component parts and maintaining subcontractor relationships.  Failure to achieve
any of these  factors  could have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

Dependence on Key Personnel.  The Company's future success depends in large part
on the continued services of its key management,  sales,  engineering,  research
and development,  customer support and operational  personnel and on its ability
to continue to attract,  motivate and retain highly qualified personnel in those
areas.  Competition  for such personnel is intense and there can be no assurance
that the Company will be successful in attracting,  motivating and retaining key
personnel.  The Company also believes stock options are a critical component for
motivating and retaining its key employees . The decline in the Company's  stock
price during 1997 has made stock options previously granted with higher exercise
prices less valuable to the  Company's  current  employees and has  consequently
made  it more  difficult  for the  Company  to  retain  its key  employees.  The
inability to hire and retain qualified  personnel or the loss of the services of
key personnel could have a material adverse effect upon the Company's  business,
financial  condition  and results of  operations.  The Company has entered  into
employment  agreements with six officers and other employees,  four of whom have
terms expiring in 1998 and two of whom have terms expiring in 1999. There can be
no assurance that any of these  contracts will be renewed.  The Company does not
maintain any key-man life insurance policies on any of its employees.

Ability to Manage Changing Business  Conditions.  The Company's future operating
results  will  depend,  among other  things,  on its ability to manage  changing
business  conditions  and to continue to improve its  operational  and financial
control  and  reporting  systems.  If the  Company's  management  is  unable  to
effectively  manage  changing  business  conditions,  its  business,   financial
condition and results of operations could be materially adversely affected.  The
Company's ability to manage future growth, should it occur, depends in part upon
the  Company's  ability  to  attract,  train and retain a  sufficient  number of
qualified personnel commensurate with the needs of the Company. During 1997, the
Company experienced an employee turnover rate in excess of 30%. In January 1998,
the Company began implementation of a strategic plan that included,  among other
initiatives,   streamlining  its  operations  to  better  balance  expenses  and
revenues,  and directing additional development efforts and resources toward new
products  that can  generate  new sources of  revenue.  By the end of the second
quarter of 1998,  the Company's  workforce will be reduced by  approximately  40
percent from December 31, 1997 levels.  As of 


<PAGE>

March 25,  1998,  the  majority of the reduction has already been  accomplished.
Failure  to  reduce  the  turnover  rate experienced in 1997 among the Company's
employees would increase the Company's recruiting and training costs, and if the
Company  were  unable  to  recruit  and  retain a sufficient number of qualified
personnel,  it  could  be  forced  to  limit  its growth or possibly curtail its
operations.  There  can  be  no assurance that the Company will be successful in
attracting, training and retaining the required number of qualified personnel to
support  the  Company's  business in the future. Failure to manage the Company's
operations  with  the  reduced  staffing discussed above, may further strain the
Company's management,  financial and other resources,  and could have a material
adverse  effect  on  the Company's business,  financial condition and results of
operations.

Limited  Customer  Base;  Reliance  on  Significant  Customers.   The  Company's
potential   customer  base  is  relatively   limited  due  to  the   significant
concentration of ownership and/or operational control of wireless  communication
markets.  Currently,  the Company  markets its  products  and  services  only to
wireless communications carriers that operate analog cellular networks. Of these
carriers,  there are approximately 25 in the United States and approximately 150
in   international   markets.   See   "--International   Operations."   Revenues
attributable  to a  relatively  small  number  of  customers  historically  have
represented and are likely for the foreseeable future to continue to represent a
significant  percentage,  in any given period,  of the Company's total revenues.
Sales to customers  aggregating 10% or more, either  individually or combined as
affiliates due to common ownership, were concentrated as follows: four customers
with sales of 31%, 20%, 20% and 19% in 1997,  three customers with sales of 42%,
38%, and 15% in 1996,  and two customers  with sales of 70% and 15% in 1995. The
aggregate  sales to these  customers  (none  accounted  for more than 10% in all
three years)  represented  90%, 95%, and 85%, of the Company's  total system and
service revenues in 1997, 1996 and 1995, respectively. There can be no assurance
that such customers will continue to maintain  business  relationships  with the
Company.  Accordingly,  the loss of one or more  major  customers  could  have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

Competition.  The market  for the  Company's  products  and  services  is highly
competitive and subject to rapid change.  A number of companies  currently offer
one or more similar products and services  offered by the Company.  In addition,
many wireless  communications  carriers are providing or can provide,  in-house,
certain of the Hotwatch Products that the Company offers. Trends in the wireless
communications  industry,  including greater  consolidation and technological or
other  developments  that make it simpler or more  cost-effective  for  wireless
communications  carriers to provide certain  services  themselves,  could affect
demand for the Company's  products and services and could make it more difficult
for  the  Company  to  offer  a   cost-effective   alternative   to  a  wireless
communications  carrier's own  capabilities.  Current and potential  competitors
have  established  or may in the future  establish  collaborative  relationships
among  themselves or with third parties,  including  third parties with whom the
Company has a  relationship,  to increase  the  visibility  and utility of their
products and  services.  Accordingly,  it is possible  that new  competitors  or
alliances may emerge and rapidly acquire  significant market share. In addition,
the Company anticipates continued growth in the wireless communications industry
and, consequently, the entrance of new competitors in the future. An increase in
competition  could result in price reductions and loss of market share and could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

The Company  believes that the principal  competitive  factors in the markets in
which the Company  competes  include factors such as product  effectiveness  and
quality,  ease  of  use,  technical  support,   customer  service,   price,  the
availability  of  real-time  information,  and the  financial  stability  of the
vendor.  An additional  factor in the  user/device  authentication  arena is the
compatibility  with user/device  authentication  products used by the carrier in
other  geographic  markets and by the carrier's  roaming  partners.  The Company
believes that carriers that purchase user/device authentication products tend to
purchase  products  from the vendor  that  supplies  user/device  authentication
products  to  other  carriers  with  whom the  purchasing  carrier  has  roaming
arrangements. Thus, the Company believes it will be more difficult to market its
Blackbird  Products to a carrier if the  carrier's  roaming  partners  are using
user/device authentication products supplied by a competitor.


<PAGE>

The  Company is aware of various  competitors,  such as Corsair  Communications,
Inc.  ("Corsair"),  Signal  Sciences  (a  subsidiary  of  Allen  Telecom  Inc.),
Authentix   Network,   Inc.,   Brite   Voice   Systems,   T-Netix,   Inc.,   GTE
Telecommunications  Services,  Inc. and the  providers  of A-Key  authentication
technology, which currently or are expected to compete directly with the Company
in the user/device  authentication area. The A-Key authentication  technology is
provided by the combination of the telephone switch manufacturers (e.g., Lucent,
Ericcson,  and Motorola ) , the wireless telephone  manufacturers  (e.g., Nokia,
Motorola,  and Ericcson),  the  authentication  center providers (e.g.,  Synacom
Technology, Inc.) or through ANSI-41  software  component and service  providers
(e.g.,   Intellinet  Technologies  and  Trillium  Digital  Systems,  Inc.).  One
competitor,   Corsair,   competes   directly   with   the   Company's   RF-based
fingerprinting  user/device  authentication  products and services.  The Company
believes  that,  to date,  it has  installed  fewer  user/device  authentication
products in domestic and  international  markets than  Corsair.  In addition,  a
significant  factor  for the  Company's  competitive  environment  has  been the
adoption of A-key cryptographic authentication technology by many major wireless
carriers. -- See "--Emergence of A-Key Authentication". Also, there are numerous
companies,  including wireless  communications  carriers,  hardware and software
development  companies  and  others  that  have  developed  or may  develop  the
expertise  which would  encourage them to attempt to develop and market products
that could render the Company's products obsolete or less marketable.

The  Company  is aware of  competitors  which  have  indicated  that  they  have
developed,  marketed and installed  commercially available products with respect
to post-call  real-time  software  technology.  These companies  include,  among
others,  IBM,  I-NET,  Inc.,  GTE  Telecommunications,  Services,  Inc.,  Boston
Communications Group, EDS Personal Communications  Corporation,  Cincinnati Bell
Information Systems, Inc.,  Lightbridge,  Inc., Subscriber Computing,  Inc., CSC
Intellicom,   and  Systems/Link   Corporation  as  well  as  cellular  carriers'
proprietary systems operating in some of the most populated cellular markets.

To remain  competitive,  the Company will need to continue to invest in research
and development, sales and marketing, customer service, manufacturing activities
and administrative systems. There can be no assurance that the Company will have
sufficient  resources to make such  investments or that the Company will be able
to make the technological advances necessary to remain competitive.  Many of the
Company's  current  and  potential   competitors  have   significantly   greater
financial,  marketing,  technical and other  competitive  resources,  as well as
greater  name  recognition,  than  the  Company.  As  a  result,  the  Company's
competitors  may be able to adapt more  quickly to new or emerging  technologies
and changes in customer  requirements or may be able to devote greater resources
to the  promotion  and sale of their  products  and  services.  There  can be no
assurance  that  the  Company  will be able to  compete  successfully  with  its
existing competitors or with new competitors.

International Operations.  The Company is marketing its products and services in
international  markets. In pursuing such opportunities,  the Company is and will
remain subject to all the risks inherent in international transactions,  such as
changes in export, import, tariff and other trade regulations, currency exchange
rates, foreign tax laws, and other legal,  economic,  and political  conditions.
There can be no assurance  that changes in any of the foregoing  will not have a
material  adverse  effect  on  the Company's  business,  financial condition and
results  of  operations.  Further,  the laws of certain foreign countries do not
protect the Company's intellectual  property  to the  same extent as the laws of
the  United  States.   See "-- Uncertainty  Regarding  Proprietary  Rights".  In
certain  international markets, the Company  will need to  modify  its  products
or  develop  new or  additional  products  to  adapt  to  the different wireless
technologies  or network standards  utilized  by the  carriers in such  markets.
There can be no assurance that the Company's marketing efforts and technological
enhancements will result in successful  commercialization  or market  acceptance
or  penetration  in such  international  markets.  If  the  Company is unable to
adequately  anticipate and respond  to marketing or  technological  requirements
in  the  international marketplace, the Company's  business, financial condition
and  results of operation could be materially adversely affected.

Fluctuations in Quarterly Performance.  The Company has experienced fluctuations
in its quarterly  operating  results and anticipates that such fluctuations will
continue and could intensify. The Company's quarterly operating results may vary
significantly  depending on a number of factors, such as the level and timing of
revenues associated with the Blackbird Products;  the timing of the introduction
or acceptance of product  


<PAGE>

enhancements  and  new  products  and  services  offered  by the Company and its
competitors;  the size, product mix and timing of significant orders; long sales
cycles;  competition  and  pricing in the markets in which the Company competes;
product  performance  problems;  disruption  in sources of supply; the timing of
payments  by customers;  changes in regulations affecting the wireless industry;
technological  changes  or developments in the wireless industry; changes in the
Company's  operating  expenses;  uneven  revenue  streams;  and general economic
conditions.  Revenue  recognition  for  the  Company's  systems  is  based  upon
performance  criteria  which vary by customer and/or by product. The significant
factors  used  in  determining  revenue  recognition  generally include physical
hardware  and  software  delivery,  definitions of system delivery, and customer
acceptance.  As a result of such performance criteria,  the Company may record a
portion of the systems revenues and the majority of the system costs at shipment
or during the early stages of a system deployment.  In  certain cases no systems
revenues  or  systems  costs  may be recorded at time of shipment, while certain
operating  costs  may  be  recorded  during the deployment process. Accordingly,
revenues  and direct margins recorded by the Company can be expected to be lower
in  earlier  periods  of  deployment  and  inconsistent from quarter to quarter,
especially  during  the  initial  market  deployments  under new agreements. The
resulting  deferral  of revenue is recognized in subsequent periods upon meeting
the performance criteria specified in the applicable agreement.  There can be no
assurance that the Company's levels of profitability will not vary significantly
among  quarterly  periods  or  that  in  future  quarterly periods the Company's
results  of  operations  will  not be below prior results or the expectations of
public market analysts and investors.

Volatility of Stock Price.  The market for the Company's  common stock is highly
volatile.  The trading  price of the  Company's  common stock has been and could
continue  to be subject to wide fluctuations in response to quarterly variations
in operating and financial results, announcements of  technological  innovations
or  new  products  by  the  Company or its competitors, changes in prices of the
Company's  or  its competitors' products and services,  changes in the Company's
revenue  and  revenue  growth  rates,  as  well as other  events or factors. See
"--Fluctuations  in Quarterly Performance".  Statements or changes  in opinions,
ratings,  or  earnings  estimates  made  by brokerage firms or industry analysts
relating to the markets in which the Company competes have resulted,  and  could
in the future result, in an adverse effect on the market  price of the Company's
common  stock.  In addition,  the stock market has from time to time experienced
extreme  price  and  volume  fluctuations  which have particularly  affected the
market  price  for  the  securities  of many high technology companies and which
often have been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Company's
common stock.

History of Net Losses;  Accumulated  Deficit. The Company had net losses of $5.0
million  and $7.4  million  for the  years  ended  December  31,  1997 and 1996,
respectively,  and, at December 31, 1997,  had an  accumulated  deficit of $16.0
million.  The Company currently  estimates that its first quarter 1998 operating
results  will  be  a  loss,  however,  it  is expected to be lower than the $4.7
million  and  $3.7 million  losses recorded during the third and fourth quarters
respectively  of  1997.  In  addition,  in the  event  that  the  Company is not
successful in generating sufficient future product revenues,  the carrying value
of capitalized software development costs, inventories and other assets could be
significantly impaired. There can be no assurance that the Company's  operations
will be profitable in the future.

Dependence on Third-Party  Vendors. The Company has been and will continue to be
dependent on  third-party  vendors for  computer  equipment,  network  services,
component parts, manufacturing,  systems integration and certain software all of
which are  incorporated  in its  products and  services.  While  available  from
multiple sources,  some of such equipment and software is obtained from a single
supplier or a limited  number of sources.  Although  the Company  believes  that
there are  currently  available  substitute  sources for all such  equipment and
software,  the  Company  could be  required  to  redesign  affected  products to
accommodate  substitutes  for  certain  of  such  equipment  and  software.  The
Company's reliance on third-party  suppliers generally,  and a sole or a limited
number of sources in particular,  involves several risks,  including a potential
inability  to obtain an  adequate  supply of  required  components  and  reduced
control over quality, pricing and timing of delivery of components. There can be
no assurance  that the Company will be able to procure  necessary  equipment and
software on a satisfactory and timely basis. For example,  from time to time the
electronic  computer  component parts industry has experienced  parts allocation
restrictions.  Any failure or delay in obtaining necessary equipment,  component


<PAGE>

parts  or  software,  or  if  necessary,  establishing  alternative  procurement
arrangements,  could cause delays in product commercialization and could require
product  redesign or  modification.  There can be no assurance  that the Company
could complete any necessary  modifications  in a timely manner or that modified
or redesigned  products  would  maintain  current  functionality  or performance
features or could be  successfully  commercialized.  Any  inability  or delay in
establishing  necessary  procurement   arrangements  or  successfully  modifying
products  could  have a  material  adverse  effect  on the  Company's  business,
financial condition and results of operations.

Uncertainty  Regarding  Proprietary Rights. The Company's success will depend in
part on its  ability to protect its  technology,  processes,  trade  secrets and
other  proprietary  rights from  unauthorized  disclosure and use and to operate
without  infringing  the  proprietary  rights of third  parties.  The  Company's
strategy is to protect  its  technology  and other  proprietary  rights  through
patents, copyrights,  trademarks,  nondisclosure agreements, license agreements,
and other forms of  protection.  The Company has been active in pursuing  patent
protection  for  technology  and processes  involving its Hotwatch  Products and
Blackbird Products that it believes to be proprietary and that offer a potential
competitive  advantage for the Company's  products and  services.  To date,  the
Company has been granted  patents on certain  features of the Hotwatch  Products
and  Blackbird  Products  and has patents  pending  for certain  features of the
Blackbird  Products.  In addition,  the Company has also  licensed  patents from
third parties in an effort to maintain flexibility in the development and use of
its technology,  including exclusive and non-exclusive  rights to use patents in
connection with the Blackbird Products. There can be no assurance, however, that
any pending or future patent  application  of the Company or its licensors  will
result in issuance of a patent,  that the scope of  protection  of any patent of
the Company or its licensors will be held valid if subsequently  challenged,  or
that third  parties  will not claim  rights in or  ownership of the products and
other proprietary rights held by the Company or its licensors.  In addition, the
laws of certain  foreign  countries  do not protect the  Company's  intellectual
property rights to the same extent as the laws of the United States.

Litigation or regulatory proceedings, which could result in substantial cost and
uncertainty  to the Company,  may also be  necessary to enforce  patent or other
proprietary  rights of the Company or to  determine  the scope and validity of a
third  party's  proprietary  rights.  Although  the  Company  believes  that its
technology  has  been  independently  developed  and that  its  products  do not
infringe patents known to be valid or violate other proprietary  rights of third
parties,  it is possible that such infringement of existing or future patents or
violation  of  proprietary  rights  may  occur or be  alleged.  There  can be no
assurance that third parties will not assert infringement claims with respect to
the Company's current or future products or that any such claims will not result
in  litigation or  regulatory  proceedings  or require the Company to modify its
products or enter into licensing arrangements,  regardless of the merits of such
claims. No assurance can be given that any necessary licenses can be obtained in
a timely manner, upon commercially reasonable terms, or at all, and no assurance
can be given that third parties will not assert infringement claims with respect
to any current licensing arrangements.  See "--Risk of Litigation". In addition,
the Company's failure to successfully  enforce its proprietary  rights or defend
against any other  infringement  claims  brought by third  parties  could have a
material  adverse  effect upon the Company.  There can be no assurance  that the
Company  will  have  the  resources   necessary  to   successfully   defend  any
infringement claim brought by a third party.

In addition to the foregoing methods of protection,  the Company employs various
physical security measures to protect its software source codes,  technology and
other  proprietary  rights.  However,  such  measures  may not  afford  complete
protection  and there can be no  assurance  that others  will not  independently
develop similar source codes,  technology or other proprietary  rights or obtain
access to the Company's software codes, technology, or other proprietary rights.
Furthermore,  although the Company has and expects to continue to have  internal
nondisclosure  agreements  with  its  employees  and  consultants,  and  license
agreements with  customers,  which contain  restrictions on disclosure,  use and
transfer  of  proprietary  information,  there  can be no  assurance  that  such
arrangements will adequately  protect the Company's  proprietary  rights or that
the Company's  proprietary rights will not become known to third parties in such
a manner that the Company has no practical recourse.


<PAGE>

Risk of Litigation. The Company is subject to the following legal matters:

Between July 1997 and September 1997, eight separate lawsuits were filed against
the Company,  its  Chairman of the Board and Chief  Executive  Officer,  and its
former  President and Chief  Operating  Officer.  The lawsuits were filed in the
United States District Court for the Western  District of Washington at Seattle,
and have now been consolidated.  A revised  consolidated  complaint was filed by
plaintiffs  on February 17, 1998.  The  complaint  purports to assert  claims on
behalf of the class of persons, other than defendants and their affiliates,  who
purchased  the Company's  common stock or call options on the  Company's  common
stock, or who sold put options on the Company's  stock,  during the period March
6, 1996 through July 30, 1997,  inclusive  (the "Class  Period").  The complaint
alleges that the  defendants  made false or misleading  statements and failed to
disclose  material  facts  during the Class  Period in  violation of the federal
securities  laws.  The plaintiffs in this lawsuit seek damages in an unspecified
amount.  The Company  believes  this lawsuit is without  merit and is vigorously
defending against it.

On January 13, 1998,  Communications  Information Services, Inc. filed an action
against the Company and AirTouch  Communications,  Inc. for alleged infringement
of United States Patent No.  5,329,591  ("the `591 patent") in the United States
District  Court for the Northern  District of Georgia at Atlanta.  The complaint
asserts  that the  plaintiff is the  exclusive  licensee of all rights under the
`591 patent.  The complaint alleges that the Company's  cellular telephone fraud
prevention   technology   infringes  the  `591  patent,  and  seeks  damages  in
unspecified  amounts.  The Company believes this lawsuit is without merit and is
vigorously defending against it.

Although no estimate of any outcome of the above lawsuits can currently be made,
an unfavorable  resolution of such suits could  materially  affect the Company's
financial  position  liquidity and  results of operations. The Company is also a
party to other legal proceedings which arise from time  to time in the  ordinary
course  of  business  and/or  which management believes will be resolved without
a material  adverse  effect on  the  Company's  financial position, liquidity or
results of operations.

Risk of System  Failure  or  Inadequacy.  The  Company  operates  and  maintains
internal  computers and  telecommunication  equipment  for,  among other things,
monitoring and supporting its products and services,  and operating its No Clone
Zone roaming fraud prevention  service.  The Company's  operations are dependent
upon its ability to maintain  such  equipment  and systems in effective  working
order and to protect  them against  damage from fire,  natural  disaster,  power
loss,  telecommunications  failure  or  similar  events.  Although  the  Company
provides back-up for substantially  all of its systems,  these measures will not
eliminate  the  risk to the  Company's  operations  from a  system  failure.  In
addition to its own systems,  the Company relies on certain  equipment,  systems
and services from third parties that are also subject to risks,  including risks
of system  failure.  There can be no assurance  that the Company's  property and
business  interruption  insurance will be adequate to compensate the Company for
any losses that may occur in the event of a system failure. Any damage,  failure
or delay that causes  interruptions  in the  Company's  operations  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

Year 2000 Processing.  The Company is currently  utilizing internal resources to
comprehensively  identify and timely  resolve the  potential  impact of the year
2000 and beyond on the processing of date-sensitive information by the Company's
Blackbird Products, Hotwatch  Products  and  its  computerized  information  and
support systems. The year 2000  problem is the result of software  that uses two
digits (rather than four) to  define  the  applicable  year. Thus  any  software
or  hardware  that  utilizes  time-sensitive  coding  may recognize a date using
"00"  as  the  year  1900  rather  than  the  year  2000, which  could result in
miscalculations or system failures.  Based on preliminary  information, costs of
addressing  potential  problems  are not  currently  expected to have a material
adverse  impact  on  the Company's  financial  position,  results of operations,
or cash flows in  future  periods.  If,  however,  the Company,  its  customers,
or vendors are unable to adequately resolve such  processing  issues in a timely
manner,  the  Company's  operations  and  financial  results  may  be  adversely
affected.

911 FCC  Mandate.  In June 1996,  the FCC  issued a Report  and Order  requiring
wireless  carriers to be able to identify  the  location of wireless  callers to
emergency 911 systems. This mandate requires that products designed 


<PAGE>

to  meet  this need must be operational and accurate to within 125 meters of the
wireless caller not  less  than 67%  of the  time by  October 2001.  The FCC 911
Report  and  Order  is  regarded  by  most wireless communications carriers as a
costly and complex prospect with a challenging need to  intercommunicate between
carriers  in  a  fragmented  market.  The  Company  believes  that its Blackbird
platform  technology  can  be  adapted  to  accommodate and work in concert with
third-party  suppliers  of  this  location  technology.  Should the FCC delay or
terminate  its  Report  and Order requiring such location technology, demand for
the  Company's  products  could  be  adversely  affected.  On March 2, 1998, the
Company  and  U.S.  Wireless  announced  the signing of a letter of intent which
provides  for  the  potential  combination  of  the  two  companies. US Wireless
develops  and manufactures products designed to provide value-added services and
features for the wireless communications industry, including caller-location and
tracking,   autonomous   network   management,   and   other  applications.  Its
RadioCamera(TM)  caller-location and tracking product is designed to meet and/or
exceed  the  emergency  911  requirements  of  the  FCC  described  above.   See
"--Overview".

Government  Regulation and Legal  Uncertainties.  While,  for the most part, the
Company's  operations  are not directly  regulated,  the Company's  existing and
potential  customers  are  subject  to a variety of United  States  and  foreign
governmental regulation.  Such regulation may inhibit the growth of the wireless
telecommunications  industry,  limit the number of potential  customers  for the
Company's  services,  and impede  the  Company's  ability  to offer  competitive
services to the  wireless  communications  market or  otherwise  have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.    Recently   enacted   federal    legislation    deregulating   the
telecommunications  industry  may  cause  changes  in  the  industry,  including
entrance  of new  competitors  or  industry  consolidation,  which could in turn
subject the Company to increased pricing pressures,  decrease the demand for the
Company's  services,  increase the Company's cost of doing business or otherwise
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.




I
tem 8.   Financial Statements and Supplementary Data

The  financial  statements  and  supplementary  data  required  by this item are
included in Part IV as indexed at Item 14(a)(1) and (a)(2).


Item 9.   Changes  in  and  Disagreements  with  Accountants  on  Accounting and
Financial Disclosure

None




<PAGE>



                                    PART III



Item 10.          Directors and Executive Officers of the Registrant

Identification of Directors and Executive Officers

The name, age,  position with the Company and other  information with respect to
each of its directors and executive officers is as set forth below.


<TABLE>
<CAPTION>

Name                             Age                    Position with Company                   Year First      Term of 
- ----                             ---                    ---------------------                   -----------    ---------
                                                                                                  Elected       Office
                                                                                                  -------      --------- 

<S>                              <C>    <C>                                                         <C>             <C> 
Stephen Katz                     54     Chairman of the Board of Directors and Chief                1988            1997
                                        Executive Officer

William C. Zollner               51     President, Chief Operating Officer and Director             1997            1998

Lawrence Schoenberg(1)(2)        65     Director                                                    1996            1999

James Porter(1)(2)               62     Director                                                    1997            1998

Michael E. McConnell             47     Vice President and Chief Financial Officer                   --              --

Kyle R. Sugamele                 35     Vice President, General Counsel and Corporate                --              --
                                        Secretary

Stephen F. Elston                40     Vice President, Engineering                                  --              --

Joyce S. Jones                   50     Vice President, Marketing                                    --              --

Michael N. Joseph                50     Vice President, Support and Service                          --              --

</TABLE>


Business Experience

Stephen  Katz,  Chairman of the Board of Directors,  was Acting Chief  Executive
Officer and Acting  President  from November 1992 until  February 1994, at which
time he became Chief Executive Officer.  Mr. Katz has been Chairman of the Board
and a director of the Company since its inception and a member of the Management
Committee  of the  predecessor  partnership  during  the  entire  period  of its
existence.  From September 1984 until  September  1995, Mr. Katz was Chairman of
the Board,  Chief  Executive  Officer and until  September  1993,  President  of
Nationwide Cellular Service,  Inc., which was the Company's majority stockholder
until  May 1992  and its  largest  stockholder,  owning  34% of its  outstanding
shares,  until  September  1995.  At that time such shares were  distributed  to
Nationwide's  stockholders,  immediately  prior to Nationwide's  merger with MCI
Communications Corp. ("MCI"). In May 1996, Mr. Katz was appointed  Vice-Chairman
of the Board and Chief Executive  Officer of Global Payment  Technologies,  Inc.
(formerly  Coin Bill  Validator,  Inc.)  whose  business  is  currency  and coin
authentication.

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

(1) Member of the Compensation and Stock Option Committee

(2) Member of the Audit Committee


<PAGE>


William  C.  Zollner  was named  President  and Chief  Operating  Officer  and a
Director of the Company in February 1997. From August 1996 to February 1997, Mr.
Zollner provided management  consulting to software and systems companies.  From
July 1991 to July 1996, Mr. Zollner served as Chief Operating  Officer of Serena
Software International, a company specializing in systems and application change
management and productivity products. Previously, Mr. Zollner served eight years
with Sterling Software,  Inc., a company  specializing in software  applications
serving several markets. While with Sterling, he served as Senior Vice President
of its Systems Software Marketing  Division,  and President of its International
Division.

Lawrence  Schoenberg joined  the  Company  as  a Director in September 1996. Mr.
Schoenberg  founded  AGS Computers,  Inc.  in 1967 and served as Chief Executive
Officer  until  1991.  The company was sold to NYNEX in 1988. The micro-computer
segment subsequently  became a part of Merisel, Inc.  Mr. Schoenberg also serves
as  Director  of  Government  Technology  Services,  Inc. (since December 1991),
Merisel, Inc. (since November 1989), SunGuard Data Services, Inc. (since October
1991),  and Penn America Group, Inc.  (since January 1994). Former directorships
include  Systems  Center,  Inc.,  which  was  sold  to  Sterling Software, Inc.,
SoftSwitch, Inc., which was sold to Lotus/IBM Corp., Forecross Corporation (from
1993  to  June  1996),  and  Image Business Systems, Inc.  (from January 1992 to
August 1994).

James Porter joined the Company as a Director in July 1997. Since February 1997,
Mr. Porter has served as Chairman of CCI/Triad Systems  Corporation,  a provider
of information  management  services and systems with more than 2,000  employees
and nearly 15,000 corporate customers worldwide. From September 1985 to February
1997, he was President and Chief  Executive  Officer of Triad Systems Corp.  Mr.
Porter is a board member of Silicon  Valley Bank,  Triad Park, LLC and FirstWave
Technologies,  all  publicly  traded  companies.  He also serves on the Board of
Regents of Pepperdine  University and is a past member of the board of directors
and executive committee of the Information Technology Association of America.

Michael E. McConnell has been Vice President and Chief Financial  Officer of the
Company  since January  1992.  Prior to joining the Company,  from April 1991 to
December 1991, Mr. McConnell engaged in personal investments. From 1986 to March
1991,  Mr.  McConnell  was the Chief  Financial  Officer  of Delphi  Information
Systems,  Inc., a public company engaged in the development of software  systems
for the insurance field. Mr. McConnell is a certified public accountant.

Kyle R. Sugamele  joined the Company in July 1995 as Vice  President and General
Counsel,  and was named Corporate  Secretary in June 1996.  Prior to joining the
Company,  Mr.  Sugamele was  associated  with the law firm of Mundt,  MacGregor,
Happel,  Falconer,  Zulauf & Hall in Seattle.  His  practice has involved a wide
range of commercial,  corporate,  banking,  and general business  matters,  with
particular emphasis in the protection and licensing of intellectual property and
trade secrets, commercial finance, and business transactions.

Stephen  F.  Elston  joined  the  Company  in July  1996 as  Vice  President  of
Engineering.  From  January  1993 until  joining the  Company,  he held  several
positions with MathSoft, Inc., a software development company. From July 1995 to
June 1996,  as Senior  Director of Product  Development  in their Data  Analysis
Products Division,  he managed development and releases for two software product
lines.  From  January  1995 to July  1995,  he was  Acting  Director  of Product
Development.  He was also Acting Product  Manager from January 1995 to September
1995, and Director of Research from January 1993 to December 1995, in MathSoft's
StatSci  Division.  From June 1990 to January  1993,  Mr.  Elston was a Research
Geophysicist with Mobil Research and Development Company.

Joyce S.  Jones  joined  the  Company  in  February  1998 as Vice  President  of
Marketing.  Prior to joining the Company, Ms. Jones was founder and President of
Creative  Business  Solutions,  a management  consulting  firm  specializing  in
software  startups.  From  August  1987 to April 1995,  Ms.  Jones held  several
positions  with  Attachmate  Corporation,  a  manufacturer  of  enterprise  data
communication  software and hardware.  From 1993 to 1995, she was Executive Vice
President of  Worldwide  Products in the Office of the  President  where she was
responsible for product strategy, product management,  product development,  and
product  marketing.  From 1991 


<PAGE>


to 1993, Ms. Jones held the position of Vice President of System Engineering.
Other positions with the company included Product Marketing, Product Management,
and Technical Sales Engineer.

Michael  N.  Joseph  joined  the  company  in July 1996 as  Director  of Support
Services.  In January  1998 he was  promoted  to Vice  President  of Support and
Service. From August 1995 until May 1996 Mr Joseph held the position of Director
of  Implementation  and  Operation  for AT&T  Wireless and was  responsible  for
providing  network and server  monitoring for five regional  network  operations
centers.  From  July  1994  until  August  of  1995,  he held  the  position  of
Engineering Manager-Global Accounts for Cable & Wireless and was responsible for
addressing  technical issues with American Express on a global basis.  From July
1991 until July 1994 Mr. Joseph held the position of Director  M.I.S.  for Prime
Equipment,  a  company  responsible  for  renting  medium  to  small  pieces  of
construction  equipment and was  responsible  for designing and  implementing  a
centralized contract rental system for all company locations.

The  Company's  Board of Directors is divided into three  classes.  The Board is
composed of two Class I  directors,  Mr.  Zollner and Mr.  Porter,  one Class II
director, Mr. Schoenberg, and one Class III director, Mr. Katz. The terms of the
Class I, Class II and Class III directors  expire on the dates of the 1998, 1999
and 2000 annual meetings,  respectively.  At each annual meeting,  successors to
the class of directors whose term expires at that annual meeting are elected for
a three-year term.  Officers are elected annually at the discretion of the Board
of Directors and serve at the discretion of the Board.




<PAGE>



Item 11.          Executive Compensation

The  following  table sets forth  information  concerning  annual and  long-term
compensation,  paid or  accrued,  for the Chief  Executive  Officer and the four
other most highly  compensated  executive  officers  of the Company  (the "Named
Executive  Officers")  for services in all  capacities to the Company during the
last three fiscal years.


<TABLE>

                         Summary Compensation Table (1)
<CAPTION>

                                                                                            Long-Term
                                             Annual Compensation                           Compensation
                               ------------------------------------------------            ------------
                                                                                              Awards
                                                                                              ------ 
                                                                                            Securities
Name and Principal                                                       Other Annual       Underlying        All Other
Position                        Year            Salary        Bonus       Compensation       Options      Compensation (2)
- ---------------------------    ------         ----------    ---------     ------------     -----------    ----------------
<S>                            <C>                     <C>          <C>           <C>            <C>                  <C>
 Stephen Katz                  1997                    $0           $0                $0               0                 $0
   Chairman of the Board of    1996                     0      100,000                 0               0                  0
   Directors and Chief         1995                     0            0                 0               0                  0
   Executive Officer

 William C. Zollner            1997      (3)      140,340            0            19,217         300,000              2,790
   President and Chief
   Operating Officer

 Michael E. McConnell          1997               126,000            0                 0          15,000              5,203
   Vice President and Chief    1996               122,500       25,000                 0          30,000              5,959
   Financial Officer           1995               115,500            0                 0           3,820              6,595

 Stephen F. Elston, Vice       1997               113,681            0                 0          30,000              3,755
   President, Engineering      1996      (4)       48,125            0                 0          20,000                 75

 Douglas F. Anderson           1997      (5)      170,351            0                 0           9,000              4,172
   Vice President, Sales       1996               125,000       50,000                 0          50,000              4,438
                               1995               115,000            0                 0           3,820              1,405

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


</TABLE>





(1)  None of the Named Executive Officers received any Restricted Stock Awards 
     or LTIP Payouts in 1995, 1996 or 1997.

(2)  Primarily  represents  contributions  by the Company to the Named Executive
     Officers'  accounts  under a 401K  plan,  and to a lesser  extent,  taxable
     income  originating from term life insurance premiums paid on behalf of the
     Named  Executive  Officers  under the  Company's  standard  employee  group
     benefits plan.

(3)  Represents compensation paid to Mr. Zollner from February 19, 1997, when he
     began  his  employment  as  President  and  Chief  Operating  Officer.   In
     connection with his employment, the Company made payments to Mr. Zollner or
     on  his  behalf  related  to  his  relocation,  which  were  deemed  to  be
     compensation  in the amount of  $19,217.  In  addition,  the  Company  made
     payments to Mr. Zollner or on his behalf  related to his  relocation  which
     were not deemed to be compensation  in the amount of $45,783.  In addition,
     Mr. Zollner received $16,526 for management  consulting  services performed
     during the month prior to his  appointment as President and Chief Operating
     Officer.


<PAGE>

(4) Represents compensation paid to Mr. Elston from July 17, 1996.

(5)  Represents  compensation  paid to Mr. Anderson in 1997 as a  non-refundable
     draw  against  incentive  compensation  to be earned  based upon  achieving
     certain  revenue and margin  performance  goals.  Such  incentives were not
     earned. Mr.
     Anderson's employment with the Company ceased on January 29, 1998.

Stock Options

The following table sets forth  information as to all grants of stock options to
the Named Executive Officers during 1996.


<TABLE>
<CAPTION>


                            Option Grants In 1997 (1)


                                          Individual                                   Potential Realizable Value at
                                           Grants                                      Assumed Annual Rates of Stock
                            ----------------------------------------------------------     Price Appreciation for
                                                                                              Option Term        (3)
                                                                                       -------------------------------
                              Number of     % of Total
                             Securities       Options
                             Underlying     Granted to
                               Options       Employees      Exercise      Expiration
          Name               Granted (2)      in 1996        Price         Date           At 5%          At 10%
- ------------------------     -----------       ------    --------------    ----       --------------    ----------

<S>                           <C>             <C>         <C>              <C>           <C>             <C>       
Stephen Katz............            0         0.0%        $          0        -          $        0      $        0
William C. Zollner......      300,000         39.1              11.375     2/18/07        2,146,103       5,438,646
Michael E. McConnell....       15,000          2.0               6.375      7/7/07           60,138         152,402
Stephen F. Elston.......       30,000          3.9               6.375      7/7/07          120,276         304,803
Douglas F. Anderson.....        9,000          1.2               6.375      7/7/07           36,083          91,441
- ----------------------------------

</TABLE>


(1)      No stock appreciation rights ("SARs") were granted to any of the Named 
         Executive Officers during 1996.

(2)      The options become exercisable in cumulative annual installments of 20%
         per year on each of the first five anniversaries of the grant date. The
         options are exercisable over a ten-year period.

(3)      The dollar  amounts  set forth  under  these  columns are the result of
         calculations at the 5% and 10% rates established by the SEC and are not
         intended to forecast future  appreciation of the Company's stock price.
         The  Company  did  not use an  alternative  formula  for a  grant  date
         valuation as it is unaware of any formula  which would  determine  with
         reasonable  accuracy a present value based upon future unknown factors.
         In order to realize  the  potential  values set forth under the columns
         headed  "At 5%" and "At 10%",  the  price  per  share of the  Company's
         Common Stock at the end of the ten-year option term would be $10.38 and
         $16.54,  respectively for all officers except Mr. Zollner,  whose price
         per share would be $18.53 and $29.50 respectively.




<PAGE>


The following table sets forth information with respect to the exercise of stock
options during 1997 by the Named Executive Officers and unexercised options held
by them on December 31, 1997.



   Aggregated Option Exercises In 1997 And December 31, 1997 Option Values (1)


<TABLE>
<CAPTION>


                                                                   Number of Securities
                                                                  Underlying Unexercised
                                                                        Options at               Value of Unexercised
                                                                      December 31, 1997         In-the-Money Options at
                               Shares Acquired        Value             Exercisable/               December 31, 1997
Name                             on Exercise        Realized           Unexercisable        Exercisable/ Unexercisable (2)
- -------------------------      ---------------   --------------  -------------------------  -------------------------------
<S>                                         <C>  <C>                       <C>                         <C>
Stephen Katz                                  0  $       0                 542,000/160,000               $177,210/$0
William Zollner                               0          0                       0/300,000                       0/0
Michael E. McConnell                          0          0                  155,528/91,292             94,896/31,131
Stephen Elston                                0          0                    4,000/46,000                       0/0
Douglas F. Anderson                           0          0                   39,528/79,292                       0/0
- -----------------                                                                           
</TABLE>


(1)      There were no SAR exercises during 1995 and no SARs were outstanding at
         December 31, 1996.

(2)      The  closing  price  for  the Company's Common Stock as reported on the
         NASDAQ National Market on December 31, 1997 was $2.97 per share.  Value
         is calculated by multiplying  (a)  the difference between $2.97 and the
         option  exercise  price  by  (b)  the  number of shares of Common Stock
         underlying the option.

Employment Agreements

Effective  February 19, 1997, the Company  entered into an employment  agreement
with William C. Zollner to serve as President and Chief Operating Officer of the
Company. The agreement expires on February 19, 1999, subject to a month-to-month
continuation provision as set forth in the agreement.  Mr. Zollner's annual base
salary is  currently  $162,000  and he is further  eligible to receive an annual
bonus in accordance with corporate  performance and other criteria  specifically
identified  by the Board of  Directors of the Company (or the  Compensation  and
Stock Option Committee thereof). In the event of a termination by the Company in
any manner other than expressly permitted under the agreement, or by Mr. Zollner
for "Good Reason" as defined in the agreement, then: (A) the Company is required
to make a lump sum payment  equal to one times the highest  annual  compensation
received by Mr. Zollner from the Company during any of the most recent two years
ending on or prior to the date on which the  termination  occurs;  (B) all stock
options  granted to Mr. Zollner shall become fully vested and exercisable at his
election; and (C) all employee benefit plans, practices,  policies, and programs
applicable  to Mr.  Zollner  under  the  agreement  and in  existence  prior  to
termination  shall  continue for an additional  one year after  termination.  In
addition,  in the event of a "Change in Control" of the Company,  then all stock
options  granted to Mr. Zollner shall become fully vested and exercisable at his
election.  A "Change in Control" shall mean and be deemed to exist if any of the
following  events occur:  (i) the  occurrence  of a change in the  "ownership or
effective control" or in the "ownership of a substantial  portion of the assets"
of  Company as defined in the  agreement;  (ii) any  "person"  as defined in the
agreement  becomes the  beneficial  owner of 25% or more of the  Company's  then
outstanding  shares of voting common stock or then outstanding voting securities
of the Company  entitled to vote  generally in the election of directors;  (iii)
the following persons cease for any reason to constitute a majority of the Board
of  Directors  of the  Company:  (a)  individuals  who, as of February 19, 1997,
constitute the Board of Directors, and (b) individuals who become members of the
Board of Directors  after  February 19, 1997 whose  election,  or nomination for
election by the  Company's  shareholders,  was  approved by a vote of at least a
majority of the directors  then  comprising  the Board of Directors,  subject to
certain  terms set forth in the  agreement;  (iv) the approval by the  Company's
shareholders  of  any  merger,  consolidation,  or  other  business  combination
involving the Company,  subject to certain terms set forth in the agreement; (v)
the  approval  by  Company's  shareholders  of  any  sale,  exchange,  or  other
disposition  of all or  substantially  all of the assets of Company,  subject to
certain  terms  set  forth  in  the  agreement;  or  (vi)  the  approval  by the
shareholders  of  the  Company  of any  plan  or  proposal  for  liquidation  or
dissolution of the Company.


<PAGE>

Effective January 1, 1993, the Company entered into an employment agreement with
Michael E. McConnell to serve as Vice President and Chief  Financial  Officer of
the Company.  The agreement expires on December 31, 1998. Mr. McConnell's annual
base salary is currently $126,000 and he is further eligible to receive,  at the
discretion of the Company, an annual bonus in an aggregate amount of up to fifty
percent (50%) of his annual base salary based upon the Company  meeting  certain
operating goals and objectives,  including financial performance, as established
from time to time by the  Company.  In the event of a "Change of Control" of the
Company, Mr. McConnell will be entitled to a lump sum severance payment equal to
the sum of (i) his annual base salary and highest  annual  bonus paid during the
term of the  agreement  and (ii) the sum of his unpaid base  salary  through the
date of  termination  and a pro rata portion of the highest annual bonus awarded
him during the term of the employment agreement. A "Change in Control" is deemed
to occur upon (i) the acquisition of 20% or more of the outstanding Common Stock
or  voting  power of the  Company  (by  other  than Mr.  McConnell  or a Company
employee benefit plan or pursuant to a purchase directly from the Company), (ii)
the Incumbent Directors, as defined,  becoming less than a majority of the Board
of Directors, or (iii) a reorganization,  merger, consolidation,  liquidation or
dissolution of the Company or a sale of substantially  all of its assets unless,
among  other  things,  at  least  60% of the  shares  of the  successor  in said
reorganization,  merger or  consolidation or transferee of such assets are owned
by the owners of the Company's Common Stock prior to such transaction.

Effective July 17, 1996, the Company  entered into an employment  agreement with
Stephen  Elston to serve as Vice  President -  Engineering  of the Company.  The
agreement  expires on July 17, 1998,  subject to a  month-to-month  continuation
provision  as set forth in the  agreement.  Mr.  Elston's  annual base salary is
currently  $126,000  and he is further  eligible  to receive an annual  bonus in
accordance with corporate performance and other criteria specifically identified
by the Board of Directors of the Company (or the  Compensation  and Stock Option
Committee thereof).  In the event of a "Change Of Control" of the Company (or in
the event of a  termination  by the Company in any manner  other than  expressly
permitted under the agreement,  or by Mr. Elston for "Good Reason" as defined in
the agreement), then under certain circumstances: (A) the Company is required to
make a lump sum  payment  equal to one times  the  highest  annual  compensation
received by Mr. Elston from the Company  during any of the most recent two years
ending on or prior to the date on which the  termination  occurs;  (B) all stock
options  granted to Mr. Elston shall become fully vested and  exercisable at his
election; and (C) all employee benefit plans, practices,  policies, and programs
applicable  to Mr.  Elston  under  the  agreement  and  in  existence  prior  to
termination  (or, if applicable,  prior to the Change of Control) shall continue
for an  additional  one year after  termination  (or, if  applicable,  after the
Change of Control).  A "Change in Control"  shall mean and be deemed to exist if
any of the  following  events  occur:  (i) the  occurrence  of a  change  in the
"ownership or effective  control" or in the "ownership of a substantial  portion
of the  assets" of Company as defined in the  agreement;  (ii) any  "person"  as
defined in the  agreement  becomes  the  beneficial  owner of 25% or more of the
Company's  then  outstanding  shares of voting common stock or then  outstanding
voting  securities of the Company  entitled to vote generally in the election of
directors;  (iii) the  following  persons  cease for any reason to  constitute a
majority of the Board of Directors of the Company:  (a)  individuals  who, as of
July 17, 1996, constitute the Board of Directors, and (b) individuals who become
members  of the Board of  Directors  after  July 17,  1996  whose  election,  or
nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the  directors  then  comprising  the Board of Directors,
subject to certain  terms set forth in the  agreement;  (iv) the approval by the
Company's  shareholders  of  any  merger,   consolidation,   or  other  business
combination  involving  the Company,  subject to certain  terms set forth in the
agreement;  (v) the approval by Company's shareholders of any sale, exchange, or
other disposition of all or substantially all of the assets of Company,  subject
to  certain  terms  set  forth in the  agreement;  or (vi) the  approval  by the
shareholders  of  the  Company  of any  plan  or  proposal  for  liquidation  or
dissolution of the Company.

Compensation Committee Interlocks and Insider Participation

During  the  fiscal  year  ended  December 31, 1997,  the Compensation and Stock
Option  Committee  of  the  Board  of  Directors of the Company consisted of Jay
Goldberg  (who  resigned  in  February 1998  and was replaced by James Porter in
March 1998) and Lawrence Schoenberg.


<PAGE>



Item 12.          Security Ownership of Certain Beneficial Owners and Management

SECURITY OWNERSHIP

The  following  table sets  forth,  as of March 16,  1998  (except as otherwise
indicated in footnote 3), information with respect to the  beneficial ownership
of  the  Company's  Common  Stock by (i)  each  person  known by the Company to
beneficially own more than  5%  of the outstanding shares of Common Stock, (ii)
each  director of the Company,  (iii) each of the Named  Executive Officers (as
such term is herein  defined) and (iv) all directors  and executive officers of
the Company as a group.


<TABLE>
<CAPTION>

    Name and Address                                           Amount and Nature     Percent of
    of Beneficial Owner (1)                                      of Beneficial       Outstanding
    -------------------                                           Ownership (2,)        Shares
                                                                  --------------       -------- 
    <S>                                                            <C>                    <C>      
    Harvey and Phyllis Sandler                             
      1050 Lee Wagener Blvd.
      Suite 301
      Fort Lauderdale, FL 33315............................        1,382,616 (3)          6.1%
    Stephen Katz...........................................        1,087,640 (4)          4.8%
    William C. Zollner.....................................           70,000 (5)             *
    Lawrence Schoenberg....................................           32,000 (6)             *
    James Porter...........................................            8,000                 *
    Michael E. McConnell...................................          158,528 (7)             *
    Stephen F. Elston......................................            4,000 (8)             *
    Kyle R. Sugamele.......................................           29,828 (9)            *
    Joyce S. Jones.........................................            1,000                 *
    Michael N. Joseph......................................            3,000 (10)            *
    All directors and executive officers as a group                         
    (9 persons)............................................        1,393,996 (11)         5.9%
</TABLE>



 *       Less than 1%

(1)      Pursuant to the rules of the  Securities and Exchange  Commission  (the
         "SEC"),  addresses  are only  given  for  holders  of 5% or more of the
         outstanding Common Stock of the Company.

(2)      Unless  otherwise  indicated,  each person or group has sole voting and
         investment  power with  respect to such  shares.  For  purposes of this
         table,  a person or group of  persons  is  deemed  to have  "beneficial
         ownership"  of any shares  which such  person or group has the right to
         acquire within 60 days of March 16, 1998. For purposes of computing the
         percent of outstanding  shares held by each person or group named above
         as of a given date, any shares which such person or group has the right
         to so acquire  are deemed to be  outstanding,  but are not deemed to be
         outstanding  for the purpose of computing the  percentage  owned by any
         other person or group.

(3)      Information  based solely on a Schedule 13D dated March 27, 1997, filed
         with the SEC by Harvey and Phyllis Sandler.


<PAGE>

(4)      Includes 542,000 shares subject to currently exercisable options.

(5)      Includes 60,000 shares subject to currently exercisable options.

(6)      Consists of 32,000 shares subject to currently exercisable options.

(7)      Includes 155,528 shares subject to currently exercisable options.

(8)      Consists of 4,000 shares subject to currently exercisable options.

(9)     Includes 29,328 shares subject to currently exercisable options.

(10)     Consists of 3,000 shares subject to currently exercisable options.

(11)     Includes   an   aggregate   of  825,856  shares  subject  to  currently
         exercisable options.  Of such options, only 138,000 are at prices lower
         than  the  market price  of  the Company's Common Stock as of March 16,
         1997.

Pursuant to Section 16 of the  Securities  Exchange Act of 1934, as amended (the
"Exchange  Act"),  officers,  directors  and  holders  of more  than  10% of the
outstanding  shares of the Company's  Common Stock are required to file periodic
reports of their ownership of, and transactions involving,  the Company's Common
Stock with the SEC. The Company  believes  that its reporting  persons  complied
with all Section 16 filing  requirements  applicable to them with respect to the
Company's  fiscal year ended  December 31,  1997,  except that James  Porter,  a
director of the Company,  filed an Initial Statement of Beneficial  Ownership of
Securities  on Form 3 dated  September 12, 1997 (that was due on August 8, 1997)
and filed a Statement of Changes of Beneficial  Ownership of Securities  for the
purchase of 2,000 shares of the Company's Common Stock on Form 4 dated September
12, 1997 (that was due on September 10, 1997).


Item 13.          Certain Relationships and Related Transactions

The Company did not engage in any material  related  party  transactions  in its
1997 fiscal year.




<PAGE>



                                     PART IV



Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1.        Financial Statements:

The following financial statements of Cellular Technical Services Company, Inc.
are included as required to be filed by Item 8.

<TABLE>
<CAPTION>

                                                                                           Page No.
<S>                                                                                            <C>
Report of Ernst & Young LLP, Independent Auditors........................................      47

Balance Sheets at December 31, 1997 and 1996.............................................      48

Statements of Operations for the years ended December 31, 1997, 1996 and 1995............      49

Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995..      50

Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............      51

Notes to Financial Statements............................................................      52

         2.       Financial Statement Schedules:

Schedule II - Valuation and Qualifying Accounts..........................................      65
</TABLE>


All other schedules have been omitted because they are inapplicable, not
required, or the information is included in the financial statements or notes
thereto.

         3.       Exhibits:

<TABLE>
<CAPTION>
  <S>        <C>
   3.1       Restated Certificate of Incorporation of the Registrant, as amended (1)

   3.2       By-Laws of the Registrant (1)

   3.3       Amendment I to By-Laws of the Registrant, dated October 28, 1993 (3)

   4.1       Specimen Certificate for Common Stock of Registrant (1)

   4.2       Stock Purchase Agreement dated as of November 11, 1996 among the Registrant 
             and the investors specified therein (9)

   7.1       1991 Qualified Stock Option Plan (as amended as of November 30, 1993) (+)(2)

   7.2       1991 Non-Qualified Stock Option Plan (as amended as of November 30, 1993) (+)(2)

   7.3       1993 Non-Employee Director Stock Option Plan (+)(3)

   7.4       1996 Stock Option Plan (+)(8)
</TABLE>



<PAGE>


<TABLE>
<CAPTION>

 <S>         <C>                                                                          
  10.1       Employment  Agreement between the Registrant and William C. Zollner dated
             February 19, 1997 (+)(10) 

  10.2       Employment Agreement between the Registrant and
             Michael E. McConnell  dated January 1, 1993 (+)(3) 

  10.3       Employment  Agreement between the  Registrant and Stephen F. Elston dated 
             July 17, 1996 (+)(11) 

  10.4       Agreement of Lease dated May 23, 1994 between the  Registrant and Martin Selig
              Properties  (5) 

  10.4A      Amendment  to Lease  dated  April 7, 1995  between  the
             Registrant and Martin Selig Properties (7) 

  10.5       Technical  Services  Agreement dated December 1, 1993, between Registrant 
             and McCaw Cellular  Communications, Inc.(a)(4)

  10.6       Source Code License Agreement (CTS Software) dated December 1, 1993, between Registrant and McCaw Cellular
             Communications, Inc. (a)(4)

  10.7       Source Code License Agreement (McCaw Software) dated July 15, 1994, between Registrant and McCaw Cellular
             Communications, Inc. (a)(4)

  10.8       Master Purchase and License Agreement between the Registrant and AirTouch
             Cellular dated March 6, 1996 (d)(7) 10.9 Master Purchase and License Agreement
             between the Registrant and Bell Atlantic NYNEX Mobile dated August 27,
             1996 (e)(9)

  10.10      Master  Purchase and License  Agreement  between the Registrant and
             GTE Mobilnet of California Limited  Partnership dated September 30,
             1996 (e)(9)

  10.11      Master Purchase and License Agreement between the Registrant and Ameritech Mobile Communications, Inc. dated
             October 14, 1996 (e)(9)

  10.12      Patent License Agreement between Registrant and The Boeing Company dated
             April 29, 1994 (c)(5) 

  10.13      Patent Sublicense Agreement between Registrant and
             Motron  Electronics  dated May 24, 1995 (b)(6) 

  10.14      Patent License  Agreement between Registrant and AirTouch Cellular,  
             dated December 22, 1995 (d)(7) 
  
  23.1       Consent of Ernst & Young LLP,  independent  auditors  (12) 
 
  27         Financial  Data  Schedule (12)

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

</TABLE>


     a       Confidential  treatment  granted pursuant to order of the Secretary
             of the  Securities and Exchange  Commission  dated December 1, 1994
             (File No. 0-19437).

     b       Confidential  treatment  granted pursuant to order of the Secretary
             of the  Securities and Exchange  Commission  dated January 25, 1996
             (File No. 0-19437).

     c       Confidential  treatment  granted pursuant to order of the Secretary
             of the Securities and Exchange Commission dated July 26, 1996 (File
             No. 0-19437).


<PAGE>

     d      Confidential  treatment  granted pursuant to order of the Secretary
            of the  Securities and Exchange  Commission  dated November 8, 1996
            (File No. 0-19437).

     e      Confidential  treatment  granted pursuant to order of the Secretary
            of the Securities and Exchange  Commission  dated February 28, 1997
            (File No. 0-19437).

    (+)     Management contract or compensation plan or arrangement
            required to be noted as provided in Item 14(a)(3).

    (1)     Incorporated by reference to Registration Statement on Form S-1
            declared effective on August 6, 1991 (File No. 33-41176).
            
    (2)     Incorporated by reference to Registration Statement on Form S-8
            filed on March 7, 1994 (File No. 33-76128).
            
    (3)     Incorporated by reference to Annual Report on Form 10-K filed on
            March 30, 1994 for the year ended December 31, 1993 
            (File No. 0-19437).
            
    (4)     Incorporated by reference to Quarterly Report on Form 10-Q filed on
            August 12, 1994 for the quarter ended June 30, 1994 
            (File No. 0-19437).
            
    (5)     Incorporated by reference to Annual Report on Form 10-K filed on
            March 28, 1995 for the year ended December 31, 1994 
            (File No. 0-19437).
        
    (6)     Incorporated by reference to Quarterly Report on Form 10-Q filed on
            August 8, 1995 for the quarter ended June 30, 1995 
            (File No. 0-19437).
            
    (7)     Incorporated by reference to Annual Report on Form 10-K filed on
            March 27, 1996 for the year ended December 31, 1995 
            (File No. 0-19437).
            
    (8)     Incorporated by reference to Registration Statement on Form S-8
            filed on July 12, 1996 (File No. 333-08049). 
            
    (9)     Incorporated by reference to Quarterly Report on Form 10-Q filed on
            November 14, 1996 for the quarter ended September 30, 1996 
            (File No.0-19437). 
            
   (10)     Incorporated by reference to Current Report on Form 8-K filed on
            March 6, 1997 (File No. 0-19437). 
            
   (11)     Incorporated by reference to Annual Report on Form 10-K filed on
            March 26, 1997 for the year ended December 31, 1996 
            (File No. 0-19437).
            
   (12)     Filed herewith.

(b) Reports on Form 8-K
            
The Registrant  did not file any Current  Reports on Form 8-K during the quarter
ended December 31, 1997.
            
The Company filed a Current Report on Form 8-K,  dated February 19, 1998,  under

Item 5 of such Report,  relating to the Company's  legal  proceedings and to the
Company's  implementation  of a strategic plan to streamline its operations.  No
financial statements were included in such Report.

The Company also filed a Current  Report on Form 8K, date March 12, 1998,  under
Item 5 of such Report,  reporting that the Company and U.S. Wireless Corporation
announced  the signing of a Letter of Intent  (dated  February 25, 1998) calling
for the combining of the two companies. No financial statements were included.




<PAGE>



                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders
Cellular Technical Services Company, Inc.



We have audited the accompanying  balance sheets of Cellular  Technical Services
Company,  Inc. as of December 31, 1997 and 1996,  and the related  statements of
operations,  stockholders' equity, and cash flows for each of the three years in
the period  ended  December  31, 1997.  Our audits also  included the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and  schedule  are  the   responsibility  of  the  Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Cellular  Technical Services
Company,  Inc. at December 31, 1997 and 1996,  and the results of its operations
and its cash flows for each of the three years in the period ended  December 31,
1997, in conformity with generally accepted accounting principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the basic financial  statements  taken as a whole,  presents  fairly,  in all
material respects, the information set forth therein.

                                                           ERNST & YOUNG LLP

Seattle, Washington
March 25, 1998





<PAGE>

                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                                 BALANCE SHEETS

                      (in 000's, except per share amounts)


<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                          --------------------------
                                                                              1997          1996
                                                                          ------------    ----------
                                     ASSETS
<S>                                                                       <C>             <C>         
CURRENT ASSETS
   Cash and cash equivalents                                              $    3,448    $   4,854
   Accounts receivable, net of allowances of $187 in 1997
     and $101 in 1996                                                          3,190       11,616
   Inventories, net                                                            6,428        8,275
   Prepaid expenses and deposits                                                 300          831
                                                                          ------------  ----------

     Total Current Assets                                                     13,366       25,576

PROPERTY AND EQUIPMENT, net                                                    3,964        3,177

SOFTWARE DEVELOPMENT COSTS, net                                                3,391        3,599
                                                                          ------------  ----------

TOTAL ASSETS                                                              $   20,721    $  32,352
                                                                          ------------  ----------
                                                                          ------------  ----------

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                       $    2,799    $   6,365
   Payroll-related liabilities                                                   792          735
   Taxes (other than payroll and income)                                         549          660
   Customers' deposits                                                            15        4,626
   Deferred revenue                                                            2,676        1,781
                                                                          ------------  ----------
     Total Current Liabilities                                                 6,831       14,167

STOCKHOLDERS' EQUITY
   Preferred Stock, $.01 par value per share, 5,000 shares authorized,
     none issued and outstanding
   Common Stock, $.001 par value per share, 30,000 shares authorized,
     22,795 shares issued and outstanding in 1997 and 22,636 in 1996              23           23
   Additional paid-in capital                                                 29,889       29,138
   Accumulated deficit                                                       (16,022)     (10,976)
                                                                          ------------  ----------
     Total Stockholders' Equity                                               13,890       18,185
                                                                          ------------  ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                $   20,721    $  32,352
                                                                          ------------  ----------
                                                                          ------------  ----------
</TABLE>


The accompanying footnotes are an integral part of these financial statements.




<PAGE>


                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                            STATEMENTS OF OPERATIONS

                      (in 000's, except per share amounts)


<TABLE>
<CAPTION>


                                                        Year Ended December 31,
                                               ---------------------------------------------
                                                   1997            1996           1995
                                               -------------   -------------  --------------

<S>                                            <C>             <C>            <C>         
REVENUES
   Systems                                     $     25,768    $     19,799   $      9,532
   Services                                           4,487           1,103          2,577
                                               -------------   -------------  --------------
     Total Revenues                                  30,255          20,902         12,109

COSTS AND EXPENSES
   Cost of Systems and Services                      19,201          16,617          4,722
   Sales and marketing                                3,755           3,401          2,142
   General and administrative                         4,481           2,966          2,116
   Research and development                           8,061           5,523          3,540
                                               -------------   -------------  --------------
     Total Costs and Expenses                        35,498          28,507         12,520
                                               -------------   -------------  --------------
LOSS FROM OPERATIONS                                 (5,243)         (7,605)          (411)
INTEREST INCOME                                         197             255            476
                                               -------------   -------------  --------------
INCOME (LOSS) BEFORE INCOME TAXES                    (5,046)         (7,350)            65
PROVISION FOR INCOME TAXES                                                               2
                                               -------------   -------------  --------------
NET INCOME (LOSS)                              $     (5,046)   $     (7,350)  $         63
                                               -------------   -------------  --------------
                                               -------------   -------------  --------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE    $      (0.22)   $      (0.33)  $       0.00
                                               -------------   -------------  --------------
                                               -------------   -------------  --------------
WEIGHTED AVERAGE SHARES OUTSTANDING                  22,728          21,999         20,398
                                               -------------   -------------  --------------
                                               -------------   -------------  -------------- 

</TABLE>


The accompanying footnotes are an integral part of these financial statements.




<PAGE>


                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                                   (in 000's)


<TABLE>
<CAPTION>


                                                     Common Stock            Additional
                                               --------------------------     Paid-in         Accumulated
                                                  Shares        Amount        Capital           Deficit           Total
                                               -------------   ----------   -------------   ----------------  --------------

<S>                                                  <C>       <C>          <C>             <C>               <C>         
Balance, January 1, 1995                             19,741    $      20    $     17,396    $        (3,689)  $     13,727
Exercise of stock options                             1,862            2           2,942                             2,944
Net income                                                                                               63             63
                                               -------------   ----------   -------------   ----------------  --------------
Balance, December 31, 1995                           21,603           22          20,338             (3,626)        16,734
Exercise of stock options                               633            1           2,360                             2,361
Sale of Common Stock                                    400                        6,440                             6,440
Net income                                                                                           (7,350)        (7,350)
                                               -------------   ----------   -------------   ----------------  --------------
Balance, December 31, 1996                           22,636           23          29,138            (10,976)        18,185
Exercise of stock options                               159                          751                               751
Net income                                                                                           (5,046)        (5,046)
                                               -------------   ----------   -------------   ----------------  --------------
Balance, December 31, 1997                           22,795    $      23    $     29,889    $       (16,022)  $     13,890
                                               -------------   ----------   -------------   ----------------  --------------
                                               -------------   ----------   -------------   ----------------  --------------

</TABLE>


The accompanying footnotes are an integral part of these financial statements.




<PAGE>


                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                            STATEMENTS OF CASH FLOWS

                                   (in 000's)


<TABLE>
<CAPTION>


                                                                                   Year Ended December 31,
                                                                         ---------------------------------------------
                                                                             1997            1996            1995
                                                                         --------------  -------------   -------------
<S>                                                                      <C>             <C>             <C>         
OPERATING ACTIVITIES
   Net income (loss)                                                     $     (5,046)   $     (7,350)   $         63
   Adjustments to reconcile net income (loss) to net cash provided by
     (used in) operating activities:
       Depreciation and amortization of property and equipment                  1,219             817             609
       Amortization of software development costs                               1,961           1,123             985
       Provision for inventory reserves                                         1,818             390             180
       Changes in operating assets and liabilities:
         (Increase) decrease in accounts receivable                             8,426         (11,108)          1,239
         (Increase) decrease in inventories                                        29          (6,718)         (1,672)
         (Increase) decrease in prepaid expenses and deposits                     531              (3)           (537)
         Increase (decrease) in accounts payable                               (3,566)          5,211             261
         Increase (decrease) in payroll-related liabilities                        57             512            (283)
         Increase (decrease) in taxes (other than payroll and income)            (111)            462              67
         Increase (decrease) in customers' deposits                            (4,611)          4,606              (8)
         Increase (decrease) in deferred revenue                                  895           1,739            (151)
                                                                         --------------  -------------   -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                             1,602         (10,319)            753

INVESTING ACTIVITIES
   Purchase of property and equipment                                          (2,006)         (1,701)         (1,565)
   Capitalization of software development costs                                (1,753)         (1,375)         (1,726)
                                                                         --------------  -------------   -------------

NET CASH USED IN INVESTING ACTIVITIES                                          (3,759)         (3,076)         (3,291)

FINANCING ACTIVITIES
   Proceeds from sale of Common Stock                                                           6,440
   Proceeds from exercise of stock options                                        751           2,361           2,944
                                                                         --------------  -------------   -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                         751           8,801           2,944
                                                                         --------------  -------------   -------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                                                                               (1,406)         (4,594)            406

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  4,854           9,448           9,042
                                                                         --------------  -------------   -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $      3,448    $      4,854    $      9,448
                                                                         --------------  -------------   -------------
                                                                         --------------  -------------   -------------
</TABLE>



The accompanying footnotes are an integral part of these financial statements.




<PAGE>


CELLULAR TECHNICAL SERVICES COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND LIQUIDITY

Nature of Operations and  Organization - Cellular  Technical  Services  Company,
Inc. (the "Company") is primarily engaged in the design, development, marketing,
installation and support of integrated data processing  systems for the wireless
communications  industry.  Although  the  Company's  current  customer  base  is
comprised of domestic U.S. cellular service providers,  management believes that
demand  for  the  Company's  products  extends  to  worldwide  wireless  service
providers. The Company was incorporated in Delaware on August 19, 1988. Prior to
September 14, 1995, the Company's single largest stockholder had been Nationwide
Cellular Service, Inc. ("Nationwide").

Liquidity  -  The Company has incurred operating losses of $5.0 million and $7.4
million  for  the years ended December 31, 1997 and 1996, respectively. Its cash
flow  from  operating  activities  was  $1.6 million in 1997 while it incurred a
negative  cash  flow  of  $10.4 million in 1996. During this period, the Company
deployed  its  initial  cloning fraud prevention Blackbird Products and incurred
substantial  operating expenses during such deployment. As of December 31, 1997,
the  Company had an accumulated deficit of $16.0 million, $12.4 million of which
has  accumulated  during  the  past  two  years.  As a result of its significant
research  and  development, customer support, sales and marketing, manufacturing
operations  and  general  and administrative  efforts,  the Company has required
substantial  working  capital  to  fund its operations. To date, the Company has
financed  its  operations  principally  through the net proceeds from its equity
offerings  (including proceeds from the exercise of warrants and options). As of
December 31, 1997,  the  Company's working capital was $6.5 million and its cash
and  cash equivalents balances were $3.4 million. Management believes that under
its current business plans, its current cash balances and cash flows expected to
be  generated  from operations are sufficient to fund its operations and capital
requirements  at  least  through  December 1998.  Going  forward  into 1998, the
Company  has  reduced  its fixed operating costs and has increased its recurring
revenue  base  from  its  maintenance  and  services.  The  Company  is pursuing
borrowings  under  its  bank  agreement, which may, however, restrict borrowings
based on the Company's current financial condition. The Company is also pursuing
other possible private sources  of additional working capital to meet its future
operational  requirements.  The  recently  signed  letter  of intent between the
Company  and U.S. Wireless Corporation (See "--Note L - Subsequent Events") that
contemplates  the merger of the two companies, provides for at least $15 million
of  financing being sought for the combined companies. There can be no assurance
such  funds  will  be available as needed or on terms that are acceptable to the
Company.  The Company's inability to successfully  generate sufficient cash flow
from  operations,  or  raise  additional  financing,  through  either  its  bank
agreement  or  private sources, or in connection with the proposed merger, would
have a material adverse impact on the Company's financial position, liquidity or
results  of  operations  and  may require the Company to reduce its expenditures
further or curtail certain operations to enable it to continue its operations at
least through December 31, 1998.

NOTE B - SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents - The Company considers all highly liquid  investments
with a maturity of three months or less when purchased to be cash equivalents.

Diversification  of Credit  Risk - The Company is subject to  concentrations  of
credit risk primarily from cash investments and accounts receivable. Credit risk
from cash investments is managed by  diversification  of cash investments  among
institutions   and  by  the  purchase  of   investment-grade   commercial  paper
securities. The estimated fair values of the securities approximate cost. Credit
risk associated with trade receivables is subject to ongoing credit evaluations.
The Company does not typically require collateral for receivables.  Reserves for
potential losses, if any, are maintained where appropriate.

Inventories - Inventories,  which  primarily  consist of raw materials,  work in
process,    and   finished    components    (including   data   processing   and
telecommunication  equipment),  are stated at the lower of cost or market value,
with cost determined on a first-in,  first-out basis. Inventories are integrated
for delivery to customers by either the Company or its third-party  integrators.
The Company's inventory is monitored for obsolescence and considers factors such
as turnover,  technical  obsolescence,  right of return  status to suppliers and
pricing. Reserves for slow-moving and obsolete inventory, if any, are maintained
where appropriate.

Property  and   Equipment  -  Property  and   equipment,   including   leasehold
improvements,   are  stated  at  cost,   less   accumulated   depreciation   and
amortization.  Depreciation  and  amortization  commences at the time assets are
placed in  service  and is  computed  using the  straight-line  method  over the
shorter of estimated useful lives of the assets of two to five years or terms of
the  associated   operating   leases.   The  Company   capitalizes  expenditures


<PAGE>

that  significantly  increase  the life of the related assets, while maintenance
and  repairs  are charged to operations. Gain or loss is reflected in results of
operations upon the retirement or sale of assets.

Software Development Costs - Software development costs, consisting primarily of
internally  developed  software,   have  been  capitalized  in  accordance  with
Financial Accounting Standards Board Statement No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise  Marketed."  Capitalization
of software  development  costs begins upon the  establishment  of technological
feasibility.  Capitalization  ceases and  amortization  begins when products are
available for general release.  The ongoing  assessment of the recoverability of
these  costs  considers  external  factors   including,   but  not  limited  to,
anticipated future net product revenues,  estimated economic life and changes in
software  and  hardware   technology.   Amortization  of  capitalized   software
development costs is the greater of the amount computed using (a) the ratio that
current  gross  revenues  for a  product  bear  to  the  total  of  current  and
anticipated  future gross  revenues  for that  product or (b) the  straight-line
method over the  remaining  estimated  economic  life of the product,  generally
ranging  from two to four  years.  As a result of analysis of sales  projections
and future product releases,  the lives used for amortization under the straight
line  method  were reduced effective January 1, 1998 to generally not exceed two
years, which will result in increased amortization in future years.

Revenue  Recognition  - In October  1997,  the  Accounting  Standards  Executive
Committee  (AcSEC) of the American  Institute of  Certified  Public  Accountants
issued Statement of Position (SOP) 97-2, Software Revenue  Recognition.  The SOP
is effective  for  transactions  entered into in fiscal  years  beginning  after
December 15, 1997. The effective date of certain provisions of the SOP have been
delayed one year. Based upon the currently issued SOP, the Company believes that
it is in  compliance  with its  provisions,  and its adoption is not expected to
have a material impact on the financial position or results of operations of the
Company.

System revenues  consist  primarily of bundled  hardware and software  products.
Revenues are recognized when all of the following conditions are met: persuasive
evidence of an arrangement exists,  delivery has occurred (contract criteria has
been satisfied),  the amount is fixed and  determinable,  and  collectability is
probable.  Non-revenue  generating  obligations after delivery are not material.
Service revenues,  consisting primarily of hardware and software maintenance and
related  support  services,   are  recognized   ratably  over  the  period  that
maintenance  coverage  is  provided,  whether  bundled  with the system  sale or
contracted for  separately.  Prepaid or allocated  maintenance  and services are
recorded as deferred  revenues.  Amounts billed and received on sales  contracts
before revenue is recognized are recorded as customer deposits.

Income Taxes - The Company  follows the deferred method of accounting for income
taxes  whereby  deferred  tax assets and  liabilities  are  determined  based on
differences  between  financial  reporting  basis and tax  basis of  assets  and
liabilities  and are  measured  using  the  enacted  tax rates and laws that are
expected  to be in effect when the  differences  are  expected  to reverse.  The
Company  provides a valuation  allowance  for deferred tax assets that cannot be
currently recognized due to the cumulative losses incurred by the Company.

Net  Income  (Loss)  Per Share - In  February  1997,  the  Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS")  No.  128,  "Earnings  per  Share."  The new  standard  simplifies  the
computation  of  earnings  per share  ("EPS")  and  increases  comparability  to
international  accounting  standards.  Under  SFAS  No.  128,  "Primary"  EPS is
replaced by "Basic"  EPS,  which  excludes  dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. "Diluted" EPS, which is computed similarly to
the former "Fully Diluted" EPS, reflects the potential dilution that could occur
if  securities  or other  contracts  to issue  common  stock were  exercised  or
converted into common stock.  The Company was required to adopt the new standard
in its  year-end  1997  financial  statements  and to restate all prior  periods
presented.  There was no material effect of this accounting change on previously
reported EPS for the three years ending December 31, 1997

Stock-Based  Compensation - The Company  evaluates  stock based  compensation in
accordance  with  Financial   Accounting  Standards  Board  Statement  No.  123,
"Accounting for Stock-Based Compensation." As provided for by Statement 123, the
Company  has  chosen  to  measure   stock-based   compensation  cost  under  the
intrinsic-value  


<PAGE>

method  prescribed  under  Accounting  Principles  Board  Opinion No. 25 and has
adopted the disclosure only provisions of Statement 123.

Risks and  Uncertainties - Management of the Company believes that the risks and
uncertainties discussed below, whether viewed individually or combined, will not
result in a significant unfavorable impact to the Company. However, there can be
no  assurance  that any  unfavorable  outcome  of the  risks  and  uncertainties
discussed  below  will not  have a  material  adverse  effect  on the  Company's
financial position, results of operations or liquidity.

a) Competition  in selling the Company's  products continues to grow as cellular
   software vendors,  cellular  carriers and other technology-oriented companies
   have developed or are developing products that do or will compete against the
   Company's  products.  In  connection  with  developing the Company's software
   products,  significant  amounts  of  software  development  costs  have  been
   capitalized.  Additionally,  the  Company  has purchased inventories that are
   intended  to  support  future product sales.  In the event the Company is not
   able, due to resource,  technological or other constraints,  to sell into its
   market,  to adequately anticipate or respond to changing market,  customer or
   technological  requirements,  the  carrying  value  of  capitalized software,
   inventories, and other assets could be significantly impaired.

b) Limited  customer base;  Reliance on significant customers: The nature of the
   Company's  business  is  such  that a single customer and its affiliates will
   account  for  more  than  10%  of  the Company's product and service revenues
   during  a  given  fiscal  year.  Sales  to customers aggregating 10% or more,
   either  individually  or combined as affiliates due to common ownership, were
   concentrated  as follows:  four customers with sales of 31%, 20%, 20% and 19%
   in 1997,  three customers with sales of 42%,  38%,  and 15% in 1996,  and two
   customers  with  sales  of  70% and 15% in 1995. The aggregate sales to these
   customers  (none accounted for more than 10% in all three years)  represented
   90%,  95%,  and  85%, of  the  Company's total system and service revenues in
   1997,  1996  and  1995,  respectively.  There  can be no assurances that such
   customers  will continue to maintain business relationships with the Company.
   Accordingly,  the  loss  of one or more major customers could have a material
   adverse effect on the Company.

c) Possible need for financing: Historically, the Company has experienced uneven
   cash flow and operating results,  and, during the past two years, significant
   operating losses. These factors originate primarily from: i) uneven quarterly
   sales,  (ii)  cash  receipts  associated  with  deferred revenue recognition,
   (iii)   varying   payment  terms  contained   in  customer   agreements,  and
   (iv) operating  losses  resulting  from  a combination of lower than expected
   revenues  and  an  unbalanced  cost  structure in relation to those revenues.
   Delays in achieving profitability, failure to convert existing inventory into
   cash and/or significant sales growth requiring working capital beyond current
   amounts  or  other changes in the Company's operating activities will require
   additional financing during the next twelve months

d) Dependent  on third party vendors:  The Company has been and will continue to
   be  dependent  on third-party vendors for the computer equipment,  electronic
   components, manufacturing services, and certain software that is incorporated
   in its  products.  While these are generally available from multiple sources,
   the  Company  currently  obtains  or  licenses  certain equipment, electronic
   components,  manufacturing  services,  and  software from a limited number of
   sources of supply.

e) Legal  proceedings:  From  time  to time,  the  Company  could be  subject to
   involvement  with  legal actions and  claims  arising in connection  with its
   business.  The  following  legal  matters  were  resolved   in  1997  or  are
   outstanding as of December 31, 1997:

         In July 1996, Reon Corporation and Reon International Corporation filed
         an  action  against  the  Company in the Superior Court of King County,
         Washington,  in  which  the  plaintiffs  alleged  breach  of  contract,
         misappropriation of trade  secrets, and  breach  of  other  obligations
         by   the   Company.   On  December  22,  1997,   the  parties   to  the
         action  entered  into   a   settlement  agreement,  pursuant  to  which


<PAGE>
         the  action  was  dismissed  by  the  court  with prejudice without any
         admission of liability or wrongdoing by any party.

         Between  July 1997  and  September  1997,  eight separate lawsuits were
         filed  against  the  Company,  its  Chairman  of  the  Board  and Chief
         Executive  Officer,  and  its  former  President  and  Chief  Operating
         Officer.  The  lawsuits  were filed in the United States District Court
         for the Western District of Washingtonat  Seattle,  and have  now  been
         consolidated. A  revised consolidated complaint was filed by plaintiffs
         on February 17, 1998. The complaint purports to assert claims on behalf
         of  the  class  of persons, other than defendants and their affiliates,
         who  purchased  the  Company's  common  stock  or  call  options on the
         Company's common stock, or who sold put options on the Company's stock,
         during  the  period March 6, 1996 through July 30, 1997, inclusive (the
         "Class  Period").  The complaint alleges that the defendants made false
         or  misleading  statements and failed to disclose material facts during
         the  Class  Period  in  violation  of  the federal securities laws. The
         plaintiffs  in  this lawsuit seek damages in an unspecified amount. The
         Company  believes  this  lawsuit  is  without  merit  and is vigorously
         defending against it.

         On January 13, 1998, Communications Information Services, Inc. filed an
         action  against  the  Company  and  AirTouch  Communications,  Inc. for
         alleged  infringement  of United States Patent No. 5,329,591 ("the `591
         patent")  in the United States District Court for the Northern District
         of Georgia at Atlanta.  The complaint asserts that the plaintiff is the
         exclusive  licensee of all rights under the `591 patent.  The complaint
         alleges   that   the  Company's  cellular  telephone  fraud  prevention
         technology  infringes the `591 patent, and seeks damages in unspecified
         amounts.  The  Company  believes  this  lawsuit is without merit and is
         vigorously defending against it.

         Although no estimate of any outcome of the above lawsuits can currently
         be  made,  an  unfavorable  resolution  of such suits could  materially
         affect  the  Company's  financial  position,  liquidity  or  results of
         operations.  The  Company  is  also  a party to other legal proceedings
         which arise from time to time in the ordinary course of business and/or
         which  management  believes will be resolved without a material adverse
         effect on the Company's financial position,  liquidity  or  results  of
         operations.

Estimates  and  assumptions  -  The  preparation  of  financial   statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

Reclassifications - Certain  reclassifications  have been made to the prior year
financial statements to conform to the current period's presentation.




<PAGE>


NOTE C - INVENTORIES:

Inventory consists of the following (in 000's):


<TABLE>
<CAPTION>

                                                       December 31,
                                               -----------------------------
                                                   1997            1996
                                               -------------   -------------

     <S>                                       <C>             <C>         
     Raw materials                             $      2,571    $      2,723
     Work in process and finished components          5,954           6,014
                                               -------------   -------------

                                                      8,525           8,737
     Less inventory reserves                         (2,097)           (462)
                                               -------------   -------------

                                               $      6,428    $      8,275
                                               -------------   -------------
                                               -------------   -------------
</TABLE>


Finished goods inventories of $2.7 million at December 31, 1996, were located at
customer sites awaiting  installation  and customer  acceptance.  Upon achieving
performance  criteria  specified in customer  agreements,  such inventories were
charged to costs of systems and removed from the inventory balance.

NOTE D - PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (in 000's):


<TABLE>
<CAPTION>

                                                                  December 31,
                                                          -----------------------------
                                                              1997            1996
                                                          -------------   -------------

     <S>                                                  <C>             <C>         
     Computer equipment and software                      $      5,648    $      3,983
     Furniture, fixtures and office equipment                    1,922           1,764
     Leasehold improvements                                        407             235
                                                          -------------   -------------

                                                                 7,977           5,982
     Less accumulated depreciation and amortization
                                                                (4,013)         (2,805)
                                                          -------------   -------------

                                                          $      3,964    $      3,177
                                                          -------------   -------------
                                                          -------------   -------------

</TABLE>



NOTE E - SOFTWARE DEVELOPMENT COSTS:

Software development costs consist of the following (in 000's):


<TABLE>
<CAPTION>

                                                                  December 31,
                                                          -----------------------------
                                                              1997            1996
                                                          -------------   -------------

     <S>                                                  <C>             <C>         
     Capitalized software                                 $      9,134    $      7,659
     Less accumulated amortization                              (5,743)         (4,060)
                                                          -------------   -------------

                                                          $      3,391    $      3,599
                                                          -------------   -------------
                                                          -------------   -------------
</TABLE>



<PAGE>


NOTE F - LINE OF CREDIT:

In November  1996,  the Company  obtained a $5.0  million  line of credit from a
major  bank  secured  by all  property  of the  Company.  Under the terms of the
agreement,  the  Company  may borrow  against  this line of credit  through  the
execution  of  promissory  notes  at  the  rate  of  prime  plus  0.75%.  Credit
availability  is subject  to  continuing  satisfaction  with  current  financial
information  furnished to the bank.  The line of credit had an initial term that
ended  September 30, 1997 and was renewed through June 30, 1998. All outstanding
balances  under the line must be repaid for a  consecutive  30-day period before
the  aforementioned  expiration  date.  As of December 31,  1997,  there were no
borrowings  against  the credit  agreement.  However,  the  Company's  financial
condition may impair its ability to borrow under the line.

NOTE G - COMMITMENTS AND CONTINGENCIES:

Leases - The Company  leases office space under three  non-cancelable  operating
leases with  expiration  dates from 1999 through  2000,  which  contain  renewal
options for  additional  terms ranging from two and one-half to five years.  The
Company also leases  equipment and  telecommunication  lines and services  under
non-cancelable  operating leases expiring through 1999. In addition, the Company
leases office space,  equipment and  telecommunication  lines and services under
various rental  agreements with initial terms ranging from one to twelve months.
Amounts charged to operations under all lease and rental agreements  totaled $.8
million,  $1.0  million  and $.8 million in 1997,  1996 and 1995,  respectively.
Future  minimum  annual  lease  payments  at  December  31,  1997,  under  those
agreements with initial terms greater than one year are as follows (in 000's):


<TABLE>
<CAPTION>

               <S>       <C>         
               1998      $        950
               
               1999               945
                    
               2000               502
                         -------------
               
               Total     $      2,397
                         -------------
                         -------------
</TABLE>


Employment  Agreements  - At December  31,  1997,  the  Company  has  employment
agreements with four officers and two senior  employees with varying  expiration
dates extending through 1998.

NOTE H - EMPLOYEE RETIREMENT SAVINGS PLAN:

The  Company  has  adopted  an  Employee   Retirement   Savings  Plan   covering
substantially  all  employees who have been employed for at least six months and
meet  certain age and  eligibility  requirements.  Each  eligible  employee  may
contribute up to 15% of his or her compensation  per year,  subject to a maximum
limit  imposed by federal  tax law,  into  various  funds.  Under  current  plan
provisions,  matching  contributions are made by the Company equal to two-thirds
of the  employee's  contribution,  subject  to a maximum  of 6% of  compensation
contribution  by the  employee.  Company  contributions  charged  to  costs  and
expenses  totaled  $176,000,  $136,000,  and $97,000 during 1997, 1996 and 1995,
respectively.

NOTE I - INCOME TAXES:

At December 31, 1997,  the Company had available for federal income tax purposes
net operating loss  carryforwards of approximately $44 million and research and
development  tax credits of  approximately  $1 million  which begin to expire in
2003.  The  federal  income  tax net  operating  loss  carryforwards  exceed the
retained deficit,  primarily due to the differences  between financial reporting
and tax treatment of software  development  costs and  deductibility  of certain
amounts  on  exercise  of stock  options.  A portion of the net  operating  loss
carryforward  (approximately  $22  million) is  attributed  to the stock  option
deduction,  the tax  effect of which  will be  credited  to  additional  paid-in
capital when realized.  The net operating loss carryforwards of the 


<PAGE>

Company  have  been  and  will  continue to be subject to limitations imposed by
Section 382  of  the  Internal  Revenue Code because there has been an ownership
change of greater than 50% in the Company.

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in 000's):


<TABLE>
<CAPTION>


                                                                                              December 31,
                                                                              ---------------------------------------------
                                                                                 1997            1996             1995
                                                                              ------------    ------------     ------------
          <S>                                                                 <C>             <C>              <C>        
          Deferred tax assets:


             Net operating loss carryforwards                                 $    15,024     $    14,049      $     9,363
             Research and development tax credits                                     996             653              688
             Reserves and allowances on financial statements in excess of

                                                                                      822             351               98
                                                                              ------------    ------------     ------------

                 Total deferred tax assets                                         16,842          15,053           10,149

          Deferred tax liabilities:
             Depreciation on tax returns in excess of financial statements            137             107               54
             Capitalized software development costs                                 1,072           1,434            1,107
                                                                              ------------    -------------    ------------

                 Total deferred tax liabilities                                     1,209           1,541            1,161
                                                                              ------------    -------------     ------------

                 Net deferred tax assets                                           15,633          13,512            8,988

                 Valuation allowance                                             (15,633)        (13,512)          (8,988)
                                                                              ------------    -------------     ------------
                                                                              ------------    -------------     ------------

          Net                                                                 $   --          $   --           $   --
                                                                              ------------    -------------     ------------
                                                                              ------------    -------------     ------------
</TABLE>


The net  change in the  valuation  allowance  for  deferred  tax  assets  was an
increase of approximately $2.1 million  attributable to the net operating losses
incurred by the Company during 1997.  While  management  believes that the total
deferred  income tax asset will be fully realized by future  operating  results,
the operating loss recognized in 1997,  losses in recent years,  and a desire to
be conservative make it appropriate to record a valuation reserve.  Accordingly,
the  Company  has  provided a valuation  allowance  of 100% of the net  deferred
income tax asset  related  to the  operating  loss  carryforward  and  temporary
differences.

The reconciliation of income tax computed at the U.S. federal statutory tax rate
to income tax expense is as follows (in 000's):


<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                                    ---------------------------------------------
                                                                       1997            1996             1995
                                                                    ------------    ------------     ------------

          <S>                                                       <C>             <C>              <C>        
          Income tax provision (benefit) at statutory rate of 34%   $    (1,716)    $    (2,499)     $        22
          Losses producing no current tax benefit                         1,716           2,499
          Utilization of net operating loss carryforward                                                     (22)
          Alternative minimum tax - current                                                                    2
                                                                    ------------    ------------     ------------

          Provision for income taxes                                $         0     $         0      $         2
                                                                    ------------    ------------     ------------
                                                                    ------------    ------------     ------------

</TABLE>



<PAGE>


NOTE J - STOCKHOLDERS' EQUITY:

Stock Split - On June 14, 1996, the Company declared a two-for-one  split of its
Common  Stock,  $.001 par value per share,  effected  by a 100%  stock  dividend
whereby each holder of Common  Stock  received  one  additional  share of Common
Stock for each share held.  The additional  shares were  distributed on June 27,
1996. All  outstanding  common shares and per share amounts in the  accompanying
financial  statements  have been  retroactively  adjusted  to give effect to the
two-for-one stock split.

Nationwide  Cellular  Service,  Inc. - Prior to September  14, 1995,  Nationwide
owned  6,680,000  shares of the Company's  Common Stock and was the holder of an
option to purchase an  additional  1,280,000  shares.  On September 14, 1995, in
conjunction   with  the  merger  between   Nationwide  and  MCI   Communications
Corporation,  Nationwide exercised its option and distributed the combined total
of  7,960,000  shares to its  stockholders.  As a result of the  exercise of the
option,  the Company received $1.6 million and issued 1,280,000 shares of Common
Stock.

Private  Placement - On November 8, 1996,  the Company  sold  400,000  shares of
Common Stock to investors in a private placement. Proceeds to the Company net of
estimated  expenses of $.1 million  amounted to  approximately  $6.4 million.  A
registration  statement for the resale of such shares was declared  effective by
the Securities and Exchange Commission in April 1997.

Stock Options - In 1991, the Company adopted a Qualified Stock Option Plan and a
Non-Qualified  Stock  Option  Plan.  Pursuant  to the 1991  Qualified  Plan,  as
amended, the Company was authorized to grant options to purchase up to 2,800,000
shares of Common Stock to its officers  and key  employees,  at a price not less
than the fair  market  value per share of Common  Stock on the date of grant and
have a term of ten years.  Pursuant to the 1991 Non-Qualified  Plan, as amended,
the Company was  authorized to grant options to purchase up to 1,200,000  shares
of Common  Stock to its  directors,  officers,  key  employees  and  others  who
rendered  services to the Company at such price as fixed by the Compensation and
Stock Option  Committee.  Options granted under both the 1991 Qualified Plan and
1991  Non-Qualified  Plan generally vest to the respective option holders at the
rate of 20% per year commencing on the first anniversary date of the grant.

In December  1993,  the Company  adopted the 1993  Non-Employee  Director  Stock
Option Plan which allows the Company to grant  options to purchase up to 300,000
shares of Common Stock.  Pursuant to the 1993  Non-Employee  Director Plan, each
non-employee  director  is to be granted  options to purchase  20,000  shares of
Common  Stock upon  initial  appointment  as a director  of the  Company  and an
additional 12,000 options,  in recurring annual increments,  at a price equal to
the fair market  value per share of Common  Stock on the date of grant.  Options
under the Non-Employee  Director Plan vest to the respective option holder after
one year and have a term of ten years.

In June 1996,  the Company  adopted the 1996 Stock  Option  Plan  covering  both
incentive  stock options and  non-qualified  stock  options.  Pursuant to action
taken by the  Company's  Board  and  approved  by a  majority  of the  Company's
shareholders,  no new options will be granted  under either the  Company's  1991
Qualified Stock Option Plan or under the 1991  Non-Qualified  Stock Option Plan.
The 1996 Stock Option Plan authorizes the grant of options to purchase a maximum
of  1,100,000  shares of the  Company's  Common  Stock to  employees  (including
officers and directors who are  employees)  of and  consultants  to the Company.
Options granted under the plan may either be incentive  stock options  ("ISOs"),
within the  meaning of Section  422 of the  Internal  Revenue  Code of 1986,  as
amended (the  "Code"),  or  non-qualified  stock options which do not qualify as
ISOs . The exercise  price,  term and vesting  provision of each option grant is
fixed by the Compensation and Stock Option Committee with the provision that the
exercise  price  of an ISO may not be less  than the  fair  market  value of the
Company's  Common  Stock  on the  date of  grant  and the term of an ISO may not
exceed ten years.

The Company has also granted options to purchase  920,000 shares of Common Stock
at fair  market  value to  certain  directors  and  officers  of the  Company at
exercise  prices  ranging  from $1.25 to $6.13 per share.  These  


<PAGE>

options  are  in  addition  to  those  granted under the 1991 Qualified and Non-
Qualified Plans, the 1993 Non-Employee Director Plan, the 1996 Stock Option Plan
and  the  options previously granted to and subsequently exercised by Nationwide
(as discussed above).  The options have terms ranging from five to ten years and
vest  to  the  respective  option  holder  over periods ranging from two to five
years.

Financial  Accounting Standards Board Statement No. 123 - The Company has chosen
to measure  stock-based  compensation cost under the  intrinsic-value  method of
Accounting Principles Board Opinion No. 25, (APB 25) and related interpretations
because,  as discussed below, the alternative fair value accounting provided for
under  Statement  123  requires  use of option  valuation  models  that were not
developed  for use in  valuing  employee  stock  options.  Under  APB 25, if the
exercise  price of the Company's  employee stock options equals the market price
of the  underlying  stock on the  date of  grant,  no  compensation  expense  is
recognized.

Pro forma information regarding net income and earnings per share is required by
Statement  123, and has been  determined as if the Company had accounted for its
employee  stock options under the fair value method of that  Statement.  In that
regard,  the fair value for options  granted  during  1997,  1996,  and 1995 was
estimated at the date of grant using a  Black-Scholes  option pricing model with
the  following   weighted-average   assumptions   for  1997,   1996,  and  1995,
respectively:  risk-free interest rates of 5.7%, 6.1%, and 5.5%; dividend yields
of 0.0%, 0.0%, and 0.0%;  volatility factors of the expected market price of the
Company's  common stock of .66%, .55%, and .56%; and a weighted average expected
life of the options of 5.1, 5.1, and 5.0 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee  stock options.  The  weighted-average
fair value of options  granted during each of the three years ended December 31,
1997, 1996 and 1995 was $5.28, $9.17, and $5.62, respectively.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  The  Company's  pro
forma information follows (in 000's, except per share amounts):


<TABLE>
<CAPTION>

                                                     1997            1996             1995
                                                  ------------    ------------     ------------

        <S>                                       <C>             <C>              <C>        
        Net earnings (loss) - as reported         $    (5,046)    $    (7,350)     $        63

        Net earnings (loss) - pro forma           $    (6,499)    $    (8,042)     $      (106)

        Earnings (loss) per share - as reported   $    (0.22)     $    (0.33)      $     0.00

        Earnings (loss) per share - pro forma     $    (0.29)     $    (0.37)      $     0.00
</TABLE>


The  pro  forma  effect  on  net  income  for  1997,   1996,  and  1995  is  not
representative  of the pro forma effect on net income in future years because it
does not take into  consideration  pro forma  compensation  expense  related  to
grants made prior to 1995.




<PAGE>


The  following  table   summarizes   information   concerning   outstanding  and
exercisable  stock  options as of December  31, 1997 (in 000's  except per share
amounts):

<TABLE>
<CAPTION>

                                                  Options Outstanding                         Options Exercisable
                                   --------------------------------------------------------------------------------------
                                                    Weighted-Average
                                                       Remaining    Weighted-Average                    Weighted-Average
                                                      Contractual    Exercise Price                      Exercise Price
                                        Number           Life                               Number
     Range of Exercise Prices        Outstanding                                          Exercisable
   ----------------------------------------------------------------------------------   ---------------------------------
<S>                  <C>                    <C>            <C>              <C>                 <C>             <C> 
   $     1.00   -    $    6.00              504            5.68             3.06                328             2.65
   $     6.13   -    $    6.13              502            6.00             6.13                422             6.13
   $     6.38   -    $    7.25              698            8.19             6.83                213             7.24
   $     8.25   -    $   11.38              496            8.75            11.11                 51            10.94
   $    12.00   -    $   19.94              270            8.31            16.18                 86            15.30
                                   -----------------                                    ----------------

   $     1.00   -    $   19.94            2,470            7.36             7.80              1,100             6.25
                                   =================                                    ================
</TABLE>



Information  with respect to the Company's stock options is as follows (in 000's
except per share amounts):


<TABLE>
<CAPTION>

                                                                                                         Weighted-Average
                                                         Shares Under                                        Exercise
                                                            Option                       Option Prices        Price
                                                       ------------------  ----------------------------------------------

<S>                      <C>                                 <C>              <C>                <C>          <C> 
        Balance, January 1, 1995                             4,530            1.00      -        7.25         3.56

        Granted                                                463            7.13      -       12.38         10.37
        Exercised                                          (1,862)            1.00      -        7.25         1.58
        Canceled                                             (117)            1.00      -        8.25         6.16
                                                       ------------------
        Balance, December 31, 1995                           3,014            1.00      -       12.38         5.73

        Granted                                                241           12.00      -       19.94         16.88
        Exercised                                            (633)            1.00      -       10.94         3.73
        Canceled                                             (299)            1.67      -       17.88         7.55
                                                       ------------------
        Balance, December 31, 1996                           2,323            1.00      -       19.94         7.19

        Granted                                                792            2.70      -       18.88         8.78
        Exercised                                            (159)            1.00      -       10.94         4.81
        Canceled                                             (486)            1.67      -       17.88         7.47
                                                       ------------------
        Balance, December 31, 1997                           2,470            1.00      -       19.94         7.80
                                                       ==================
        Exercisable at December 31, 1997                     1,100            1.00      -       19.94         6.25
                                                       ==================
        Available for grant at December 31, 1997               361
                                                       ==================
        Common Stock reserved for future issuance            2,831
                                                       ==================
</TABLE>


Shares exercisable at December 31, 1996 and 1995 were 789 and 845, 
         respectively.


<PAGE>


NOTE J - EARNINGS PER SHARE

The computation of earnings per share is as follows (in 000's,  except per share
amounts):


<TABLE>
<CAPTION>

                                                                                        Year Ended December 31,
                                                                              ---------------------------------------------
                                                                                                              ----------
                                                                                 1997            1996            1995
                                                                                                              ----------
                                                                              ----------    -----------

<S>                                                                           <C>             <C>             <C>        
   Basic and diluted earnings per share:
   Net income (loss) for calculation of earnings per share                    $ (5,046)       $ (7,350)       $    63
                                                                              ==========    ===========      =========

   Weighted average number of shares outstanding                                22,728          21,999         20,398 

                                                                              ==========    ===========      =========
Basic and diluted (loss) per share                                            $  (0.22)       $  (0.33)       $   .00
                                                                              ==========    ===========      =========
                                                                                              

</TABLE>


Common stock  equivalent  shares have not been considered in the calculation for
the  years  ended  December  31,  1997  and 1996  because  the  effect  would be
antidilutive

NOTE L - SUBSEQUENT EVENTS:

In January 1998, the Company began  implementation  of a strategic plan that has
included,  among other  initiatives,  streamlining  the Company's  operations to
better  balance  expenses and  revenues,  and directing  additional  development
efforts and  resources  toward new  products  that can  generate  new sources of
revenue.  By the end of the second quarter of 1998, the Company's workforce will
be reduced by approximately 40 percent from January 1, 1997 levels.  As of March
25, 1998, the majority of the reduction has already been accomplished. Severance
costs  incurred as a result of  headcount  reductions,  estimated  losses on the
unamortized  value  of  leasehold   improvements  resulting  from  relinquishing
unneeded  rental  space to the  landlord,  and  sales of  excess  furniture  and
fixtures at less than net book value are  expected to  approximate  in excess of
$0.5 million and are expected to be recorded in the first and second quarters of
1998.  In  addition,  in late 1997 and early  1998,  the Company  completed  the
consolidation of certain hardware  assembly and integration  operations  through
the  selected  acquisition  of  assets,  assumptions  of  leases,  and hiring of
employees  from  two  former  suppliers.  The  total  cost  of  assets  acquired
approximated $0.2 million.

On March 2, 1998,  the Company and U.S.  Wireless  Corporation  ("US  Wireless")
announced  the signing of a letter of intent which  provides  for the  potential
combination  of the two companies.  If the proposed  transaction is completed on
the terms contemplated,  which includes  stockholder approval for both companies
and as to which no assurance can be given,  the  stockholders of the Company and
US Wireless will each own 50 percent of the shares of the resulting company, and
the board of  directors  of the  resulting  company  will be  controlled  by the


<PAGE>


stockholders  of US Wireless.  The companies  have commenced a due diligence and
final agreement  negotiation  process.  That process will determine the acquirer
and the business  combination  accounting  method to be used, which is currently
expected to be "Purchase Accounting".  In connection with this transaction,  the
letter of intent calls for the companies to seek no less than $15 million in new
financing.  US Wireless  develops and manufactures  products designed to provide
value-added  services and features  for the  wireless  communications  industry,
including caller-location and tracking, autonomous network management, and other
applications.  Its  RadioCamera-TM-  caller-location  and  tracking  product  is
designed to meet the emergency 911  requirements  of the Federal  Communications
Commission  ("FCC").  In June 1996, the FCC issued a Report and Order  requiring
wireless  carriers to be able to identify  the  location of wireless  callers to
emergency 911 systems. This mandate requires that products designed to meet this
need must be  operational  and  accurate  to within 125  meters of the  wireless
caller not less than 67% of the time by October 2001




<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.

                  Cellular Technical Services Company, Inc.

                                    By: /s/ Stephen Katz
                                    ----------------------------------------
                                    Stephen Katz, Chairman of the Board
                                    of Directors and Chief Executive Officer
                                    March 30, 1998

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.

<TABLE>
<CAPTION>

<S>                                                    <C>  
/s/ Stephen Katz                                       /s/ William C. Zollner
- --------------------------------------------------     ---------------------------------------
Stephen Katz, Chairman of the Board of Directors and   William C. Zollner, Director, President and
Chief Executive Officer                                Chief Operating Officer
(Principal Executive Officer)                          March 30, 1998
March 30, 1998

/s/ Michael E. McConnell                               /s/ James Porter
- --------------------------------------------------     ---------------------------------------
Michael E. McConnell                                   James Porter, Director
Vice President and Chief Financial Officer             March 30, 1998
(Principal Financial and Accounting Officer)
March 30, 1998

/s/ Lawrence Schoenberg
- --------------------------------------------------          
Lawrence Schoenberg, Director
March 30, 1998

</TABLE>




<PAGE>


                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                   (in 000's)


<TABLE>
<CAPTION>


                                    Balance at                                       Balance at
                                    Beginning                                          End of
                                    of Period        Additions       Deductions        Period
                                   ------------     ------------    ------------     ------------
<S>                                <C>              <C>             <C>              <C>     
INVENTORY RESERVES

Year ended December 31, 1995       $     89         $    180        $     51         $    218
                                   =========        =========       =========        =========
Year ended December 31, 1996       $    218         $    390        $    146         $    462
                                   =========        =========       =========        =========
Year ended December 31, 1997       $    462         $  1,818        $    183         $  2,097
                                   =========        =========       =========        =========
SALES AND RECEIVABLE ALLOWANCES                                                    
                                                                                   
Year ended December 31, 1995       $    178         $    (59)       $     49         $     70
                                   =========        =========       =========        =========
Year ended December 31, 1996       $     70         $    116        $     85         $    101
                                   =========        =========       =========        =========
Year ended December 31, 1997       $    101         $    528        $    442         $    187
                                   =========        =========       =========        =========
</TABLE>








<PAGE>


Exhibit 23.1      Consent of Ernst & Young LLP, Independent Auditors

We consent to the  incorporation  by  reference in the  Registration  Statements
(Form S-8) pertaining to the 1991 Qualified Stock Option Plan, 1991 Nonqualified
Stock Option Plan,  1993  Non-Employee  Director  Stock Option Plan,  1996 Stock
Option Pln, and Non-Qualified  Stock Option Agreement Between the Registrant and
Robert P. Dahut of Cellular Technical Services Company, Inc. of our report dated
March 25,  1998,  with  respect to the  financial  statements  and  schedule  of
Cellular Technical  Services Company,  Inc. in the Annual Report (Form 10-K) for
the year ended December 31, 1997.

                                                         /s/ Ernst & Young LLP

Seattle, Washington
March 31, 1998







<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000876378
<NAME> CELLULAR TECHNICAL SVCS. CO., INC.
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                           3,448
<SECURITIES>                                         0
<RECEIVABLES>                                    3,377
<ALLOWANCES>                                       187
<INVENTORY>                                      6,428
<CURRENT-ASSETS>                                13,366
<PP&E>                                           7,977
<DEPRECIATION>                                   4,013
<TOTAL-ASSETS>                                  20,721
<CURRENT-LIABILITIES>                            6,831
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            23
<OTHER-SE>                                      13,867
<TOTAL-LIABILITY-AND-EQUITY>                    20,721
<SALES>                                         25,768
<TOTAL-REVENUES>                                30,255
<CGS>                                           11,866
<TOTAL-COSTS>                                   35,498
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                (5,046)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (5,046)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (5,046)
<EPS-PRIMARY>                                   (0.22)<F1>
<EPS-DILUTED>                                   (0.22)<F1>
<FN>
<F1>STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 128, "EARNINGS PER
SHARE" ("EPS") WAS ADOPTED IN 1997 AND REQUIRES RESTATEMENT OF ALL PRIOR
PERIODS. THERE WAS NO MATERIAL EFFECT OF THIS ACCOUNTING CHANGE ON PREVIOUSLY
REPORTED EPS FOR THE THREE YEARS ENDING DECEMBER 31, 1997.
</FN>
        

</TABLE>