Washington, DC. 20549

                                    FORM 10-Q

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

For the quarterly period ended             Commission File Number 0-19437
March 31, 1998
             (Exact Name of Registrant as Specified in Its Charter)

                Delaware                                    11-2962080
- ------------------------------------------  ------------------------------------
(State   or   Other    Jurisdiction    of   (I.R.S. 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

                                 Not Applicable
- --------------------------------------------------------------------------------
 (Former name, former address and former fiscal year, if changed since last 

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

          22,815,092 Common Shares were outstanding as of May 12, 1998.

                                       Page 1



                         TABLE OF CONTENTS FOR FORM 10-Q


<S>                                                                                                          <C>

PART I.  FINANCIAL INFORMATION................................................................................3

ITEM 1. FINANCIAL STATEMENTS..................................................................................3


PART II.  OTHER INFORMATION..................................................................................14

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................14


                                     Page 2



                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                                 BALANCE SHEETS

                      (in 000's, except per share amounts)


                                                                                           March 31,           December 31,
                                                                                            1998                  1997
                                                                                     -------------------    -------------------
<S>                                                                                  <C>                    <C>              
   Cash and cash equivalents                                                         $           1,468      $           3,448
   Accounts receivable, net of allowances of $187 in both 1997 and 1998                          5,120                  3,190
   Inventories, net                                                                              6,201                  6,428
   Prepaid expenses and other current assets                                                       275                    300
                                                                                     -------------------    -------------------

     Total Current Assets                                                                       13,064                 13,366

PROPERTY AND EQUIPMENT, net                                                                      3,722                  3,964

SOFTWARE DEVELOPMENT COSTS, net                                                                  3,491                  3,391
                                                                                     -------------------    -------------------

TOTAL ASSETS                                                                         $          20,277      $          20,721
                                                                                     ===================    ===================


   Accounts payable and accrued liabilities                                          $           2,682      $           2,799
   Payroll related liabilities                                                                     647                    792
   Taxes (other than payroll and income)                                                           120                    549
   Customers' deposits                                                                              11                     15
   Deferred revenue                                                                              4,674                  2,676
                                                                                     -------------------    -------------------

     Total Current Liabilities                                                                   8,134                  6,831

   Preferred Stock, $0.01 par value per share, 5,000
     shares authorized, none issued and outstanding
   Common Stock, $0.001 par value per share, 30,000
     shares authorized, 22,815 shares issued and
     outstanding in 1998 and 22,795 in 1997                                                         23                     23
   Additional paid-in capital                                                                   29,931                 29,889
   Accumulated Deficit                                                                         (17,811)               (16,022)
                                                                                     -------------------    -------------------

     Total Stockholders' Equity                                                                 12,143                 13,890
                                                                                     -------------------    -------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $          20,277      $          20,721
                                                                                     ===================    ===================


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

                                     Page 3



                            STATEMENTS OF OPERATIONS

                      (in 000's, except per share amounts)


                                                                                               Three Months Ended
                                                                                                   March 31,
                                                                                           1998                 1997
                                                                                      ----------------     ----------------
<S>                                                                                   <C>                  <C>            
  Systems                                                                             $         1,742      $        16,826
  Services                                                                                      1,680                  542
                                                                                      ----------------     ----------------

Total Revenues                                                                                  3,422               17,368

  Cost of systems and services                                                                  2,495                8,375
  Sales and marketing                                                                             389                1,395
  General and administrative                                                                      848                  892
  Research and development                                                                      1,503                2,340
                                                                                      ----------------     ----------------

Total Costs and Expenses                                                                        5,235               13,002
                                                                                      ----------------     ----------------

INCOME (LOSS) FROM OPERATIONS                                                                  (1,813)               4,366

INTEREST INCOME, NET                                                                               24                   48
                                                                                      ----------------     ----------------

INCOME (LOSS) BEFORE INCOME TAXES                                                              (1,789)               4,414

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

NET INCOME (LOSS)                                                                     $        (1,789)     $         4,414


    Basic                                                                             $         (.08)      $           .19
                                                                                      ================     ================

    Diluted                                                                           $         (.08)      $           .19
                                                                                      ================     ================


    Basic                                                                                      22,804               22,639
                                                                                      ================     ================

    Diluted                                                                                    22,804               23,711
                                                                                      ================     ================

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

                                     Page 4



                            STATEMENTS OF CASH FLOWS

                                   (in 000's)


                                                                                              Three Months Ended
                                                                                                   March 31,
                                                                                           1998                 1997
                                                                                     -----------------     ----------------
<S>                                                                                  <C>                   <C>            
   Net income (loss)                                                                 $        (1,789)      $         4,414
   Adjustments to reconcile net income (loss) to net cash (used in) provided by
     operating activities:
       Depreciation and amortization of property and equipment                                   315                   277
       Amortization of software development costs                                                316                   305
       Loss on disposal of assets                                                                 41
       Provision for inventory reserves                                                          105                   518
       Issuance of common stock                                                                   42
       Changes in operating assets and liabilities:
         (Increase) in accounts receivable                                                    (1,930)                 (740)
         Decrease in inventories                                                                 122                   396
         Decrease in prepaid expenses and other current assets                                    25                    93
         (Decrease) in accounts payable and accrued liabilities                                 (117)               (2,669)
         (Decrease) increase in payroll related liabilities                                     (145)                  364
         (Decrease) Increase in taxes (other than payroll and income)                           (429)                  513
         (Decrease) in customers' deposits                                                        (4)               (4,328)
         Increase in deferred revenue                                                          1,998                 1,929
                                                                                     -----------------     ----------------

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                           (1,450)                1,072

   Purchase of property and equipment                                                           (114)                 (872)
   Capitalization of software development costs                                                 (416)                 (370)
                                                                                     -----------------     ----------------

NET CASH USED IN INVESTING ACTIVITIES                                                           (530)               (1,242)

   Proceeds from exercise of stock options                                                                              22
                                                                                     -----------------     ----------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                                                          0                    22
                                                                                     -----------------     ----------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                                     (1,980)                 (148)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                               3,448                 4,854

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                           $         1,468       $         4,706
                                                                                     =================     ================

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

                                     Page 5



                          NOTES TO FINANCIAL STATEMENTS


The accompanying unaudited financial statements of Cellular Technical Services
Company, Inc. (the "Company"), including the December 31, 1997 balance sheet
which has been derived from audited financial statements, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.


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

                                                               March 31, 1998     December 31, 1997
                                                              ------------------  ------------------
<S>                                                           <C>                 <C>             
          Raw materials and components                        $          2,457    $          2,571
          Work in process and finished components                        5,947               5,954
                                                              ------------------  ------------------
                                                                         8,404               8,525
          Less inventory reserves                                       (2,203)             (2,097)
                                                              ------------------  ------------------

                                                              $          6,201    $          6,428
                                                              ==================  ==================


The calculation of basic and diluted earnings per share is as follows (in 000's,
except per share amounts):


                                                                                  Three Months Ended March 31,
                                                                                   1998                  1997
                                                                              ----------------     ------------------
<S>                                                                           <C>                  <C>         
Net (loss) income                                                             $     (1,789)        $      4,414
                                                                              ================     ==================

Weighted average number of shares for basic earnings per share                      22,804                22,639
Effect of dilutive securities: Employee stock options                                                      1,072
                                                                              ----------------     ------------------

Weighted average number of shares for diluted earnings per share                    22,804                23,711
                                                                              ================     ==================

(Loss) net income per share - Basic                                           $       (.08)        $         .19
                                                                              ================     ==================

(Loss) net income per share - Diluted                                         $       (.08)        $         .19
                                                                              ================     ==================

                                     Page 6



                      NOTES TO FINANCIAL STATEMENTS (con't)


The following legal matters are outstanding as of March 31, 1998:

               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 common 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 


The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
governing the reporting and display of comprehensive income and its components,
and Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131"), requiring
that all public businesses report financial and descriptive information about
their reportable operating segments. Both statements are applicable to reporting
periods beginning after December 15, 1997. The adoption of SFAS Nos. 130 and 131
is not applicable to the Company at this time, nor to the financial statements
or notes to the financial statements.

                                     Page 7


tem 2.           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 the discussion and analysis within the Company's 
1997 Form 10-K and other filings with the Securities and Exchange Commission.


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. From time-to-time, the 
Company participates in trials of its products with the goal of gaining 
contracts with new customers. In this regard, the Company has recently 
completed one trial in which it passed all the required tests, and is 
currently involved in a second trial which is still in progress in the Asia 
Pacific Region.  Whether either one or both of these trials will result in 
significant, or any, new business is unknown at this time.

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 systems 
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 

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 

                                     Page 8


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 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 Company's business. In addition, the 
Company has incurred, and anticipates it will continue to incur, increased 
legal fees in connection with pending litigation.

Market Trends

The Company's 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, will 
affect 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, also 
will affect demand for the Company's Blackbird Products.  

In addition, a majority of cellular carriers in the largest domestic markets 
currently are using user/device authentication products to an extent, and the 
Company believes that the combined deterrent of RF Fingerprinting, A-Key 
authentication, and other cloning fraud prevention technologies has 
significantly reduced cloning fraud.  As a result, the Company believes that 
there is a general decline in demand for its RF Fingerprinting Blackbird 
Products as well as the user/device authentication products of other vendors 
in the United States, and that this trend could also occur in international 
markets over time.

In light of the above trends, 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 or add products and 
services to keep pace with changes in the wireless communications industry.  
To this end, the Company expects to further its efforts to:  (i) increase 
focus for sales of Blackbird Products in international markets, (ii) enhance 
its existing products and develop new products, including other application 
products utilizing the Blackbird platform, and (iii) pursue business 
opportunities that complement the Company's existing business, including 
strategic alliances with, and acquisitions of, complementary technologies and 
businesses.  See also "--Recent Developments" below.  There can be no 
assurance that the Company will be able to successfully achieve further 
domestic and international market penetration, enhance existing products or 
develop new products, acquire complementary technologies and businesses, or 
timely introduce and gain acceptance of such enhancements, new products, or 
complementary technologies in the marketplace. 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.

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 achieve more 
balance between expenses and revenues, and directing additional development 
efforts and resources toward new products that can generate new sources of 
revenue. As a result, the Company's workforce has been reduced by 
approximately 40 percent from December 31, 1997 levels. In addition, in late 
1997 and early 1998, the Company completed the consolidation of certain 
hardware assembly and integration operations of two former suppliers through 
the acquisition of selected assets, assumptions of leases, and hiring of 

US Wireless Letter of Intent

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, the stockholders of the Company and US Wireless will 
each own approximately 50 percent of the shares of the resulting company, and 
the majority of the board of directors of the resulting company will be 

                                    Page 9


US Wireless designees. The letter of intent calls for the companies to seek 
no less than $15 million in new financing. This proposed transaction will 
require approval by the boards of directors and stockholders of both 
companies. The companies have commenced a due diligence and final agreement 
negotiation process. 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 or exceed 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 who dial into 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.

Three months ended March 31, 1998 compared to three months ended March 31, 1997

Total revenues decreased 80% to $3.4 million in 1998 from $17.4 million in 1997
and resulted in the Company incurring a net loss of $1.8 million, or $0.08 per
share in 1998, compared to net income of $4.4 million, or $0.19 per share in

The Company attributes the lower revenue to: (i) a reduction in domestic 
market opportunities for the Company's (and its competitor's) radio frequency 
fingerprinting cloning fraud prevention technology, due to the effectiveness 
of these and other authentication-based products (primarily digital 
technology) in combating cloning fraud; (ii) slower than anticipated roll-out 
and lower penetration of Blackbird Platform systems to existing customers; 
(iii) the continued uneven sales cycle of, and lengthy trial periods required 
for, potential new domestic and international customers; and (iv) the 
lingering impact of the delay in the release and acceptance of a Version 2 
Release of its Blackbird Platform/PreTect application software during the 
second quarter of 1997. During 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. During the first quarter 
of 1998, the Company installed Version 3.0 Release of its Blackbird 
Platform/PreTect Application software and continued to receive acceptances 
for systems shipped in previous quarters as well as receive reorders for two 
of its existing markets and an order for a new market with an existing 
customer. However, the Company has not been able to generate a level of new 
orders in the first quarter of 1998 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 decreased 90% to $1.7 million in 1998 from $16.8 million in
1997, and represent revenues from customers for the Company's Blackbird
Products. System revenues from Hotwatch Products were zero in 1998, a decline of
$.3 million from 1997. The Company expects minimal Hotwatch revenue in 1998.

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 210% to $1.7 million in 1998 from $.5 million in 1997. Approximately
93% and 76%, respectively of the 1998 and 1997 total revenues, were 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 will increase
during 1998 as a result of the anticipated acceptances and continued deployment
of the Company's Blackbird Products.

                                    Page 10


Costs of systems and services, the majority of which relate to the Company's
Blackbird Products, decreased 70% to $2.5 million in 1998 from $8.4 million in
1997. 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 73% and 48%
for the 1998 and 1997 periods, respectively. The increased percentage cost for
1998 relative to 1997 reflects (i) the 1997 higher revenue which in turn
resulted in a greater leveraging of fixed overhead costs relating to
manufacturing, installation and system integration and (ii) an increase in 1998
of 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. 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. Conversely, the Company benefited from increased
service revenues that leveraged fixed customer support operating expenses. The
Company believes that increased sales volumes and/or an increase in the number
of acceptances of previously shipped systems during the first quarter of 1998
would have provided higher margins by achieving even greater leverage of its
fixed overhead costs in the manufacturing, installation and customer support

Sales and marketing expenses decreased 72% to $.4 million in 1998, from $1.4
million in 1997 concurrent with a 80% decline in revenues, as noted above. Sales
and marketing expenses, as a percent of revenues, increased to 11% in 1998 from
8% in 1997 and reflects certain fixed expenses. The dollar decrease in sales and
marketing expenses resulted from the (i) lower personnel and related expenses in
connection with the Company's 1998 Strategic Plan as discussed above, (ii)
reduced number of customer and industry events in which the Company
participated, and (iii) lower incentive compensation which varies with revenue.

General and administrative expenses decreased 5% to $.8 million in 1998 from $.9
million in 1997 and primarily reflect reduced compensation related expenses.

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 decreased 36% to $1.5 million in 1998 from $2.3 million in 
1997. The decrease in expenditures in 1998 was primarily attributable to 
reduced staffing and prototype activities. Such expenditures were incurred in 
1997 in association with the expansion of the Company's business. Software 
development costs of $.4 million were capitalized in 1998, consistent with 
the $.4 million that were capitalized during 1997, and relate to the 
development and enhancement of the Blackbird Products.

Interest income decreased 50% to $0.02 million in 1998 from $0.05 million in
1997. The decrease was attributable to lower average cash balances invested
during 1998 as compared to 1997.

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 

                                    Page 11


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 March 31, 1998, the Company's cash
balance was $1.5 million as compared to $3.4 million on December 31, 1997. The
Company's working capital decreased to $4.9 million at March 31, 1998 from $6.5
million at December 31, 1997.

Cash used in operating activities amounted to $1.5 million in 1998, as compared
to cash provided by operating activities of $1.1 million in 1997. The major
factors contributing to the Company's reduced cash flow from operating
activities in 1998 was (i) primarily the $1.8 million loss that was recorded in
1998 as compared to the 1997 $4.4 million net income; and (ii) the net changes
in the balances of the major working capital components affecting cash flow from
operating activities that included:

(a)  accounts receivable, which increased primarily as a result of advance
     annual maintenance billings to Blackbird product customers which were $2.2
     million at March 31, 1998 and $.7 million at December 31, 1997,
(b)  inventories, which decreased slightly due to systems sales and the addition
     of $.1 million to inventory reserves. The latter represented an addition to
     the $1.8 million recorded in 1997 as a provision for excess and obsolete
     inventory, primarily resulting from delayed sales and for technology
     changes in the Company's cloning fraud interdiction methods;
(c)  taxes (other than payroll and income), which decreased to reflect payments
     made on certain liabilities accrued throughout 1997 that were payable on an
     annual basis;
(d)  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.

Cash utilized by investing activities totaled $.5 million and $1.2 million in
1998 and 1997, 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 maintaining 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
balance expenses and revenues of the Company. At March 31, 1998, 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.

Cash provided by financing activities totaled $0.02 million during 1997 and
originated from the exercise of stock options. 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. However, Company's current financial condition
may impair its ability to borrow under the line. The line of credit, if
available, would be used to provide additional working capital and fund the
Company's operations.

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, $.6 million and ($1.5) million in the first through fourth
quarters of 1997, and first quarter of 1998, respectively, while the net income
(loss) for each of the same quarters was $4.4 million, ($1.0) million, ($4.7)
million, ($3.7) million, and ($1.8) million, respectively. The uneven cash flow
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 

                                    Page 12


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 may require additional financing and/or further expense reductions
during the next twelve months.

                                    Page 13


                          PART II. OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K

a)    Exhibits

         27       Financial Data Schedule - filed only with EDGAR submission

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

b)       Reports on Form 8-K

         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 8-K, dated 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.


Pursuant to the requirements 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.


                               By: /s/Michael E. McConnell
                                   Michael E. McConnell
                                   Vice President and Chief Financial Officer
                                   May 15, 1998

                                    Page 14

<TABLE> <S> <C>

<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               MAR-31-1998
<CASH>                                           1,468
<SECURITIES>                                         0
<RECEIVABLES>                                    5,307
<ALLOWANCES>                                       187
<INVENTORY>                                      6,201
<CURRENT-ASSETS>                                13,064
<PP&E>                                           8,050
<DEPRECIATION>                                   4,328
<TOTAL-ASSETS>                                  20,277
<CURRENT-LIABILITIES>                            8,134
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            23
<OTHER-SE>                                      12,120
<TOTAL-LIABILITY-AND-EQUITY>                    20,277
<SALES>                                          1,742
<TOTAL-REVENUES>                                 3,422
<CGS>                                            2,495
<TOTAL-COSTS>                                    5,235
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                (1,789)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (1,789)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (1,789)
<EPS-PRIMARY>                                   (0.08)
<EPS-DILUTED>                                   (0.08)