10-K

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)

[X]  Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
     Act of 1934

     For the fiscal year ended...............................DECEMBER 31, 1999

                                       OR

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the transition period from....................to......................

                         Commission File Number 0-19437

                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

             (Exact Name of Registrant as Specified in Its Charter)

                                                     
            DELAWARE                                    11-2962080
(State or Other Jurisdiction of            (I.R.S. Employer Identification No.)





                  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 10, 2000, there were 2,281,969 shares of Common Stock, $.001 par
value outstanding. As of March 10, 2000, the aggregate market value of the
Registrant's Common Stock, $.001 par value, held by non-affiliates was
approximately $31.1 million. The aggregate market value of the Company's stock
was calculated using the average of the high ($15.00) and low ($12.875) sale
price for its Common Stock on March 10, 2000 as reported on The Nasdaq Stock
Market (National Market System).

Documents incorporated by reference in Part III: The Company's definitive proxy
statement to be filed in connection with the 2000 Annual Meeting of
Stockholders.










                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                         TABLE OF CONTENTS FOR FORM 10-K
                                                                                                
PART I............................................................................................. 3

ITEM 1.   BUSINESS................................................................................. 3
ITEM 2.   PROPERTIES...............................................................................19
ITEM 3.   LEGAL PROCEEDINGS........................................................................19
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................19

PART II............................................................................................20

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................20
ITEM 6.   SELECTED FINANCIAL DATA..................................................................21
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....22
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............................29
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................29
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....29

PART III...........................................................................................30

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................30
ITEM 11.   EXECUTIVE COMPENSATION..................................................................31
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................31
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................31


PART IV............................................................................................32

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................32







                                       2








                                     PART I

ITEM 1. BUSINESS

Unless the context otherwise requires, all references to the "Company" in this
Annual Report on Form 10-K include Cellular Technical Services Company, Inc. and
any entity over which it has or shares operational control.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
reflect the Company's views with respect to future events and financial
performance. The Company uses words and phrases such as "anticipate," "expect,"
"intend," "the Company believes," "future," and similar words and phrases to
identify forward-looking statements. Reliance should not be placed on these
forward-looking statements. These forward-looking statements are based on
current expectations and are subject to risks, uncertainties and assumptions
that could cause, or contribute to causing, actual results to differ materially
from those expressed or implied in the applicable statements. Readers should pay
particular attention to the descriptions of risks and uncertainties described in
this report and in the Company's other filings with the Securities and Exchange
Commission. All forward-looking statements included in this report are based on
information available to the Company on the date of this report. The Company
assumes no obligation or duty to update any such forward-looking statements.

GENERAL

The Company develops, markets, distributes and supports a diversified mix of
products and services for the telecommunications industry. Over the past 11
years, the Company has developed expertise in real-time wireless call processing
and has created technologically advanced solutions for this industry, focusing
primarily in the area of wireless communications fraud management. During 1999,
the Company implemented a short and long-range strategic plan to diversify its
product mix, both within and outside of the telecommunications industry. This
diversification strategy is at the foundation of the Company's growth plan for
the future.

In the fourth quarter of 1999, as part of its diversification strategy, the
Company launched Isis Tele-Communications, Inc., a majority-owned subsidiary,
which designs, markets, and distributes both regionally and nationally branded
prepaid long-distance phone cards. The Company expects that this new product
line will provide growth potential and product line expansion for the year 2000
and beyond. Also in the fourth quarter of 1999, the Company made a strategic
investment in KSI, Inc., a provider of development-stage wireless geo-location
technology. This technology is expected to provide a platform for hosting a
variety of location-sensitive consumer applications for the wireless
communications market. The Company expects to leverage its entrance into the
geo-location marketplace by developing, marketing, distributing, and supporting
a suite of commercial geo-location applications as this technology evolves and
is commercially deployed by wireless carriers.

Presently, the Company's major customers are wireless telephone carriers. These
carriers operate in a dynamic, rapidly-changing environment and are subject to
intense competition, cost sensitivity and other market forces. These and other
related factors have influence on the Company's direction for the future. The
Company believes that these factors will provide opportunities for new products
and services in a wide variety of markets.

PRODUCTS

The Blackbird Platform Products

The Company's Blackbird'r' Platform product line includes a suite of radio
frequency ("RF") based platform solutions focusing on wireless fraud prevention.
Presently, it involves various forms of "pre-call" verification to ensure that
the use of an analog wireless telephone is legitimate before the device is
allowed to connect to a




                                       3







carrier's analog wireless communications network. In this area, the Company is a
leading provider of RF-based solutions for the prevention of "cloning fraud."
This term is used to describe the illegal activity of using a scanning device to
steal the electronic serial number and mobile identification number of a
legitimate wireless telephone while in use, then reprogramming the stolen
numbers into other phones. These reprogrammed phones, or "clone phones," are
then used to make illegal calls on a wireless communications network, without
payment for the wireless services rendered. The Company's suite of RF-based
platform solutions include the Blackbird'r' Platform, PreTect'TM' cloning-fraud
prevention application, No Clone Zone'sm' roaming-fraud prevention service, and
related application products and services (collectively, the "Blackbird Platform
Products"). The Company's Blackbird Platform Products are currently deployed in
approximately 2,000 cell sites in most major metropolitan areas throughout the
United States. The Company's customers have reported up to a 98% reduction in
cloning fraud activity in areas served by the Blackbird Platform Products since
its initial installation, and continue to rely on its cloning prevention
capabilities for their existing analog wireless communications networks.

The Blackbird Platform. The Blackbird Platform provides real-time collection,
distribution, storage and reporting of pre-call data retrieved from an analog
wireless communications network. It is designed to deliver centralized control
and efficiencies of operation based on industry standards, open systems and
real-time distributed messaging. The Blackbird Platform Products incorporate
software and hardware designs that use the UNIX operating system with TCP/IP
message transport networking, supporting both client-server and peer-to-peer
communication architectures. This operating system environment is widely used
and accepted in the telecommunications industry.

The PreTect Application. The PreTect application employs patented RF
"fingerprinting" technology to proactively prevent cloning fraud in real-time.
It accomplishes this by building RF fingerprints of legitimate subscribers'
wireless phones using the pre-call data collected by the Blackbird Platform. An
RF fingerprint is the wireless phone's unique electromagnetic signal waveform
characteristics contained in each phone, with no two RF fingerprints being
exactly the same. The PreTect application 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. The PreTect application provides
proactive pre-call fraud prevention rather than post-call fraud detection.

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 fraud prevention application. The service
leverages the underlying power of existing Blackbird Platform deployments, and
the Blackbird Platform's real-time distributed messaging system, to quickly and
seamlessly link participating carrier systems nationwide, into a private,
high-speed cloning fraud prevention network.

Blackbird Platform Monitoring Option. The Company has developed system
monitoring technology for the Blackbird Platform Products which provides
real-time capabilities for monitoring overall system health of any network-based
distributed applications. The Company's Blackbird Platform Monitoring product
provides sophisticated real-time alarming of system performance exceptions which
can be directed to a centralized call center. The product is designed to support
industry standards with the flexibility of open architecture and platform
portability. Additionally, the Company provides a Blackbird Platform Monitoring
service, available to all Blackbird Platform customers, which is hosted from the
Company's Seattle headquarters call center. This provides a flexible alternative
for customers who have limited expertise to perform this critical component of
fraud system management to keep the Blackbird Platform Products at optimal
performance 24 hours per day, 7 days per week.

Blackbird Backup & Restore Option. The Company has developed the Blackbird
Backup & Restore product that optimizes and validates the storage of critical
data in the event of system failure so complete reconstruction can be performed
easily. This product provides a completely automated operation with customizable
scheduling flexibility, requiring no manual intervention by customer personnel.



                                       4







Blackbird Platform Professional Services. The Company provides system
performance analysis, system project planning, configuration, implementation and
other professional services in connection with its Blackbird Platform Products.
Customers are charged hourly rates for such services or may contract with the
Company for fixed fees.

Prepaid Wireline Long-Distance Phone Cards

To stimulate revenue growth for the Company, and in alignment with its product
diversification strategy, the Company expanded into the prepaid long-distance
service arena in the fourth quarter of 1999. Prepaid long-distance service
represents one of the fastest growing sectors of the telecommunications
industry, with growth in this market accelerating as a result of the
Telecommunications Act of 1996. According to the International Telecard
Association, prepaid long-distance calling card revenues in the United States
have grown from an estimated $12.0 million in 1992 to an estimated $2.1 billion
in 1997, and they are projected to be at least $4.0 billion in 2001. Growth in
this market is has been driven by a large population of consumers such as first
generation immigrants, students, temporary residents, and lower-income
individuals, who in many instances do not have local phone service due to credit
or identification problems. The Company expects that growth in this market will
both continue in these customer groups and expand to other customer groups as
prepaid phone cards become more widely adopted.

Through its new majority-owned subsidiary, Isis Tele-Communications, Inc., the
Company markets and distributes branded prepaid long-distance phone cards
primarily under the Value Maxx'TM' and Straight Talk'TM' brands in denominations
generally ranging from $5 to $20 per card. Isis specializes in targeted
marketing programs with aggressive domestic and international long-distance
rates. The Company expects that Isis will distribute cards through regional and
national multi-level distribution channels, using direct sales, third-party
distributors, vending machines, and telemarketing. End users of these cards can
use them by dialing the local or toll-free access number identified on the card,
keying in a personal identification number (a "PIN") that is assigned to the
card, and then dialing the telephone number that the end user seeks to reach.
The third-party long-distance service provider then completes the call, debits
the balance on the card following the call, and provides customer assistance as
necessary. The Company anticipates that its ability to provide aggressive
per-minute rates, broad multi-level distribution coverage, and quality customer
service will be the key ingredients for fueling revenue growth and expansion of
this product line. Isis has recently opened offices in Los Angeles, Boston, New
York, New Jersey, and Chicago.

Future Opportunities For Growth In Emerging Technologies

The Federal Communications Commission ("FCC") has required all wireless carriers
to deploy wireless geo-location technology by October 2001 to provide comparable
911 services to wireless telecommunications subscribers. Wireless geo-location
technology provides and identifies the specific geographic location (in latitude
and longitude measurements) of a wireless telephone, and can eventually be
applied to other wireless communications devices. Industry analysts have
estimated the market for commercial geo-location applications to be well over
$8.0 billion. During the fourth quarter of 1999, and as part of the Company's
long-term diversification strategy, the Company made a strategic investment in
KSI, Inc., a provider of development-stage wireless geo-location technology. The
Company anticipates developing, marketing, distributing, and supporting a suite
of commercial geo-location applications as this technology evolves and is
deployed by all wireless carriers to comply with the FCC's requirements.

The Hotwatch Platform

The Company's Hotwatch Platform provides technological solutions primarily in
the "service metering" area, which involves various forms of "post-call"
verification to ensure that a prepaid wireless subscriber has proper account
status to make additional calls. The Company's real-time rating technology is
capable of supporting multiple long-distance rating and multiple airtime price
plans. As anticipated by the Company, the Company's remaining customers of the
Hotwatch Platform phased out their use of the Hotwatch Platform by the fourth



                                       5








quarter of 1999. However, the Company is reviewing market opportunities to use
the patented Hotwatch real-time technology in new value-added applications that
could expand its product mix in the prepaid services arena.

THE TELECOMMUNICATIONS INDUSTRY

The Telecommunications Act of 1996 was implemented to stimulate competition in
all arenas of the telecommunications industry. The results have provided
consumers with a broader spectrum of cost-effective service choices for their
telecommunication needs. Correspondingly, the wireless industry has seen a
dramatic expansion. The Cellular Telecommunications Industry Association has
estimated that the number of wireless telephone subscribers in the United States
increased from approximately 340,000 subscribers in 1985 to approximately 75
million subscribers in 1999. Industry analysts believe that the number of
wireless telephone subscribers may grow to in excess of 120 million in the
United States by the end of 2001. International market analysts have forecast
that total worldwide wireless telephone service revenue will grow from $195
billion in 1998 to $280 billion by the end of 2000 and $361 billion by the end
of 2002.

Key Issues Resulting from Increased Competition in the Telecommunications
Industry

Lower price per minute has driven minutes of usage up. The increased presence of
multiple telecommunications carriers in any given market has spawned a number of
new single-rate pricing plans, effectively driving the price per minute of
wireless telephone usage substantially lower. According to the Yankee Group,
wireless rates have dropped an average of 40% from early 1995. As a result,
wireless telephone carriers must supplement revenues by implementing new
subscriber service offerings to not only grow, but also preserve their existing
subscriber base. New add-on consumer services (such as text messaging, stock
quote delivery and transportation alerts) is expected to continue to drive the
minutes of use up, which should position the wireless communication device as
the only communication device an individual will need to own, covering both
communication and personal information management needs of the future.

Nearly one-third of all new subscribers leave each year. Customer "churn," which
is when a subscriber switches from one wireless carrier to another in a short
amount of time, has become a significant problem facing the wireless telephone
carriers today. Churn not only results is a loss of subscriber revenue, but also
makes it difficult for carriers to recover the significant costs associated with
acquiring new subscribers. Presently, churn is running in the range of 25% - 35%
per year for most carriers, according to industry sources. This level is
expected to remain high as competition to attract new subscribers continues.
Aggressive rate plans and bundled service packages, including free roaming and
free or low-cost long-distance rates have served to differentiate one wireless
carrier from another. However, the Company believes that the availability of
consumer applications and services by carriers that integrate personalized
information, the internet, and email messaging may prove to be the most
effective tool for managing subscriber churn.

Prepaid market has expanded to capture new consumers. Prepaid service represents
one of the fastest growing sectors of the telecommunications industry and is
providing a new point of differentiation in local markets as telecommunication
carriers expand their service offerings. Once driven primarily by a large
population of first generation immigrants, students and lower-income
individuals, a variety of prepaid services are rapidly expanding toward the
mainstream in the United States. This expansion is primarily due to the
widespread availability of competitive long-distance rates, the convenience of a
set-limit debit card for long-distance calling, and an easy solution for travel
and emergency situations.

Competition has raised consumer expectations on service offerings. The intense
competition in the telecommunications market is placing new pressures on
wireless telephone carriers to differentiate their service offerings. As the
wireless communications device becomes capable of receiving a wider variety of
communications, i.e., voice messaging, paging, or emails, the Company believes
that wireless subscribers will require and expect a robust suite of consumer
services that not only replicate what landline service providers offer (such as
emergency 911 assistance), but also provide new ways to access personalized
information through their wireless phone. Examples include roadside assistance,
asset tracking, personalized information or



                                       6








"concierge" service ("E411" and traffic advisories), and others. The Company
believes the results of competition in the telecommunications market, including
lower price per minute, higher minutes of usage, and demand for new sources of
carrier revenue, will continue to provide diversified market opportunities for
the Company's existing products and services, as well as new offerings in the
future.

THE COMPANY'S STRATEGY

The Company believes the key issues affecting the telecommunications industry
described above support and validate the Company's strategic direction toward
diversification.

1. Diversify the Company's product mix within the growing telecommunications
market.

The Company believes that the present dynamics of the telecommunications
industry will result in a proliferation of new service applications focused on
mobile information management. These services may include such things, for
example, as prepaid calling services, location-sensitive advertising, stock
quote notification and weather advisories. The Company believes that many of the
new applications will be enhanced by the addition of geo-location technology. As
the Company further expands on its diversification plan, it believes it will be
well positioned for offering a variety of new consumer-convenience products and
services. The Company expects that these target offerings may help the carriers
reduce churn and increase revenues, while enhancing the Company's market
position beyond its current products and services, enlarging its customer base
across multiple sectors, and providing for both near-term and long-term revenue
growth.

2. Leverage existing intellectual property in new ways.

The Company believes it can leverage its core expertise and patented technology
in the real-time information management area to develop new products and
services. The Company has developed unique expertise in the area of distributed
real-time computing over high-speed, interlinked networks on a nationwide scale.
This capability allows the Company to acquire data and perform information
processing in a highly distributed environment, such as encountered in wireless
infrastructures. The Company believes this expertise will be particularly useful
in the development of new commercial geo-location applications. The Company has
also 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. This happens within minutes after the end
of the call, rather than in the typical batch process for monthly customer
billing cycles. The Company's focus on diversification supports the continued
use of its intellectual property, providing cost-savings and accelerating
product development efforts for new telecommunications products and services.

3. Expand product offerings outside of the telecommunications market.

The Company believes it is well positioned to apply its core competencies and
technologies toward product opportunities outside of the telecommunications
industry, which would reduce its dependence on the telecommunications market.
The Company expects to continue pursuing strategic opportunities in this area in
the future.

4. Deliver exceptional customer service.

The Company believes the ability to provide knowledgeable, high quality customer
service is a critical success factor for servicing the needs of wireless
telephone carriers as they implement new commercial applications. The Company
currently provides real-time system monitoring 24 hours per day, 7 days per week
for its Blackbird Platform Products through its call center located at the
Seattle headquarters. Additionally, the Company provides regional technical
support personnel in major markets for on-site maintenance service of its
systems, ensuring optimal uptime performance. The Seattle call center employs
sophisticated commercial call tracking and system alarming software, integrated
with the Company's own proprietary Blackbird technology, and is staffed with
technicians who are required to meet continuous training objectives. Through its
knowledge of unique customer



                                       7









technical requirements, the Company believes it can expand these same technical
support service offerings to support other new commercial applications it
develops for the telecommunications marketplace, as well as products and
services offered in new markets.

PRODUCT DEVELOPMENT

For the years ended December 31, 1999, 1998 and 1997, the Company incurred gross
research and development expenditures of $1.6 million, $5.1 million and $9.8
million, respectively, prior to capitalization of software development costs
during each period in the amounts of zero, $0.6 million and $1.8 million,
respectively. The Company ceased capitalization of software development costs
during 1998. The Company's current research and development efforts are focused
on enhancing and improving existing products and services, and developing new
products and services, including new software applications and technology
interfaces. These enhancements and/or new products and services may, when and if
developed, enable the Company to expand on its existing products and services to
provide a broad variety of functions not presently offered. Costs included in
the Company's gross research and development expenditures include costs for
research, design, development, tests, and preparation of training and user
documentation. The Company anticipates that it will continue to commit
significant resources to product development in the future to address market
opportunities for new and enhanced products and services. See also "Business
Risks -- Dependence on New Product Development and Product Enhancements" below.

SALES, MARKETING AND DISTRIBUTION

The Company primarily markets Blackbird Platform Products directly to wireless
telephone carriers operating analog networks in the most heavily populated
United States markets. The Company sells and licenses Blackbird Platform
Products pursuant to agreements that typically provide for hardware purchases,
software licenses, customer support and the provision of related services.

The Company designs and markets its own prepaid phone cards and also resells
prepaid phone cards produced by others. The Company expects to market prepaid
phone card products primarily through regional and national multi-level
distribution channels, using direct sales, third-party distributors, vending
machines, and telemarketing. The Company anticipates that these marketing
efforts will be pursuant to distribution agreements and other forms of sales and
marketing arrangements.

The Company also participates at targeted trade shows, conferences and industry
events to augment its marketing efforts. The Company further consults with its
current and prospective customers to gather product feedback to assist the
Company in determining product direction. Achieving greater market acceptance
and penetration of the Company's products and services will require, in addition
to enhancing and improving its products and services, increased marketing
efforts and the expenditure of funds to increase customer awareness of the
Company and to inform potential customers of the benefits of the Company's
products and service offerings. See also "Business Risks -- Fluctuations in
Quarterly Performance," "Business Risks -- "Need for Additional Financing" and
"Business Risks Dependence on Distributors" below.

Revenues from Blackbird Platform Products represented 96% of the Company's total
revenues in 1999 and 1998, compared to 94% of total revenues in 1997. The
Company anticipates that revenues from Blackbird Platform Products will continue
to represent a meaningful portion of the Company's total revenue in 2000, but
that the Company's dependence on Blackbird Platform Products should decrease
during 2000 as revenues from its prepaid phone card products are expected to
increase during the year. Revenues from Hotwatch Platform Products were not
material in 1999, 1998 or 1997. See also "Business Risks -- Dependence on
Limited Product Base; Uncertainty of Widespread Market Demand" below.



                                       8








CUSTOMER SUPPORT AND SERVICES

The Company provides hardware maintenance, software maintenance, software
subscription services (for software upgrades and new releases), the No Clone
Zone service and Blackbird Platform Monitoring service to its customers of
Blackbird Platform Products. Customer service personnel diagnose and resolve
problems, dispatch third-party vendors, provide provisioning and integration
services, forward enhancement requests to the Company's product management
staff, and coordinate with customers with respect to software upgrades and new
releases. From its centralized call center in Seattle, Washington, the Company
monitors and maintains a national high-speed network for optimizing uptime and
connectivity to the local area networks of its customers. The Company also
provides on-site maintenance services for selected customers. Software
troubleshooting, maintenance and upgrades are performed either through the
Company's private data network or through modem over a standard telephone line.
An on-line customer management system tracks problems and resolutions. Customer
service is available 24 hours per day, seven days per week. Engineering research
and development personnel assist in software support activities to the extent
required.

MAJOR CUSTOMERS

The customers of the Company's Blackbird Platform Products are wireless
telephone carriers. The Company has entered into agreements with AirTouch
Cellular and certain of its affiliates (collectively, "AirTouch"), Bell Atlantic
Mobile ("BAM"), Ameritech Mobile Communications, Inc. ("Ameritech"), GTE
Wireless Service Corp. ("GTE Wireless") and SNET Mobility ("SNET") to deploy and
support Blackbird Platform Products. As a result, the Blackbird Platform
Products are currently operational in over forty of the largest markets
throughout the United States, including New York, Boston, Hartford/New Haven,
Philadelphia, Pittsburgh, Baltimore, Washington D.C., Chicago, Detroit,
Milwaukee, St. Louis, Atlanta, Los Angeles, San Francisco, San Diego and
Sacramento. Revenues from the Company's agreements with AirTouch, BAM, Ameritech
and GTE Wireless each accounted for greater than 10% of the Company's total
revenues in 1999, and collectively accounted for greater than 93% of the
Company's total revenues in 1999. See "Business Risks -Limited Customer Base;
Reliance on Significant Customers" below.

COMPETITION

The market for the Company's products and services is highly competitive and
subject to rapid technological change, regulatory developments and emerging
industry standards. A number of companies currently offer one or more products
or services similar to the products and services offered by the Company. In
addition, many carriers and vendors of telecommunications products are or may be
capable of developing and offering products and services that are competitive
with the Company's current or future offerings. Trends in the telecommunications
industry, including greater consolidation and technological developments that
make it easier or more cost-effective for carriers to develop or provide certain
services themselves, could affect demand for any new products or services
offered by the Company, and could make it more difficult for the Company to
offer cost-effective alternatives to a carrier's own in-house capabilities.

The Company is aware of various competitors which currently or are expected to
compete directly with the Company's Blackbird Platform Products in the cloning
fraud prevention arena. One competitor, Corsair Communications, Inc., competes
directly with the Company's RF-based cloning fraud prevention products and
services. The Company also competes with a number of alternative technologies in
this arena, including roamer verification reinstatement systems, profiler
systems, personal identification numbers and A-Key authentication systems.
Companies marketing such technologies include, among others, Nortel Networks,
GTE Telecommunications Services, Inc., Paragon, Inc., Lightbridge, Inc., and
Systems/Link Corporation. The A-Key authentication technology is provided by the
combination of telephone switch manufacturers (e.g., Lucent Technologies, Inc.,
Ericsson Radio Systems AB, Motorola, Inc. and Nortel Networks), wireless
telephone manufacturers (e.g., Nokia, Motorola, Inc. and Ericsson Radio Systems
AB), authentication center providers (e.g., Synacom Technology, Inc.) and/or
IS-41C software component and service providers (e.g., Intellinet Technologies
and Trillium Digital Systems, Inc.).



                                       9








The Company believes that A-Key authentication, in particular, poses significant
future competition for the Blackbird Platform Products in the cloning fraud
prevention arena. A-Key authentication is a form of cryptographic authentication
that uses a complex algorithm derived from a mathematical cryptographic process
containing a secret key (or number) shared only by the phone and the carrier's
network. A-Key authentication is expected to be the form of cryptographic
authentication most widely adopted by wireless telephone carriers in the United
States. Today, almost all new digital and analog phones for the U.S. market are
being manufactured with A-Key authentication capability. A-Key authentication is
now in extensive use by wireless telephone carriers operating digital networks
and, to a lesser extent, is now in use by certain wireless telephone carriers
operating analog networks. However, the Company believes that the use of A-Key
authentication is currently limited in analog networks due to the large number
of existing analog phones that were not manufactured with A-Key authentication
capability.

The Company also is aware of many competitors which currently or are expected to
compete directly with the Company's prepaid phone card products. In part, these
competitors include both the long-distance telecommunications service providers
as well as their service resellers, including service providers and resellers
for whom the Company resells prepaid long-distance telephone services through
its prepaid phone card products. Many of these competitors, including AT&T
Corp., MCI WORLDCOM, Inc. and Sprint Corporation, are substantially larger and
have longer operating histories, greater name recognition, larger customer
bases, and substantially greater financial, marketing, technical and other
resources than the Company.

The Company believes that the principal competitive factors in the markets in
which the Company competes include factors such as product effectiveness,
quality and ease of use, technical support, customer service, price, the
availability of real-time information and the financial stability of the vendor.
An additional competitive factor in the cloning fraud prevention arena includes
the compatibility with cloning fraud prevention products used by the carrier in
other geographic markets and by the carrier's roaming partners. The Company
believes that carriers purchasing RF fingerprinting fraud prevention products
tend to purchase these products from the same vendor that supplies these
products to their roaming partners. Thus, the Company believes it will be more
difficult to market its Blackbird Platform Products to a carrier if the
carrier's roaming partners are using RF fingerprinting fraud prevention products
supplied by a competitor. Additional competitive factors in the prepaid phone
card arena include factors such as efficiency and depth of distribution
channels, marketing capabilities and name recognition. See generally "Business
Risks -- Competition" below for a more detailed description of the risks and
uncertainties associated with competition involving the Company and its current
and future products and services.

MANUFACTURING AND 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,
maintenance services and 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, maintenance services and software from a limited number of suppliers.
The Company's current software products are specifically designed to adhere to
the UNIX operating system standard which can operate on standard computer
equipment sold by numerous manufacturers and vendors. The Company currently
purchases hardware and maintenance services directly or indirectly from
Hewlett-Packard Company, its primary system hardware supplier. 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, as necessary, its proprietary Blackbird Cell Site
System hardware which operates in connection with the hardware components
described above. While certain parts and components of this system



                                       10








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. See also "Business Risks -- Risk of
Hardware Manufacturing Activities" below.

In connection with its prepaid phone card products, the Company has been and
will continue to be dependent on third-party long-distance telephone service
providers and their resellers for a package of accurate, reliable and
competitively-priced telecommunications services, access numbers, PIN codes and,
in some cases, prepaid phone cards produced by third parties. While these
components are generally available from multiple sources, the Company currently
acquires them from a relatively limited number of suppliers. See also "Business
Risks -- Dependence on Third-Party Vendors" below.

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 products that it believes to be proprietary and to
provide a potential competitive advantage for the Company. To date, the Company
owns 14 issued United States patents relating to its 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
Platform Products. The Company also attempts to protect its proprietary rights
through the use of nondisclosure agreements with its employees and consultants,
and license agreements with customers, which contain restrictions on disclosure,
use and transfer of proprietary information. The Company further employs various
physical security measures to protect its software source codes, technology and
other proprietary rights. See also "Business Risks -- Uncertainty Regarding
Proprietary Rights" below.

EMPLOYEES

As of March 10, 2000, the Company had 48 employees. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
that its relations with its employees are good. See also "Business Risks-
Dependence on Personnel" below.

BUSINESS RISKS

The Company operates in a dynamic and rapidly changing business environment that
involves substantial risk and uncertainty. The following discussion addresses
some of the risks and uncertainties that could cause, or contribute to causing,
actual results to differ materially from those expressed or implied in this
report or any other disclosures or statements, oral or written, made by or on
behalf of the Company. Readers should pay particular attention to the
descriptions of risks and uncertainties described below and in other sections of
this report and the Company's other filings with the Securities and Exchange
Commission.

Dependence on Limited Product Base; Uncertainty of Widespread Market Demand. The
Company's revenues and profits have been and can be expected to continue to be
derived from a limited number of products and services. See "Business -- Major
Customers" above. In part, the Company's future operating results will depend on
the continued demand for Blackbird Platform Products. Currently, a majority of
the carriers in the largest markets in the United States are using cloning fraud
prevention products. The Company believes that the demand for cloning fraud
prevention products in the United States has begun to decline and will continue
to decline in the future. If not offset by other sales opportunities, this trend
would have a material adverse effect on sales of Blackbird Platform Products.
The Company anticipates that its prepaid phone card products will account for a
growing percentage of the Company's revenue in 2000. As a result, the Company's
future operating results will



                                       11








depend on the demand for and market acceptance of prepaid phone card products.
These products have contributed to a modest amount of the Company's revenue
since the Company's launch of these products in the fourth quarter of 1999. The
market adoption of the Company's prepaid phone card products will need to
increase substantially in order to achieve the Company's revenue targets for
that product line. Although the Company believes that its product and services
present the basis for growth for the Company's business, there can be no
assurance that its products and services will achieve widespread market
penetration or that the Company will derive significant revenues or profits from
the sale of such products and services.

Dependence on Analog 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 Company's target industries, and its ability to adapt existing
products and services to keep pace with changes in the Company's target
industries. Presently, the Company's Blackbird Platform Products are used
exclusively in analog networks, although the Company believes that its Blackbird
Platform Products may be adaptable for use in digital networks in the future.
The Company believes that a majority of wireless telephone subscribers in the
United States use analog networks today, but that the industry is undertaking a
shift to digital networks due to certain advantages of digital technology,
including expanded capacity, greater privacy and enhanced security. In addition,
alternative cloning fraud prevention products are available in both digital and
analog networks, such as A-Key authentication. See "Business -- Competition"
above. The Company expects that A-Key authentication will be widely deployed in
digital networks over time. Accordingly, the Company does not believe that
wireless telephone carriers will purchase RF fingerprinting fraud prevention
solutions, such as the Blackbird Platform Products, for their digital networks
unless and until the encryption technology that forms the basis for A-Key
authentication is compromised. The shift from analog networks to digital
networks, the expanded use of alternative cloning fraud prevention technologies
such as A-Key authentication, and other technological developments in the
wireless communications industry, could each reduce or eliminate demand for the
Company's Blackbird Platform 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 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 services and enhancements to existing
products and services to meet the needs of the Company's target industries. The
Company is continually seeking to enhance its existing products and to develop
new products. 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.

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. If the Company's management is unable to do so effectively,
its business, financial condition and results of operations could be materially
adversely affected. The Company's ability to manage changing business conditions
depends, in part, on its ability to attract, train and retain a sufficient
number of qualified personnel to meet the ongoing needs of the Company. During
1998, the Company implemented a restructuring plan that included, among other
initiatives, reducing its workforce by approximately 75% from December 1997
staffing levels. The Company continued to experience a high level of turnover in
its workforce during 1999. Failure to properly manage the effects of such
activity may limit the Company's ability to attract, train and retain qualified
personnel and may increase the Company's recruiting and training costs. If the
Company is unable to recruit and retain a sufficient number of qualified



                                       12







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 levels 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 telecommunication
markets. Currently, the Company markets its Blackbird Platform Products only to
wireless communications carriers that operate analog networks. Historically, a
significant portion of the Company's revenues in any given period have been
attributable to a relatively small number of customers. This trend is likely to
continue for the foreseeable future. Sales to customers aggregating 10% or more,
either individually or combined as affiliates due to common ownership, were
concentrated as follows: four customers whose purchases represented 46%, 21%,
14% and 12% of 1999 sales, three customers whose purchases represented 41%, 20%
and 19% of 1998 sales, and four customers whose purchases represented 31%, 20%,
20% and 19% of 1997 sales. The aggregate sales to these customers represented
93%, 80% and 90% of the Company's total systems and service revenues in 1999,
1998 and 1997, 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 technological change, regulatory developments
and emerging industry standards. A number of companies currently offer one or
more products or services similar to the products and services offered by the
Company. In addition, many carriers and vendors of telecommunications products
are or may be capable of developing and offering products and services that are
competitive with the Company's current products and services or any new products
or services that the Company may offer in the future. See "Business --
Competition" above.

The Company believes that, among other competing technologies, A-Key
authentication poses significant future competition for the Blackbird Platform
Products in the cloning fraud prevention arena. See "Business -- Competition"
above. The Company believes the demand for its Blackbird Platform Products would
be materially adversely affected if wireless communications carriers implement
A-Key authentication applicable to analog phones as their sole or major cloning
fraud prevention solution in major markets, if wireless communications carriers
adopt a uniform digital standard that reduces the need for digital phones to
operate in analog mode while roaming, or if analog phone manufacturers change
product designs and/or manufacturing standards in such a way as to impact the
performance of the Blackbird Platform Products. See also "Business Risks --
Dependence on Analog Networks; Industry and Technological Changes" above.

The Company also is aware of many competitors which currently or are expected to
compete directly with the Company's prepaid phone card products. The market for
prepaid phone cards in the United States is increasingly competitive. In part,
the Company competes with the long-distance telecommunications service providers
as well as their service resellers, including service providers and resellers
for whom the Company resells prepaid long-distance telephone services through
its prepaid phone card products. Many of these competitors, including AT&T
Corp., MCI WORLDCOM, Inc., and Sprint Corporation, are substantially larger and
have longer operating histories, greater name recognition, larger customer
bases, and substantially greater financial, marketing, technical and other
resources than the Company.

In addition, trends in the telecommunications industry, including greater
consolidation and technological or other developments that make it simpler or
more cost-effective for telecommunications 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 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



                                       13








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 telecommunications 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.

To remain competitive, the Company will need to continue to invest in
engineering, 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.

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. See "Business -- Proprietary Rights" above.

Patents issued and patent applications filed relating to products used in the
Company's target industries are numerous, and the patent positions of companies
in these industries, including the Company, are generally uncertain and involve
complex legal and factual issues. Accordingly, 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 or that, when a patent does issue, that the scope
of protection of the patent will be sufficiently broad to protect the Company's
technology or provide a competitive advantage for the Company. There can be no
assurance that any issued patent will not be challenged, invalidated or
circumvented. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may 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. There can be no assurance that
the Company will succeed or will have the resources necessary to succeed in any
such litigation or regulatory proceedings.

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 the Company is aware of all
third-party proprietary rights that may materially affect the Company's ability
to make, use or sell its current or future products and services. United States
patent applications, for example, are confidential while pending at the United
States Patent and Trademark Office, and the laws of many foreign countries do
not protect proprietary rights to the same extent as the laws of the United
States. There can be no assurance that third parties will not assert
infringement claims with respect to the Company's current or future products or
services, 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 "Business
Risks -- Risk of Litigation" below. No assurance can be given that the Company
will have the resources necessary to successfully defend against any such
infringement claims or that any necessary licenses can be obtained in a timely
manner, upon commercially reasonable terms, or at all. Parties making such
infringement claims may be able to obtain injunctive or other equitable relief
that could effectively limit or prohibit the Company's ability to make, use or
sell its current or future products or services. The Company's failure to
successfully defend against any such claims or obtain any such license could
result in substantial cost and uncertainty to the Company and have a material
adverse effect on the Company's business, financial condition or results of
operations.


                                       14








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. In addition, although the Company has and expects
to continue to have internal nondisclosure agreements with its employees and
consultants and strategic partners, 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. The Company's failure to successfully defend against any such claims
or obtain any such license could result in substantial cost and uncertainty to
the Company and have a material adverse effect on the Company's business,
financial condition or results of operations.

Risk of Litigation. The Company is a party to certain legal proceedings as
described below:

In January 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. In January 1999,
the Court granted the Company's motion to transfer this lawsuit to the United
States District Court for the Western District of Washington. The complaint
asserts that the plaintiff is the exclusive licensee of all rights under the
`591 patent, alleges that the Company's wireless 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 this action can currently be
made, an unfavorable resolution of this lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.

From time to time, the Company is also a party to other legal proceedings in the
ordinary course of business and/or which management believes will be resolved
without a material adverse effect on the Company's business, financial condition
or results of operations.

Need for Additional Financing. The Company's needs for additional financing will
depend upon a number of factors, including, but not limited to, the commercial
success of the Company's existing products and services, the timing and success
of new products and services (if any), the progress of the Company's research
and development efforts, the Company's results of operations, the status of
competitive products and services, and the timing and success of potential
strategic alliances or acquisitions of businesses, technologies or assets. In
addition, the Company historically has experienced uneven cash flow and
operating results, and, during two of the past three years, significant
operating losses. The Company believes the combination of existing cash reserves
and projected cash flow from operations will provide sufficient cash to fund its
operations for at least the next 12 to 24 months. However, if the Company is
unable to maintain profitability or achieves sales growth requiring working
capital beyond current amounts, the Company may be required to seek additional
financing sooner than currently anticipated or may be required to curtail some
of its activities. There can be no assurance that additional financing will be
available on acceptable terms, or at all. The Company's failure to obtain such
additional financing, if needed, could have a material adverse effect on the
Company's business, financial condition and results of operations.

Fluctuations in Quarterly Performance. The Company has experienced fluctuations
in its quarterly operating results and anticipates that such fluctuations may
continue and/or 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 its products and services; the timing of the
introduction or acceptance of product 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;



                                       15








changes in the Company's operating expenses; uneven revenue streams; the
Company's revenue recognition practices and policies; and general economic
conditions. There can be no assurance that the Company's results of operations
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, changes in the Company's stock market listing
status, as well as other events or factors. See "Business Risks -- Fluctuations
in Quarterly Performance" above. 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. As of December 31, 1999, the Company
had an accumulated deficit of $24.3 million, the majority of which has
accumulated during the three years ended December 31, 1998. See Part II, Item 7,
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below for a more detailed description of the Company's
accumulated deficit and history of net losses. There can be no assurance that
the Company's operations will be profitable on a quarterly or annual basis in
the future or that existing revenue and earnings levels can be enhanced or
sustained. Past and existing revenue levels should not be considered indicative
of future operating results. Operating results for future periods are subject to
numerous risks and uncertainties, including those specified elsewhere in this
report. If the Company is not successful in addressing such risks and
uncertainties, the Company's business, financial condition and results of
operations will be materially adversely affected.

Dependence on Personnel. The Company's future success depends in large part on
its ability to continue to attract, motivate and retain highly qualified
personnel, particularly the members of its senior management and certain other
employees who may be difficult to replace. 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
personnel. The decline in the Company's stock price during the past three years
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 personnel. 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 two of the members of its senior management, both of whom have terms
expiring in 2000. There can be no assurance that either of these contracts will
be renewed. The Company does not maintain any key-man life insurance policies on
any of its employees.

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. The Company continues to utilize third-party vendors 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 Platform Products. The Company will
continue to depend on third-party vendors for manufacturing activities with
respect to the design and engineering of hardware, and its future success will
depend on maintaining relationships with such third-party vendors, improving its
inventory control



                                       16








systems, maintaining effective quality control and procuring sufficient
quantities of component parts. 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 Third-Party Vendors. The Company has been and will continue to be
dependent on third-party vendors for a variety of components incorporated in its
products and services, including such items as quality long-distance service and
related telecommunications services, competitive end-user rates and wholesale
discounts, accurate and reliable access numbers and PIN codes, prepaid phone
cards, computer equipment, network services, component parts, manufacturing
services, maintenance services, systems integration and certain software. While
available from multiple sources, some of these items are obtained from a single
supplier or a limited number of sources. Although the Company believes that
there are currently available substitute sources for all of these items, the
Company could be required to redesign or modify affected products to accommodate
for substitutions. 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 components on a satisfactory and timely basis. Any failure or delay in
obtaining necessary components 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.

Dependence on Distributors. The Company's Blackbird Platform Products are
currently marketed primarily through the Company's direct sales efforts.
However, its prepaid phone card products are currently marketed through multiple
distribution channels. In this regard, the Company is actively pursuing
distribution agreements and other forms of sales and marketing arrangements with
other companies, and the Company believes that its dependence on distributors
and these other sales and marketing relationships will increase in the future,
both with respect to its prepaid phone card products and any new products and
services that the Company may offer in the future. There can be no assurance
that any existing or future distributors or other sales and marketing partners
will not become competitors of the Company with respect to its prepaid phone
card products or any new products and services, either by developing their own
competitive products and services or by distributing the competitive offerings
of others. Any failure by the Company's existing and future distributors or
other sales and marketing partners to generate significant revenues could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Risk of Product Defects. It is common for hardware and software as complex and
sophisticated as that incorporated in the Company's products and services 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 Platform 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 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. Once the Company's products are
installed, they are subject to compliance with certain contractual requirements,
which may include acceptance testing to ensure that they are properly installed
and performing in accordance with contractual specifications. While the Company
has achieved acceptance of a substantial number 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, product
warranties are generally included as part of the Company's contractual
obligations. To the extent that available support or maintenance fees from its
products are not adequate to cover the costs of making any necessary
modifications or meeting the Company's warranty



                                       17








obligations, the Company could be required to make significant additional
expenditures, which could have a material adverse effect on the Company.

Risk of System Failure. 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,
communications failure, unauthorized entry or other events. Although the Company
provides back-up for substantially all of its systems, these measures do 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 Issues. The Company's products and services are dependent upon certain
internally-developed and third-party software and hardware. Year 2000 issues may
adversely affect such software and hardware and the Company's business.
Generally, year 2000 issues are the result of systems that use two digits
(rather than four digits) to define the applicable year. Thus, for example, any
system that utilizes date-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. Year 2000 issues also may arise in other contexts, such as
certain leap year calculations and in systems that use certain dates to provide
special functionality. As a result, systems may need to be upgraded to comply
with such year 2000 issues. Since January 1, 2000, the Company has not become
aware of any material malfunctions of the Company's products and services or its
internal systems relating to year 2000 issues. However, the Company's evaluation
of year 2000 issues is continuing, and there can be no assurance that year 2000
issues will not be discovered which could present a material risk to the
function of the Company's products and services or its internal systems. If the
Company, its customers, or vendors are unable to adequately resolve such issues
in a timely manner, the Company's operations and financial results may be
adversely affected. See Part II, Item 7, entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for a more detailed
description of the Company's efforts regarding year 2000 issues.

International Operations. To the extent that the Company pursues potential sales
opportunities for its products and services in international markets, the
Company is and will remain subject to all the risks inherent in international
sales activities, such as lengthy sales cycles, high costs of sales, 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 the occurrence of 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 "Business Risks -- 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 operations could be materially adversely affected.

Government Regulation and Legal Uncertainties. While, for the most part, the
Company's operations are not directly regulated, certain of the Company's
existing and potential customers, vendors and strategic alliance partners are
subject to a variety of United States and foreign governmental laws, regulations
and other requirements. The terms of any existing laws, regulations or other
requirements, or any changes thereto, may inhibit the growth of the
telecommunications industry, limit the number of potential customers for the
Company's products and services and/or impede the Company's ability to offer
competitive services to the


                                       18








telecommunications 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 has
caused and is expected to continue causing 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 products and 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.

ITEM 2. PROPERTIES

The Company leases approximately 17,500 square feet of general office space in
Seattle, Washington, for its corporate offices and approximately 1,200 square
feet of space in Seattle, Washington, 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 renewal
options and provide for the pass-through to the Company of increases in
operating and other costs. In March 2000, the Company entered into a lease for
approximately 4,000 square feet of space in Seattle, Washington, for assembly,
testing and general warehouse purposes. This lease expires on December 14, 2001,
subject to certain early termination provisions. In January 2000, the Company
began entering into lease arrangements in connection with its prepaid phone card
operations, which to date include a 15 month sublease for approximately 1,200
square feet of general office space in Lyndhurst, New Jersey, a one-year lease
for approximately 1,200 square feet of general office space in Stoneham,
Massachusetts, and a short-term lease for approximately 1,100 square feet of
general office space in Chicago, Illinois.

ITEM 3. LEGAL PROCEEDINGS

In January 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. In January 1999,
the Court granted the Company's motion to transfer this lawsuit to the United
States District Court for the Western District of Washington. The complaint
asserts that the plaintiff is the exclusive licensee of all rights under the
`591 patent, alleges that the Company's wireless 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.

From time to time, the Company is also a party to other legal proceedings which
arise 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.

See "Business Risks -- Risk of Litigation" above for a detailed description of
the risks and uncertainties associated with the legal proceedings described in
this Item 3.

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 Annual Report.



                                       19









                                     PART II

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

The following table sets forth, for each quarter during fiscal 1998 and 1999 and
for the period from January 1, 2000 through March 10, 2000, the reported high
and low sales prices of the Company's Common Stock on The Nasdaq Stock Market
(National Market System) (Symbol: "CTSC"). Prices and the number of shares of
the Company's common stock described in this Item 5 have been adjusted to give
effect to the one-for-ten stock combination (reverse stock split) described in
this report, which was consummated as of January 5, 1999.




                                                        Sales Price
                                                        -----------
                                                   High                 Low
                                                   ----                 ---
                                                                 
                  1998
                  ----
                  First Quarter                    33.75              14.38
                  Second Quarter                   20.94               4.06
                  Third Quarter                    13.44               2.81
                  Fourth Quarter                    8.75               2.81

                  1999
                  ----
                  First Quarter                     4.38               1.88
                  Second Quarter                   12.00               1.69
                  Third Quarter                     6.25               3.25
                  Fourth Quarter                   13.50               3.19

                  2000
                  ----
                  First Quarter through
                  March 10, 2000                   18.56               7.56


As of March 10, 2000, the number of holders of record of the Company's Common
Stock was 212, and the number of beneficial  shareholders was estimated to be in
excess of 5,300.

There were no  dividends  paid or other  distributions  made by the Company with
respect to its Common Stock during 1999 or 1998.

On February 17, 1998, the Company issued 2,000 shares of Common Stock to Circuit
Concepts International, LLC as partial consideration for the Company's purchase
of certain assets in accordance with the terms of an asset purchase and sale
agreement. No sales commissions were paid in connection with this transaction.
The securities were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.


                                       20









ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)




                                                                   Year Ended December 31,
                                                                Statement of Operations Data:
                                              ----------------------------------------------------------------
                                                    1999        1998        1997        1996         1995
                                                    ----        ----        ----        ----         ----

                                                                                   
Revenues                                          $10,241    $11,955     $30,255     $20,902       $12,109
 Gross Research & Development Expenditures(2)       1,593      5,112       9,814       7,010         5,819
Net Income (Loss)                                   2,599    (10,860)     (5,046)     (7,350)           63
Basic Earnings (Loss) Per Share(3)                   1.14      (4.76)      (2.22)      (3.34)         0.03
Diluted Earnings (Loss) Per Share(3)                 1.13      (4.76)      (2.22)      (3.34)         0.03
Weighted-Average Shares Outstanding:
     Basic                                          2,282      2,281       2,273       2,199         2,040
     Diluted                                        2,292      2,281       2,273       2,199         2,277
Cash Dividends Declared                              --         --          --          --             --







Balance Sheet Data:                                                     December 31,
                                                                        (in 000's)
                                                 ---------------------------------------------------------
                                                   1999        1998        1997       1996         1995
                                                  -----        -----       ----       ----         -----

                                                                                    
Working Capital                                   $ 3,621     $  596     $ 6,535     $11,409       $11,094
Cash                                                4,787      1,567       3,448       4,854         9,448
Capitalized Software Development Costs, net           178        535       3,391       3,599         3,347
Total Assets                                       10,202      8,102      20,721      32,352        18,371
Long Term Obligations                               1,000       --          --          --            --
Total Stockholders' Equity                          5,673      3,072      13,890      18,185        16,734




- --------
(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 for 1998 and earlier due to the
inclusion herein of capitalized software development costs and contract design
and development services costs which are disclosed elsewhere in the financial
statements. The Company did not capitalize any software development costs in
1999. 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 split in 1996
and the one-for-ten reverse stock split effective January 5, 1999. 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.



                                       21








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. Unless the context
otherwise requires, all references to the "Company" herein include Cellular
Technical Services Company, Inc. and any entity over which it has or shares
operational control.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
reflect the Company's views with respect to future events and financial
performance. The Company uses words and phrases such as "anticipate," "expect,"
"intend," "the Company believes," "future," and similar words and phrases to
identify forward-looking statements. Reliance should not be placed on these
forward-looking statements. These forward-looking statements are based on
current expectations and are subject to risks, uncertainties and assumptions
that could cause, or contribute to causing actual results to differ materially
from those expressed or implied in the applicable statements. Readers should pay
particular attention to the descriptions of risks and uncertainties described in
this report and in the Company's other filings with the Securities and Exchange
Commission. All forward-looking statements included in this report are based on
information available to the Company on the date of this report. The Company
assumes no obligation or duty to update any such forward-looking statements.

OVERVIEW

The Company develops, markets, distributes and supports a diversified mix of
products and services for the telecommunications industry. Over the past 11
years, the Company has developed expertise in real-time wireless call processing
and has created technologically advanced solutions for this industry, focusing
primarily in the area of wireless communications fraud management. During 1999,
the Company implemented a short and long-range strategic plan to diversify its
product mix, both within and outside of the telecommunications industry. This
diversification strategy is at the foundation of the Company's growth plan for
the future.

PRODUCTS

The Blackbird Platform Products

The Company's Blackbird'r Platform product line includes a suite of radio
frequency ("RF") based platform solutions focusing on wireless fraud prevention.
Presently, it involves various forms of "pre-call" verification to ensure that
the use of an analog wireless telephone is legitimate before the device is
allowed to connect to a carrier's analog wireless communications network. In
this area, the Company is a leading provider of RF-based solutions for the
prevention of "cloning fraud." This term is used to describe the illegal
activity of using a scanning device to steal the electronic serial number and
mobile identification number of a legitimate wireless telephone while in use,
then reprogramming the stolen numbers into other phones. These reprogrammed
phones, or "clone phones," are then used to make illegal calls on a wireless
communications network, without payment for the wireless services rendered. The
Company's suite of RF-based platform solutions include the Blackbird'r
Platform, PreTect'TM' cloning-fraud prevention application, No Clone Zone'sm'
roaming-fraud prevention service, and related application products and services
(collectively, the "Blackbird Platform Products"). The Company's Blackbird
Platform Products are currently deployed in approximately 2,000 cell sites in
most major metropolitan areas throughout the United States. The Company's
customers have reported up to a 98% reduction in cloning fraud activity in areas
served by the Blackbird Platform Products since its initial installation, and
continue to rely on its cloning prevention capabilities for their existing
analog wireless communications networks.



                                       22







Prepaid Wireline Long-Distance Phone Cards

To stimulate revenue growth for the Company, and in alignment with its product
diversification strategy, the Company expanded into the prepaid long-distance
service arena in the fourth quarter of 1999. Through its new majority-owned
subsidiary, Isis Tele-Communications, Inc., the Company markets and distributes
branded prepaid long-distance phone cards primarily under the Value Maxx'TM' and
Straight Talk'TM' brands in denominations generally ranging from $5 to $20 per
card. Isis specializes in targeted marketing programs and features local and
toll-free access numbers and aggressive domestic and international long-distance
rates. The Company expects that Isis will distribute cards through regional and
national multi-level distribution channels, using direct sales, third-party
distributors, vending machines, and telemarketing. The Company anticipates that
its ability to provide aggressive per-minute rates, broad multi-level
distribution coverage, and quality customer service will provide the key
ingredients to fueling revenue growth and future product expansion of this
product line for the Company. Isis has recently opened offices in Los Angeles,
Boston, New York, New Jersey, and Chicago.

Future Opportunities For Growth In Emerging Technologies

During the fourth quarter of 1999, and as part of the Company's long-term
diversification strategy, the Company made a strategic investment in KSI, Inc.,
a provider of development-stage wireless geo-location technology. The Federal
Communications Commission ("FCC") has required all wireless carriers to deploy
wireless geo-location technology by October 2001 to provide comparable 911
services to wireless telecommunications subscribers. Wireless geo-location
technology provides and identifies the specific geographic location (in latitude
and longitude measurements) of a wireless telephone, and can eventually be
applied to other wireless communications devices. The Company expects to
leverage its entrance into the geo-location marketplace by developing,
marketing, distributing, and supporting a suite of commercial geo-location
applications as the technology evolves and is deployed by all wireless carriers
to comply with the FCC's requirements.

The Hotwatch Platform

The Company's Hotwatch Platform provides technological solutions primarily in
the "service metering" area, which involves various forms of "post-call"
verification to ensure that a prepaid wireless subscriber has proper account
status to make additional calls. The Company's real-time rating technology is
capable of supporting multiple long-distance rating and multiple airtime price
plans. As anticipated by the Company, the Company's remaining customers of the
Hotwatch Platform phased out their use of the Hotwatch Platform by the fourth
quarter of 1999. However, the Company is reviewing market opportunities to use
the patented Hotwatch real-time technology in new value-added applications that
could expand its product mix in the prepaid services arena.

REVENUE AND EXPENSE

Revenue

During 1999, the Company generated revenue through two sources: systems revenue
and service revenue.

Systems revenue is generated from licensing and sales of the Company's
proprietary software and hardware products, the sale of third-party products
sold in connection with the Company's proprietary products and, to a lesser
extent, fees earned in connection with the installation and deployment of these
products. Revenue is recognized when all of the following conditions are met:

(i)      persuasive evidence of an arrangement exists;

(ii)     delivery has occurred, including satisfaction of all contractual
         obligations, and other elements that are essential to the functionality
         of the delivered products have been satisfied;



                                       23








(iii)    the amount is fixed or determinable; and

(iv)     collectability is probable.

Revenue is deferred if the above conditions are not met, based on vendor
specific objective evidence ("VSOE") of the fair value for all elements of the
arrangement. VSOE is typically based on the price charged when an element is
sold separately, or, in the case of an element not yet sold separately, the
price established by authorized management, if it is probable that the price,
once established, will not change before market introduction. Elements included
in multiple element arrangements could consist of software products, upgrades,
enhancements, customer support services, or consulting services.

Service revenue is derived primarily from hardware and software maintenance
programs, No Clone Zone roaming fraud prevention service, Blackbird Platform
Monitoring service and related professional services provided in support of the
Company's currently deployed product base. Service revenue is recognized ratably
over the period that the service is provided. Hardware and software maintenance
generally begins after system acceptance. Prepaid or allocated maintenance and
services are recorded as deferred revenue.

Revenue recognition for the Company's systems varies by customer and by product.
Every element of a contract must be identified and valued based upon VSOE,
regardless of any stated price in the contract. Revenue from any undelivered
elements of a contract is deferred. However, any undelivered element essential
to the functionality of the delivered product will cause a 100% deferral of the
sale. Amounts billed and received on sales contracts before products are
delivered or before revenue is recognized or recognizable are recorded as
customer deposits or deferred revenue. The significant factors used in
determining revenue recognition generally include physical hardware and software
delivery, definitions of system delivery and customer acceptance. For those
agreements which provide for payment based upon meeting actual performance
criteria, the Company may record a portion of the systems revenue and the
majority of the systems costs at shipment or during the early stages of a system
deployment. In certain cases no systems revenue may be recorded at time of
shipment, while certain operating costs may be recorded during the deployment
process. Accordingly, revenue and direct margin 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.

Costs and Expenses

Costs of systems and services are primarily comprised of the costs of: (i)
equipment, which includes both proprietary and third-party hardware and, to a
lesser extent, manufacturing overhead and related expenses; (ii) amortization of
capitalized software development costs; (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, repair and testing of parts returned from the
field in connection with the Company's ongoing hardware maintenance service
activities.

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 products and services.

The Company expects that its costs and expenses in these and other areas will
continue to be incurred in the future, due to the ongoing need to: (i) make
investments in research and development to enhance existing products and
services and to develop new products and services to address emerging market
opportunities, such as those in the geo-location and prepaid phone card markets;
(ii) enhance its sales and marketing activities; (iii) enhance hardware
maintenance processes; (iv) enhance its customer support capabilities; and (v)
enhance its general and administrative activities.


                                       24






YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Overview

Total revenues decreased 14% to $10.2 million in 1999 from $12.0 million in 1998
and the Company generated net income of $2.6 million, or $1.14 per basic share
in 1999 compared to a net loss of $10.9 million, or $4.76 per basic share in
1998. The Company recognized an alternative minimum tax expense of $31,000
during the 1999 period.

While the Company enjoyed increased service revenue, as described below, the
Company attributes the total lower revenue to: (i) a reduction in domestic
market opportunities for the Company's cloning fraud prevention technology due
to the effectiveness of this and other authentication-based products in
combating cloning fraud; (ii) lower market penetration than originally planned
of Company's cloning fraud prevention technology; and (iii) the lack of
significant additional new sales of the Company's cloning fraud prevention
technology in 1999.

The improved net income performance is attributable to: (i) cost reductions that
included, among other initiatives, streamlining the Company's operations,
reducing its workforce and consolidating its facilities; (ii) increased service
revenue originating from an increased installed base of systems; (iii) reduced
non-cash charges including inventory reserves, software amortization and fixed
asset writeoffs; and (iv) increased interest income due to higher average cash
balances on hand during 1999.

Revenue

Systems revenue decreased 63% to $1.6 million in 1999 from $4.4 million in 1998
due to the factors discussed above, and represents revenue from customers of the
Company's Blackbird Platform Products.

Service revenue increased 14% to $8.6 million in 1999 from $7.5 million in 1998.
Approximately 96% and 92%, respectively, of the 1999 and 1998 total service
revenue was derived from Blackbird Platform Products. The increase in service
revenue is largely attributable to a larger installed base of Blackbird Platform
Products in the current period as compared to 1998 and additional recurring
services performed in the current period as compared to 1998. Service revenues
from Hotwatch Platform Products, which were phased out of commercial use in
1999, were not material in the 1999 period.

Cost of Systems and Services

Costs of systems and services, which primarily relate to the Company's Blackbird
Platform Products, decreased 74% to $3.7 million in 1999 from $14.4 million in
1998. Costs of systems and services, as a percent of total revenue, were 37% and
120% for the 1999 and 1998 periods, respectively. The decrease in amounts and
percentages for 1999 relative to 1998 reflects:

(i)   the full-year impact of cost reductions implemented in 1998;

(ii)  reduced inventory reserve additions and capitalized software amortization;

(iii) increased service revenue in 1999, resulting from an increased
      leveraging of the Company's fixed customer support operating expenses;
      and

(iv)  lower costs associated with the decrease in systems revenue in 1999 as
      discussed above.

Operating Expenses

Sales and marketing expenses decreased 20% to $0.7 million in 1999 from $0.9
million in 1998. The decrease in sales and marketing expense is attributable
primarily to the full-year impact of reductions in average staffing levels and
related expenses resulting from the cost reductions implemented in 1998.

                                       25







General and administrative expenses decreased 19% to $2.1 million in 1999 from
$2.6 million in 1998 and primarily reflects the full-year impact of a reduction
in staffing levels and related expenses implemented in 1998.

Research and development costs decreased 65% to $1.6 million in 1999 from $4.5
million in 1998. The decrease in expenditures in 1999 was primarily attributable
to the full-year impact of reduced staffing levels implemented in 1998 and was
partially offset by spending on product enhancements and new product research.

Other Income, net

Net other income was $0.3 million in 1999 compared to a net expense of $0.5
million in 1998. A net state sales tax refund of $0.5 million was received in
the 1999 period. Net losses on dispositions of fixed assets were $0.2 million in
1999 and $0.5 million in 1998.

Interest Income, net

Interest income increased to $0.3 million in 1999 from $0.1 million in 1998,
resulting from higher average cash balances, interest income earned on customer
accounts and interest earned on a state sales tax refund received in the 1999
period.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Overview

Total revenues decreased 60% to $12.0 million in 1998 from $30.3 million in 1997
and the Company generated net losses of $10.9 million, or $4.76 per share in
1998 compared to net losses of $5.0 million, or $2.22 per share in 1997. The
adverse operating results in 1998 and 1997 are primarily attributed to:

(i)      a reduction in domestic market opportunities for the Company's cloning
         fraud prevention technology, due to the effectiveness of this and other
         authentication-based products in combating cloning fraud;

(ii)     lower penetration than originally planned of Blackbird Platform
         Products into existing customers' markets and to new and/or additional
         markets;

(iii)    the Company's inability to gain additional new domestic and
         international customers; and

(iv)     an unbalanced cost structure in relation to the 1998 and 1997 revenues,
         which resulted in the Company implementing a restructuring plan that
         included, among other initiatives, streamlining the Company's
         operations and reducing its workforce to approximately one-fourth of
         January 1, 1998 staffing levels.

Systems Revenues

Systems revenues, which decreased 83% to $4.4 million in 1998 from $25.8 million
in 1997, represent revenues primarily from Blackbird Platform Products. The
Company attributes the decrease in revenues from Blackbird Platform Products to:

(i)      a reduction in domestic market opportunities for the Company's cloning
         fraud prevention technology, due to the effectiveness of this and other
         authentication-based products in combating cloning fraud;

(ii)     lower penetration than originally planned of Blackbird Platform
         Products into existing customers' markets and to new and/or additional
         markets; and

(iii)    the Company's inability to gain additional new domestic and
         international customers.

Systems revenues from Hotwatch Platform Products, which were not actively
marketed during the 1998 period, decreased 85% to $0.2 million in 1998 from $1.3
million in 1997.



                                       26







Service Revenues

Service revenues increased 68% to $7.5 million in 1998 from $4.5 million in 1997
with approximately 92% and 89% of the 1998 and 1997 revenues, respectively,
being derived from existing customers utilizing the Blackbird Platform Products.
This increase is directly attributable to the increased installed base of
systems originating from Blackbird Platform Product deployments in late 1997 and
during 1998.

Cost of System and Services

Costs of systems and services, the majority of which relate to the Company's
Blackbird Platform Products, decreased 25% to $14.4 million in 1998 from $19.2
million in 1997. Costs of systems and services, as a percent of total revenues,
were 120% and 63% for the 1998 and 1997 periods, respectively. The increased
percentage cost for 1998 relative to 1997 primarily reflects:

(i)      a decrease in systems revenues in 1998, resulting in a decrease in
         leveraging of its fixed overhead costs relating to manufacturing,
         installation and systems integration, despite significant cost
         reductions implemented in 1998 in connection with the Company's
         restructuring plan;

(ii)     an increase in the amount of inventory reserves to $4.6 million in 1998
         from $1.8 million in 1997, reflecting provisions for excess inventory
         quantities resulting from lower future sales projections based on
         changing market conditions; and

(iii)    a change made effective January 1, 1998 resulting in an increase in and
         the acceleration of the amortization of capitalized software costs to
         $3.4 million in 1998 from $2.0 million in 1997, reflecting current
         estimates to recoverability values resulting from lower future sales
         projections based on changing market conditions.

Conversely, the Company benefited from increased service revenues in 1998,
resulting in an increased leveraging of its fixed customer support operating
expenses. The Company also benefited from cost reductions implemented in 1998 in
connection with the Company's restructuring plan.

Sales and Marketing Expenses

Sales and marketing expenses decreased 77% to $0.9 million in 1998 from $3.8
million in 1997 while total revenues decreased 60% as explained above. Sales and
marketing expenses, as a percent of revenues, decreased to 7% in 1998 from 12%
in 1997. The decrease in sales and marketing expenses resulted primarily from:

(i)      a reduction in staffing levels and related expenses in connection with
         the Company's restructuring plan;

(ii)     reduction in trade shows and other events in which the Company
         participated; and

(iii)    lower incentive compensation expense, which varies with revenue.

General and Administrative Expenses

General and administrative expenses decreased 41% to $2.6 million in 1998 from
$4.5 million in 1997, primarily due to:

(i)      a reduction in staffing levels and related expenses in connection with
         the Company's restructuring plan;

(ii)     reduction in legal expenses related to settled and pending legal
         proceedings; and

(iii)    no bad debt expense in 1998 compared to a bad debt expense of $0.4
         million in 1997.

Research and Development Expenditures

Research and development costs decreased 44% to $4.5 million in 1998 from $8.1
million in 1997. The decrease in expenditures in 1998 was primarily attributable
to reduced staffing levels and reduced hardware research




                                       27







activities associated with cost reductions implemented in 1998 in connection
with the Company's restructuring plan. Software development costs of $0.6
million were capitalized in 1998, a decrease from the $1.8 million that were
capitalized during 1997, and relate to the development and enhancement of the
Blackbird Platform Products. The decrease is attributable to the Company's
decision, during the second quarter of 1998, to no longer capitalize software
development and enhancement costs as a result of its review of projected product
sales from a recoverability perspective. Some expenditures were undertaken for
the investigation of additional application products for the Blackbird Platform,
such as geo-location technology.

Other Income and Expense, net

In response to the Company's 1998 restructuring plans, the Company sold, wrote
off or otherwise disposed of assets, having an original cost of $3.1 million.
The resulting loss, net of $0.3 million proceeds, totaled $0.5 million. The loss
originated from the sale of excess furniture and miscellaneous equipment, the
unamortized balance of leasehold improvements associated with the consolidation
of certain facilities at the Company's corporate offices, and the write off
and/or disposal of assets no longer used in the Company's business.

Interest Income, Net

Interest income (net of interest expense) decreased 53% to $0.1 million in 1998
from $0.2 million in 1997. The decrease was primarily attributable to lower
average cash balances invested during 1998 as compared to 1997 and, to a lesser
extent, miscellaneous interest charges from suppliers in connection with the
payment of supplier liabilities.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements have consisted primarily of funding hardware
and software research and development, property and equipment requirements,
working capital and the Company's operating expenses. The Company historically
has 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, 1999, the Company's cash balance was $4.8
million as compared to $1.6 million on December 31, 1998. The Company's working
capital increased to $3.6 million at December 31, 1999 from $0.6 million at
December 31, 1998.

Cash Provided by Operating Activities

Cash provided by operating activities amounted to $4.2 million in 1999, as
compared to cash used in operating activities of $1.4 million in 1998, and cash
provided by operating activities of $1.6 million in 1997. The major factor
contributing to the Company's increased cash flow from operating activities in
the 1999 period was the $2.6 million net income recorded in 1999 compared to a
$10.9 million net loss in 1998. Non-cash charges including depreciation,
amortization and changes in balance sheet accounts contributed $1.6 million to
the 1999 operating cash flow compared to $9.5 million in 1998.

Cash Used by Investing Activities

Cash used by investing activities totaled $1.0, $0.5 and $3.8 million in 1999,
1998 and 1997, respectively. In 1999 the Company invested $1.0 million in a
convertible note receivable due from KSI, Inc., a provider of development-stage
wireless geo-location technology. The amounts in the 1998 period were primarily
for (i) capitalization of software development of the Blackbird Platform
Products which ceased during the second quarter of 1998, and (ii) equipment
purchases and sales. During 1997, the amounts included $2.0 million in equipment
purchases and $1.8 million in capitalized software expenses. At December 31,
1999, the Company had no significant commitments for capital expenditures.


                                       28








Cash Provided By Financing Activities

Cash provided by financing activities resulted from the exercise of stock
options totaling $2,000, $0 and $800,000 during 1999, 1998 and 1997,
respectively.

Operating Trends

The Company earned $2.6 million for the year ended 1999, compared to operating
losses of $10.9 million and $5.0 million for the years ended December 31, 1998
and 1997, respectively. Net non-cash charges included in the operating losses
were $1.7 million, $9.9 million and $5.5 million, respectively. As of December
31, 1999, the Company had an accumulated deficit of $24.3 million, which
primarily accumulated during the three years ended December 31, 1998. During
1996 and 1997, the Company deployed its initial cloning fraud prevention
Blackbird Platform Products and incurred substantial operating expenses during
such deployment. During 1998, in response to unfavorable operating results, the
Company implemented its 1998 restructuring plan that included, among other
initiatives, streamlining the Company's operations to better balance expenses
and revenues, and directing additional development efforts and resources towards
new products to generate new sources of revenue. Through the end of 1999 the
results of the Company's 1998 plan showed significant improvement in
profitability and cash flow. There can be no assurance, however, that the
Company's operations will be profitable on a quarterly or annual basis in the
future or that existing revenue levels can be enhanced or sustained. Past and
existing revenue levels should not be considered indicative of future operating
results. While the Company believes that its current cash reserves and projected
cash flow from operations provide sufficient cash to fund its operations for at
least the next twelve to twenty-four months, unanticipated changes in customer
needs and/or other external factors may require additional financing and/or
further expense reductions.

YEAR 2000 ISSUES

In prior years, the Company discussed the nature and progress of its plans
relating to year 2000 issues. Generally, year 2000 issues are the result of
systems that use two digits (rather than four digits) to define the applicable
year. Thus, for example, any system that utilizes date-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. Year 2000 issues also may
arise in other contexts, such as certain leap year calculations and in systems
that use certain dates to provide special functionality. As a result, such
systems may need to be upgraded to comply with such year 2000 requirements. In
late 1999, the Company completed its remediation and testing of systems. As a
result of those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the year 2000 date change. The Company's costs during 1999 in
connection with remediating its systems were considered immaterial. The Company
is not aware of any material problems resulting from year 2000 issues, either
with its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical systems and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent year 2000 matters that may arise are addressed promptly.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes that all risks are immaterial.

ITEM 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.

                                       29







                                    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.




                                                                                                   YEAR FIRST     TERM OF
NAME                           AGE              POSITION WITH COMPANY                                ELECTED       OFFICE
- ----                           ---             -----------------------                              --------       ------
                                                                                                           
Stephen Katz                    56   Chairman of the Board of Directors, Chief Executive Officer      1988          2000
                                       and Acting President
Joyce S. Jones                  52   Chief Operating Officer and Director                             1998          2001
Lawrence Schoenberg(1)(2)       67   Director                                                         1996          2002
James Porter(1)(2)              63   Director                                                         1997          2001
Kyle R. Sugamele                37   Vice President, General Counsel and Corporate Secretary           --            --
Bruce R. York                   45   Vice President and Chief Financial Officer                        --            --


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 was re-appointed as Acting
President in September 1998. 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. 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 validation. In September
1996, Mr. Katz was appointed Chairman of the Board of Global Payment
Technologies, Inc.

Joyce S. Jones joined the Company in February 1998 as Vice President of
Marketing. In September 1998, Ms. Jones was promoted to Chief Operating Officer
and became a Director. 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 to 1993, Ms. Jones held the position of Vice
President of System Engineering. Other positions with Attachmate Corporation
included Product Marketing, Product Management, and Technical Sales Engineer.

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

(1) Member of the Compensation and Stock Option Committee
(2) Member of the Audit Committee


                                       30







Lawrence Schoenberg joined the Company as a Director in September 1996. Mr.
Schoenberg also serves as Director of Government Technology Services, Inc.,
Merisel, Inc., and Sunguard Data Services, Inc. Former directorships include
Systems Center, Inc. (which was sold to Sterling Software, Inc.), SoftSwitch,
Inc. (which was sold to Lotus/IBM Corp.), Forecross Corporation, Image Business
Systems, Inc., and Penn America Group, Inc. 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.

James Porter joined the Company as a Director in July 1997. Mr. Porter also
serves as a Director of Silicon Valley Bank and Chairman of FirstWave
Technologies, both publicly-traded companies. He further serves on the Board of
Directors of CCI/Triad Systems Corporation and Cordona Industries, the Board
of Regents of Pepperdine University, and the Board of Trustees of Abilene
Christian University. From February 1997 to June 1999, Mr. Porter served as
Chairman of CCI/Triad Systems Corporation. From September 1985 to February 1997,
he was President and Chief Executive Officer of Triad Systems Corporation.

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 practiced law from March 1991 to July 1995 at the law firm
of Mundt, MacGregor, Happel, Falconer, Zulauf & Hall in Seattle. Prior to that
time, Mr. Sugamele practiced law at the law firm of Graham & Dunn 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.

Bruce R. York joined the Company in April 1999 as Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. York was the Director of
Finance of Cell Therapeutics, Inc., a biopharmaceutical company, from February
1998 to February 1999. From May 1987 to January 1998, Mr. York held various
positions with Physio Control International Corporation, a manufacturer of
external defibrillators. These positions included Director of Business Planning,
Director of Finance - Europe, Director of Finance and Corporate Controller, and
Manager of Tax and Assets. From September 1978 to April 1987, Mr. York held
several positions with Price Waterhouse. Mr. York is a certified public
accountant.

The Company's Board of Directors is divided into three classes. The Board is
composed of two Class I directors, Ms. Jones 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 2001, 2002
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.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 Annual Meeting of
Stockholders under the caption "Executive Compensation and Related Information."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 Annual Meeting of
Stockholders under the caption "Security Ownership."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 Annual Meeting of
Stockholders under the caption "Certain Relationships and Related Transactions."

                                       31








                                     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.

                                                                                          
Report of Ernst & Young LLP, Independent Auditors ........................................   34
Consolidated Balance Sheets at December 31, 1999 and 1998 ................................   35
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997   36
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997.......................................................................   37
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997   38
Notes to Financial Statements ............................................................   39




         2. FINANCIAL STATEMENT SCHEDULES:

                                                                                          
Schedule II - Valuation and Qualifying Accounts...........................................   52



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:
           
   3.1         Restated Certificate of Incorporation of the Registrant, as amended (1)
   3.2         Amendment to Restated Certificate of Incorporation of the Registrant (9)
   3.3         By-Laws of the Registrant (1)
   3.4         Amendment I to By-Laws of the Registrant, dated October 28, 1993 (3)
   4.1         Specimen Certificate for Common Stock of Registrant (1)
   7.1         1991 Qualified Stock Option Plan (as amended as of November 30, 1993) (+)(2)
   7.2         Amendment to 1991 Qualified Stock Option Plan dated July 11, 1996 (+)(9)
   7.3         1991 Non-Qualified Stock Option Plan (as amended as of November 30, 1993) (+)(2)
   7.4         Amendment to 1991 Non-Qualified Stock Option Plan dated July 11, 1996 (+)(9)
   7.5         1993 Non-Employee Director Stock Option Plan (+)(3)
   7.6         Amendment to 1993 Non-Employee Director Stock Option Plan dated July 11, 1996 (+)(9)
   7.7         Amendment to 1993 Non-Employee Director Stock Option Plan dated April 22, 1999 (+)(10)
   7.8         1996 Stock Option Plan (+)(7)
   7.9         Amendment to 1996 Stock Option Plan dated December 14, 1998 (+)(9)
  10.1         Employment Agreement between the Registrant and Joyce Jones dated September 18, 1998 (+)(9)
  10.2         Employment Agreement between the Registrant and Kyle R. Sugamele dated June 29, 1995 (+)(6)
  10.3         First Amendment to Employment Agreement between the Registrant and Kyle R. Sugamele dated August 25,    1998
  10.4         Agreement of Lease dated May 23, 1994 between the Registrant and Martin Selig Properties (4)
  10.4A        Amendment to Lease dated April 7, 1995 between the Registrant and Martin Selig Properties (6)
  10.5         Master Purchase and License Agreement between the Registrant and AirTouch Cellular dated March 6, 1996
  10.6         Master Purchase and License Agreement between the Registrant and Bell Atlantic NYNEX Mobile dated    August
  10.7         Master Purchase and License Agreement between the Registrant and GTE Mobilnet of California Limited
  10.8         Master Purchase and License Agreement between the Registrant and Ameritech Mobile Communications, Inc.
               dated October 14, 1996(d)(8)



                                       32







            
  10.9         Patent License Agreement between Registrant and The Boeing Company dated April 29, 1994 (b)(4)
  10.10        Patent Sublicense Agreement between Registrant and Motron Electronics dated May 24, 1995 (a)(5)
  10.11        Patent License Agreement between Registrant and AirTouch Cellular, dated December 22, 1995 (c)(6)
  21.1         Subsidiaries of the Registrant (10)
  23.1         Consent of Ernst & Young LLP, independent auditors (10)
  27           Financial Data Schedule (10)



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

          
    (a)        Confidential treatment granted pursuant to order of the Secretary of the
               Securities and Exchange
    (b)        Confidential treatment granted pursuant to order of the Secretary of the
               Securities and Exchange Commission
    (c)        Confidential treatment granted pursuant to order of the Secretary of the
               Securities and Exchange Commission
    (d)        Confidential treatment granted pursuant to order of the Secretary of the
               Securities and Exchange Commission
    (+)        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.
    (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
    (4)        Incorporated by reference to Annual Report on Form 10-K filed on March 28, 1995
               for the year ended December
    (5)        Incorporated by reference to Quarterly Report on Form 10-Q filed on August 8,
               1995 for the quarter ended June
    (6)        Incorporated by reference to Annual Report on Form 10-K filed on March 27, 1996
               for the year ended December
    (7)        Incorporated by reference to Registration Statement on Form S-8 filed on July
               12, 1996 (File No. 333-08049).
    (8)        Incorporated by reference to Quarterly Report on Form 10-Q filed on November 14,
               1996 for the quarter ended
    (9)        Incorporated by reference to Annual Report on Form 10-K filed on March 30, 1999
               for the year ended December
    (10)       Filed herewith.




(b)      REPORTS ON FORM 8-K

During the fourth quarter ended December 31, 1999, the Company filed a Current
Report on Form 8-K, dated December 7, 1999, under Item 5 of such Report,
relating to the Company's investment in, and formation of a strategic alliance
with, KSI Inc., a developer of commercial, wireless network-based,
location-finding systems. No financial statements were included in such Report.

                                              33












                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Cellular
Technical Services Company, Inc. as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the consolidated 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of
Cellular Technical Services Company, Inc. at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with auditing
standards generally accepted in the United States. 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
February 8, 2000

                                    34












                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                           CONSOLIDATED BALANCE SHEETS

                      (in 000's, except per share amounts)




                                                                                        DECEMBER 31,
                                                                                ------------------------------
                                                                                    1999            1998
                                                                                --------------  --------------
                                                                                          
                                     ASSETS

CURRENT ASSETS

   Cash and cash equivalents                                                    $      4,787    $      1,567
   Accounts receivable, net of allowances of $5 in 1999
     and $72 in 1998                                                                   2,647           2,860
   Inventories                                                                           592           1,014
   Prepaid expenses and deposits                                                         124             185
                                                                                --------------  --------------

     Total Current Assets                                                              8,150           5,626

PROPERTY AND EQUIPMENT                                                                   874           1,941

SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of
   $9,526 in 1999 and $9,170 in 1998.                                                    178             535

NOTE RECEIVABLE                                                                        1,000              --
                                                                                --------------  --------------

TOTAL ASSETS                                                                    $     10,202    $      8,102
                                                                                ==============  ==============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued liabilities                                     $        917    $      1,358
   Payroll-related liabilities                                                           525             470
   Taxes (other than payroll and income)                                                  35             128
   Customers' deposits                                                                   175              --
   Deferred revenue                                                                    2,877           3,074
                                                                                --------------  --------------

     Total Current Liabilities                                                         4,529           5,030

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,
     2,282 shares issued and outstanding in 1999 and 2,281 in 1998                        23              23
   Additional paid-in capital                                                         29,933          29,931
   Accumulated deficit                                                               (24,283)        (26,882)
                                                                                --------------  --------------

     Total Stockholders' Equity                                                        5,673           3,072
                                                                                --------------  --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $     10,202    $      8,102
                                                                                ==============  ==============



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

                                       35









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      (in 000's, except per share amounts)



                                                                YEAR ENDED DECEMBER 31,
                                                    -------------------------------------------------
                                                        1999              1998             1997
                                                    --------------   ---------------   --------------
                                                                              
REVENUES
   Systems                                          $      1,642     $      4,415      $     25,768
   Services                                                8,599            7,540             4,487
                                                    --------------   ---------------   --------------

     Total Revenues                                       10,241           11,955            30,255

COSTS AND EXPENSES

   Cost of systems and services                            3,745           14,402            19,199
   Sales and marketing                                       685              857             3,755
   General and administrative                              2,137            2,625             4,481
   Research and development                                1,593            4,542             8,061
                                                    --------------   ---------------   --------------

     Total Costs and Expenses                              8,160           22,426            35,496
                                                    --------------   ---------------   --------------

INCOME (LOSS) FROM OPERATIONS                              2,081          (10,471)           (5,241)

OTHER INCOME (EXPENSE), net                                  274             (482)               (2)

INTEREST INCOME, net                                         275               93               197
                                                    --------------   ---------------   --------------

INCOME (LOSS) BEFORE INCOME TAXES                          2,630          (10,860)           (5,046)

PROVISION FOR INCOME TAXES                                    31               --                --
                                                    ==============   ===============   ==============

NET INCOME (LOSS)                                   $      2,599     $    (10,860)     $     (5,046)
                                                    ==============   ===============   ==============

EARNINGS (LOSS) PER SHARE:

  Basic                                             $       1.14     $      (4.76)     $      (2.22)
                                                    ==============   ===============   ==============

  Diluted                                           $       1.13     $      (4.76)     $      (2.22)
                                                    ==============   ===============   ==============

WEIGHTED AVERAGE SHARES OUTSTANDING:

  Basic                                                    2,282            2,281             2,273

  Diluted                                                  2,292            2,281             2,273



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

                                       36









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                   (in 000's)




                                            COMMON STOCK                ADDITIONAL
                                  ---------------------------------       PAID-IN             ACCUMULATED
                                      SHARES            AMOUNT            CAPITAL               DEFICIT             TOTAL
                                  ----------------   --------------   -----------------    -------------------  --------------

                                                                                                
Balance, January 1, 1997                 2,263       $      23        $     29,138         $       (10,976)     $     18,185

Exercise of stock options                   16                                 751                                       751
Net loss                                                                                            (5,046)           (5,046)
                                  ----------------   --------------   -----------------    -------------------  --------------

Balance, December 31, 1997               2,279              23              29,889                 (16,022)           13,890

Common Stock exchanged for                   2                                  42                                        42
assets
Net loss                                                                                           (10,860)          (10,860)
                                  ----------------   --------------   -----------------    -------------------  --------------

Balance, December 31, 1998               2,281              23              29,931                 (26,882)            3,072

Exercise of stock options                    1                                   2                                         2
Net income                                                                                           2,599             2,599
                                  ----------------   --------------   -----------------    -------------------  --------------

Balance, December 31, 1999               2,282       $      23        $     29,933         $       (24,283)     $      5,673
                                  ================   ==============   =================    ===================  ==============



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

                                       37









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (in 000's)



                                                                                          YEAR ENDED DECEMBER 31,

                                                                                --------------------------------------------
                                                                                     1999            1998           1997
                                                                                ---------------  -------------  -------------
                                                                                                       
OPERATING ACTIVITIES
   Net income (loss)                                                            $      2,599     $    (10,860)  $     (5,046)
   Adjustments to reconcile net income (loss) to net cash provided by (used
     in) operating activities:
       Depreciation and amortization of property and equipment                           848            1,454          1,219
       Loss on disposal of assets                                                        230              482              2
       Amortization of software development costs                                        357            3,426          1,961
       Provision for inventory reserves and other non cash charges                       255            4,632          1,818
       (Reduction in) provision for accounts receivable reserves                          --              (44)           528
       Changes in operating assets and liabilities:

         Decrease (increase) in accounts receivable                                      213              374          7,898
         Decrease (increase) in inventories                                              167              824             29
         Decrease (increase) in prepaid expenses and deposits                             61              115            531
         (Decrease) increase in accounts payable and accrued liabilities                (441)          (1,441)        (3,566)
         (Decrease) increase in payroll-related liabilities                               55             (322)            57
         (Decrease) increase in taxes (other than payroll and income)                    (93)            (421)          (111)
         Increase (decrease) in customers' deposits                                      175              (15)        (4,611)
         (Decrease) increase in deferred revenue                                        (197)             398            895
                                                                                ---------------  -------------  -------------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                    4,229           (1,398)         1,604

INVESTING ACTIVITIES
   Purchase of property and equipment                                                    (25)            (179)        (2,008)
   Proceeds from sale of assets                                                           14              266              0
   Capitalization of software development costs                                           --             (570)        (1,753)
   Issuance of  Note Receivable                                                       (1,000)              --             --
                                                                                ---------------  -------------  -------------

NET CASH USED IN INVESTING ACTIVITIES                                                 (1,011)            (483)        (3,761)

FINANCING ACTIVITIES
   Proceeds from exercise of stock options                                                 2               --            751
                                                                                ---------------  -------------  --------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                                                  2               --            751
                                                                                ---------------  -------------  -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   3,220           (1,881)        (1,406)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                         1,567            3,448          4,854
                                                                                ---------------  -------------  -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                        $      4,787     $      1,567   $      3,448
                                                                                ===============  =============  =============


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

                                       38









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of Operations and Organization

Cellular Technical Services Company, Inc. ("CTS") is primarily engaged in the
design, development, marketing, installation and support of integrated
information processing and information management systems for the wireless
communications industry. CTS was incorporated in Delaware on August 19, 1988.
CTS formed a majority-owned subsidiary, Isis Tele-Communications, Inc. ("Isis")
on November 16, 1999. Isis is engaged in the wireline phone card industry
primarily as a distributor and a reseller. Isis commenced operations in December
1999. Its results were immaterial in 1999. Unless the context otherwise
requires, all references to the "Company" herein include Cellular Technical
Services Company, Inc. and any entity over which it has or shares operational
control.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiary. All intercompany accounts and transactions have been eliminated
in consolidation.

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 consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

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.

Fair Values of Financial Instruments

At December 31, 1999, the Company has the following financial instruments: cash
and cash equivalents, accounts receivable, a note receivable, accounts payable
and accrued liabilities. The carrying value of cash and cash equivalents,
accounts receivable, note receivable, accounts payable and accrued liabilities
approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature.

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.

                                       39










                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Inventories

Inventories, which primarily consist of service parts and accessories (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. The
Company monitors inventory for obsolescence and considers factors such as
turnover, technical obsolescence and pricing. Reserves for slow-moving and
obsolete inventory are maintained where appropriate. Currently, the majority of
the Company's inventory is being used as repair parts for servicing its
installed customer base.

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 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 consist primarily of internally developed software.
Capitalization of software development costs begins upon the establishment of
technological feasibility and ceases when products are completed. Amortization
begins when products are available for general release. Amortization of
capitalized software development costs is the greater of the amount computed
using the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product, or the
straight-line method over the remaining estimated economic life of the product,
generally twenty-four months.

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. As part
of an ongoing recoverability review to address the capitalization of new
software development and enhancement costs and the amortization of existing
capitalized costs, the Company ceased capitalizing software development and
enhancement costs in 1998. The Company also accelerated the amortization of
certain capitalized costs reflecting the Company's estimates of recoverability
values resulting from lower sales levels in 1998 and future sales projections,
based on changed market conditions.

Long-Lived Assets

Long-lived and intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Impairment is measured by comparing the carrying value of the
long-lived assets to the estimated future cash flows expected to result from use
of the assets and their ultimate disposition. In circumstances where impairment
is determined to exist, the Company will write down the asset to its fair value
based on the present value of estimated expected future cash flows.

                                       40










                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Revenue Recognition

Statement of Position 97-2, Software Revenue Recognition (SOP 97-2) was issued
in 1997 by the American Institute of Certified Public Accountants (AICPA) and
was amended by SOP 98-4. The Company adopted SOP 97-2 effective January 1, 1998.
Based upon its interpretation of SOP 97-2 and SOP 98-4, the Company believes its
current revenue recognition policies and practices are consistent with these
SOPs.

The AICPA recently issued SOP 98-9, which provides certain amendments to SOP
97-2, and which is effective for transactions entered into beginning January 1,
2000. CTS will adopt this pronouncement as of January 1, 2000. The pronouncement
is not expected to materially impact the Company's revenue recognition
practices.

The Company generates revenues through two sources: (1) systems revenues,
consisting primarily of bundled hardware and software products, and (2) services
revenues, consisting primarily of hardware and software maintenance and related
support services.

Systems revenues are recognized when all of the following conditions are met:

(i)      Persuasive evidence of an arrangement exists.

(ii)     Delivery has occurred. Delivery also includes satisfaction of contract
         criteria and that there are no additional undelivered elements
         essential to the functionality of the delivered products. Revenues are
         deferred for undelivered non-essential elements based on vendor
         specific objective evidence ("VSOE") of the fair value for all elements
         of the arrangement.

(iii)    The amount is fixed and determinable.

(iv)     Collectability is probable.

VSOE is typically based on the price charged when an element is sold separately,
or, in the case of an element not yet sold separately, the price established by
authorized management, if it is probable that the price, once established, will
not change before market introduction. Elements included in multiple element
arrangements could consist of software products, upgrades, enhancements,
customer support services, or consulting services.

Service revenues are recognized ratably over the period that maintenance
coverage is provided. Prepaid or allocated maintenance and services are recorded
as deferred revenues.

Segment Reporting

In January 1999, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This standard established interim and
annual reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company's operations consist of two segments, integrated information
processing and information management systems for the wireless communications
industry, and phone-card distribution.

Financial information from segments below the quantitative thresholds is
attributable to one operating segment of the Company. The phone-card
distribution business segment does not meet the quantitative thresholds for a
reportable segment.

                                       41










                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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 Earnings or Loss Per Share

Basic earnings or loss per share is computed by dividing net earnings or loss by
the weighted average number of common shares outstanding for the period. Diluted
earnings or loss per share reflects the potential dilution of securities by
including other common stock equivalents (i.e. stock options) in the weighted
average number of common shares outstanding for a period, if dilutive.

Other Comprehensive Income

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. The Company has no items of
comprehensive income (loss).

Stock-Based Compensation

The Company evaluates stock-based compensation in accordance with SFAS 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 method prescribed under Accounting Principles Board Opinion No.
25 and has adopted only the disclosure provisions of Statement 123.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because the Company has never used nor currently intends to use
derivatives, management does not anticipate the adoption of this new standard
will have a significant effect on the Company's financial position, results of
operations or liquidity.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin Number 101 ("SAB 101"). This summarized certain areas of the staff's
views in applying generally accepted accounting principles in financial
statements. The Company believes that its current revenue recognition principles
comply with SAB 101.


                                       42









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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) 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. 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 whose purchases represented 46%, 21%, 14% and 12% of 1999 sales,
   three customers whose purchases represented 41%, 20% and 19% of 1998 sales,
   and four customers whose purchases represented 31%, 20%, 20% and 19% of 1997
   sales. The aggregate sales to these customers represented 93%, 80% and 90% of
   the Company's total systems and service revenues in 1999, 1998 and 1997,
   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.

b) Liquidity; Possible need for financing: Historically, the Company has
   experienced uneven cash flow and operating results, and, during 1997 and
   1998, significant operating losses. These losses originated primarily from a
   combination of lower than expected revenues and an unbalanced cost structure
   in relation to those revenues. The Company's net operating results were $2.6
   million, ($10.9) million and ($5.0) million for the years ended December 31,
   1999, 1998 and 1997, respectively. Net non-cash charges included in these
   three years were $1.7 million, $9.9 million and $5.5 million, respectively.
   Cash provided by (used in) operating activities was $4.2 million, ($1.4)
   million and $1.6 million in 1999, 1998 and 1997, respectively. As of December
   31, 1999, the Company had an accumulated deficit of $24.3 million, the
   majority of which accumulated during 1997 and 1998. As of December 31, 1999,
   the Company's working capital was $3.6 million and its cash and cash
   equivalents balances were $4.8 million.

   During 1996 and 1997 the Company deployed its initial cloning fraud
   prevention Blackbird Products and incurred substantial operating expenses
   during such deployment. During 1998, in response to changing market
   conditions and unfavorable operating results, the Company implemented a
   restructuring plan that included, among other initiatives, streamlining the
   Company's operations to better balance expenses and revenues, and directing
   additional development efforts and resources towards new products that can
   generate new sources of revenue. Through the end of 1999, the results of the
   Company's restructuring plan resulted in both positive cash flow and
   profitability.

   Going forward into 2000, the Company has continued to reduce its fixed
   operating costs and has a consistent base of recurring revenue from its
   services business. 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
   through the next twelve to twenty-four months. However, the Company's
   inability to successfully generate sufficient cash flow from operations 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 for that period.

                                       43









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

c) 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 significant legal matter is outstanding as of
   December 31, 1999:

   In January 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.
   In January 1999, the Court granted the Company's motion to transfer this
   lawsuit to the United States District Court for the Western District of
   Washington. The complaint asserts that the plaintiff is the exclusive
   licensee of all rights under the `591 patent, alleges that the Company's
   wireless 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 this action can currently be made, an unfavorable resolution
   of this lawsuit could have a material adverse effect on the Company's
   financial position, results of operations and liquidity.

   The Company is also a party to other legal proceedings which arise in the
   ordinary course of business and/or which management believes will be resolved
   without a material adverse effect on the Company's business, financial
   condition or results of operations.

Reclassifications

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

NOTE B - INVENTORIES:

The current inventory level primarily reflects parts and accessories used in the
Company's service and maintenance business. Inventory consists of the following
(in 000's):



                                                                          DECEMBER 31,
                                                                  ------------------------------
                                                                      1999            1998
                                                                  --------------  --------------
                                                                            
         Service parts and accessories                            $      1,589    $      3,815
         Less reserves                                                    (997)         (2,801)
                                                                  --------------  --------------
                                                                  $        592    $      1,014
                                                                  ==============  ==============




NOTE C - PROPERTY AND EQUIPMENT:

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



                                                                           DECEMBER 31,
                                                                  -------------------------------
                                                                      1999             1998
                                                                  --------------   --------------
                                                                             
         Computer equipment and software                          $      3,518     $      3,898
         Furniture, fixtures and office equipment                          588              950
         Leasehold improvements                                            181              181
                                                                  --------------   --------------
                                                                         4,287            5,029
         Less accumulated depreciation and amortization                 (3,413)          (3,088)
                                                                  --------------   --------------
                                                                  $        874     $      1,941
                                                                  ==============   ==============


                                       44









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - NOTE RECEIVABLE:

In November 1999, the Company invested in a $1.0 million 10% convertible note of
KSI, Inc. which is due in full in November 2000. The Company intends to hold the
note until maturity. The note is convertible into 9% preferred stock.
Additionally, the Company received warrants to purchase KSI, Inc. common stock
in connection with this investment.

NOTE E - COMMITMENTS AND CONTINGENCIES:

Leases:

The Company leases office space under three non-cancelable operating leases with
expiration dates in 2000. The Company also leases equipment and
telecommunication lines and services under non-cancelable operating leases
expiring through 2001. 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.

The Company is evaluating its future space needs and believes it will be able to
obtain renewals of current office leases or new office space under commercially
reasonable terms.

Amounts charged to operations under all lease and rental agreements totaled $0.7
million, $0.9 million and $0.8 million in 1999, 1998 and 1997, respectively.
Future minimum annual lease payments at December 31, 1999, under those
agreements with initial terms greater than one year are as follows (in 000's):

                
                           2000                $    253
                           2001                      13
                                              -----------
                                               $    266
                                              ===========


                           


Employment Agreements:

At December 31, 1999, the Company has employment agreements with two officers,
both of which have terms expiring in 2000.

NOTE F - EMPLOYEE RETIREMENT SAVINGS PLAN:

The Company has adopted an Employee Retirement Savings Plan covering
substantially all employees who have been employed for at least one month 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 $63,000, $133,000 and $176,000 during 1999, 1998 and 1997,
respectively.

                                       45









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - INCOME TAXES:

At December 31, 1999, the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $50.2 million and research and
development tax credits of approximately $1.2 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 certain amounts on exercise of stock options. A portion of
the net operating loss carryforward (approximately $28 million) is attributed to
the stock option deduction, the tax effect of which will be credited to
additional paid-in capital when realized. Certain net operating loss
carryforwards of the Company are subject to limitations imposed by Section 382
of the Internal Revenue Code because there was an ownership change of greater
than 50% in the Company during 1991.

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):



                                                                                             DECEMBER 31,
                                                                            -----------------------------------------------
                                                                               1999              1998             1997
                                                                            ------------     -------------    -------------
                                                                                                     
    Deferred tax assets:
       Net operating loss carryforwards                                     $    17,068      $    17,688      $    15,024
       Research and development credits                                           1,207            1,158              996
       AMT credits                                                                   27                0                0
       Reserves and allowances on financial statements in excess of tax
         returns                                                                  1,113              977              822
       Depreciation on tax returns lower than financial statements                   22                0                0
       Capitalized software development costs                                        28                0                0
                                                                            ------------     -------------    -------------

           Total deferred tax assets                                             19,465           19,823           16,842

    Deferred tax liabilities:
       Depreciation on tax returns lower than financial statements                    0               90              137
       Capitalized software development costs                                         0              125            1,072
                                                                            ------------     -------------     ------------

           Total deferred tax liabilities                                             0              215            1,209
                                                                            ------------     -------------     ------------

           Net deferred tax assets                                               19,465           19,608           15,633

           Valuation allowance                                                  (19,465)         (19,608)         (15,633)
                                                                            ============     =============    =============

    Net                                                                     $   --           $   --           $   --
                                                                            ============     =============    =============



The Company was placed in a position to owe Alternative Minimum Tax (AMT) for
1999. This has created an AMT credit of approximately $27,000 to be utilized in
future tax periods against any regular federal tax liability.

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 net changes in the valuation allowance for deferred tax assets
were approximately ($0.1) million, $4.0 million and $2.1 million and were
primarily attributable to the net income in 1999 and the net operating losses
incurred by the Company during 1998 and 1997, respectively.

                                       46









                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - INCOME TAXES (CONTINUED):

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



                                                                                        YEAR ENDED DECEMBER 31,
                                                                              ---------------------------------------------
                                                                                 1999            1998             1997
                                                                              ------------    ------------     ------------
                                                                                                     
        Income tax provision (benefit) at statutory rate of 34%               $       894     $    (3,692)     $    (1,716)

        Utilization of net operating loss carryforwards                              (894)              0                0

        (Income) losses producing no current tax benefit                                0           3,692            1,716

        Alternative minimum tax provision                                              31               0                0
                                                                              ------------    ------------     ------------

        Provision for income taxes, current                                   $        31     $         0      $         0
                                                                              ============    ============     ============




NOTE H - STOCKHOLDERS' EQUITY:

Reverse Stock Split:

On January 5, 1999, the Company implemented a one-for-ten stock combination
(reverse stock split) pursuant to the stockholders' approval at the Company's
annual meeting of stockholders on December 14, 1998. All outstanding common
shares and per share amounts in the accompanying financial statements have been
retroactively adjusted to give effect to the one-for-ten stock combination.

Stock Options

Pursuant to the Company's 1991 Qualified Stock Option and 1991 Non-Qualified
Stock Option Plans, as amended, the Company was authorized to grant options to:
(i) purchase up to 280,000 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 (ii) purchase up to 120,000 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, respectively. 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. No
new grants may be made under the 1991 Plans.

The Company's 1993 Non-Employee Director Stock Option Plan allows the Company to
grant options to purchase up to 30,000 shares of Common Stock. Each non-employee
director is to be granted options to purchase: (i) 2,000 shares of Common Stock
upon initial appointment as a director of the Company; and (ii) an additional
1,200 shares, 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.

The Company's 1996 Stock Option Plan authorizes the grant of both incentive
("ISO") and non-qualified stock options up to a maximum of 185,000 shares of the
Company's Common Stock to employees (including officers and directors who are
employees) of and consultants to the Company. 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.

                                       47










                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - STOCKHOLDERS' EQUITY (CONTINUED):

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 (loss) and earnings (loss) 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 1999, 1998
and 1997 was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1999, 1998 and 1997,
respectively: risk-free interest rates of 6.4%, 4.7% and 5.7%; dividend yields
of 0.0%, 0.0% and 0.0%; volatility factors of the expected market price of the
Company's common stock of 1.36, .79 and .66 and a weighted average expected life
of the options of 5.0, 4.8 and 5.1 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,
1999, 1998 and 1997 was $2.79, $10.57 and $52.80, 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):



                                                                          1999             1998             1997
                                                                      --------------   -------------    -------------
                                                                                               
       Net Income (loss) - as reported                                $     2,599      $   (10,860)     $    (5,046)

       Net Income (loss) - pro forma                                  $     2,353      $   (11,248)     $    (6,499)

       Basic earnings (loss) per share - as reported                  $      1.14      $    (4.76)      $     (2.22)

       Basic earnings (loss) per share - pro forma                    $      1.03      $    (4.93)      $     (2.90)

       Diluted earnings (loss) per share - as reported                $      1.13      $    (4.76)      $     (2.22)

       Diluted earnings (loss) per share - pro forma                  $      1.03      $    (4.93)      $     (2.90)



                                       48










                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - STOCKHOLDERS' EQUITY (CONTINUED):

The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 1999 (in 000's except per share
amounts):



                                                       Options Outstanding                         Options Exercisable
                                        --------------------------------------------------------------------------------------
                                                           Weighted-
                                                            Average
                                                           Remaining                                            Weighted-
                                             Number       Contractual   Weighted-Average         Number          Average
         Range of Exercise Prices         Outstanding        Life        Exercise Price        Exercisable    Exercise Price
       -----------------------------------------------------------------------------------   ---------------------------------

                                                                                                   
       $     1.91   -    $  3.28                                              $  2.97                 --        $      --
                                                  62            9.41

             3.47   -      10.00                  53            7.64             5.36                 16             7.57

            16.72   -      61.25                  56            4.91            53.18                 49            56.96

            63.75   -     188.75                  38            5.66            96.90                 33            95.90
                                        -----------------                                    ----------------
       $     1.91   -    $188.75                 209            7.08         $  34.07                 98        $   61.95
                                        =================                                    ================




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





                                                         Shares Under                    Option                Weighted Ave.
                                                            Option                       Prices               Exercise Price
                                                     ==================== ==================================  ================
                                                                                                        

       Balance, January 1, 1997                                232              $  10.00      -   $  199.40           $ 71.90
       Granted                                                  79                 27.00      -      188.80             87.80
       Exercised                                               (16)                10.00      -      109.40             48.10
       Canceled                                                (48)                16.67      -      178.80             74.70
                                                     --------------------

       Balance, December 31, 1997                              247                 10.00      -      199.40             77.96
       Granted                                                  91                  3.44      -       29.69             10.83
       Exercised                                                --                            -
       Canceled                                               (151)                 5.00      -      199.38             74.42
                                                     --------------------

       Balance, December 31, 1998                              187                  3.44      -      188.75             48.10
       Granted                                                  83                  1.91      -        7.88              3.13
       Exercised                                                (1)                 5.00      -        5.00              5.00
       Canceled                                                (60)                 2.06      -      178.75             35.14
                                                     ====================

       Balance, December 31, 1999                              209                  1.91      -      188.75             34.07
                                                     ====================

       Exercisable at December 31, 1999                         98
                                                     ====================

       Available for grant at December 31, 1999                 77
                                                     ====================

       Common Stock reserved for future issuance               286
                                                     ====================



Shares exercisable at December 31, 1998 and 1997 were 103 and 110, respectively.


                                       49













                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I - EARNINGS PER SHARE

The following represents the calculations for earnings per share (in 000's,
except per share amounts):



                                                                           YEAR ENDED DECEMBER 31,
                                                                -----------------------------------------------
                                                                   1999             1998              1997
                                                                ------------     ------------     -------------
                                                                                         
Basic and diluted earnings per share:

  Net Income (loss) (A)                                         $2,599           $(10,860)        $(5,046)
                                                                ======           ========         =======
   Weighted average number of shares outstanding (B)             2,282              2,281           2,273

   Stock options                                                    10               **              **
                                                                ------           --------         -------
   Weighted average number of shares outstanding (C)             2,292              2,281           2,273
                                                                ======           ========         =======

   Earnings (loss) per share:

      Basic (A)/(B)                                             $ 1.14           $  (4.76)        $ (2.22)
                                                                ======           ========         =======

      Diluted (A)/(C)                                           $ 1.13           $  (4.76)        $ (2.22)
                                                                ======           ========         =======


** Excluded from the computation of diluted earnings per share given the effects
   were anti-dilutive.





                                       50













                                   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 29, 2000

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

                                               
/s/ Stephen Katz                                  /s/ Joyce S. Jones
- --------------------------------------            -----------------------------
Stephen Katz, Chairman of the Board of            Joyce S. Jones, Director and
Directors and Chief Executive Officer             Chief Operating Officer
(Principal Executive Officer)                     March 29, 2000
March 29, 2000

/s/ Bruce R. York                                 /s/ James Porter
- --------------------------------------            -----------------------------
Bruce R. York                                     James Porter, Director
Vice President and Chief Financial Officer        March 29, 2000
(Principal Financial and Accounting Officer)
March 29, 2000

/s/ Lawrence Schoenberg
- -------------------------------------
Lawrence Schoenberg, Director
March 29, 2000






                                       51











                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                   (in 000's)



                                                            Balance at                                             Balance at
                                                           Beginning of                                              End of
                                                              Period          Additions          Deductions          Period
                                                           -------------    ---------------    --------------     -------------
                                                                                                       
INVENTORY RESERVES

Year ended December 31, 1997                                  $  462          $1,818             $  183              $2,097
                                                           =============    ===============    ==============     =============

Year ended December 31, 1998                                  $2,097          $4,590             $3,886              $2,801
                                                           =============    ===============    ==============     =============

Year ended December 31, 1999                                  $2,801          $  255             $2,059              $  997
                                                           =============    ===============    ==============     =============

SALES AND RECEIVABLE ALLOWANCES

Year ended December 31, 1997                                  $  101          $  528             $  442              $  187
                                                           =============    ===============    ==============     =============

Year ended December 31, 1998                                  $  187          $  (44)            $   71              $   72
                                                           =============    ===============    ==============     =============

Year ended December 31, 1999                                  $   72          $    0             $   67              $    5
                                                           =============    ===============    ==============     =============



                                       52


                       STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as.................................'TM'

The registered trademark symbol shall be expressed as.......................'r'

The service mark symbol shall be expressed as..............................'sm'

EX-7

                                                                     EXHIBIT 7.7

           AMENDMENT TO 1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN


                                 AMENDMENT NO. 2
                                       TO
                  1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
                                       OF
                    CELLULAR TECHNICAL SERVICES COMPANY, INC.
                        (Effective as of April 22, 1999)

         Paragraph 4 of the Plan is hereby amended to read as follows:

"4.      OPTION GRANTS

         Each individual who first becomes an Outside Director after the
effective date of the Plan shall be granted on the date he or she first becomes
an Outside Director an option to purchase 5,000 shares of Common Stock. In
addition, on January 2 of each year beginning with January 2, 1994, each Outside
Director then in office shall be granted an option to purchase an additional
3,000 shares of Common Stock. Furthermore, subject to the express provisions of
the Plan, the Board also shall have the authority, in its sole discretion, to
determine: the Outside Directors who shall be granted options in addition to the
option grants described above; the times when such additional options shall be
granted; the number of shares of Common Stock to be subject to each such
additional option; whether and under what conditions to accelerate the date of
exercise of any such additional option; whether to restrict the sale or other
disposition of the shares of Common Stock acquired upon the exercise of such an
option and, if so, whether to waive any such restriction; whether to subject the
exercise of all or any portion of an option to the fulfillment of contingencies
as specified in the contract referred to in Paragraph 13 hereof and to determine
whether such contingencies have been met; and, with the consent of the optionee,
to cancel or modify an option, provided, that the modified provision is
permitted to be included in an option granted under the Plan on the date of the
modification."

EX-21

                                                                    EXHIBIT 21.1


                         SUBSIDIARIES OF THE REGISTRANT




Name of Subsidiary                      State of Incorporation    Name Under Which Subsidiary Is Doing Business
- ------------------                      ----------------------    ---------------------------------------------
                                                            
Isis Tele-Communications, Inc.          Delaware                  Isis Tele-Communications, Inc.

EX-23

                                                                    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, and 1996 Stock
Option Plan of our report dated February 8, 2000 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, 1999.

                                                           /s/ Ernst & Young LLP

Seattle, Washington
March 29, 2000

EX-27

 

<ARTICLE>                              5
<LEGEND>
THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS

<MULTIPLIER>                           1,000

                                    
<PERIOD-TYPE>                               12-MOS
<FISCAL-YEAR-END>                      DEC-31-1999
<PERIOD-START>                         JAN-01-1999
<PERIOD-END>                           DEC-31-1999
<CASH>                                       4,787
<SECURITIES>                                     0
<RECEIVABLES>                                2,652
<ALLOWANCES>                                     5
<INVENTORY>                                    592
<CURRENT-ASSETS>                             8,150
<PP&E>                                       4,287
<DEPRECIATION>                               3,413
<TOTAL-ASSETS>                              10,202
<CURRENT-LIABILITIES>                        4,529
<BONDS>                                          0
<PREFERRED-MANDATORY>                            0
<PREFERRED>                                      0
<COMMON>                                        23
<OTHER-SE>                                   5,650
<TOTAL-LIABILITY-AND-EQUITY>                10,202
<SALES>                                      1,642
<TOTAL-REVENUES>                            10,241
<CGS>                                        3,745
<TOTAL-COSTS>                                8,160
<OTHER-EXPENSES>                                 0
<LOSS-PROVISION>                                 0
<INTEREST-EXPENSE>                               0
<INCOME-PRETAX>                              2,630
<INCOME-TAX>                                    31
<INCOME-CONTINUING>                          2,599
<DISCONTINUED>                                   0
<EXTRAORDINARY>                                  0
<CHANGES>                                        0
<NET-INCOME>                                 2,599
<EPS-BASIC>                                 1.14
<EPS-DILUTED>                                 1.13