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, 2001

                                       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.)
 Incorporation or Organization)

            2815 Second Avenue, Suite 100, 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. [X]

As of March 22, 2002, there were 2,291,770 shares of Common Stock, $.001 par
value outstanding. As of March 22, 2002 the aggregate market value of the
Registrant's Common Stock, $.001 par value, held by non-affiliates was
approximately $5.2 million. The aggregate market value of the Company's stock
was calculated using $2.33, the closing price for its Common Stock on March 22,
2002 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 2002 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.....................................................................................................18
Item 3.   Legal Proceedings..............................................................................................18
Item 4.   Submission of Matters to a Vote of Security Holders............................................................18


PART II..................................................................................................................19

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters..........................................19
Item 6.   Selected Consolidated Financial Data...........................................................................20
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations..........................21
Item 7A.  Quantitative and qualitative disclosures about market risk.....................................................28
Item 8.   Financial Statements and Supplementary Data....................................................................28
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........................28

PART III.................................................................................................................29

Item 10.   Directors and Executive Officers of the Registrant............................................................29
Item 11.   Executive Compensation........................................................................................30
Item 12.   Security Ownership of Certain Beneficial Owners and Management................................................30
Item 13.   Certain Relationships and Related Transactions................................................................30


PART IV..................................................................................................................31

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................................31


                                       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 13
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
and 2000, the Company implemented short and long-range strategic plans to
diversify its product mix. This diversification strategy is at the foundation of
the Company's future plans

In the fourth quarter of 1999, as part of its diversification strategy, the
Company launched Isis Tele-Communications, Inc. ("Isis"), a majority-owned
subsidiary, which designs, markets, and distributes both regionally and
nationally branded prepaid long-distance phonecards. Also in the fourth quarter
of 1999, the Company made a strategic investment in KSI, Inc. ("KSI"), a
provider of development-stage wireless geo-location technology. The Company made
further investments in KSI during 2000. KSI was acquired by TruePosition, Inc.
("TruePosition") in August 2000; as a result, the Company's investment in KSI
became and remains one in TruePosition. 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. During 2000 the
Company created a division called Neumobility'TM' to develop and market its
range of geo-location wireless software applications.

In recent years the Company's major customers have been wireless telephone
carriers for its Blackbird Platform Products. These carriers operate in a
dynamic, rapidly changing environment and are subject to intense competition,
cost sensitivity and other market forces. The primary customers for the
Company's Isis phonecard segment in 2001 and 2000 have been distributors,
retailers and convenience stores, which also operate in highly competitive
marketplaces. Customers for the Company's future Neumobility products and
services will be a variety of carriers, providers of location-based services and
data, merchants and consumers.

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Products

The Blackbird Platform Products

The Company's Blackbird'r' Platform product line included a suite of radio
frequency based platform solutions focusing on wireless fraud prevention. It
involved various forms of "pre-call" verification to ensure that the use of an
analog wireless telephone was legitimate before the device was allowed to
connect to a carrier's analog wireless communications network. Blackbird
Platform products were initially installed in over 2,000 cell sites in the US by
wireless carriers in 1996-1998. As digital wireless communication was adopted,
analog fraud decreased, and carriers gradually removed the Blackbird Platform
products from service. The final Blackbird customer contract expired on December
31, 2001, and no future revenue is anticipated from the Blackbird Platform
product line. Blackbird revenue accounted for 26% and 31% of consolidated
revenue for 2001 and 2000, respectively.

Prepaid Long-Distance Phonecard Products; Isis

To provide 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. Prepaid phonecards are generally known to be
reliable, easy-to-use and cost-effective alternatives to pay phones and other
long-distance calling alternatives. Growth in this market 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 groups as prepaid phonecards become even more widely
adopted.

Phonecards are primarily purchased through a variety of retail outlets such as
newsstands, convenience stores and grocery stores. Retail outlets purchase their
stock from carriers, resellers, or distributors, and sell them in individual
quantities. The primary types of phonecards the Company sells are pre-printed,
pre-activated cards from carriers, and private-label cards printed by the
Company that are activated upon sale or first usage, depending on terms. The
Company purchases large quantities of pre-printed cards or PINs at discounts to
face value of the product and resells them in smaller quantities to distributors
or retailers. For private-label cards, the Company incurs up-front printing
expenses, however, activation fees are generally delayed until sale is made to
the customer or first usage occurs by the end consumer. This allows the Company
to have a lower investment in its inventory. Long distance rates on the
Company's phonecards are typically lower than those charged by major,
facilities-based carriers. The Company also offers prepaid wireless products
including phones and prepaid wireless airtime cards.

Through its majority-owned subsidiary, Isis, the Company markets and distributes
branded and private-label prepaid long-distance phonecards in denominations
generally ranging from $5 to $20 per card. Isis specializes in targeted
marketing programs with aggressive domestic and international long-distance
rates. Isis distributes cards through regional and national multi-level
distribution channels, using direct sales, third-party distributors, 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 improving revenue and profitability of this product
line. Isis currently has offices in Los Angeles and Boston. Isis revenue
accounted for 74% and 69% of consolidated revenue for 2001 and 2000,
respectively.

                                       4











Location-Based Services: TruePosition, Inc. Investment and Neumobility'TM'
Division

Location-based services ("LBS") are part of a new, emerging market in which
wireless products or services are delivered to a consumer based upon where the
consumer is located. 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. There are currently two primary means of pinpointing the
location of a wireless device: 1) handset-based using global positioning
satellites ("GPS"), or 2) network-based using various technologies measuring the
signals including triangulation methods from cell-site antennae. Combinations of
the two methods and other technologies using different measurement techniques
may also develop. The services or applications to be delivered to mobile phones
or other wireless devices include finder applications assisting users in
locating others, businesses, or addresses; maps; directions; traffic reports;
coupons; and many other similar services. Revenue from these services will help
wireless carriers offset the costs of providing the location data within their
networks and will increase data airtime usage.

The Federal Communications Commission ("FCC") outlined a two-stage
implementation program in 1996 that requires all wireless carriers to deploy
wireless geo-location technology to provide the location of 911 wireless calls,
similar to that of wireline 911 calls over a phased-in period ("E-911"). Phase I
required the telephone number and cell site location to be provided by April
1998. Phase II required greater location accuracy, to within 50 to 300 meters,
depending on the location method used, by October 31, 2001. The E-911
implementation has been delayed, as carriers have obtained waivers and have been
slow to roll out the technology in their networks. The scheduled date for full
implementation of the FCC's Phase II requirements is still December 31, 2005,
but major carriers have been granted waivers to build out their networks and to
meet interim handset penetration deadlines. Certain wireless carriers have
announced that they now offer Phase II accuracy through network-based or
handset-based solutions in portions of their networks, effective in late 2001
and in early 2002, however, it will be a period of time until coverage available
for LBS is widespread.

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, a
provider of development-stage wireless geo-location technology. In August 2000,
TruePosition, Inc., a subsidiary of Liberty Media Corporation, acquired KSI. The
Company's total investment valued at cost in TruePosition, Inc. common stock at
December 31, 2001 was $1,754,000.

In late 1999 the Company began development of a location-based wireless software
product platform and mobile commerce applications. 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. In January 2001 the Company formed a
division called Neumobility'TM' for this product line. The Neumobility family of
products includes a scalable platform and an application suite providing
location-based information utilizing both network and satellite positioning
technologies. The platform is called NeuTrac'TM', and is a system utilizing
positioning data to create, maintain and deliver relevant content and services
in a location-based format. The NeuTrac platform is configurable and creates a
combination of subscription-based, pay-per-use and free, value-added services.
The application suite will include: NeuCommerce'TM', which allows for
personalized, permission-based one-to-one marketing; NeuMerchant'TM', which
allows for the tracking of merchant offers and creates metrics to analyze the
impact of marketing efforts; NeuMap'TM', which creates directions based upon
positioning data; NeuList'TM', which adds a location-sensitive component to
wireless e-mail functions; and NeuJournal'TM', a journaling feature which allows
for the documentation of location and content. The Company completed the initial
product suite in 2001.

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

                                       5












expansion. The Cellular Telecommunications Industry Association has estimated
that the number of wireless telephone subscribers in the United States increased
from approximately 34 million subscribers in 1995 to approximately 118 million
subscribers by mid-2001.

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. 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) are expected to continue to drive the minutes of use up.

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. 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

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 "concierge" service ("E411") and
traffic advisories. 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 provide opportunities
for the Company's products and services.

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.

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 and as such is moving to diversify the Company's
product mix within the growing telecommunications market. 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.

                                       6











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 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. Continuing to develop new products on a timely basis and
delivering exceptional customer service are key components of the Company's
strategic plans.

Product Development

For the years ended December 31, 2001, 2000 and 1999, the Company incurred
research and development expenditures of $1.8 million, $1.5 million and $1.6
million, respectively. 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 variety of functions not presently offered. Costs included
in the Company's 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 marketed Blackbird Platform Products directly to wireless
telephone carriers operating analog networks in the most heavily populated
United States markets. The Company sold and licensed Blackbird Platform Products
pursuant to agreements that typically provided for hardware purchases, software
licenses, customer support and the provision of related services.

The Company designs and markets prepaid phonecards and also re-sells prepaid
phonecards produced by others. The Company markets prepaid phonecard products
primarily through regional and national multi-level distribution channels, using
direct sales, third-party distributors, and telemarketing. These marketing
efforts are 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
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.

Revenue from Blackbird Platform Products represented 26% of the Company's total
revenue in 2001, compared to 31% in 2000 and 96% in 1999. The Company
anticipates no revenue from Blackbird Platform products in 2002 or beyond. The
Company's revenue will primarily result from sales from its Isis phonecard
subsidiary. The Company is actively marketing its Neumobility products but has
not yet received any orders for products from this division. See also "Business
Risks -- Dependence on Limited Product Base; Uncertainty of Widespread Market
Demand" below.

                                       7











Customer Support and Services

The Company provided hardware maintenance, software maintenance, software
subscription services (for software upgrades and new releases) and monitoring
services to its customers. Customer service personnel diagnosed and resolved
problems, dispatched third-party vendors, provided provisioning and integration
services, forwarded enhancement requests to the Company's product management
staff, and coordinated with customers with respect to software upgrades and new
releases. From its centralized call center in Seattle, Washington, the Company
maintained a national high-speed network for optimizing uptime and connectivity
to the local area networks of its customers. The Company also provided on-site
maintenance services for selected customers. An on-line customer management
system tracked problems and resolutions. Engineering research and development
personnel assist in software support activities to the extent required. The
Company believes it can build upon these same service offerings to support new
products to be delivered from its Neumobility division.

Major Customers

Customers of the Company's Blackbird Platform Products were wireless telephone
carriers. The Company had agreements expiring in 2001 with Verizon Wireless and
Cingular Wireless. Revenues from the Company's agreements with Verizon accounted
for 21% of the Company's total revenues in 2001 and 24% in 2000. 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. 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. 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 several large and many small competitors that currently
compete directly with the Company's prepaid phonecard 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 which the Company resells prepaid long-distance telephone services through
its prepaid phonecard products. Many of these competitors, including AT&T Corp.,
MCI WORLDCOM, Inc., Sprint Corporation, Verizon Select Services, Inc., Qwest,
IDT Corp., and 9278 Communications, Inc., 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. Additional competitive factors in the prepaid phonecard arena
include factors such as efficiency and depth of distribution channels, marketing
capabilities and name recognition. The prepaid phonecard business does not have
high entry barriers, and price competition is fierce. This has led to pressure
on gross margins. Certain competitors have exited this market to focus on other
telecommunications businesses.

The location-based services and mobile commerce market is in its early stages.
The Company believes that there will be several categories of competitors for
its products and services. These may include both network-based and GPS-based
geo-location position determination equipment providers, wireless switch
providers, wireless carriers and applications software providers. These
companies include: TruePosition, Inc., the Grayson Wireless

                                       8











division of Allen Telecom, Inc., Cell-Loc, Inc., Cambridge Positioning Systems,
Intrado, Inc., SiRF Technology, Inc., SignalSoft Corp., the XYPoint division of
TeleCommunication Systems, Inc., the SnapTrack, Inc. division of Qualcomm, Inc.,
Alcatel, Ericsson Inc., Nortel Networks Corp., Motorola Inc., Verizon Wireless,
Cingular Wireless, Sprint, AT&T Wireless, Voicestream Wireless, Airbiquity,
Inc., Webraska Mobile Technologies S.A., Mforma Corp., Autodesk, Inc., MapInfo
Corp., and others. Many of these competitors 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.

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 software that is incorporated in its products. The Company's current
software products have been designed to adhere to the UNIX operating system
standard that can operate on standard computer equipment sold by several
manufacturers and vendors.

In connection with its prepaid phonecard 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 phonecards 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. 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 February 28, 2002, the Company had 28 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

                                       9











attention to the descriptions of risks and uncertainties described below.

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 five 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 18 to 24 months. However, if the Company is unable to achieve positive cash
flow 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. See also "Nasdaq National Market System
Listing Requirements" below.

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: rapid industry change and technological obsolescence; changes
in regulations affecting the wireless industry; limited customer base and
reliance on a relatively small number of customers and customer contracts;
dependence on a limited number of existing products and services; uncertainty of
continued demand for and market penetration of its existing products and
services under existing and future contracts; long sales cycles; uncertainty in
its ability to timely develop, introduce and gain acceptance of new products and
services; uncertainty of the demand for and market penetration of new products
and services; the possible impact of competitive products and pricing; the risk
that its current and future products may contain errors or be affected by
technical problems that would be difficult and costly to detect and correct;
reliance on a limited number of outside vendors for key components and
processes; potential difficulties in managing changing business conditions; the
availability of financing; changes in the Company's operating expenses; uneven
revenue streams; the timing of payments by customers; 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 and has had limited
trading volumes in recent quarters. 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 and "Nasdaq
National Market System Listing Requirements below. 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

                                       10












companies. These broad market fluctuations may adversely affect the market price
of the Company's common stock.

Nasdaq National Market System ("Nasdaq") Listing Requirements.

Nasdaq requires a minimum $5 million value of public float for continued listing
on the Nasdaq National Market System. At December 31, 2001 the Company's stock
price was $2.29 and the market value of its public float was approximately $5.1
million. On March 1, 2002 the Company's closing stock price was $2.12 and the
market value of its public float was approximately $4.8 million. On March 4,
2002 the Company received a notice from Nasdaq indicating that the Company's
public float had not been over $5 million for 30 consecutive days. If the
Company fails to increase its public float value to $5 million for 10
consecutive trading days prior to June 3, 2002, Nasdaq has the right to delist
the stock or require the Company to move its stock to the Nasdaq SmallCap Market
System. The Company would have the right to request a hearing to appeal a
determination that the stock should be delisted. There is no assurance that the
Company would prevail in such a hearing. If the Company's stock were delisted,
the delisting would most likely have a material adverse affect on the price of
its common stock, would adversely affect the liquidity of the shares held by its
shareholders, and could severely restrict any ability the Company may have to
raise additional capital.

At December 31, 2001, the Company's stockholder's equity was $8.9 million. The
SEC has recently approved certain changes to Nasdaq's continued listing
quantitative standards. Effective November 30, 2002, Nasdaq's current $4 million
net tangible asset standard is being replaced with a $10 million stockholder's
equity requirement for continued listing on the Nasdaq National Market System.
If the Company fails to increase its stockholder's equity to $10 million by
November 1, 2002, Nasdaq has the right to delist the stock or require the
Company to move its stock to the Nasdaq SmallCap Market System. In the event the
Company's stockholder's equity does not rise above $10 million by November 1,
2002, the Company would have the right to request a hearing to appeal a
determination that the stock should be delisted. There is no assurance that the
Company would prevail in such a hearing. If the Company's stock were delisted,
the delisting would most likely have a material adverse affect on the price of
its common stock, would adversely affect the liquidity of the shares held by its
shareholders, and could severely restrict any ability the Company may have to
raise additional capital.

History of Net Losses; Accumulated Deficit

As of December 31, 2001, the Company had an accumulated deficit of $21.1
million, the majority of which accumulated during the three years ended December
31, 1998. 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 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. The Company's future operating results will not benefit
from revenue from Blackbird Platform Products as they were discontinued at
December 31, 2001. The Company anticipates that its prepaid phonecard products
will account for nearly all of the Company's revenue in 2002. As a result, the
Company's near-term operating results will depend on the demand for and market
acceptance of prepaid phonecard products. The market adoption and profitability
of the Company's prepaid phonecard products will need to increase in order to
achieve the Company's income targets for that product line. The market for
mobile location products and services is new and its potential is uncertain. The
Company needs wireless network operators to launch and maintain mobile location
position services

                                       11











allowing the Company's products and services to succeed in the future. The
Company cannot be assured that wireless carriers will accept the Company's
products or services or that end users will purchase mobile location services in
the future. 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 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's Blackbird Platform Products have been
discontinued as of December 31, 2001 and future revenue from its Neumobility
Products is uncertain. 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 that could result in
material delays in product introduction and acceptance or significantly
increased costs. The Company will be required to fund adequate product
development for its Neumobility Products to meet customer demands and to expand
its infrastructure during an initial sales cycle whose terms are not yet known.
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.

Dependence on Third-Party Vendors; Location equipment; Bandwidth.

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 phonecards, computer equipment,
network services, maintenance services and certain software are also required.
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 financial condition of the suppliers and 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 operation.

The Company's Neumobility products are dependent on third party location
services companies to build and install location equipment in conjunction with
wireless carriers. Technical failures, delays, increased costs or new technology
associated with developing or installing location equipment could delay demand
for the Company's products and services.

Risk of Product Defects; Product Design Flexibility

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. There
can be no assurance that any errors in the Company's existing or future products
will be

                                       12













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

The Company's Neumobility products have been designed to be operated on a
variety of hardware and software used by customers. The software must be
regularly updated to keep pace with changes in hardware, software,
communication, browser and other technology. Uncertainties about the timing and
nature of vendors' new product announcements or introduction of changes to
operating systems could require increased research and development spending by
the Company. Failure of the Company's products to operate effectively across
existing and future versions of hardware and software used by customers could
limit or reduce the market for the Company's products and 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 are developing or offer one
or more products or services similar to the products and services being
developed or being 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 is aware of many competitors that currently compete, or are expected
to compete in the future, directly with the Company's prepaid phonecard
products. The market for prepaid phonecards in the United States is increasingly
competitive and highly sensitive to declining prices. Per-minute pricing
continues to decline, and in some cases has declined faster than costs,
resulting in pressures on gross margins. The Company's strategy is to locate
high quality, low-cost product and sell directly to distributors and retailers.
There can be no assurance that the Company will be able to maintain or increase
its gross margins in the prepaid phonecard segment. 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
phonecard 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 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

                                       13











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 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.

Limited Customer Base; Reliance on Significant Customers.

The Company's potential customer base has been 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 one or
more single customers and their affiliates have accounted for more than 10% of
the Company's phonecard, 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:
one customer whose purchases represented 21% of consolidated 2001 sales, one
customer whose purchases represented 24% of consolidated 2000 sales, and four
customers whose purchases represented 46%, 21%, 14% and 12% of consolidated 1999
sales. The aggregate sales to these customers represented 21% of the Company's
consolidated phonecard and services revenue in 2001, and 24% and 93% of the
Company's consolidated phonecard, systems and service revenues in 2000 and 1999,
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 phonecard customers could have a material adverse effect on the
Company's business, financial condition and results of operations.

Strategic Relationships and Partnerships.

The Company will need to establish and maintain strategic relationships in the
geo-location wireless marketplace. The Company's objectives and goals for
strategic alliances include joint ventures with respect to technology, joint
sales and marketing relationship and alliances for new product development and
for the creation of new markets. The Company's success will depend on strategic
relationships to offer products and services to a larger customer base than can
be reached through its direct sales efforts. The Company cannot be assured that
it will be able to maintain, expand or enter into new relationships or that the
relationships will be on commercially reasonable terms. If the Company is unable
to develop strategic relationships, it will need to use substantially more
resources to develop, distribute and market its products and services than
planned, and could lose the customer introductions and co-marketing benefits
anticipated from such relationships.

Ability to Manage Product Distribution Channels.

The Company's prepaid phonecard products are currently marketed through multiple
distribution channels. 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 phonecard products and 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 phonecard
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

                                       14











Company's business, financial condition and results of operations.

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 effectively expand its products and services beyond its traditional
businesses into new arenas, 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 and 1999, the Company implemented a
restructuring plan that included, among other initiatives, reducing its
workforce by approximately 80% from December 1997 staffing levels. During 2001
the Company further reduced its workforce as its Blackbird Platform Product Line
approached the end of its business life and as it restructured its Isis sales
offices to more closely align with its revenue stream. 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 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.

Dependence on Personnel; Adequate Staffing Levels and Management of Growth.

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 several 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 does not maintain any key-man life insurance policies on
any of its employees.

The Company's accounting and financial requirements have become more complex
with the addition of its ISIS business and this trend is expected to continue as
its Neumobility products reach the marketplace. The Company's failure to
adequately recruit, hire, train and retain sufficient qualified staff to enable
proper financial and accounting control of the Company's future growth could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Uncertainty Regarding Proprietary Rights.

The Company's success will depend in part on its ability to protect its
technology, processes, trade secrets and other proprietary rights from
unauthorized disclosure and use and to operate without infringing the
proprietary rights of third parties. The Company's strategy is to protect its
technology and other proprietary rights through patents, copyrights, trademarks,
nondisclosure agreements, license agreements and other forms of protection. 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

                                       15











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.

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 System Failure and Risk of Network Security Failure

The Company operates and maintains internal computers and telecommunication
equipment. 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

                                       16











a material adverse effect on the Company's business, financial condition and
results of operations.

The Company's systems may be vulnerable to security risks or service disruptions
that could harm the Company's business. Potential unauthorized access to the
Company's systems could result in technical difficulties including delays, loss
of data, and inability to process user requests or network downtime causing
business interruption. Such events could be very expensive to remedy and could
damage the Company's reputation, discouraging customers from using the Company's
products or services. Any major disruption could have a material adverse effect
on the Company's business, financial condition and results of operations.

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 may 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; Legal Uncertainties; Website Information; Personal Data

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 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.

The Company may be subject to claims relating to information available on its
website, or from information or content accessible from the Company's websites
through links to other websites or through content and materials posted in chat
rooms or bulletin boards. The Company's commercial liability insurance may not
provide adequate protection against these types of claims.

The Company may be limited by domestic or international regulations promulgated
that limit the use of mobile location services with respect to personal privacy.
The FCC may adopt regulations related to European Union directives prohibiting
the transmission of personally identifiable data to third parties deemed to
provide inadequate privacy protection for that information. Congress has been
considering legislation that may regulate wireless carriers' use of call
location information. The Company may also be impacted by FCC actions relating
to protection of the privacy of a caller's location for E911 as well as for
commercial services. Any new

                                       17











legislation or regulation, or the application of laws or regulations could have
a material adverse effect on the Company's business, financial condition and
results of operations.

Risk of Litigation.

From time to time, the Company may be a party to legal proceedings, which may or
may not be in the ordinary course of business and which may have a material
adverse effect on the Company's business, financial condition or results of
operations.

Item 2. Properties

The Company leases approximately 10,000 square feet of general office space in
Seattle, Washington for its corporate offices under a three-year non-cancelable
operating lease that expires in September 2003. The lease contains renewal
options and provides for the pass-through to the Company of increases in
operating and other costs. Additionally, the Company currently has two lease
arrangements in connection with its prepaid phonecard operations consisting of a
12-month lease for approximately 1,700 square feet of general office space in
Boston, Massachusetts expiring November 2002 and a three-year lease for
approximately 1,700 square feet of general office space in Los Angeles,
California expiring March 2003.

Item 3. Legal Proceedings

From time to time, the Company may be a party to legal proceedings, which may or
may not be in the ordinary course of business and which may have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company is currently involved in one commercial litigation case.
On October 25, 2001, New England Telecom, Inc. and Paul Gregory, a former
employee, filed a claim in the Superior Court of Massachusetts against the
Company and its Chairman alleging, among other things, that the Company breached
a purchase agreement and a related employment contract. The Company has answered
the allegations and intends to vigorously defend the case. Since the case is
currently in the discovery phase, the Company is therefore unable to assess the
likely outcome of the case.

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.

                                       18












                                     PART II

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

The following table sets forth, for each quarter during fiscal 2000 and 2001 and
for the period from January 1, 2002 through March 22, 2002, the reported high
and low sales prices of the Company's Common Stock on The Nasdaq Stock Market
(National Market System) (Symbol: "CTSC").



                                                          Sales Price
                                                          -----------
                                                     High               Low
                                                     ----               ---
                                                                 
                 2000
                 ----
                 First Quarter                      $18.56             $7.56
                 Second Quarter                      16.38              6.75
                 Third Quarter                       11.38              7.06
                 Fourth Quarter                       8.50              2.22
                 2001
                 ----
                 First Quarter                        7.00              2.31
                 Second Quarter                       5.00              2.25
                 Third Quarter                        3.44              2.07
                 Fourth Quarter                       3.76              1.99
                 2002
                 ----
                 First Quarter through
                 March 22, 2002                       2.46              1.91


As of March 22, 2002, the number of holders of record of the Company's Common
Stock was 203, and the number of beneficial shareholders was estimated to be in
excess of 4,500. There were no dividends paid or other distributions made by the
Company with respect to its Common Stock during 2001 or 2000 and the Company has
no plans for any such payments in the future.

Nasdaq requires a minimum $5 million value of public float for continued listing
on the Nasdaq National Market System. At December 31, 2001 the Company's stock
price was $2.29 and the market value of its public float was approximately $5.1
million. On March 1, 2002 the Company's closing stock price was $2.12 and the
market value of its public float was approximately $4.8 million. On March 4,
2002 the Company received a notice from Nasdaq indicating that the Company's
public float had not been over $5 million for 30 consecutive days. If the
Company fails to increase its public float value to $5 million for 10
consecutive trading days prior to June 3, 2002, Nasdaq has the right to delist
the stock or require the Company to move its stock to the Nasdaq SmallCap Market
System. The Company would have the right to request a hearing to appeal a
determination that the stock should be delisted. There is no assurance that the
Company would prevail in such a hearing. If the Company's stock were delisted,
the delisting would most likely have a material adverse affect on the price of
its common stock, would adversely affect the liquidity of the shares held by its
shareholders, and could severely restrict any ability the Company may have to
raise additional capital.

At December 31, 2001, the Company's stockholder's equity was $8.9 million. The
SEC has recently approved certain changes to Nasdaq's continued listing
quantitative standards. Effective November 30, 2002, Nasdaq's current $4 million
net tangible asset standard is being replaced with a $10 million stockholder's
equity requirement for continued listing on the Nasdaq National Market System.
If the Company fails to increase its stockholder's equity to $10 million by
November 1, 2002, Nasdaq has the right to delist the stock or require the
Company to move its stock to the Nasdaq SmallCap Market System. In the event the
Company's stockholder's equity does not rise above $10 million by November 1,
2002, the Company would have the right to request a hearing to appeal a
determination that the stock should be delisted. There is no assurance that the
Company would prevail in such a hearing. If the Company's stock were delisted,
the delisting would most likely have a material adverse affect on the price of
its common stock, would adversely affect the liquidity of the shares held by its
shareholders, and could severely restrict any ability the Company may have to
raise additional capital.

                                       19











Item 6. Selected Consolidated Financial Data(1)



                                                              Year Ended December 31,
Statement of Operations Data:                           (In 000's, except per share amounts)
                                           ------------------------------------------------------------------
                                             2001          2000          1999           1998           1997
                                             ----          ----          ----           ----           ----
                                                                                      
Revenues                                   $20,416       $25,973       $10,241       $ 11,955        $30,255
Net Income (Loss)                              611         2,552         2,599        (10,860)        (5,046)
Basic Earnings (Loss) Per Share(2)            0.27          1.12          1.14         (4.76)          (2.22)
Diluted Earnings (Loss) Per Share(2)          0.27          1.09          1.13          (4.76)         (2.22)
Weighted Average Shares Outstanding:
     Basic                                   2,292         2,287         2,282          2,281          2,273
     Diluted                                 2,302         2,339         2,292          2,281          2,273
Cash Dividends Declared                         --            --            --             --             --


                                                                     December 31,
Balance Sheet Data:                                                   (In 000's)
                                           ------------------------------------------------------------------
                                             2001          2000          1999           1998           1997
                                             ----          ----          ----           ----           ----
                                                                                      
Working Capital                            $ 6,523       $ 5,443       $ 3,621       $    596        $ 6,535
Cash                                         6,353         4,529         4,787          1,567          3,448
Long Term Investment                         1,754         1,758         1,000             --             --
Total Assets                                 9,990         9,774        10,202          8,102         20,721
Total Stockholders' Equity                   8,879         8,268         5,673          3,072         13,890


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

(2) Per share amounts and weighted average shares outstanding have been
    retroactively adjusted to give effect to the one-for-ten reverse stock split
    effective January 5, 1999. In years where the Company incurred a net loss,
    common equivalent shares were not used in calculating diluted earnings per
    share, as the effect would be antidilutive.

                                       20











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.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to revenue recognition, product returns, bad
debts, inventories, investments, intangible assets, contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. A more detailed discussion on the application of these and other
accounting policies can be found in Note A in the Notes to the Consolidated
Financial Statements in Item 14 of this Annual Report on Form 10-K. Actual
results may differ from these estimates under different assumptions or
conditions.

Bad Debt

The Company maintains allowances for doubtful accounts for estimated losses
based on past collection history and specific risks identified in the portfolio,
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.

Allowance for Sales Returns

The Company maintains a provision for estimated sales returns of prepaid
phonecards. The Company records a provision for estimated sales returns in the
same period as the related revenues are recorded. These estimates are based on
historical sales returns, analysis of credit memo data and other known factors.
If the historical data the Company uses to calculate these estimates does not
properly reflect future returns, revenue could be overstated.

                                       21












Inventory

The Company is required to state its inventories at the lower of cost or market.
In assessing the ultimate realization of inventories, the Company is required to
make judgments as to future demand requirements and compare that with the
current or committed inventory levels. An allowance for obsolete inventory is
maintained to reflect the expected un-saleable inventory based on an evaluation
of slow moving products. It is possible that changes in required inventory
reserves may occur in the future.

Goodwill and Intangible Impairment

In assessing the recoverability of the Company's goodwill and other intangibles
the Company must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, the Company may be
required to record impairment charges for these assets not previously recorded.
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and will be required
to analyze its goodwill for impairment issues during the first six months of
2002, and then on a periodic basis thereafter. During the year ended December
31, 2001, the Company did not record any impairment losses related to goodwill
and other intangible assets.

Long-Term Investment

The Company accounts for its investment in True Position, Inc. of $1,754,000
under the cost method, as the Company does not have the ability to exercise
significant influence. Under the cost method of accounting, an investment in a
private company is carried at cost and adjusted only for other-than-temporary
declines in fair value, distributions of earnings and additional investments.
The Company periodically evaluates whether any decline in fair value of its
investment is other-than-temporary. This evaluation consists of review of
qualitative and quantitative factors by members of senior management as well as
market prices of comparable public companies. The Company receives periodic
financial statements to assist in reviewing relevant financial data and to
assist in determining whether such data may indicate other-than-temporary
declines in fair value below the Company's accounting basis. If the decline in
fair value is determined to be other-than-temporary and below the accounting
basis, the Company would record an expense to reduce the cost to fair value.

Overview

The Company develops, markets, distributes and supports a diversified mix of
products and services for the telecommunications industry. Over the past 13
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
and 2000, 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
future plans.

Products

Prepaid Long-Distance Phonecard Products

To provide 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 majority-owned
subsidiary, Isis Tele-Communications, Inc., the Company markets and distributes
branded prepaid long-distance phonecards in denominations generally ranging from
$5 to $20 per card. Isis also markets prepaid wireless phones and phonecards.
Isis specializes in targeted marketing programs and features local and toll-free
access numbers and aggressive domestic and international long-distance rates.
Isis distributes cards through regional and national multi-level distribution
channels, using direct sales, third party distributors and

                                       22











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 for improving revenue and profitability
of this product line for the Company. Isis has sales offices in Los Angeles and
Boston.

Geo-Location Wireless Applications Investment and Product Development

The Federal Communications Commission ("FCC") has required all wireless carriers
to deploy wireless geo-location technology to provide the location of 911
wireless calls, similar to that of wireline 911 calls. 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.

In late 1999 the Company began development of a location-based wireless software
product platform and mobile commerce applications. 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. In January 2001 the Company formed a
division called Neumobility'TM' for this product line. The Neumobility family of
products includes a scalable platform and an application suite providing
location-based information utilizing both network and satellite positioning
technologies. The platform is called NeuTrac'TM', and is a system utilizing
positioning data to create, maintain and deliver relevant content and services
in a location-based format. The NeuTrac platform is configurable and creates a
combination of subscription-based, pay-per-use and free value-added services.
The application suite will include: NeuCommerce'TM', which allows for
personalized, permission-based one-to-one marketing; NeuMerchant'TM', which
allows for the tracking of merchant offers and creates metrics to analyze the
impact of marketing efforts; NeuMap'TM', which creates directions based upon
positioning data; NeuList'TM', which adds a location-sensitive component to
wireless e-mail functions; and NeuJournal'TM', a journaling feature which allows
for the documentation of location and content. The Company completed the initial
product suite in 2001.

The Blackbird Platform Products

The Company's Blackbird Platform product line included a suite of radio
frequency based platform solutions focusing on wireless fraud prevention. It
involved various forms of "pre-call" verification to ensure that the use of an
analog wireless telephone was legitimate before the device was allowed to
connect to a carrier's analog wireless communications network. Blackbird
Platform products were initially installed in over 2,000 cell sites in the US by
wireless carriers in 1996-1998. As digital wireless communication was adopted,
analog fraud decreased, and carriers gradually removed the Blackbird Platform
products from service. The final contract expired December 31, 2001, and no
future revenue is anticipated from the Blackbird Platform product line.

Revenue and Expense

Revenue

During 2001, the Company generated revenue through two sources: (i) Isis
pre-paid phonecard product sales and (ii) Blackbird service revenue.

Prepaid phone-card revenue is comprised of wholesale and retail sales of prepaid
local, long-distance and wireless products. The revenue is recognized at
shipment of product, net of reserves for estimated returns. The Company
maintains an allowance for sales returns for prepaid phonecards based on
estimated returns in accordance with SFAS 48. Estimated returns, along with
their costs, have been reflected as a reduction in sales and cost of goods sold,
respectively, and reflected as a reduction in accounts receivable and an
increase in inventory, respectively.

                                       23












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.

Systems revenues are recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred
(including 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 of the fair value for all elements of the
arrangement); (iii) the amount is fixed and determinable; and (iv)
collectability is probable. There were no systems revenues during 2001.

Costs and Expenses

Costs of phonecards, services and systems are primarily comprised of the costs
of: (i) prepaid phonecard costs; (ii) equipment, including both proprietary and
third-party hardware and, to a lesser extent, manufacturing overhead and related
expenses; (iii) customer support; and (iv) 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 develop new products and services to
address emerging market opportunities, including those in the geo-location and
prepaid phonecard markets; (ii) enhance its sales and marketing activities; and
(iii) enhance its general and administrative activities.

Year ended December 31, 2001 compared to year ended December 31, 2000

Overview

Total revenues decreased 21% to $20,416,000 in 2001 from $25,973,000 in 2000.
Net income was $611,000, or $0.27 per diluted share in 2001, compared to net
income of $2,552,000, or $1.09 per diluted share in 2000. The Company recognized
a tax benefit of $11,000 in 2001 compared to a tax expense of $58,000 in 2000,
including federal alternative minimum taxes and state income taxes. The
consolidated revenue decrease was a result of lower systems and service revenue
from both the Company's Blackbird Platform products and Isis prepaid phonecard
segments as described below under "Revenue".

The $1.9 million decrease in net income for 2001 in comparison to 2000 is due to
several factors:

         Total gross margin decreased by $1.1 million from the 2000 year to the
         2001 year. Gross margin in the Blackbird segment decreased by $1.4
         million as revenue declined by $2.7 million and costs to provide the
         services were reduced by $1.3 million. Gross margin in the Isis segment
         increased by $0.3 million as revenue declined by $2.9 million and costs
         were reduced by $3.2 million.

         Operating expenses increased $0.1 million due to $0.4 million of
         increased R&D spending for the Company's Neumobility product line,
         partially offset by $0.1 million reduced sales and marketing and $0.2
         million reduced G&A spending.

                                       24












         Other income decreased $0.7 million as the Company recognized a
         one-time net arbitration settlement (excluding interest) of
         approximately $0.9 million during 2001 related to the Blackbird
         segment, compared to a one-time net payment from settlement of
         litigation in the amount of approximately $1.5 million during 2000
         related to the Isis segment. Additionally, there was approximately $0.1
         million in asset sales in 2000.

Revenue

Prepaid phonecard revenue decreased 16% to $15,148,000 in 2001, from $18,033,000
in 2000. The decrease is due to reduced demand for the Company's current product
offerings, lower headcount in the Company's ISIS segment and the closure of the
Company's New York and Chicago offices during 2001.

Service and systems revenue decreased 34% to $5,268,000 in 2001 from $7,940,000
in 2000. All of the 2001 and 2000 service revenue was derived from Blackbird
Platform Products. There was no systems revenue in 2001, a decrease from
$708,000 recognized in 2000 when the Company recognized revenue from certain
systems upgrades. The service revenue decrease is due to fewer cell sites under
contract during 2001 as compared to 2000. There will be no Blackbird revenue in
2002 as the Company's customer contracts for periods after December 2001 were
not renewed.

Costs and expenses

Cost of phonecards, services and systems decreased by $4,433,000 to $16,099,000
in 2001 from $20,532,000 in 2000. As a percent of total revenue, the costs were
79% for both the 2001 and 2000 periods. Blackbird gross margins were 76% and 67%
for 2001 and 2000, respectively. Isis gross margins were 2% and 0% for 2001 and
2000, respectively. The Isis segment recorded approximately $0.4 million in
inventory reserves in cost of sales during 2001, and approximately $1.4 million
during 2000, including approximately $1.3 million related to the bankruptcies of
three of its suppliers.

Sales and marketing expenses decreased 10% to $1,241,000 in 2001 from $1,373,000
in 2000. As a percent of total revenue, the costs were 6% and 5% for 2001 and
2000, respectively. The decrease in sales and marketing expenses is attributable
to headcount reductions for the Isis segment in 2001 compared to 2000 and a
decrease in sales and marketing expenditures for the Blackbird Platform
products, offset by increased spending for Neumobility products.

General and administrative expenses decreased 7% to $1,917,000 in 2001 from
$2,063,000 in 2000, primarily due to headcount and overhead reductions as
compared to the prior year.

Research and development costs increased 24% to $1,841,000 in 2001 from
$1,480,000 in 2000. The increase was attributable to increased spending on new
product development in the geo-location application technology area.

Other Income, net

Net other income decreased to $974,000 in 2001 from $1,669,000 in 2000. The 2001
period included a net arbitration settlement (excluding interest) of
approximately $900,000 related to the Blackbird business segment. The 2000
period included a net litigation settlement of approximately $1,500,000 related
to the Isis phonecard business segment. Other income also includes gains or
losses from sales of equipment and other miscellaneous income items.

Interest Income and Expense

                                       25












Net interest income decreased to $308,000 in 2001 from $416,000 in 2000. This
decrease is attributable to lower interest rates earned on invested cash
balances in the current year compared to prior year, which included interest
earned on a note with KSI, Inc. that was outstanding during the prior year,
offset by pre-award interest received on an arbitration settlement in 2001.

Year ended December 31, 2000 compared to year ended December 31, 1999

Overview

Total revenues increased 154% to $25,973,000 in 2000 from $10,241,000 in 1999,
and the Company generated net income of $2,552,000, or $1.09 per diluted share
in 2000, compared to $2,599,000, or $1.13 per diluted share in 1999. The Company
recognized an alternative minimum tax expense of $58,000 in 2000 compared to
$31,000 in 1999.

As described below, the increased overall revenue was due to an increase in
revenue from the Company's ISIS Tele-Communications, Inc. subsidiary from
prepaid long distance phone products, offset by a 22% decrease in combined sales
and service revenue from the Company's Blackbird Platform Products. The Company
attributes the lower revenue from its 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 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 2000.

Revenue

Prepaid phonecard revenue totaled $18,033,000 in 2000. Revenue was $19,000 from
sales of prepaid phonecards in 1999.

Service and systems revenue decreased 22% to $7,940,000 in 2000 from $10,222,000
in 1999 due to the factors discussed above.

Cost and Expenses

Costs of phonecards, services and systems increased to $20,532,000 in 2000 from
$3,745,000 in 1999. As a percent of total revenue, the costs were 79% and 37%
for the 2000 and 1999 periods, respectively. The increase in the amounts and
percentages of costs for 2000 relative to 1999 is primarily due to the prepaid
phonecard business being a larger percentage of the Company's overall business
with lower gross margins compared to the Company's other products. Included in
costs of goods sold for the Company's Isis subsidiary were write-offs related to
bankruptcies of three of its suppliers during 2000 totaling approximately $1.3
million. Partially offsetting these increases in costs were decreases in
amortization of capitalized software development costs and expense reductions
relating to reduced headcount and consolidation of warehousing facilities.

Sales and marketing expenses increased to $1,373,000 in 2000 from $685,000 in
1999. As a percent of total revenue, the costs were 5% and 7% for the 2000 and
1999 periods, respectively. The increase in sales and marketing expenses is
attributable to costs incurred in selling and marketing prepaid phonecards in
2000 offset by a decrease in sales and marketing expenses for the Blackbird
Platform products.

General and administrative expenses remained comparable at $2,063,000 and
$2,137,000 in 2000 and 1999, respectively.

Research and development costs decreased to $1,480,000 in 2000 from $1,593,000
in 1999. The decrease in expenditures in 2000 was attributable to reduced
staffing levels and related expenditures from the prior year

                                       26











period, partially offset by increased spending on product enhancements and new
product research in the geo-location application technology area.

Other Income, net

Net other income was $1,669,000 in 2000, compared to $274,000 in 1999. The 2000
period included a net legal settlement of approximately $1,500,000 received by
the Company and the 1999 period included a net state sales tax refund of
approximately $500,000.

Interest Income and Expense

Net interest income increased to $416,000 in 2000 from $275,000 in 1999,
resulting from higher average cash balances on hand and higher average interest
rates earned on invested cash in 2000 compared to 1999.

Liquidity and Capital Resources

The Company's capital requirements have historically 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 the sale of common stock
(including proceeds from the exercise of warrants and options) and from
operating profits in certain periods. On December 31, 2001, the Company's cash
balance was $6.4 million as compared to $4.5 million on December 31, 2000. The
Company's working capital increased to $6.5 million at December 31, 2001 from
$5.4 million at December 31, 2000.

Net Cash provided by operating activities amounted to $1.9 million in 2001,
compared to $1.1 million in 2000 and $4.2 million in 1999. Over the past few
years operating cash flow has been impacted by the contractual timing of
customer payments related to Blackbird sales agreements. Operating cash flow for
2001 was positively impacted by the Company's $0.6 million in net income and by
decreases in receivables, inventories, prepaid assets and an increase in
payables. It was negatively impacted by decreases in payroll-related liabilities
and deferred revenue. Operating cash flow for the comparable 2000 period was
positively impacted by the Company's $2.6 million in net income, non-cash
expenses and balance sheet changes. The reduction in operating cash flow from
1999 to 2000 primarily reflects the reduced level of deferred revenue at
December 31, 2000 as compared to the level at December 31, 1999.

Net cash used in investing activities totaled $55,000, $1,431,000 and $1,011,000
in 2001, 2000 and 1999, respectively. In 2000 the Company made an additional
investment in TruePosition, Inc. of $0.8 million and purchased $0.7 million in
equipment and leasehold improvement capital expenditures. 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 note
receivable and common stock were converted into common stock of TruePosition,
Inc. during 2000. At December 31, 2001, the Company had no commitments for
capital expenditures.

Net cash provided by financing activities resulting from the exercise of stock
options totaling $0, $43,000 and $2,000 during 2001, 2000 and 1999,
respectively.

Off-Balance Sheet Arrangements, Certain Trading Activities and Transactions with
Related and Certain Other Parties

The Company has no disclosed or undisclosed off-balance sheet arrangements. The
Company has future operating lease commitments of $0.4 million in 2002 and $0.3
million in 2003 relating primarily to office leases. The Company has no other
debt or standby arrangements requiring future payments. The Company had not
engaged in any trading activities involving non-exchange traded commodity
contracts. The Company has no

                                       27











material transactions with related parties or other parties able to negotiate
terms that would be more favorable than those available to clearly independent
third parties.

Operating Trends

The Company earned $0.6 million for the year ended December 31, 2001, compared
to $2.6 million for each of the years ended December 31, 2000 and December 31,
1999. As of December 31, 2001, the Company had an accumulated deficit of $21.2
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 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 to generate new sources of revenue.

In 2001, revenue from prepaid phonecards represented 74% of total revenue, and
revenue from Blackbird Platform Products represented 26% of the Company's total
revenue. The Company's Blackbird customer contracts were not renewed for 2002,
and the Company does not anticipate any revenue from any Blackbird products
after December 31, 2001.

Despite the Company's profitability, positive cash flow, and product
diversification in 1999, 2000 and 2001, there can be no assurance that the
Company's operations will be profitable on a quarterly 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.
Non-recurring, other income items favorably impacted results for calendar year
2000 and 2001. The Company does not anticipate any such items will occur in
future periods. The Company will use its cash and cash flow to cover operating
expenses for research and development, sales and marketing and general and
administrative activities; capital expansion to support new product development
including network and server expansion; potential acquisitions that may arise;
and for other general corporate purposes. The Company expects to post quarterly
losses during 2002 as it continues its development of its Neumobility products,
and has budgeted less than $250,000 per month for these development efforts.
While the Company believes that its current cash reserves and working capital
will provide sufficient cash to fund its operations for at least the next
eighteen to twenty-four months, unanticipated changes in customer needs and/or
other external factors may require additional financing and/or further expense
reductions.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company believes that all such 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.

                                       28












                                    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                    58   Chairman of the Board of Directors, Chief Executive              1988          2003
                                     Officer and Acting President
Lawrence Schoenberg(1)          69   Director                                                         1996          2002
Joshua J. Angel(1)              65   Director                                                         2001          2004
Henry B. Ellis(1)               52   Director                                                         2001          2004
Bruce R. York                   47   Vice President, Chief Financial Officer and Secretary             --            --


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. Since
September 1996 Mr. Katz has served as Chairman of the Board and Chief Executive
Officer of Global Payment Technologies, Inc.

         Lawrence Schoenberg has been 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 microcomputer segment subsequently became
a part of Merisel, Inc.

         Joshua J. Angel has been a director of the Company since June 2001. Mr.
Angel is Founder and Senior Managing Shareholder of Angel & Frankel, P.C., a New
York based law firm specializing in commercial

                                       29











insolvency and creditors' rights. Mr. Angel serves as a director of Dynacore
Holdings Corporation. Mr. Angel has a B.S. from N.Y.U. and an L.L.B. from
Columbia University.

         Henry B. Ellis has been a director of the Company since February 2001.
Since 1992 Mr. Ellis has been President and Chief Executive Officer of Bassett
California Company, a family-owned real estate holding company located in El
Paso, Texas. From June 1992 to February 1994 Mr. Ellis served as Chairman of the
Board and Chief Executive Officer of Grayson County State Bank, located in
Sherman, Texas. Since 1992 Mr. Ellis has served as a member of the Board of
Directors of Bluebonnet Savings Bank, a savings and loan institution located in
Dallas Texas. Mr. Ellis is also a director of Global Payment Technologies, Inc.

         Bruce R. York joined the Company in April 1999 as Vice President and
Chief Financial Officer. Mr. York has also served as Secretary since August
2000. 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, in
Seattle and London, including Director of Business Planning, Director of Finance
- - Europe, Director of Finance and Corporate Controller, and Finance Manager.
From September 1978 to April 1987, Mr. York held several positions with Price
Waterhouse in Seattle and New York, including Senior Tax Manager. Mr. York is a
C.P.A. and has an A.B. and an M.B.A. from Dartmouth College.

The Company's Board of Directors is divided into three classes. The Board is
composed of two Class I directors, Mr. Angel and Mr. Ellis, 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 2004, 2002
and 2003 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 2002 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 2002 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 2002 Annual Meeting of
Stockholders under the caption "Certain Relationships and Related Transactions."

                                       30













                                     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.............................................  33
Consolidated Balance Sheets at December 31, 2001 and 2000.....................................  34
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999....  35
Consolidated Statements of Stockholders' Equity for the years ended December 31,
   2001, 2000 and 1999........................................................................  36
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999....  37
Notes to Consolidated Financial Statements....................................................  38


    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 (5)
   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 (+)(5)
   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 (+)(5)
   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 (+)(5)
   7.7         Amendment to 1993 Non-Employee Director Stock Option Plan dated April 22, 1999 (+)(5)
   7.8         1996 Stock Option Plan (+)(4)
   7.9         Amendment to 1996 Stock Option Plan dated December 14, 1998 (+)(4)
  10.1         Lease Agreement between Registrant and ASA Properties, Inc. dated July 11, 2000 (7)
  21.1         Subsidiaries of the Registrant (8)
  23.1         Consent of Ernst & Young LLP, independent auditors (8)


                                       31












- ----------
            
    (+)        Management contract or compensation plan or arrangement required to be noted as provided in Item 14(a)(3).
    (1)        Incorporated by reference to Registration Statement on Form S-1 declared effective on August 6, 1991 (File No.
                  33-41176).
    (2)        Incorporated by reference to Registration Statement on Form S-8 filed on March 7, 1994 (File No. 33-76128).
    (3)        Incorporated by reference to Annual Report on Form 10-K filed on March 30, 1994 for the year ended
                  December 31, 1993 (File No. 0-19437).
    (4)        Incorporated by reference to Quarterly Report on Form 10-Q filed on August 8, 1995 for the quarter ended June
                  30, 1995 (File No. 0-19437).
    (5)        Incorporated by reference to Annual Report on Form 10-K filed on March 30, 1999 for the year ended
                  December 31, 1993 (File No. 0-19437).
    (6)        Incorporated by reference to Annual Report on Form 10-K filed on March 29, 2000 for the year ended
                  December 31, 1993 (File No. 0-19437).
    (7)        Incorporated by reference to Annual Report on Form 10-K filed on March 29, 2001 for the year ended
                  December 31, 1993 (File No. 0-19437).
    (8)        Filed herewith.



(b) Reports on Form 8-K

None.

                                       32











                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, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cellular Technical Services Company, Inc. at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, 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, 2002, except for Note B,
as to which the date is March 4, 2002.

                                       33












                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                 (In 000's, except share and per share amounts)



                                                                                       December 31,
                                                                                -----------------------
                                                                                   2001           2000
                                                                                --------       --------
                                     ASSETS
CURRENT ASSETS
                                                                                         
  Cash and cash equivalents                                                     $  6,353       $  4,529
  Accounts receivable, net of reserves of  $259 in 2001 and $418 in 2000             529            793
  Employee receivable, net of reserves of $13 in 2001                                 16             60
  Inventories                                                                        531          1,096
  Prepaid expenses, deposits and other current assets                                205            471
                                                                                --------       --------
    Total Current Assets                                                           7,634          6,949
PROPERTY AND EQUIPMENT, net                                                          477            963
LONG TERM DEPOSIT                                                                     25             --
GOODWILL                                                                             100            104
LONG TERM INVESTMENT                                                               1,754          1,758
                                                                                --------       --------
TOTAL ASSETS                                                                    $  9,990       $  9,774
                                                                                ========       ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable and accrued liabilities                                      $    847       $    550
  Payroll-related liabilities                                                        180            561
  Customers' deposits and deferred revenue                                            84            395
                                                                                --------       --------
    Total Current Liabilities                                                      1,111          1,506
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,
    2,292 shares issued and outstanding in 2001 and 2000                              23             23
  Additional paid-in capital                                                      29,976         29,976
  Accumulated deficit                                                            (21,120)       (21,731)
                                                                                --------       --------
    Total Stockholders' Equity                                                     8,879          8,268
                                                                                --------       --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $  9,990       $  9,774
                                                                                ========       ========


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

                                       34












                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------

                      (In 000's, except per share amounts)



                                                  Year Ended December 31,
                                           ------------------------------------
                                             2001           2000          1999
                                           -------        -------       -------
                                                               
REVENUES
  Phonecards                               $15,148        $18,033       $    19
  Services                                   5,268          7,232         8,580
  Systems                                        0            708         1,642
                                           -------        -------       -------
    Total Revenues                          20,416         25,973        10,241

COSTS AND EXPENSES
  Cost of phonecards                        14,812         17,975            18
  Cost of services                           1,287          2,545         3,077
  Cost of systems                               --             12           650
  Sales and marketing                        1,241          1,373           685
  General and administrative                 1,917          2,063         2,137
  Research and development                   1,841          1,480         1,593
                                           -------        -------       -------
    Total Costs and Expenses                21,098         25,448         8,160
                                           -------        -------       -------
INCOME (LOSS) FROM OPERATIONS                 (682)           525         2,081
OTHER INCOME, net                              974          1,669           274
INTEREST INCOME                                308            416           275
                                           -------        -------       -------
INCOME BEFORE INCOME TAXES                     600          2,610         2,630
INCOME TAX PROVISION (BENEFIT)                 (11)            58            31
                                           -------        -------       -------
NET INCOME                                 $   611        $ 2,552       $ 2,599
                                           =======        =======       =======
EARNINGS PER SHARE:
  Basic                                    $   .27        $  1.12       $  1.14
                                           =======        =======       =======
  Diluted                                  $   .27        $  1.09       $  1.13
                                           =======        =======       =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic                                      2,292          2,287         2,282
  Diluted                                    2,302          2,339         2,292


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


                                       35












                    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, 1999           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
Exercise of stock options             10            --            43            --             43
Net income                            --            --            --         2,552          2,552
                                   -----           ---       -------      --------         ------
Balance, December 31, 2000         2,292           $23       $29,976      $(21,731)        $8,268
Net income                            --            --            --           611            611
                                   -----           ---       -------      --------         ------
Balance, December 31, 2001         2,292           $23       $29,976      $(21,120)        $8,879
                                   =====           ===       =======      ========         ======


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


                                       36













                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                                   (In 000's)



                                                                                 Year Ended December 31,
                                                                             --------------------------------
                                                                             2001          2000          1999
                                                                             ----          ----          ----
                                                                                              
OPERATING ACTIVITIES
Net income                                                                  $  611       $ 2,552       $ 2,599
Adjustments to reconcile net income to net cash provided by operating
  activities:
    Depreciation and amortization of property and equipment                    544           516           848
    Amortization of software development costs                                  --           178           357
    Amortization of goodwill                                                    30            --            --
    (Gain) Loss on disposal of assets                                          (25)          (36)          230
    Changes in operating assets and liabilities:
      Decrease in accounts receivable, net                                     264         1,854           213
      Decrease (increase) in employee receivable, net                           44           (60)           --
      Decrease (increase) in inventories                                       565          (504)          422
      Decrease (increase) in prepaid expenses, deposits                        266          (347)           61
      Increase in long term deposit                                            (25)           --            --
      Increase (decrease) in accounts payable and accrued liabilities          297          (402)         (534)
      (Decrease) increase in payroll-related liabilities                      (381)           36            55
      Decrease in deferred revenue and customers' deposits                    (311)       (2,657)          (22)
                                                                            ------       -------       -------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                    1,879         1,130         4,229
INVESTING ACTIVITIES
  Purchase of property and equipment                                           (72)         (684)          (25)
  Proceeds from sale of assets                                                  39           115            14
  Long-term investment                                                           4          (758)       (1,000)
  Additional purchase price related to acquisition of NET                      (26)         (104)           --
                                                                            ------       -------       -------
NET CASH USED IN INVESTING ACTIVITIES                                          (55)       (1,431)       (1,011)
NET CASH PROVIDED BY FINANCING ACTIVITIES (Stock option exercises.)             --            43             2
                                                                            ------       -------       -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         1,824          (258)        3,220
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                               4,529         4,787         1,567
                                                                            ------       -------       -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                    $6,353       $ 4,529       $ 4,787
                                                                            ======       =======       =======
      Supplemental disclosure of cash flow information
Cash paid during the period for:
  Interest                                                                  $   --       $    --       $     8
                                                                            ======       =======       =======
  Income taxes                                                              $   19       $    45       $    40
                                                                            ======       =======       =======
      Supplemental schedule of non-cash investing activities
Conversion of note receivable to common stock investment                    $   --       $ 1,000       $    --
                                                                            ======       =======       =======


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


                                       37













                    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 domestic
wireless communications industry, and through CTS' majority-owned subsidiary,
Isis Tele-Communications, Inc. ("Isis"), in the prepaid long distance and
wireless products as a distributor and a reseller. Isis commenced operations in
December 1999. CTS is developing geo-location wireless software applications in
its Neumobility division, but does not have revenue or customers for this
product line as of December 31, 2001. Unless the context otherwise requires, all
references to the "Company" herein include Cellular Technical Services Company,
Inc. and any entity over which it has control.

Management expects that it will incur an operating loss and negative cash flow
through most or all of 2002 as the Company continues to develop its Neumobility
product offerings and its Isis customer base. If the Company fails to develop
revenues from new products and expand its customer base, it will require
additional financing to continue its operations beyond mid to late 2003. Such
financing may not be available on acceptable terms or at all.

NOTE B - LIQUIDITY

Going forward into 2002, the Company has continued to reduce its fixed operating
costs. Management believes that under its current business plan, 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
eighteen 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.

Nasdaq requires a minimum $5 million value of public float for continued listing
on the Nasdaq National Market System. At December 31, 2001 the Company's stock
price was $2.29 and the market value of its public float was approximately $5.1
million. On March 1, 2002 the Company's closing stock price was $2.12 and the
market value of its public float was approximately $4.8 million. On March 4,
2002 the Company received a notice from Nasdaq indicating that the Company's
public float had not been over $5 million for 30 consecutive days. If the
Company fails to increase its public float value to $5 million for 10
consecutive trading days prior to June 3, 2002, Nasdaq has the right to delist
the stock or require the Company to move its stock to the Nasdaq SmallCap Market
System. The Company would have the right to request a hearing to appeal a
determination that the stock should be delisted. There is no assurance that the
Company would prevail in such a hearing. If the Company's stock were delisted,
the delisting would most likely have a material adverse affect on the price of
its common stock, would adversely affect the liquidity of the shares held by its
shareholders, and could severely restrict any ability the Company may have to
raise additional capital.

At December 31, 2001, the Company's stockholder's equity was $8.9 million. The
SEC has recently approved certain changes to Nasdaq's continued listing
quantitative standards. Effective November 30, 2002, Nasdaq's current $4 million
net tangible asset standard is being replaced with a $10 million stockholder's
equity requirement for continued listing on the Nasdaq National Market System.
If the Company fails to increase its stockholder's equity to $10 million by
November 1, 2002, Nasdaq has the right to delist the stock or require the
Company to move its stock to the Nasdaq SmallCap Market System. In the event the
Company's stockholder's

                                       38












equity does not rise above $10 million by November 1, 2002, the Company would
have the right to request a hearing to appeal a determination that the stock
should be delisted. There is no assurance that the Company would prevail in such
a hearing. If the Company's stock were delisted, the delisting would most likely
have a material adverse affect on the price of its common stock, would adversely
affect the liquidity of the shares held by its shareholders, and could severely
restrict any ability the Company may have to raise additional capital.

NOTE C - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All inter-company accounts and transactions have been
eliminated in consolidation.

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 maturities of three
months or less when purchased to be cash equivalents.

Fair Values of Financial Instruments

At December 31, 2001, the Company has the following financial instruments: cash
and cash equivalents, accounts receivable, long-term stock investment, accounts
payable and accrued liabilities. The carrying value of cash and cash
equivalents, accounts receivable, stock investment, 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.

Inventories

Phonecard inventories 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.

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 into 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 leases. The Company capitalizes
expenditures that significantly increase the life

                                       39











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. At December 31, 2000, the Company's capitalized
software costs had been fully amortized.

Long-Lived Assets and Goodwill

Goodwill represents the excess purchase price over the fair value of net assets
acquired in business acquisitions accounted for under the purchase method of
accounting. Goodwill is presented net of related accumulated amortization and is
being amortized over the estimated useful life of four years.

The Company assesses the realizability of its long-lived assets, including
goodwill, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
records impairment losses on long-lived assets and goodwill when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount. Conditions that would
necessitate an impairment assessment include material adverse changes in
operations, significant adverse differences in actual results in comparison with
initial valuation forecasts prepared at the time of acquisition, a decision to
abandon services, or other significant adverse changes that would indicate the
carrying amount of the recorded asset might not be recoverable. Based on its
most recent analysis, the Company believes that no material impairment of
long-lived assets or goodwill exists as of December 31, 2001.

Long-Term Investment

The Company accounts for its investment in True Position, Inc. under the cost
method, as the Company does not have the ability to exercise significant
influence. Under the cost method of accounting, an investment in a private
company is carried at cost and adjusted only for other-than-temporary declines
in fair value, distributions of earnings and additional investments. The Company
periodically evaluates whether the declines in fair value of its investment is
other-than-temporary. This evaluation consists of review of qualitative and
quantitative factors by members of senior management as well as market prices of
comparable public companies. The Company receives periodic financial statements
to assist in reviewing relevant financial data and to assist in determining
whether such data may indicate other-than-temporary declines in fair value below
the Company's accounting basis.

Revenue Recognition

The Company has generated revenues through three sources: (1) prepaid phonecard
sales, (2) systems revenues, consisting primarily of bundled hardware and
software products, and (3) services revenues, consisting primarily of hardware
and software maintenance and related support services.

Phonecard revenues are recognized upon shipment, net of estimated returns. Costs
of goods sold for phonecards include related shipping and handling costs.

Systems revenues are recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred
(including satisfaction of contract criteria and that there are no additional
undelivered elements essential to the functionality of the delivered products.
Revenues are deferred for

                                       40











undelivered non-essential elements based on vendor specific objective evidence
of the fair value for all elements of the arrangement); (iii) the amount is
fixed and determinable; and (iv) collectability is probable.

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

Advertising and Marketing Expense

All costs related to marketing and advertising the Company's products are
expensed in the periods incurred. Advertising expense was $133, $23, and $0 for
the years ended December 31, 2001, 2000 and 1999, respectively.

Research and Development Costs

Research and development expenses consist principally of payroll and related
expenses for design and development of the Company's technologies. Research and
development costs are expensed as incurred.

Segment Reporting

The Company's operations consist of two segments, (i) telecom hardware/software
integrated information processing and information management systems for the
wireless communications industry including anti-fraud and geo-location wireless
applications, and (ii) phone-card distribution.

Income Taxes

The Company follows the liability 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

The Company has no items of other comprehensive income or loss.

Stock-Based Compensation

As provided for by SFAS No. 123, "Accounting for Stock-Based Compensation"
("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. As the Company issues options with exercise prices equal to market value on
the date of grant, compensation expense is not recognized. Stock compensation
expense for options granted to non-employees has been determined in accordance
with Statement 123 and EITF 96-18 as the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured. The fair value of options granted to non-employees is
periodically re-measured as the underlying options vest.

Recent Accounting Pronouncements

                                       41












In July 2001, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard 141 -- Business Combinations ("FAS 141"). FAS 141, effective
for all business combinations initiated after July 1, 2001, requires that all
business combinations be accounted for using the purchase method of accounting.
Further, FAS 141 requires certain intangible assets to be recognized as assets
apart from goodwill if they meet certain criteria. FAS 141 also requires
expanded disclosures regarding the primary reason for consummation of the
combination and the allocation of the purchase price to the assets acquired and
liabilities assumed by major balance sheet caption. The Company does not expect
FAS 141 to have a material effect on our results of operations or financial
position.

 In July 2001, the FASB issued Financial Accounting Standard 142 -- Goodwill and
Intangible Assets ("FAS 142"). FAS 142, effective for fiscal years beginning
after December 15, 2001, defines accounting requirements for the treatment of
goodwill. Under FAS 142, goodwill is considered to have an indefinite life and
is therefore subject to impairment accounting rather than amortization. The
Company recorded $30,000 of amortization expense during 2001 related to
goodwill. The goodwill balance at December 31, 2001 was $100,000 and will no
longer be amortized upon adoption of FAS 142 beginning January 2002. As a result
of adopting FAS 142, the Company will be required to conduct an annual
impairment test of its goodwill. The Company will perform this test during the
first 6 months of 2002.

In July 2001, the FASB issued Financial Accounting Standard 143 -- Accounting
for Asset Retirement Obligations ("FAS 143"). FAS 143, effective for fiscal
years beginning after June 15, 2002, addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from acquisition, construction, development, and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company does
not expect FAS 143 to have a material effect on our results of operations or
financial position.

In August 2001, the FASB issued Financial Accounting Standard 144 -- Accounting
for the Impairment or Disposal of Long-Lived Assets ("FAS 144 "). FAS 144,
effective for fiscal years beginning after December 15, 2001, addresses
financial accounting and reporting requirements for the impairment or disposal
of long-lived assets. The Company does not expect FAS 144 to have a material
effect on our results of operations or financial position.

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.

Limited customer base; Reliance on significant customers: The Company's
potential customer base has been 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 have accounted for more than 10% of the Company's phonecard,
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: one customer whose purchases
represented 21% of consolidated 2001 sales, one customer whose purchases
represented 24% of consolidated 2000 sales, and four customers whose purchases
represented 46%, 21%, 14% and 12% of consolidated 1999 sales. The aggregate
sales to these customers represented 21% of the Company's consolidated phonecard
and services revenue in 2001, and 24% and 93% of the Company's consolidated
phonecard, systems and service revenues in 2000 and 1999, respectively. The loss
of one or more major phonecard customers could have a material adverse effect on
the Company.

                                       42












Limited vendor base; Reliance on small number of vendors: The Company purchases
its phonecards from a limited number of long distance providers and is reliant
on these providers to provide service for its customers. There can be no
assurance that all of the vendors will continue to provide the level of service
the Company requires.

Legal proceedings: From time to time, the Company could be subject to
involvement with legal actions and claims which arise in the ordinary course of
business 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 D - INVENTORIES:

Inventory reflects phonecards sold through the Company's phonecard business.
Included in phonecard inventory at December 31, 2001 is $80,000 and $87,000
related to 2001 and 2000 sales, respectively, that have been accounted for on
consignment basis and $143,000 and 259,000 related to sales returns reserves for
2001 and 2000, respectively. Inventory consists of the following (in 000's):



                                                     December 31,
                                                     ------------
                                                 2001            2000
                                                 ----            ----
                                                         
         Phonecards                              $578          $1,123
         Less reserves                            (47)            (27)
                                                 ----          ------
                                                 $531          $1,096
                                                 ====          ======


NOTE E - PROPERTY AND EQUIPMENT:

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



                                                                             December 31,
                                                                             ------------
                                                                         2001             2000
                                                                         ----             ----
                                                                                  
         Computer equipment and software                               $ 1,050          $ 3,339
         Furniture, fixtures and office equipment                          367              466
         Leasehold improvements                                            254              248
                                                                       -------          -------
                                                                         1,671            4,053
         Less accumulated depreciation and amortization                 (1,194)          (3,090)
                                                                       -------          -------
                                                                       $   477          $   963
                                                                       =======          =======



During 2001 the Company wrote off $2,355,000 against accumulated depreciation in
connection with the retirement of certain assets.

NOTE F - LONG TERM INVESTMENT:

In November 1999, the Company invested in a one-year, $1.0 million 10%
convertible note of KSI, Inc. ("KSI"). The Company also received warrants to
purchase KSI common stock in connection with this investment. All of the
outstanding stock of KSI, Inc. was acquired by TruePosition, Inc., (a subsidiary
of Liberty Media Corporation) in August 2000. Prior to the acquisition, the
convertible note was exchanged for KSI common stock. The Company exercised
warrants and purchased additional KSI common stock aggregating a total of
$754,000. The KSI common stock was exchanged for TruePosition, Inc. common stock
on the date of the acquisition. The Company accounts for the investment in
TruePosition, Inc. using the cost method.

                                       43











NOTE G - COMMITMENTS AND CONTINGENCIES:

Leases:

The Company leases office space under non-cancelable operating leases with
expiration dates ranging from 2002 to 2003. In addition, the Company leases
equipment under various rental agreements with initial terms ranging from one to
twelve months.

Amounts charged to operations under all lease and rental agreements totaled $0.4
million, $0.4 million and $0.7 million in 2001, 2000 and 1999, respectively.
Future minimum annual lease payments at December 31, 2001, under those
agreements with initial terms greater than one year are as follows ($ millions):


                               
                 2002             $0.4
                 2003              0.3
                                  ----
                                  $0.7
                                  ====


ISIS Management Equity Agreement:

The Company incorporated its ISIS Tele-Communications, Inc. subsidiary in
November 1999. In January 2000 three founder-employees of ISIS entered into a
Management Equity Agreement with ISIS. This agreement provided that the
founder-employees would purchase a total of 20% of the outstanding stock of
ISIS, subject to restrictions as defined in the agreement. One-half of the
initial shares were restricted and due to vest upon ISIS meeting certain defined
financial objectives in either 2000 or 2001. At December 31, 2000 and 2001 the
objectives had not been met and vesting did not occur. The agreement also
provided for stock appreciation rights (SARs) that allow for an additional 10%
of ISIS' stock to be granted to the founder-employees based upon ISIS meeting
financial objectives as defined in the agreement in either 2000 or 2001, and
also allows for a cash payout option. At December 31, 2000 and 2001, the SAR
objectives had not been met and no accrual or expense had been recorded.

NOTE H - EMPLOYEE RETIREMENT SAVINGS PLAN:

The Company has adopted an Employee Retirement Savings Plan covering
substantially all employees who have been employed for at least 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 equaling 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 $43,000, $0 and $63,000 during 2001, 2000 and 1999,
respectively.

NOTE I - OTHER INCOME:

During the second quarter of 2001 the Company received a net arbitration
settlement (excluding interest) of approximately $0.9 million related to early
termination of a contract by a former customer of its Blackbird product line.
During the second quarter of 2000 the Company received a net litigation
settlement of approximately $1.5 million related to the Isis phonecard business
segment.

NOTE J - INCOME TAXES:

At December 31, 2001, the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $48.4 million and research and
development tax credits of approximately $1.2 million that begin to expire in
2007. A portion of the net operating loss carryforward (approximately $28
million)

                                       44











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,     December 31,
                                                                                  2001              2000
                                                                              -----------------------------
                                                                                           
    Deferred tax assets:
       Net operating loss carryforwards                                        $ 16,464          $ 16,584
       Research and development credits                                           1,203             1,223
       AMT credits                                                                   53                65
       Reserves and allowances on financial statements in excess of tax
          returns                                                                    --                98
       Depreciation on tax returns lower than financial statements, net              98                43
       Capitalized software development costs                                        --                81
                                                                               ---------------------------
          Total deferred tax assets                                              17,818            18,094
          Valuation allowance                                                   (17,818)          (18,094)
                                                                               ===========================
    Net deferred tax assets                                                    $     --          $     --
                                                                               ===========================


The Company was placed in an Alternative Minimum Tax (AMT) position for 2000 and
1999. This has created an AMT credit of approximately $53,000 to be utilized in
future tax periods to the extent the regular tax liability exceeds the AMT
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 ($0.2) million, ($1.3) million and ($0.1) million
and were primarily attributable to the utilization of net operating loss
carryforwards in 2001, 2000 and 1999.

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,
                                                                              ----------------------------------------------
                                                                                  2001              2000            1999
                                                                              ----------------------------------------------
                                                                                                         
       Income tax provision (benefit) at statutory rate of 34%                    $ 207             $ 874         $ 894
       Utilization of net operating loss carryforwards                             (207)             (874)         (894)
       Alternative minimum tax provision (refunds)                                  (32)               38            31
       State income taxes                                                            21                20            --
                                                                                  ------------------------------------------
       Provision for income taxes, current                                        $ (11)            $  58         $  31
                                                                                  ==========================================



NOTE K - STOCKHOLDERS' EQUITY:

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
purchase up to (i) 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

                                       45











date of grant; and (ii) 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. 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 70,000 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 335,000 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.

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. 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 2001, 2000 and 1999 was estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999:



                                                                      2001             2000            1999
                                                                      ----             ----            ----
                                                                                             
       Risk-free interest rate                                        4.2%             5.5%            6.4%
       Dividend yield                                                 0.0%             0.0%            0.0%
       Volatility factor                                              1.61             1.56            1.36
       Expected life of the options (years)                           5.0              5.0             5.0
       Fair value of options granted during the year                 $2.65            $7.70           $2.79



                                       46












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):






                                                                      2001           2000          1999
                                                                      ----           ----          ----
                                                                                         
       Net Income - as reported                                       $611          $2,552        $2,599
       Net Income - pro forma                                         $256          $2,210        $2,353
       Basic earnings per share - as reported                         $.27          $ 1.12        $ 1.14
       Basic earnings per share - pro forma                           $.11          $ 0.97        $ 1.03
       Diluted earnings per share - as reported                       $.27          $ 1.09        $ 1.13
       Diluted earnings per share - pro forma                         $.11          $ 0.95        $ 1.03


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, 1999                        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
Granted                                         187           6.56             -  13.75        8.29
Exercised                                       (10)          2.63             -   5.00        4.28
Canceled                                        (85)          2.63             - 178.75       23.78
                                               -----

Balance, December 31, 2000                      301          $1.91             -$188.75      $21.96

Granted                                          89           2.63             -   5.38        2.83
Canceled                                        (51)          2.75             - 109.38        9.01
                                               -----
Balance, December 31, 2001                      339          $1.91             -$188.75      $18.88
                                               =====
Exercisable at December 31, 2001                141
                                               =====
Available for grant at December 31, 2001        110
                                               =====
Common Stock reserved for future issuance       449
                                               =====



                                       47











The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2001 (in 000's except per share
amounts):



                                       Options Outstanding                      Options Exercisable
                            ------------------------------------------------------------------------------
                                              Weighted-
                                               Average
                                              Remaining      Weighted-                        Weighted-
                                Number       Contractual      Average         Number           Average
 Range of Exercise Prices     Outstanding        Life      Exercise Price   Exercisable     Exercise Price
- ----------------------------------------------------------------------------------------------------------
                                                                              
   $ 1.91   -   $  2.87            91            9.31          $ 2.63            11             $ 2.04
     3.03   -      5.38            38            7.71            3.62            16               3.67
     8.00   -      8.00           123            8.47            8.00            32               8.00
     8.09   -     29.69            20            7.79           13.68            14              14.73
    60.00   -    188.75            67            2.58           70.35            68              70.37
                                  ---                                           ---
   $ 1.91   -   $188.75           339            7.39          $18.88           141             $37.70
                                  ===                                           ===


Shares exercisable at December 31, 2000 and 1999 were 102,225 and 98,260,
respectively.

NOTE L - EARNINGS PER SHARE

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




                                                           Year Ended December 31,
                                                       ------------------------------
                                                        2001        2000        1999
                                                       ------      ------      ------
                                                                      
Net Income (A)                                         $  611      $2,552      $2,599
                                                       ======      ======      ======
Weighted average number of shares outstanding (B)       2,292       2,287       2,282
Stock options                                              10          52          10
                                                       ------      ------      ------
Weighted average number of shares outstanding (C)       2,302       2,339       2,292
                                                       ======      ======      ======
Earnings per share:
   Basic (A)/(B)                                       $ 0.27      $ 1.12      $ 1.14
                                                       ======      ======      ======
   Diluted (A)/(C)                                     $ 0.27      $ 1.09      $ 1.13
                                                       ======      ======      ======


Outstanding stock options of 329,671, 249,825 and 198,772 at December 31, 2001,
2000 and 1999, respectively, were excluded from the computation of dilutive
earnings per share because their effect was anti-dilutive.

NOTE M - ACQUISITION OF NEW ENGLAND TELECOM, INC.

On August 10, 2000, the Company announced the acquisition of substantially all
of the assets of New England Telecom, Inc. ("NET") through Isis
Tele-Communications, Inc. ("Isis") the Company's majority-owned subsidiary. The
agreement included the purchase of approximately $135,000 in inventory of
prepaid phonecards, an employment agreement with the principal NET shareholder
and a two-year earn-out period. The earn-out is calculated on a quarterly basis
whereby the former shareholder can earn up to 50% of net profits of the former
business, as defined in the agreement, with a maximum contingent total payout of
$1.5 million. The transaction is being accounted for using the purchase method
of accounting, and, accordingly, the results of NET's operations

                                       48











have been included in the Company's consolidated financial statements from the
date of acquisition. The cash purchase price represented the value of the
inventory assets purchased. There were no liabilities assumed in the
transaction. Any future purchase price payments made contingent upon net profit
during the earn-out period, as defined in the agreement, will be capitalized as
goodwill and amortized over four years. The former shareholder through December
31, 2001 earned a total of $130,000 of the $1.5 million maximum amount. This
amount was capitalized as goodwill and is being amortized over 4 years. At
December 31, 2001, the unamortized balance was $100,000. Should Isis terminate
the employee without cause, as defined in the agreement, or should ISIS cease to
sell pre-paid phonecards prior to the end of the two-year earn-out period, ISIS
will be liable for any unpaid contingent compensation up to a total of $1.5
million. The agreement also provided for 20,000 stock options of its ISIS
subsidiary to be granted to the employee over a three-year period, as defined in
the agreement. During June 2001 the employee was terminated for breach of his
employment contract. At that time all options granted to the employee were
cancelled, as they had not yet vested. In October 2001 the former shareholder
filed a claim against the Company alleging, among other things, that the Company
breached the purchase agreement and the employment contract. The case is
currently in the discovery phase and therefore the Company is unable to assess
the likely outcome of the case.

If the Company's results had been combined with the results of NET, revenue and
net income would have been as follows, in 000's:



                                   Revenue     Net Income
                                   -------     ----------
                                           
Year ended December 31, 2000
- ----------------------------
CTS, as reported                   $25,973       $2,552
NET, unaudited                      12,176          364
                                   -------       ------
Pro-Forma Combined                 $38,149       $2,916
Earnings per pro-forma share:
   Basic                                          $1.28
   Diluted                                        $1.25


NOTE N - SETTLEMENT OF LITIGATION AND ACQUISITION OF COMMUNICATIONS INFORMATION
SERVICES, INC.

On July 28, 2000, the Company announced the settlement of a patent infringement
lawsuit originally brought in 1998 by Communications Information Services, Inc.
("CISI") against the Company and AirTouch Communications, Inc. ("AirTouch"). The
settlement, in which no liability or fault was admitted by the Company or
AirTouch, provided for the Company's acquisition of all of the capital stock of
CISI, including certain patent license rights for a one-time cash payment of
$500,000 in 2000 which was offset against a previously established accrual for
the use of the technology. There were no other assets or liabilities of CISI.

NOTE O - SEGMENT INFORMATION

The Company has two reportable business segments offering distinctive products
and services marketed through different channels: (i) a telecom
hardware/software segment including the Company's Blackbird'r' Platform product
line, which includes the Blackbird'r' Platform, PreTect'TM' cloning-fraud
prevention application, No Clone Zone'TM' roaming-fraud prevention service, and
related application products and services and the Company's Neumobility
geolocation wireless software applications; and (ii) the Company's prepaid
long-distance phonecard business, which is conducted through its majority-owned
subsidiary, Isis Tele-Communications, Inc. Management evaluates segment
performance based upon segment profit or loss before income taxes. The
difference in pretax segment income of $600,000 and net income of $611,000 for
the year ended December 31, 2001 is attributable to income tax benefit of
$11,000. The difference in pretax segment income of $2,610,000

                                       49











and net income of $2,552,000 for the year ended December 31, 2000 is
attributable to income tax expense of $58,000. There were no inter-company sales
of products between the segments.



       Year ended December 31, 2001
       ------------------------------------
       (In 000's)                                                               Segments
                                                                   ------------------------------        Consolidated
                                                                   Telecom HW/SW        Phonecards             Totals
                                                                   -------------        ----------             ------
                                                                                                     
       Revenue from external customers                                    $5,268           $15,148            $20,416
       Depreciation and amortization expense                                 519                55                574
       Pretax segment profit (loss)                                        1,966           (1,366)                600
       Income tax expense (benefit)                                         (11)                --               (11)
       Expenditures for segment assets                                        48                24                 72
       Segment assets                                                      8,432             1,558              9,990


       Year ended December 31, 2000
       ------------------------------------
       (In 000's)                                                               Segments
                                                                   ------------------------------        Consolidated
                                                                   Telecom HW/SW        Phonecards             Totals
                                                                   -------------        ----------             ------
                                                                                                     
       Revenue from external customers                                    $7,940           $18,033            $25,973
       Depreciation and amortization expense                                 681                13                694
       Pretax segment profit (loss)                                        2,876             (266)              2,610
       Income tax expense                                                     58                --                 58
       Expenditures for segment assets                                       623                61                684
       Segment assets                                                      7,707             2,067              9,774



NOTE P - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth the Company's unaudited quarterly financial
information for the years ended December 31, 2001 and 2000 (in thousands, except
per share date):



       2001                                    March 31       June 30       September 30        December 31
                                               --------       -------       ------------        -----------
                                                                                         
       Net sales                                 $5,561        $5,568             $5,370             $3,917
       Gross profit                               1,207           828              1,199              1,083
       Net income (loss)                           (50)           504                 81                 76
       Earnings (loss) per share:
          Basic                                 $(0.02)         $0.22              $0.04              $0.03
          Diluted                               $(0.02)         $0.22              $0.04              $0.03


       2000                                    March 31       June 30       September 30        December 31
                                               --------       -------       ------------        -----------
                                                                                         
       Net sales                                 $4,917        $6,398             $8,041             $6,617
       Gross profit                               1,762         1,782                701              1,197
       Net income (loss)                            666         1,845                 65               (24)
       Earnings (loss) per share:
          Basic                                   $0.29         $0.81              $0.03            $(0.01)
          Diluted                                 $0.28         $0.79              $0.03            $(0.01)


                                       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 26, 2002

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/ Henry B. Ellis
- -----------------------------------------------------       ------------------------
Stephen Katz, Chairman of the Board of Directors and        Henry B. Ellis, Director
Chief Executive Officer                                     March 26, 2002
(Principal Executive Officer)
March 26, 2002

/s/ Bruce R. York                                           /s/ Joshua J. Angel
- -----------------------------------------------------       -------------------------
Bruce R. York                                               Joshua J. Angel, Director
Vice President, Chief Financial Officer and Secretary       March 26, 2002
(Principal Financial and Accounting Officer)
March 26, 2002

/s/ Lawrence Schoenberg
- -----------------------
Lawrence Schoenberg, Director
March 26, 2002



                                       51












                    CELLULAR TECHNICAL SERVICES COMPANY, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                 -----------------------------------------------

                                   (In 000's)



                                   Balance at                                      Balance at
                                   Beginning                                         End of
                                   of Period       Additions      Deductions         Period
                                   ---------       ---------      ----------         ------
                                                                          
INVENTORY RESERVES
Year ended December 31, 1999         $2,801           $255           $2,059           $997
                                     ======           ====           ======           ====
Year ended December 31, 2000         $  997           $426           $1,396           $ 27
                                     ======           ====           ======           ====
Year ended December 31, 2001         $   27           $387           $  367           $ 47
                                     ======           ====           ======           ====

SALES AND RECEIVABLE ALLOWANCES

Year ended December 31, 1999         $   72           $  0           $   67           $  5
                                     ======           ====           ======           ====
Year ended December 31, 2000         $    5           $618           $  205           $418
                                     ======           ====           ======           ====
Year ended December 31, 2001         $  418           $173           $  332           $259
                                     ======           ====           ======           ====



                                       52





                          STATEMENT OF DIFFERENCES
                          ------------------------

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

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.

Communications Information Services, Inc.      Florida            Communications Information Services, Inc




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Exhibit 23.1     Consent of Ernst & Young LLP, Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-76128) pertaining to the 1991 Qualified Stock Option Plan and
1991 Nonqualified Stock Option Plan, in the Registration Statement (Form S-8
No. 33-82016) pertaining to the 1993 Non-Employee Director Stock Option Plan,
in the Registration Statement (Form S-8 No. 333-08049) pertaining to the 1996
Stock Option Plan, and in the Registration Statement (Form S-8 No. 333-44410)
pertaining to the 1993 Non-Employee Director Stock Option Plan and 1996
Stock Option Plan of our report dated February 8, 2002, (except Note B as to
which the date is March 4, 2002) with respect to the consolidated financial
statements and schedule of Cellular Technical Services Company, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 2001.

                                                           /s/ Ernst & Young LLP

Seattle, Washington
March 26, 2002


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