<PAGE>
 
                                 UNITED STATES
                                 -------------
                       SECURITIES AND EXCHANGE COMMISSION
                       ----------------------------------
                             Washington, D.C. 20549
                             ----------------------
                                        
                                   Form 10-K
                                   ---------
                                        
(Mark One)
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[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---  ------------------------------------------------------------------------
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
     -------------------------------------------------------

                                       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 NO. 0-17909
                          ---------------------------
                                        
                             Phoenix Network, Inc.
                             ---------------------
             (Exact Name of registrant as specified in its charter)
             ------------------------------------------------------
            Delaware                              84-0881154
            --------                              ----------
(State or other jurisdiction of                 (I.R.S. Employer
-------------------------------                 ----------------
 incorporation or organization)                Identification No.)
 ------------------------------                -------------------

         13952 Denver West Parkway, Building 53, Golden, Colorado 80401
         --------------------------------------------------------------
                    (Address of principal executive offices)
                    ----------------------------------------
                                        
Registrant's telephone number, including area code: (303) 215-5500
------------------------------------------------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
-----------------------------------------------------------



                                                  
        TITLE OF EACH CLASS           NAME OF EACH EXCHANGE ON WHICH REGISTERED
        -------------------           -----------------------------------------
   Common Stock $0.001 Par Value                American Stock Exchange

                                        
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     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 such
filing requirements for the past 90 days.  Yes [X]  No [ ]

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

     As of March 2, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant was $19,967,556  (based on the closing sales
price as reported on the American Stock Exchange).

     The number of shares outstanding of the Registrant's Common Stock, $0.001
par value, was 35,898,958 at March 2, 1998.
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE


     Parts I and II incorporate certain information by reference from the Proxy
Statement/Prospectus included as part of the Registration Statement on Form S-4
of Qwest Communications International Inc. declared effective on February 12,
1998 (File No. 333-46145) (the "Proxy Statement/Prospectus").

     Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Registrant's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included herein and in the section entitled "Risk
Factors" included within the Proxy Statement/Prospectus incorporated by
reference herein.

                                     PART I
                                        
ITEM 1.  Business

GENERAL

     Phoenix Network, Inc., together with its subsidiaries ("Phoenix" or the
"Company") is a publicly-owned interexchange carrier of long distance
telecommunications services. Phoenix believes that it offers "simple, honest and
straightforward" pricing plans that are generally priced lower than many plans
of larger carriers such as AT&T Corporation ("AT&T"), MCI Communications
Corporation ("MCI") and Sprint Communications, Inc. ("Sprint"). Moreover,
Phoenix believes that it provides more attentive customer service than its
larger competitors. In addition to "1 plus" domestic long distance service,
Phoenix offers its customers a wide range of value-added products and services,
including inbound "800" service, dedicated access and private line service,
Internet access, calling cards, international call-back, conference calling,
debit cards and customized management reports.

     Since May 1995, Phoenix has acquired 10 companies or customer bases,
including one switched reseller, two switchless resellers, one international
call-back company, and six customer bases. These acquired companies and customer
bases have added significant amounts of revenue, new products and services,
enhanced marketing capabilities and provided technical and network
infrastructure. See "--Acquisitions."

RECENT DEVELOPMENTS

     On January 6, 1998, Phoenix, Qwest Communications International Inc.
("Qwest") and Qwest 1997-5 Acquisition Corp. ("Qwest Subsidiary") entered into a
definitive Agreement and Plan of Merger dated as of December 31, 1997. On
January 29, 1998, the parties amended and restated such Agreement and Plan of
Merger in order to (i) delete certain references to the shares of Series I
Convertible Preferred Stock, par value $.001 per share, of Phoenix, all of which
had been converted into shares of common stock, par value $.001 per share, of
Phoenix ("Phoenix Common Stock"), pursuant to their terms, and certain
requirements relating thereto, (ii) reflect the two-for-one stock split
announced on January 20, 1998 by Qwest's Board of Directors, payable on February
24, 1998 as a dividend to the holders of record of common stock, par value $.01
per share, of Qwest, on February 2, 1998 and (iii) clarify the terms of the
Merger Consideration (as defined in the Merger Agreement). On February 10, 1998,
the parties further amended and restated such Agreement and Plan of Merger in
its entirety pursuant to the Amended and Restated Agreement and Plan of Merger
dated as of December 31, 1997 (the "Merger Agreement"), to further clarify the
terms of the Merger Consideration and to add certain covenants and closing
conditions relating to dissenting stockholders of the Company.

     The Merger Agreement provides for a merger (the "Merger") of Qwest
Subsidiary with and into the Company with the Company being the surviving
corporation. The Merger will result in the Company becoming a wholly-owned
subsidiary of Qwest at the time that the Merger becomes effective under
applicable laws. A copy of the Merger 

                                       2
<PAGE>
 
Agreement has been filed with the Commission by Qwest as Exhibit 2 to the
Registration Statement on Form S-4 of Qwest declared effective February 12, 1998
(File No. 333-46145) and included as Exhibit A to the Proxy Statement/Prospectus
included as part of such Registration Statement and is hereby incorporated by
reference herein.

COMPANY STRATEGY

     Phoenix's objective is to grow revenue and cash flow by being a leading
provider of telecommunications services. Phoenix's strategy for achieving this
goal is to: (i) provide customers a full range of telecommunications products
and services and (ii) consummate a business combination transaction with a
company operating its own long distance network and loading such network with
Phoenix's long distance traffic.

     Phoenix seeks to provide a full range of telecommunications products and
services. As competition increases in the telecommunications industry, Phoenix
believes that the successful companies will be those that can offer a wide range
of products and services, acting as a "one-stop-shop" for customers who are
confronted with a proliferation of products and technologies. In addition to
providing extra sources of revenue, Phoenix believes that cross-selling a
variety of products and services to its customers builds customer loyalty. See
"--Products and Services."

ACQUISITIONS

     Since May 1995, Phoenix has acquired 10 companies or customer bases,
including one switched reseller, two switchless resellers, one international
call-back company, and six customer bases. The following acquired companies and
customer bases have added significant amounts of revenue, new products and
services, enhanced marketing capabilities and/or provided technical and network
infrastructure:

<TABLE>
<CAPTION>
                                                                Approximate
                                                                 MONTHLY       APPROXIMATE
                                                ACQUISITION      REVENUE         PURCHASE        FORM OF         TYPE OF
                 ACQUISITION                       Date          (000s)(1)      Price (000s)   Consideration    Acquisition
                 -----------                   -------------  ---------------  --------------  --------------  -------------
<S>                                            <C>            <C>              <C>             <C>             <C>
AMERICOM.....................................  July 1995           $   30          $    98     Cash            Customer base
Bright Telecom, L.P..........................  August 1995         $   50          $   356     Cash            Company
Interstate Savings, Inc......................  August 1995         $  367          $ 1,450     Cash            Customer base
Tele-Trend Communications, LLC...............  August 1995         $  725          $ 4,430     Cash            Company
Education Communications Systems, Inc........  December 1995       $  175          $   525     Cash            Customer base
Automated Communications, Inc................  January 1996        $1,917          $17,522     Cash, common    Company
                                                                                               stock and note
King Communications..........................  January 1996        $   54          $   203     Cash            Customer base
Baldcor Capital Group........................  January 1996        $   28          $   119     Cash            Customer base
Connections Communications Source............  March 1996          $   20          $    36     Cash            Customer base
AmeriConnect, Inc............................  October 1996        $1,442          $12,820(2)  Common stock    Company
</TABLE>

(1) Monthly revenue for first month's billing following the acquisition.
(2) Represents estimated fair market value, as of the closing date of the
    acquisition, of Phoenix Common Stock issued in connection with this
    transaction, which was accounted for as a pooling of interests.

OPERATIONS

     Phoenix's strategy is to reduce its line costs by either moving traffic to
its lowest cost wholesale provider or placing the traffic on one of its three
switches. Through a combination of use of its three switches and agreements with
vendor carriers, Phoenix is able to complete point-to-point long distance calls
from anywhere within the United States and various foreign countries to anywhere
in the world.   Phoenix carries its customers traffic in three ways: (1)
complete switchless resale which entails entirely using the network of another
carrier, (2) switch-based resale which entails using one of its three switches
to originate or terminate the call while using another carrier to provide the
remaining transport of the call and (3) carrier service which entails
originating, transporting and terminating the call using Phoenix's switches and
leased inter-machine trunks which connect the switches.  Phoenix chooses the
type of transport based on availability and cost.

                                       3
<PAGE>
 
PRODUCTS AND SERVICES

     Phoenix offers a wide variety of long distance and value-added products and
services to its customers. These products and services include: "1 plus"
domestic long distance service, inbound (800) service, dedicated access and
private line services, Internet access, calling cards, international call-back,
conference calling and debit cards. Phoenix also provides customized management
reports to help its customers better understand and manage their
telecommunications costs. In addition, Phoenix's business strategy includes
opportunistically adding additional telecommunications products and services,
such as local service and cellular service.

     Phoenix's pricing structure for its products and services is established on
the basis of cost and competition. Phoenix believes that its customers generally
select Phoenix because it offers lower cost long distance transmission than
larger interexchange carriers, such as AT&T, MCI and Sprint, while providing
more attentive customer service. Phoenix offers a variety of rate plans that it
believes meet the needs of its customers. Under Phoenix's most commonly
subscribed long distance rate plans, customers are generally sold flat per
minute rates for interstate and intrastate long distance calls. Such rates
generally are determined based upon the customers' usage levels at the time of
the sale and do not vary based upon the time of day of a call.

CUSTOMERS

     At December 31, 1997, Phoenix's customer base was comprised of over 40,000
customers, consisting primarily of small and medium-size business customers and,
to a much lesser extent, residential customers. Phoenix targets its marketing
efforts primarily to business customers spending $10,000 or less per month on
long distance services. For the year ended December 31, 1997, Phoenix's 20
largest customers accounted for less than 10% of revenue and no one customer
accounted for more than 2% of revenue.

     Phoenix is presently serving customers in 49 states. Through its
international call-back service, Phoenix serves approximately 1,000 customers in
various countries worldwide.

MARKETING AND SALES

     Overview.   Phoenix's marketing and sales efforts are designed to
differentiate Phoenix from its competitors through simple low-cost pricing,
customization of products and services and person-to-person customer service.
Phoenix's pricing schedules typically include a flat-rate cost per minute, with
additional discounts available for higher volume use. While a variety of rate
plans are offered, Phoenix attempts to price its long distance service below the
basic rates of AT&T, MCI and Sprint.

     Phoenix emphasizes to its business customers that its menu of services can
be customized to meet each individual company's needs, including monthly
management reports and specially formatted invoices that help identify and sort
calling patterns and track non-business calling. Phoenix also highlights the
high level of regular personal contact in its approach to customer service,
including a three to five person team of customer service representatives that
is assigned to each business customer throughout its relationship with Phoenix.

     Phoenix believes that a key attraction of its marketing and sales
presentations to business customers is its invoice system, which utilizes simple
and understandable formats for conveying billing information and presents most
services provided by Phoenix to a customer on a single bill.

     Under Phoenix's "clear billing" program, most of its charges for "1 plus"
calls to new customers are based upon six-second increments and the applicable
per-minute rate charge. Phoenix believes that this calculation method differs
from that currently employed by certain of its competitors, who use minutes as
the minimum billing increment and round up partial minutes of calling time to
the next whole minute. In addition, under Phoenix's most recent rate plans, per
call charges are calculated out to four decimal places while many of Phoenix's
competitors round charges for each call up to two decimal places. The resulting
charges for the "rounded-up" portion of calling time can be significant for

                                       4
<PAGE>
 
business customers with a high volume of short calls, and Phoenix's billing
method is thus presented to potential customers as a cost-saving feature.
Phoenix views its clear billing policies as a competitive advantage when
compared to the billing practices of certain of its competitors.

     Phoenix conducts its marketing efforts through a focused program that
combines direct sales offices located in selected metropolitan areas with a
network of master sales agents and independent distributors, and a group that
focuses on larger volume wholesale and retail customers ("National Accounts").
Phoenix believes that utilizing a staff of dedicated sales employees promotes
lower turnover, better training and more consistency in presenting Phoenix's
image to the marketplace. At the same time, its network of agents and
distributors serves to extend Phoenix's marketing reach and coverage efficiently
and economically.

     For the year ended December 31, 1997, Phoenix's direct sales, independent
distributors and National Accounts contributed approximately 51%, 13% and 36%,
respectively, of the total number of new customers.

     Direct Sales Offices.   Phoenix currently operates 2 sales offices located
in Minneapolis and Tampa. At December 31, 1997, Phoenix employed 15 direct sales
representatives, 2 sales managers that support, train and assist the direct
sales representatives and 2 supervisory and administrative personnel in its
sales offices.

     Distribution Network.   Phoenix's distributor network consists primarily of
master sales agents and independent distributors. Master sales agents are either
individuals or marketing companies with their own experienced sales forces and
established networks of business customers. They typically sell
telecommunications products and services offered by other companies in addition
to Phoenix. Independent, or "standard," distributors are non-employee
contractors who generally have not developed the larger sales staffs that
characterize master sales agents. Phoenix estimates that the number of its
standard distributor relationships that produce sales on a regular monthly basis
is currently in the range of 30-35, although Phoenix has approximately 50
standard distributor relationships that occasionally produce sales.

     National Accounts.   National Accounts consists of 4 employees who solicit
large, nationwide organizations to purchase Phoenix's products and services.
Typically products are offered to those organization at lower prices and Phoenix
provides expanded customer service and sales support in return for higher levels
of business.

CUSTOMER SERVICE

     Phoenix places a strong emphasis on customer service and believes that
frequent contact with customers is a significant factor in customer retention.
Phoenix has recently completed a new Customer Service Call Center (the "Center")
that has state-of-the-art telephone systems, data systems and operating maps to
assist in the customer service function. The Center is located adjacent to
Phoenix's headquarters and houses all of Phoenix's customer service
representatives. Phoenix believes that its new Center further enhances its
ability to serve its customers.

     Customer service representatives are available from 6:00 a.m. to 6:00 p.m.
Mountain Standard Time (encompassing the business day on both coasts) by dialing
a toll-free number to handle any customer inquiries regarding their service. To
assess satisfaction with the services and products being provided by Phoenix,
customer service representatives call existing business customers on a routine
basis.

     Phoenix's customer service department is organized into three to five
person teams, with each having a team leader that supervises activities. Each
customer is assigned to one of the teams which is responsible for all the
service needs of that customer. Phoenix employed 27 customer service
representatives as of December 31, 1997.

EMPLOYEES

     As of December 31, 1997, Phoenix had approximately 138 full-time employees.
Of the full-time employees, 24 are engaged in sales and marketing, 27 in
customer service, and the remainder in management, development, finance and
administrative capacities.

                                       5
<PAGE>
 
MCI AND SPRINT COMMUNICATIONS, L.P. CONTRACT ISSUES

     MCI.   The Carrier Agreement by and between MCI and Phoenix dated March
1996 (the "MCI Agreement") requires that Phoenix place long distance traffic on
MCI's long distance network having a minimum "postalized" (as defined in the MCI
Agreement) value of $900,000 per year during the two year term beginning on
January 1, 1996 and ending on December 31, 1997. During the first year of the
term of the MCI Agreement, Phoenix did not place long distance traffic with a
postalized value of $900,000 on MCI's long distance network. However, Phoenix
was not invoiced for any shortfall amount for that year. During the second year
of the term of the MCI Agreement, Phoenix did not place long distance traffic
with a postalized value of $900,000 on MCI's long distance network. In December
1997, an MCI representative informed Phoenix that a shortfall had occurred for
the second year of the MCI Agreement.  The Company has estimated the shortfall
to be approximately $420,000 (the "MCI Shortfall Amount"). As of March 2, 1998,
MCI had not invoiced Phoenix for any portion of the MCI Shortfall Amount and
Phoenix had not received any written or verbal notice from MCI of its intentions
with respect to the MCI Shortfall Amount. Phoenix management has contacted
representatives of MCI and is in the process of attempting to negotiate a
settlement and elimination or reduction of the MCI Shortfall Amount.

     Sprint Communications, L.P. The Resale Solutions Switched Services
Agreement by and between Sprint Communications, L.P. ("Sprint Communications")
and Phoenix dated December 1996 (the "Sprint Communications Agreement") requires
that Phoenix pay to Sprint Communications minimum usage fees of $20.0 million
during the two year term beginning October 1, 1996 and ending on September 30,
1998, of which a minimum of $12.0 million must be paid in the first year of the
term. During the first year of the term of the Sprint Communications Agreement,
Phoenix placed long distance traffic having a value of approximately $10.725
million on Sprint Communications's long distance network resulting in a
shortfall amount of approximately $1.275 million (the "Sprint Communications
Shortfall Amount" and together with the MCI Shortfall Amount, the "Shortfall
Amounts") for the first year of the Sprint Communications Agreement. In November
1997 Sprint Communications invoiced Phoenix for the Sprint Communications
Shortfall Amount. Pursuant to the terms of the Sprint Communications Agreement,
Phoenix cannot incur any further shortfall amounts until September 30, 1998. In
addition, if Phoenix places long distance traffic having a value of $20.0
million on Sprint Communications long distance network during the full two year
term of the Sprint Communications Agreement (which term ends on September 30,
1998) the Sprint Communications Shortfall Amount will be eliminated. Phoenix
presently is able, and intends, to place sufficient long distance traffic on the
Sprint Communications long distance network in order to eliminate the Sprint
Communications Shortfall Amount prior to the end of the term of the Sprint
Communications Agreement.

     While Phoenix management is in negotiations with each of Sprint
Communications and MCI with respect to the elimination or reduction of the
Shortfall Amounts, there can be no assurance that the Shortfall Amounts will in
fact be eliminated or reduced. In addition, pursuant to the Merger Agreement,
Phoenix will require Qwest's consent prior to entering into any agreement
relating to the Shortfall Amounts.

PHOENIX CREDIT FACILITY

     In September 1995, Phoenix renewed its line of credit facility with
Foothill Capital Corporation (the "Phoenix Credit Facility") to make available
to Phoenix a line of credit of up to $10,000,000. Phoenix may borrow up to the
lesser of $10,000,000 or its borrowing base, which is defined as a percentage of
its eligible receivables. The amended term of the Phoenix Credit Facility is
five (5) years, expiring October 2000, with automatic renewal options. There are
penalties for early termination by Phoenix. Borrowings bear interest at 1.75%
over the "reference rate," as defined in the Phoenix Credit Facility.

     The loan is collateralized by Phoenix's accounts receivable, equipment,
general intangibles and other personal property assets. Among other provisions,
Phoenix must maintain certain minimum financial covenants, is prohibited from
paying dividends without the approval of Foothill Capital Corporation, and is
subject to limits on capital expenditures.

     On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
$2,000,000 bridge loan with the principal amount to be paid in eight (8) equal
monthly installments between July 1, 1997 and January 1, 1998. Phoenix made
installment payments of $250,000 on the principal amount of the bridge loan
during each of June, July and August, 1997. On September 1, 1997, the parties
entered into an amendment to provide for a temporary moratorium on payments in
respect of the bridge loan with a final payment of all outstanding principal and
accrued and unpaid 

                                       6
<PAGE>
 
interest being due on January 9, 1998. On December 12, 1997, the Phoenix Credit
Facility was amended to provide for an additional bridge loan of $1,825,000 and
the retention of an over-advance of $300,000. On December 31, 1997, the Phoenix
Credit Facility was further amended to provide that Foothill Capital Corporation
may, in its sole discretion, lend Phoenix up to $1.25 million, to be treated
either as an increase to the aggregate principal amount of $3.075 million (the
"Bridge Loan Amount") previously made as bridge loans to Phoenix or as an over-
advance, which must be repaid on the earliest to occur of (a) April 30, 1998,
(b) the effective time of the Merger (the "Effective Time") and (c) termination
of the Phoenix Credit Facility. On February 2, 1998, the Phoenix Credit Facility
was amended to provide for an additional over-advance of $500,000 and to reduce
the amount that Foothill Capital Corporation may lend Phoenix from $1.25 million
to $750,000.

     On January 16, 1998, Phoenix failed to make a scheduled payment under the
long term note (the "Van Essen Note") in the principal amount of $1.3 million
held by Judy Van Essen Kenyon ("Van Essen") and is currently in default thereon.
On January 17, 1998, Phoenix received a notice from Van Essen declaring a
default under the Van Essen Note and notifying Phoenix that if the scheduled
payment is not received by February 2, 1998, the entire unpaid principal balance
of the Van Essen Note will become due and payable and that Van Essen will pursue
all remedies available to her. Phoenix has not made the scheduled payment and
currently does not have sufficient cash to make the scheduled payment. Foothill
Capital Corporation has waived the resulting cross-default in the Phoenix Credit
Facility.

     From time to time Phoenix has been in violation of certain of its covenants
in the Phoenix Credit Facility. Phoenix has received waivers of its violations
of these covenants so long as it continues to meet the continuing requirements
of the Phoenix Credit Facility. Such requirements include (a) the execution of
the Merger Agreement by January 8, 1998; (b) the filing with the Commission of a
preliminary proxy statement with respect to the Merger Agreement by January 31,
1998; (c) the prompt response to any comments the Commission might have with
respect to such preliminary proxy statement; (d) the registration statement
filed by Qwest with the Commission with respect to the offering of the
securities of  Qwest in connection with the Merger being declared effective by
the Commission by April 30, 1998; (e) the filing with the Commission of
Phoenix's Annual Report on Form 10-K for the year ended December 31, 1997 by
March 31, 1998; (f) the approval of the Merger Agreement and Merger by the
holders of a majority of the shares of Phoenix Common Stock by April 30, 1998;
and (g) the consummation of the Merger by April 30, 1998. A failure by Phoenix
to meet any of such requirements would constitute an event of default under the
Phoenix Credit Facility. In the future, should Phoenix violate, or have a
continuing violation of, any of the covenants constituting an event of default
under the Phoenix Credit Facility, there can be no assurance that it will
receive a waiver of such violation. Under the terms of the Phoenix Credit
Facility, upon the occurrence of an event of default, the lender may, among
other things, declare all amounts outstanding under the Phoenix Credit Facility
immediately due and payable, cease advancing money or extending credit to
Phoenix and/or during the continuance of an event of default, increase the
interest rate on amounts outstanding under the Phoenix Credit Facility.

     As of March 2, 1998, $4,886,576 was outstanding under the line of credit
(including over-advances of $800,000, in the aggregate) provided by the Phoenix
Credit Facility and the interest rate was 10.25%. The average daily outstanding
borrowing for the year ended December 31, 1997 was $4,092,859. The highest
month-end balance outstanding for the year ended December 31, 1997 was
$5,621,926.  As of March 2, 1998, there was approximately $2.3 million available
to Phoenix under the Phoenix Credit Facility, however, the amount available
varies greatly based upon the timing of (i) payments by Phoenix to its vendors,
(ii) collections by Phoenix from customers and (iii) monthly invoicing of
Phoenix's customers.

     As of March 2, 1998, Phoenix estimated that it will require financing
between $7 million and $10 million in order to repay the Bridge Loan Amount and
over-advances under the Phoenix Credit Facility  and fund operating losses,
working capital requirements and capital expenditures during the remainder of
1998. This amount is in addition to funds provided by operations and funding
available, if any, under the Phoenix Credit Facility. The exact amount and
timing of these working capital requirements and Phoenix's ability to continue
as a going concern will be determined by numerous factors, including (i) the
revenue level of, and gross margin on, sales; (ii) the outcome of outstanding
contingencies and disputes, including the LDDS Litigation and other pending
lawsuits; (iii) payment terms achieved 

                                       7
<PAGE>
 
by Phoenix; (iv) Phoenix's ability to manage selling, general and administrative
expenses and (v) the timing of capital expenditures.

     If the Merger is not concluded, there can be no assurance that Phoenix will
be able to obtain additional equity or debt financing on terms that Phoenix will
find acceptable. Any additional equity or debt financing may involve substantial
dilution to the interests of Phoenix Stockholders. If Phoenix is unable to
obtain sufficient funds to satisfy its cash requirements, it will be forced to
curtail operations, dispose of assets, seek extended payment terms from its
vendors or seek protection under federal bankruptcy laws. There can be no
assurance that Phoenix will be able to obtain additional working capital, reduce
expenses or successfully complete other steps necessary to continue as a going
concern. See "ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."

COMPETITION

     The telecommunications services industry is highly competitive and is
significantly influenced by the marketing and pricing decisions of the larger
industry participants. It is characterized by low barriers to entry (e.g., the
major facilities-based carriers' bulk rate tariffs are available to a wide range
of potential market entrants), intense competition for customers and high
customer churn rates. Competition on the basis of price, service offerings, and
customer service is expected to increase in the future.

     Furthermore, the Telecommunications Act of 1996 (the "Telecommunications
Act") can be expected to increase competition in the domestic long distance
market as the Regional Bell Operating Companies ("RBOCs") begin providing both
in-region and out-of-region long distance service. The RBOCs may build their own
national networks, resell telecommunications services of others, lease
facilities from others or acquire smaller domestic long distance service
providers. To the extent that the RBOCs enter the domestic long distance market
by acquiring other long distance providers, the domestic long distance service
industry may consolidate.

     Certain of Phoenix's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than Phoenix, control transmission lines and have long-standing
relationships with Phoenix's target customers. Phoenix competes with the same
facilities-based carriers from whom Phoenix procures bulk-rate services. Certain
of Phoenix's competitors are able to provide services comparable to or more
extensive than Phoenix's at rates competitive with Phoenix's rates.
Additionally, Phoenix's strategy of partnering with a company that controls a
network can be and has been replicated by some of its competitors.

     Phoenix competes with the principal long distance carriers, AT&T, MCI and
Sprint as well as other major providers of long distance services, including
Frontier Communications ("Frontier"), LCI International, Inc. ("LCI") and
WorldCom, Inc. ("WorldCom"). Moreover, as a result of Congress' enactment of the
Telecommunications Act, the nation's largest local telephone companies (i.e.,
the RBOCs) and GTE Corporation and its affiliates ("GTE"), energy utilities,
cable television companies, competitive local exchange carriers ("CLECs"), and
other entities will also be allowed to provide long distance service in the near
future subject to various regulatory requirements and safeguards. An increase in
such competition could have a material adverse effect on Phoenix's business,
financial condition and results of operations, including higher customer
attrition.

     There can be no assurance that Phoenix will be able to compete successfully
in the future in the event that the Merger is not completed. Phoenix intends to
compete in the long distance market and in the local market on the basis of
price, service offerings and customer service. Phoenix's ability to compete on
the basis of price is dependent on (i) its ability to consummate a business
combination transaction with a company operating its own long distance network
and loading such network with Phoenix's long distance traffic and (ii) secure
volume-discount pricing from vendor carriers. The same volume-discount pricing
that Phoenix utilizes is available to current and potential competitors, and
current and potential competitors could lease or build networks in order to
lower line costs. Phoenix does not have proprietary contractual arrangements in
this regard. As a result, there are no substantial barriers to the entry of
additional

                                       8
<PAGE>
 
competitors into the field. Furthermore, to the extent such competitors acquire
or develop facilities-based long distance, such competitors may be able to offer
rates as low as or lower than those available from Phoenix.

     Phoenix's competitors may reduce rates or offer incentives to existing and
potential customers of Phoenix, whether caused by general competitive pressures
or the entry of the RBOC's, GTE and other Local Exchange Carriers ("LECs") into
the long distance market. Phoenix has historically attracted customers by
pricing its services at a discount to the basic "1 plus" rates offered by AT&T,
MCI and Sprint. These and other large long distance providers are offering an
increasing number of flat rate and other rate plans in addition to basic
service, and these plans are likely to result in a reduction in the number of
long distance customers using basic "1 plus" rates. Because Phoenix believes
that to maintain its competitive position it must be able to reduce its prices
in order to maintain its relative price position in the market, a decrease in
the rates charged by others for long distance services could have a material
adverse effect on Phoenix's business, results of operations and financial
condition.

     In addition, in certain instances LECs have been afforded a degree of
pricing flexibility in differentiating among markets and carriers in setting
access charges and other rates in areas where adequate competition has emerged.
As LECs become free to set rates and to provide discounts to high-volume
customers, the ability of competitors that are substantially larger than Phoenix
to obtain volume discounts for access and termination charges could adversely
affect Phoenix by reducing the operating costs of its larger competitors
relative to those of Phoenix. In particular, it is expected that the largest
players in the long distance market, such as AT&T, MCI, Sprint and WorldCom will
be able to guarantee substantially larger volumes to LECs than will Phoenix. As
deregulation of the local exchange market occurs, LECs may be willing to grant
large interexchange carriers significant discounts in return for guarantees of
volume. There can be no assurance that Phoenix will be able to obtain similar
discounts.

GOVERNMENT REGULATION

     The terms and conditions under which Phoenix provides telecommunications
products and services are subject to government regulation. Federal laws and
Federal Communications Commission ("FCC") regulations apply to interstate and
international telecommunications, while particular state regulatory authorities
have jurisdiction over telecommunications that originate and terminate within
the same state.

     Federal Regulation.   Phoenix is classified by the FCC as a non-dominant
carrier, and therefore is subject to significantly reduced federal regulation.
After the reclassification of AT&T as a non-dominant carrier in its provision of
domestic services, among domestic carriers only the LECs are classified as
dominant carriers for the provision of interstate access services. As a
consequence, the FCC regulates many of the rates, charges, and services of the
LECs to a greater degree than Phoenix's. The FCC has proposed that the RBOCs
offering out-of-region interstate inter-exchange services be regulated as non-
dominant carriers, as long as such services are offered by an affiliate of the
RBOC that complies with certain structural separation requirements, which may
make it easier for the RBOCs to compete directly with Phoenix for long distance
subscribers. These would be the same separation requirements that currently are
applicable to independent LECs that provide interstate inter-exchange services,
although the FCC on March 21, 1996 initiated a rule-making proceeding in which
it is considering whether to modify or eliminate these separation requirements.

     Because AT&T is no longer classified as a dominant carrier, certain pricing
restrictions that formerly applied to AT&T have been eliminated, which may make
it easier for AT&T to compete with Phoenix for low volume long distance
subscribers. International carriers may also be classified as dominant if they
exercise market power or are considered to be affiliated with foreign carriers,
as defined under the FCC's rules. Non-dominant carriers are currently required
to file international tariffs. The FCC generally does not exercise direct
oversight over cost justification and the level of charges for service of non-
dominant carriers, such as Phoenix, although it has the statutory power to do
so. Non-dominant carriers are required by statute to offer interstate and
international services under rates, terms, and conditions that are just,
reasonable, and not unduly discriminatory. The FCC has the jurisdiction to act
upon complaints filed by third parties or brought on the FCC's own motion
against any common carrier, including non-dominant carriers, for failure to
comply with its statutory obligations. Additionally, the Telecommunications Act
grants explicit authority to

                                       9
<PAGE>
 
the FCC to "forbear" from regulating any telecommunications services provider
in response to a petition and if the agency determines that the public interest
will be served. On October 29, 1996, the FCC exercised this authority and
released an order which, among other things, requires nondominant interexchange
carriers to cancel their currently-filed tariffs for interstate domestic
services within nine months of the effective date of the order and prohibits
such filings in the future. However, on February 19, 1997, the United States
Court of Appeals for the District of Columbia Circuit stayed the FCC's order
pending further expedited judicial review or FCC reconsideration or both. In
August 1997, the FCC issued an order on reconsideration in which it affirmed its
decision to impose complete or mandatory detariffing, although it decided to
allow optional or permissive tariffing in certain limited circumstances
(including for interstate, domestic, interexchange dial-around services, which
end users access by dialing a carrier's 10XXX access code). Petitions for
further reconsideration of this order are pending, and this order also remains
subject to the Court of Appeals' stay pending further judicial review and any
appeals of the order on reconsideration. Phoenix cannot predict the ultimate
outcome of these or other proceedings on its service offerings or operations.

     The FCC imposes only minimal reporting requirements on non-dominant
resellers, although Phoenix is subject to certain reporting, accounting, and
record keeping obligations. A number of these requirements are imposed, at least
in part, on all carriers, and others are imposed on carriers whose annual
operating revenue exceed $100 million. Phoenix has been granted authority by the
FCC to provide international telecommunication services through the resale of
switched services of various vendor carriers. The FCC reserves the right to
condition, modify, or revoke such international authority for violations of the
Communications Act of 1934 or its rules.

     Phoenix currently has two tariffs on file with the FCC, one covering its
domestic interstate services and one covering international services. As an
international non-dominant carrier, Phoenix has been required to include, and
has included, detailed rate schedules in its international tariffs, which are
filed on 14-days' notice without cost support to justify rates. Resale carriers,
like all other interstate carriers, are also subject to a variety of
miscellaneous regulations that, for instance, govern the documentation and
verifications necessary to change a subscriber's long distance carrier, limit
the use of "800" numbers for pay-per-call services, require disclosure of
certain information if operator assisted services are provided, and govern
interlocking directors and management.

     The Telecommunications Act authorizes the RBOCs to provide inter-Local
Access and Transport Area ("LATA") inter-exchange telecommunication services,
upon the receipt of any necessary state and/or federal regulatory approvals that
are otherwise applicable to the provision of intrastate or interstate long
distance services and, for in-region long distance services, upon specific FCC
approval and upon satisfying other conditions, including a checklist of
interconnection and other requirements. The Telecommunications Act also provides
for certain safeguards against anticompetitive conduct by the RBOCs in the
provision of inter-LATA service including a requirement for a separate
subsidiary and certain joint marketing limitations.

     GTE was previously prohibited from providing inter-exchange
telecommunications services, however, the Telecommunications Act authorizes GTE
to provide inter-LATA inter-exchange telecommunications services without regard
to limitations by region, although the necessary state and/or federal regulatory
approvals that are otherwise applicable to the provision of intrastate and/or
interstate long distance service must be obtained by the various operating
companies of GTE prior to the provision of long distance service, and GTE is
subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on the LECs.

     Like substantially all other long distance carriers, Phoenix has been the
subject of complaints before the FCC regarding the unauthorized switching of
subscribers' long distance carriers, also known in the industry as "slamming."
Phoenix believes that most of such complaints arose from telemarketing efforts
by Phoenix, a marketing practice that Phoenix discontinued in early 1996.
Phoenix has never been penalized or cited for "slamming" by the FCC. As to all
complaints pending at December 31, 1997 Phoenix has filed or is in the process
of filing responses to such complaints and believes that such complaints will be
resolved without a material adverse impact upon Phoenix.

     In addition, the Telecommunications Act adds a new provision that imposes
liability upon all telecommunications carriers to the carrier previously
selected by the subscriber for unauthorized switching of 

                                       10
<PAGE>
 
subscribers' long distance carriers. Liability is imposed in an amount equal to
all charges paid by the subscriber after the unauthorized conversion. The FCC is
required to adopt new rules to implement this new statutory requirement. The
impact that this statutory provision will have on Phoenix cannot be determined
at this time.

     State Regulation.   Phoenix is subject to varying levels of regulation in
the 49 states in which it is currently authorized to provide originating
interstate telecommunications services and the 47 states in which it is
currently authorized to provide intrastate telecommunications services. The vast
majority of the states require Phoenix to apply for certification, which entails
proof of technical, managerial and financial ability, to provide intrastate
telecommunications services, or at least to register or to be found exempt from
regulation, before commencing intrastate service. A majority of states also
require Phoenix to file and maintain detailed tariffs listing their rates for
intrastate service. Many states also impose various reporting requirements
and/or require prior approval or notice for transfers of control of certified
carriers, and/or for corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; and carrier securities offerings. In certain instances Phoenix
has sought retroactive authority in various jurisdictions for certain
acquisitions and other reportable events. While Phoenix expects to receive all
requested approvals with respect to such retroactive filings, Phoenix had not
received all of such approvals as of December 31, 1997. Certificates of
authority can generally be conditioned, modified, canceled, terminated, or
revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory authorities.
Fines and other penalties, including the return of all monies received for
intrastate traffic from residents of a state, may be imposed for such
violations. If state regulatory agencies conclude that Phoenix has taken steps
without obtaining the required authority, they may impose one or more of the
sanctions listed above.

     Currently, Phoenix can provide originating interstate and intrastate
service to customers in 47 states and the District of Columbia. Of the states in
which Phoenix provides originating service, 39 have Public Utilities Commissions
("PUCs") that actively assert regulatory oversight over the services offered by
Phoenix.

     Additionally, the rules for each state vary in regard to the authorization
of inter-LATA versus intra-LATA service. Upon initial certification, Phoenix
generally requested approval to provide resold intrastate long distance
telecommunications services, unless a state had specific rules pertaining to
LATAs. At the time, depending on the individual state regulations, some states
only allowed Phoenix to provide inter-LATA services, and the LECs typically
provided intra-LATA services. However, many states have modified their rules to
allow competition in the intra-LATA market. Generally speaking, as the rules
have been modified, the states have either ordered that all certified inter-LATA
carriers now have the authority to provide intra-LATA services, or directives
have been given for companies to apply for intra-LATA authority or revise
existing tariffs to comply with state regulations. In those states which issued
directives for companies to apply for intra-LATA authority or revise tariffs,
Phoenix has complied with such orders.

     Phoenix continuously monitors regulatory developments in all states in
which it does business in order to ensure regulatory compliance. To the extent
that Phoenix converts from a switchless reseller to a switched reseller,
modification or amendment of Phoenix's state certifications may be required.

     Additional complaints for unauthorized switching of subscribers' long
distance carriers and for other issues involving subscriber liability for billed
calls for which the subscriber denies responsibility and other billing issues
have been lodged against Phoenix before other state public utilities
commissions. Although such complaints could result in additional legal actions
or proceedings being initiated against Phoenix, Phoenix believes that such
matters would be satisfactorily resolved without a material adverse impact upon
Phoenix's results of operations or financial condition. A final determination by
one or more jurisdictions that Phoenix engaged in the unauthorized switching of
subscribers' long distance carriers or other unauthorized conduct could have a
material adverse effect upon Phoenix's results of operations or financial
condition as, among other things, Phoenix would be subject to financial
penalties and potential revocation of its operating authority in the particular
jurisdiction, as well as other possible restrictions.

                                       11
<PAGE>
 
     Phoenix believes that it is in compliance in all material respects with the
requirements of federal and state regulatory authorities and maintains
communications regularly with the various regulatory authorities in each
jurisdiction.

ITEM 2. PROPERTIES

     Phoenix leases its principal executive offices in Golden, Colorado. In June
1996, Phoenix completed the relocation of its corporate headquarters from San
Francisco. In December 1997, Phoenix relocated its corporate headquarters from
1687 Cole Boulevard, Golden, Colorado to 13952 Denver West Parkway, Golden,
Colorado. Phoenix's headquarters is now located in the same building as its
Customer Service Call Center. Phoenix's lease at that site terminates on October
14, 2001. Phoenix leases office space in the following cities: Lombard,
Illinois; Overland Park, Kansas; Los Angeles, California; San Francisco,
California; Bellevue, Washington; Costa Mesa, California; Roseville, Minnesota;
Mendota Heights, Minnesota and Clearwater, Florida. Phoenix currently leases
approximately 45,000 square feet of office space for an aggregate of $51,174 per
month. In addition, Phoenix currently leases space for switches in Colorado
Springs, Minneapolis and Phoenix for an aggregate of $15,740 per month.

ITEM 3. LEGAL PROCEEDINGS

     LDDS Litigation.   LDDS Communications, Inc. (now known as WorldCom)
commenced an action styled LDDS/Worldcom, Inc. and Dial-Net, Inc. v. Automated
Communications, Inc. and Judy Van Essen Kenyon, C.A. No. 3:93-CV-463 (WS)
(U.S.D.C. S.D. Miss) (the "LDDS Litigation") in the United States District Court
for the Southern District of Mississippi in July of 1993 against Automated
Communications, Inc., a wholly-owned subsidiary of Phoenix ("ACI"), and Van
Essen, the former owner of ACI asserting claims relating to alleged breaches of
noncompete and confidentiality agreements the defendants had signed in
connection with two transactions in which WorldCom was involved. The alleged
breaches primarily relate to ACI's hiring of sales representatives employed by
Dial-Net, Inc., a long distance company WorldCom acquired in a merger
transaction, before the Phoenix/ACI merger was consummated. ACI and Van Essen
filed certain counterclaims against WorldCom. Shortly after the closing of the
Phoenix/ACI merger, ACI informed WorldCom of the acquisition but WorldCom has
taken no steps to add Phoenix to the litigation.

     A bench trial was conducted in the United States District Court in Jackson,
Mississippi from October 2 through October 17, 1996; final arguments were made
on November 15, 1996. Pursuant to the Van Essen Indemnification and Hold
Harmless Agreement dated January 16, 1996 by and among Phoenix, Phoenix Network
Acquisition Corp., a wholly-owned subsidiary of Phoenix ("PNAC"), ACI and Van
Essen (the "Van Essen Indemnification and Hold Harmless Agreement"), Van Essen
has the right to control, and did control, the defense on behalf of herself and
ACI. The potential liability of Phoenix and its subsidiaries, based on the
damages asserted by WorldCom, exceeds $4 million, and includes (1) compensatory
damages of approximately $3,020,000; (2) attorneys' fees in excess of $700,000;
(3) punitive damages in an unspecified amount; and (4) pre-judgment interest.
Phoenix is entitled to be indemnified for any liability with respect to the LDDS
Litigation, pursuant to the Van Essen Indemnification and Hold Harmless
Agreement summarized below.

     On February 2, 1998, the trial court issued a Memorandum Opinion and Order
("Order") addressing only the liability issues that were tried in the LDDS
Litigation, not causation or damages. With respect to WorldCom's various claims
against ACI and Van Essen, the Order states that ACI and Van Essen breached the
merger agreement and the noncompete agreement arising out of WorldCom's
acquisition of Dial-Net, Inc. The trial court did not impose liability on ACI or
Van Essen for WorldCom's other claims of (1) fraud and misrepresentation, (2)
securities fraud, (3) tortious interference, (4) misappropriation of trade
secrets, and (5) civil conspiracy. The trial court did not find WorldCom liable
for any of the claims asserted in ACI's and Van Essen's counterclaims.

     The court heard oral arguments with respect to the issues of causation and
damages at a telephonic hearing held on February 16, 1998. The court took the
matter under advisement following the hearing and has not, as of the date
hereof, indicated when a ruling on those issues will be made.

                                       12
<PAGE>
 
     Van Essen Indemnification and Hold Harmless Agreement.   The following
description summarizes the terms of the Van Essen Indemnification and Hold
Harmless Agreement and is qualified in its entirety by the Van Essen
Indemnification and Hold Harmless Agreement, a copy of which has been filed with
the Commission by Qwest as Exhibit D to the Proxy Statement/Prospectus included
as part of the Registration Statement on Form S-4 of Qwest declared effective
February 12, 1998 (File No.333-46145) and is hereby incorporated by reference
herein.

     The Van Essen Indemnification and Hold Harmless Agreement was entered into
on January 16, 1996 among Phoenix, PNAC, ACI and Van Essen in connection with a
merger agreement among those parties pursuant to which Phoenix acquired ACI.
Pursuant to the Van Essen Indemnification and Hold Harmless Agreement, Van Essen
agreed, among other things, to (i) be solely responsible for the defense (and
related fees and costs) relating to or arising from all pending and threatened
litigation against ACI (including certain named claims) as well as all claims
that might arise in the future relating solely to actions by ACI prior to
January 16, 1996 (the "ACI Legal Claims") and (ii) fully indemnify, defend and
hold harmless Phoenix, PNAC and ACI against any and all claims, judgments,
payments, expenses, liabilities and actual damages, including reasonable
attorneys' fees, that Phoenix, PNAC and/or ACI incurred relating to any ACI
Legal Claim. The Van Essen Indemnification and Hold Harmless Agreement does not
specifically list the LDDS Litigation as one of the legal claims subject to the
indemnity. However, because the list of claims does not purport to be exhaustive
and based on the parties' course of dealing, Phoenix believes that the LDDS
Litigation qualifies as an ACI Legal Claim, and, therefore, is subject to the
indemnity.

     Phoenix expresses no view as to whether Van Essen now has, or in the future
will have, the financial capability to perform her obligations under the Van
Essen Indemnification and Hold Harmless Agreement. The obligations of Van Essen
to indemnify Phoenix under the Van Essen Indemnification and Hold Harmless
Agreement are unsecured, although certain shares of Phoenix Common Stock have
been deposited in escrow in support of Van Essen's indemnification obligations,
as described below. As the value of the shares of Phoenix Common Stock held in
escrow is considerably less than the potential liability that ACI faces,
Phoenix's, and after the Effective Time, Qwest's ability to enforce any right of
indemnification will be dependent on, among other things, the financial
resources of Van Essen. There can be no assurance that Van Essen will have
adequate financial resources to pay Phoenix any or all amounts that may be owed
pursuant to the Van Essen Indemnification and Hold Harmless Agreement.

     Van Essen has deposited in escrow 727,273 shares of Phoenix Common Stock
pursuant to an escrow agreement (the "Van Essen Escrow Agreement") among
Phoenix, PNAC, Van Essen and Vectra Bank. Van Essen has asserted that none of
Phoenix, ACI or their subsidiaries has a security interest in the shares subject
to the escrow. The Van Essen Escrow Agreement provides that all or a portion of
the shares of Phoenix Common Stock held in escrow will be released to Phoenix
and/or PNAC upon a showing by PNAC of the liability of Van Essen to make payment
pursuant to the Van Essen Indemnification and Hold Harmless Agreement. The Van
Essen Escrow Agreement does not address whether any shares of the common stock,
par value $.01 per share, of Qwest (the "Qwest Common Stock") issued to Van
Essen in the Merger in substitution for the escrowed shares of Phoenix Common
Stock would be subject to the escrow. Van Essen has asserted that such shares of
Qwest Common Stock will not be subject to the Van Essen Escrow Agreement and
should be released from the escrow and delivered to her. Accordingly, there can
be no assurance that the shares of Qwest Common Stock received after the
Effective Time will be subject to the Escrow Agreement.

     Van Essen Threatened Litigation.   On January 16, 1998, Phoenix failed to
make a scheduled payment under the Van Essen Note and is currently in default
thereon. On January 17, 1998, Phoenix received a notice from Van Essen declaring
a default under the Van Essen Note and notifying Phoenix that if the scheduled
payment is not received by February 2, 1998, the entire unpaid principal balance
of the Van Essen Note will become due and payable and that Van Essen will pursue
all remedies available to her. Phoenix has not made the scheduled payment and
currently does not have sufficient cash to make the scheduled payment.

     Other Legal Proceedings.   In addition, Phoenix is a party, from time to
time, in litigation incident to its business. Phoenix is not aware of any such
current or pending litigation that it believes will have a material adverse
affect on Phoenix's results of operations or financial condition.

                                       13
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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

     Phoenix Common Stock is traded on the American Stock Exchange under the
symbol "PHX". The following table reflects the range of high and low closing
sales prices for each period indicated.

<TABLE>
<CAPTION>
 
                                                    Low     High 
                                                  ------  ------ 
 <S>                                               <C>     <C>   
                                                                 
YEAR ENDED DECEMBER 31, 1996                                     
  First quarter ended March 31, 1996               $3.44   $4.00 
  Second quarter ended June 30, 1996               $2.88   $5.88 
  Third quarter ended September 30, 1996           $4.50   $5.94 
  Fourth quarter ended December 31, 1996           $3.38   $4.94 
                                                                 
YEAR ENDED DECEMBER 31, 1997                                     
  First quarter ended March 31, 1997               $2.50   $4.50 
  Second quarter ended June 30, 1997               $1.63   $3.88 
  Third quarter ended September 30, 1997           $1.13   $3.50 
  Fourth quarter ended December 31, 1997           $0.38   $1.69 
</TABLE>

     The closing sales price of Phoenix Common Stock as reported by the American
Stock Exchange on March 2, 1998 was $0.6875.

     As of the close of business on March 2, 1998, there were approximately
1,269 stockholders of record of Phoenix Common Stock, including shares held in
street name by various brokerage firms.

     The Company has not, since 1983, paid any dividends on its Common Stock and
the Company does not anticipate the payment of dividends on such stock in the
foreseeable future. In addition to any applicable state law restrictions
relating to the payment of dividends on its Common Stock, the Company is
restricted from paying dividends on Common Stock or Preferred Stock without the
consent of Foothill Capital Corporation under the terms of the Phoenix Credit
Facility.

     On April 4, 1997, the Company sold to JNC Opportunity Fund Ltd. ("JNC")
150,000 shares of the Company's Series G Convertible Preferred Stock, par value
$.001 per share (the "Series G Preferred Stock"), for an aggregate sales price
of $3,000,000. In connection with such sale, the Company paid financial advisory
fees of $150,000.  Also in connection with such sale, Wharton Capital Partners,
Ltd. ("Wharton") received a five year warrant to acquire 50,000 shares of
Phoenix Common Stock on April 4, 1997 with an exercise price of $2.3375 per
share of Phoenix Common Stock in partial payment of financial advisory services
to the Company. In addition, Keith A. Rhodes ("Rhodes") received a five year
warrant to acquire 10,000 shares of Phoenix Common Stock on April 4, 1997 with
an exercise price of $2.3375 per share of Phoenix Common Stock in partial
payment of financial advisory services to the Company. The Series G Preferred
Stock provided for conversion into shares of Phoenix Common Stock on the basis
of a floating conversion ratio tied to a percentage of the market price of
Phoenix Common Stock. The stated value of $20 per share of each share of Series
G Preferred Stock was convertible into shares of Phoenix Common Stock at any
time at the lower of (i) the fixed price conversion of $2.45 and (ii) a 20%
discount to the five day average closing bid price preceding a conversion,
subject to adjustment under certain circumstances. In addition, all dividends
payable with regards to the Series G Preferred Stock were payable in shares of
Phoenix Common Stock at the lower of (i) and (ii) above. As of 

                                       14
<PAGE>
 
October 3, 1997, all of such shares of Series G Preferred Stock had been
converted into an aggregate of 2,491,879 shares of Phoenix Common Stock.

     On July 17, 1997, the Company sold to JNC 125,000 shares of the Company's
Series I Convertible Preferred Stock, par value $.001 per share (the "Series I
Preferred Stock"),and a five year warrant to acquire 45,000 shares of Phoenix
Common Stock with an exercise price of $2.00 per share of Phoenix Common Stock
and on July 23, 1997, JNC was issued a five year warrant to acquire 30,000
shares of Phoenix Common Stock  with an exercise price of $2.00 per share of
Phoenix Common Stock all for an aggregate sales price of $2,500,000. In
connection with such sales, the Company paid financial advisory fees of
$125,000.  Also in connection with such sales, Wharton received a five year
warrant to acquire 19,000 shares of Phoenix Common Stock on July 17, 1997 with
an exercise price of $2.00 per share of Phoenix Common Stock and a five year
warrant to acquire 11,000 shares of Phoenix Common Stock on July 23, 1997 with
an exercise price of $2.00 per share of Phoenix Common Stock in partial payment
of financial advisory services to the Company. In addition, Rhodes received a
five year warrant to acquire 3,500 shares of Phoenix Common Stock on July 17,
1997 with an exercise price of $2.00 per share of Phoenix Common Stock and a
five year warrant to acquire 4,000 shares of Phoenix Common Stock on July 23,
1997 with an exercise price of $2.00 per share of Phoenix Common Stock in
partial payment of financial advisory services to the Company. The Series I
Preferred Stock provided for conversion into shares of Phoenix Common Stock on
the basis of a floating conversion ratio tied to a percentage of the market
price of Phoenix Common Stock. The stated value of $20 per share of each share
of Series I Preferred Stock was convertible into shares of Phoenix Common Stock
at any time at the lower of (i) the fixed price conversion of $1.875 and (ii) a
17% discount to the average of the lowest five closing bid prices during the ten
trading days immediately preceding a conversion, subject to adjustment under
certain circumstances. In addition, all dividends payable with regards to the
Series I Preferred Stock were payable in shares of Phoenix Common Stock at the
lower of (i) and (ii) above. As of December 31, 1997, 85,500 of such shares of
Series I Preferred Stock had been converted into an aggregate of 2,337,355
shares of Phoenix Common Stock.  In addition, as of January 15, 1998, the
remaining 39,500 of such shares of Series I Preferred Stock had been converted
into an aggregate of 2,349,011 additional shares of Phoenix Common Stock.

     In each case, the issuance of securities by Phoenix to JNC, Wharton and
Rhodes was undertaken pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial data presented below for, and as of the
end of, the years ended December 31, 1997, 1996, 1995, 1994 and 1993 have been
derived from the consolidated financial statements of the Company, which
statements have been audited by Grant Thornton LLP, independent certified public
accountants. This data should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
elsewhere herein.

                                       15
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                              Year ended December 31,
                                         --------------------------------------------------------------
                                            1993         1994         1995         1996         1997
                                         --------------------------------------------------------------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S>                                      <C>          <C>          <C>          <C>          <C>
 
Revenue                                     $53,905      $74,405      $75,855     $ 99,307     $ 76,947
Cost of revenue                              39,381       52,650       53,776       73,438       57,195
                                            -------      -------     --------     --------      -------      
 
               Gross profit                  14,524       21,755       22,079       25,869       19,752

Selling, general and administrative          
 expenses                                    15,851       21,075       22,323       31,115       25,941
Depreciation and Amortization                   538          678        1,126        4,358        3,973
Relocation expenses                              --           --           --        1,133           --
Acquisition expenses                             --           --           --        1,309          513
    Loss on abandonment of fixed assets          --           --        1,020           15        3,260
Aborted bond offering expenses                   --           --           --          246           --
                                            -------      -------     --------     --------      -------      
                                             16,389       21,753       24,469       38,176       33,687
                                            -------      -------     --------     --------      -------      
    Operating income (loss)                  (1,865)           2       (2,390)     (12,307)     (13,935)
Other income (expense):
    Interest income                              19           36          103           85           71
    Interest expense                            186         (425)        (260)        (626)      (1,092)
    Miscellaneous income (expense)              (10)          43           (7)           4           11
                                            -------      -------     --------     --------      -------      
                                               (177)        (346)        (164)        (537)      (1,010)
                                            -------      -------     --------     --------      -------      
Income (loss) before income taxes and
  cumulative effect of accounting            
   change                                    (2,042)        (344)      (2,554)     (12,844)     (14,945)
Income tax benefit (expense)                    494          (16)        (500)          --           --
                                            -------      -------     --------     --------      -------      
Income (loss) before cumulative effect       
 of accounting change                        (1,548)        (360)      (3,054)     (12,844)     (14,945)
                                            -------      -------     --------     --------      -------      
Cumulative effect of change in 
 amortization of deferred commissions            --          123           --           --           --
                                            -------      -------     --------     --------      -------      
               Net income (loss)            $(1,548)     $  (483)     $(3,054)    $(12,844)    $(14,945)
                                            =======      =======     ========     ========      =======      
Net income (loss) attributable to
 common shares:
   Net income (loss)                        $(1,548)     $  (483)     $(3,054)    $(12,844)    $(14,945)
   Preferred dividends                         (268)        (232)        (594)      (1,206)        (179)
                                            -------      -------     --------     --------      -------      
                                            $(1,816)     $  (715)     $(3,648)    $(14,050)    $(15,124)
                                            =======      =======     ========     ========      =======      
Loss per common share:
Loss before cumulative effect of
 accounting change                          $ (0.15)     $ (0.04)     $ (0.24)     $ (0.68)     $ (0.52)
Cumulative effect of accounting change           --        (0.01)          --           --           --
                                            -------      -------     --------     --------      -------      
Net loss per common share                   $ (0.15)     $ (0.05)     $(0.24)      $ (0.68)      $(0.52)
                                            =======      =======     ========     ========      =======      
BALANCE SHEET DATA (at end of period):
Working capital (deficit)                   $ 1,478      $ 1,409      $10,252      $(7,786)    $(12,840)
Total assets                                 17,317       17,568       33,028       45,794       35,134
Long term debt                                   --           --           --        2,213          386
Stockholders' equity (deficit)                3,668        4,512       19,188       18,172        9,696
</TABLE>

    The Company has not, since 1983, declared or paid any dividends on its
Common Stock.

                                       16
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     In addition to the historical information contained herein, the following
discussion contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled
"Business" included herein and the section entitled "Risk Factors" included in
Proxy Statement/Prospectus incorporated by reference herein. The following
discussion reflects the merger with AmeriConnect, Inc. (the "AmeriConnect
Merger") on a pooling of interests basis and is based upon and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included elsewhere in this Annual Report.

INTRODUCTION

     Phoenix entered the telecommunications industry as a switchless long
distance reseller in 1985, and Phoenix grew internally on the efforts of its
sales and marketing force during the following decade. Additionally, since May
1995, Phoenix has completed 10 acquisitions of companies or customer bases,
thereby strengthening Phoenix's customer base, product and service offerings and
sales distribution. The largest of these acquisitions include: Bright Telecom
L.P. ("Bright"), a San Francisco-based international call-back company, Tele-
Trend Communications, LLC ("Tele-Trend"), a switchless reseller based in Denver,
and a portion of the customer base of Interstate Savings, Inc. ("ISI"), a
switched reseller, all of which were completed in the last half of 1995. In
January 1996, Phoenix acquired Automated Communications, Inc. ("ACI") and, in
October 1996, Phoenix completed the acquisition of AmeriConnect, Inc. See "ITEM
1 -- BUSINESS--Acquisitions."

     Phoenix derives the bulk of its revenue through the sale of
telecommunications services to its customers including, (i) "1 plus" and (800)
service and (ii) dedicated service and private lines. Revenues are based upon
rates set by Phoenix and billed to its customers for the services utilized.
Phoenix's other revenue are primarily derived from calling cards, Internet
access, international call-back and conference calling.

     Phoenix's cost of revenue consists of amounts paid to switching services
providers and to carriers for bundled switching and transmission services.
Switching services rates are fixed on a contractual, per minute basis. The rates
Phoenix pays for bundled switching and transmission service vary depending on
which underlying carrier is used for service and the volume of traffic on such
carriers.

     SG&A consist of personnel costs, sales commission  and  marketing costs,
facilities costs, billing costs, bad debt expense and other general expenses.
Sales commissions represent the amounts paid to employees and independent
contractors for the procurement of new customers. Residual commissions are paid
based upon either customers' usage or payment. Bad debt expense is provided for
on a monthly basis as a charge to earnings based upon estimated uncollectible
accounts. Accounts are written off against the reserve when deemed to be
uncollectible.

SUPPLIER RELATIONSHIPS

     Phoenix currently has agreements with major long distance carriers, such as
WorldCom, Sprint, Frontier, AT&T and others, to carry the majority of its long
distance traffic. Phoenix's agreements with vendors specify minimum volume usage
requirements, but, in contrast to many of its competitors, such requirements
scale down or expire over the next 12 months, thereby freeing traffic to be
loaded on another company's network including that of Qwest if the Merger is
consummated.

                                       17
<PAGE>
 
RESULTS OF OPERATIONS

     The following table sets forth for the years and periods indicated the
respective percentages of revenue represented by certain items in Phoenix's
statements of operations.

<TABLE>
<CAPTION>
 
                                                        Years Ended December 31,
                                                   ---------------------------------
                                                     1995         1996        1997
                                                   --------    --------     --------
STATEMENT OF OPERATIONS DATA:
<S>                                                <C>        <C>           <C>
Revenue....................................         100.0%      100.0%        100.0%
Cost of revenue............................          70.9         74.0         74.3
Gross profit...............................          29.1         26.0         25.7
Selling, general and administrative........          29.4         31.3         33.7
Depreciation and amortization..............           1.5          4.4          5.2
Relocation expenses........................            --          1.1           --
Acquisition expenses.......................            --          1.3          0.7
Loss on abandonment of fixed assets........           1.3           --          4.2
Aborted bond offering expenses.............            --          0.2           --
                                                    -----       ------       ------
                                                     32.2         38.3         43.8
Operating income (loss)....................          (3.1)       (12.3)       (18.1)
Interest income............................           0.1           --           --
Interest expense...........................          (0.3)        (0.6)        (1.4)
Miscellaneous income.......................            --           --           --
Income tax benefit (expense)...............          (0.7)          --           --
                                                     ----       ------       ------
Loss before cumulative effect of accounting
 change........                                      (4.0)       (12.9)       (19.5)
Cumulative effect of change in amortization 
 of deferred commissions...................            --           --           --
                                                    -----        -----       ------ 
Net income (loss)..........................          (4.0)%      (12.9)%      (19.5)%
                                                    =====       ======       ======
Preferred dividends........................          (0.8)        (1.2)        (0.2)
                                                    -----       ------       ------
Net income (loss) attributable to common 
 shares....................................          (4.8)%      (14.1)%      (19.7)%
                                                    =====       ======       ======
</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     Revenue.   Revenue decreased by $22.4 million or 22.5%, to $76.9 million
for the year ended December 31, 1997 from $99.3 million for the year ended
December 31, 1996. This decrease was primarily the result of a decrease in
minutes of usage ("MOU") of 95,186,000 minutes, to 533,166,000 minutes for 1997,
from 628,352,000 minutes for 1996 and a 8.7% decrease in the average revenue per
MOU to $.144 per MOU for 1997 from $.158 per MOU for 1996. The average revenue
per MOU decline was due to Phoenix's customers continuing to utilize more
competitively priced services offered by Phoenix. These new services have been a
result of Phoenix's reaction to an overall decline in retail rates and price
sensitivity in the telecommunications industry.

     Cost of Revenue.   Cost of revenue decreased by $16.2 million or 22.1%, to
$57.2 million for 1997 from $73.4 million for 1996; however, as a percentage of
revenue, cost of revenue increased to 74.3% compared to 74.0% for 1996. Although
Phoenix's average cost per MOU has declined by 8.2% for the year ended December
31, 1997, compared to the prior year, the higher percentage decrease in the
average revenue per minute resulted in the decline in Phoenix's gross profit
margin percentage.

     Selling, General and Administrative Expenses.   SG&A decreased by $5.2
million, or 16.6%, to $25.9 million for 1997 from $31.1 million for 1996. SG&A
as a percentage of revenue increased to 33.7% for 1997 from 31.3% of revenue for
1996.

     Depreciation and Amortization.   Depreciation and amortization expense
decreased by $0.4 million to $4.0 million for 1997 from $4.4 million for 1996.
However, as a percentage of revenue, these costs increased by 0.8 percentage
points over 1996.

                                       18
<PAGE>
 
     Acquisition Expenses.   Acquisition expenses of $0.5 million were
primarily incurred in connection with the aborted mergers between Midcom
Communications Inc. ("Midcom") and Phoenix and US One Communications Corp.,
Resurgens Capital Group, Inc. and Phoenix.  The costs consist of transaction
fees to third parties and legal and accounting fees.

     Loss on Abandonment of Fixed Assets.   Loss on abandonment of fixed
assets expenses of $3.3 million was incurred in 1997 due to management's
decision to abandon the New Billing and Customer Care Platform (as hereinafter
defined).

     Interest Income.  Interest income decreased by $14,000 to $71,000 for 1997
from $85,000 for 1996, as a result of lower cash balances in Phoenix's interest
bearing bank accounts.

     Interest Expense.  Interest expense increased by $466,000 to $1,091,000
for 1997 from $625,000 for 1996. This increase was primarily the result of
increased borrowings under the Phoenix Credit Facility.

     Net Loss.  Net loss increased by $2.1 million to a net loss of $14.9
million for 1997 from a net loss of $12.8 million for 1996 for the reasons
discussed above.

     Preferred Dividends.  Preferred dividend requirements decreased by
$1,027,000 to $179,000 for 1997 from $1,206,000 for 1996 primarily as a result
of the conversion of substantially all of its outstanding Preferred Stock to
Phoenix Common Stock during 1997.

     Net Loss Attributable to Common Shares.   Net loss attributable to common
shares increased by $1.1 million to a net loss attributable to Phoenix Common
Stock of $15.1 million for 1997 from a net loss attributable to Phoenix Common
Stock of $14.0 million for 1996 for the reasons discussed above.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Revenue.  Revenue increased by $23.4 million or 30.8%, to $99.3 million
for the year ended December 31, 1996 from $75.9 million for the year ended
December 31, 1995. This increase was primarily the result of an increase in
minutes of usage ("MOU") of 214,484,000 minutes, to 628,352,000 minutes for
1996, from 413,868,000 minutes for 1995 which was partially offset by a 13.7%
decrease in the average revenue per MOU to $.158 per MOU for 1996 from $.183 per
MOU for 1995. Revenue per MOU decreased primarily as a result of Phoenix's
customers utilizing more competitively priced services offered by Phoenix during
1996 and the effect of acquired companies' rate structures which generally were
lower than those offered by Phoenix. The customers gained from the ACI
acquisition during 1996 accounted for approximately 26.8% of total MOU in the
period.

     Cost of Revenue.   Cost of revenue increased by $19.6 million or 36.4%, to
$73.4 million for 1996 from $53.8 million for 1995. This increase was primarily
the result of an increase in MOU resulting from acquisitions. Cost of revenue
per MOU decreased 10.0% to $.117 per MOU for 1996 from $.130 per MOU for 1995
primarily as a result of the acquisition of ACI, which had a cost per MOU which
was lower than Phoenix's, and, to a lesser extent, Phoenix being able to place
new business on its most favorably priced vendor carrier contracts. As a
percentage of revenue, cost of revenue increased to 74.0% for 1996 from 70.9%
for 1995. The increase in cost of revenue as a percentage of revenue was
primarily the result of Phoenix providing lower-priced services to its customers
without a corresponding decrease in the cost of providing such services.
Historically, as Phoenix's traffic volume with its vendor carriers has
increased, it has been able to negotiate more favorable rates with such vendor
carriers, usually in conjunction with an increased volume commitment. However,
in order to pursue its long-term strategy of deploying and loading a network,
Phoenix did not renegotiate any of its material vendor carrier contracts in the
first half of 1996 in order to avoid increased vendor carrier commitments.

     Selling, General and Administrative Expenses.  SG&A increased by $8.8
million, or 39.4%, to $31.1 million for 1996 from $22.3 million for 1995. This
increase was primarily the result of incremental SG&A associated with the ACI
acquisition. SG&A as a percentage of revenue increased to 31.3% for 1996 from
29.4% of revenue for 1995. During 1996, Phoenix was incurring certain
duplicative operating costs in connection with the operation of ACI, such as
facilities expense and salaries of administrative personnel performing similar
functions. Phoenix consolidated its San 

                                       19
<PAGE>
 
Francisco operations into the former ACI facilities in July 1996. During 1996,
Phoenix incurred approximately $1.0 million in duplicative operating costs which
were eliminated as of July 1996.

     Depreciation and Amortization.   Depreciation and amortization increased by
$3.3 million to $4.4 million for 1996 from $1.1 million for 1995. This increase
is primarily attributable to the increased amortization of goodwill and customer
bases recorded as a result of the acquisitions discussed above.

     Relocation Expenses.   Relocation expenses of $1.1 million were incurred in
1996 from Phoenix's relocation of its primary operations from San Francisco to
Golden, Colorado.

     Acquisition Expenses.   Acquisition expenses of $1.3 million were incurred
in connection with the AmeriConnect acquisition and consist primarily of
transaction fees to third parties, legal and accounting fees and a contractual
severance payment to AmeriConnect's chief executive officer.

     Aborted Bond Offering Expenses.   Aborted bond offering expenses related to
legal and accounting fees in connection with a proposed bond offering Phoenix
began in the last half of 1996. Phoenix decided to discontinue the offering in
January 1997 due to unfavorable market conditions.

     Interest Income.   Interest income decreased by $18,000 to $85,000 for 1996
from $103,000 for 1995, as a result of lower cash balances in Phoenix's interest
bearing bank accounts.

     Interest Expense.   Interest expense increased by $364,000 to $625,000 for
1996 from $261,000 for 1995. This increase was primarily the result of increased
borrowings under the Phoenix Credit Facility. Interest expense will increase
substantially in future periods as a result of increased indebtedness under the
Phoenix Credit Facility.

     Net Loss.   Net loss increased by $9.8 million to a net loss of $12.8
million for 1996 from a net loss of $3.0 million for 1995 for the reasons
discussed above.

     Preferred Dividends.   Preferred dividend requirements increased by
$612,000 to $1,206,000 for 1996 from $594,000 for 1995 primarily as a result of
the issuance of 1,176,056 shares of Series F Preferred Stock in October 1995.
Effective in December 1996, Phoenix converted its outstanding Series F Preferred
Stock into Phoenix Common Stock in accordance with the terms of the Series F
Preferred Stock. As a result of the conversion of the Series F Preferred Stock,
Phoenix's preferred dividend requirements have decreased.

     Net Loss Attributable to Common Shares.   Net loss attributable to common
shares increased by $10.4 million to a net loss attributable to Phoenix Common
Stock of $14.0 million for 1996 from a net loss attributable to Phoenix Common
Stock of $3.6 million for 1995 for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     Cash flows from operations for the year ended December 31, 1997 resulted in
a net negative cash flow of $1.1 million compared to a negative cash flow of
$6.7 million for the year ended December 31, 1996, primarily as a result of the
loss incurred for the period.

     Phoenix's capital expenditures were $1.7, $3.6 million and $589,000 in
1997, 1996 and 1995, respectively. Phoenix has financed approximately $1.4
million of the 1996 costs associated with implementation of a new billing and
customer care platform (the "New Billing and Customer Care Platform")
(implementation of which was abandoned as of December 1997) through a financing
company over a three year term. During 1996, and during 1995, Phoenix spent
$17.6 million and $6.2 million, respectively, on acquisitions, of which $4.6
million and $6.2 million, respectively, was paid in cash. The cash for such
acquisitions was raised through equity offerings and short-term borrowings.

     Phoenix's principal source of cash to fund its liquidity needs has been
through its borrowings under the Phoenix Credit Facility. The Phoenix Credit
Facility allows for borrowings of up to $10 million based upon Phoenix's
qualified accounts receivable. The loan balance as of December 31, 1997 was $6.7
million. Net cash used in operating activities for 1997 was $5.6 million
compared to $4.0 million for 1996, primarily as a result of the loss incurred
for the period. Net cash used in operating activities for 1996 was $4.0 million
compared to $1.7 million for 1995, primarily as a result of the loss incurred
for the period. The total net cash used by operations over the periods discussed
above has generally been a result of the losses incurred by Phoenix over such
periods.


                                       20
<PAGE>
 
     On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
$2,000,000 bridge loan with the principal amount to be paid in eight (8) equal
monthly installments between July 1, 1997 and January 1, 1998. Phoenix made
installment payments of $250,000 on the principal amount of the bridge loan
during each of June, July and August, 1997. On September 1, 1997, the parties
entered into an amendment to provide for a temporary moratorium on payments in
respect of the bridge loan with a final payment of all outstanding principal and
accrued and unpaid interest being due on January 9, 1998. On December 12, 1997,
the Phoenix Credit Facility was amended to provide for an additional bridge loan
of $1,825,000 and the retention of an over-advance of $300,000. On December 31,
1997, the Phoenix Credit Facility was further amended to provide that Foothill
Capital Corporation may, in its sole discretion, lend Phoenix up to $1.25
million, to be treated either as an increase to the Bridge Loan Amount or as an
over-advance, which must be repaid on the earliest to occur of (a) April 30,
1998, (b) the Effective Time and (c) termination of the Phoenix Credit Facility.
On February 2, 1998, the Phoenix Credit Facility was amended to provide for an
additional over-advance of $500,000 and to reduce the amount that Foothill
Capital Corporation may lend Phoenix from $1.25 million to $750,000.

     On January 16, 1998, Phoenix failed to make a scheduled payment under the
Van Essen Note (as defined herein) and is currently in default thereon. On
January 17, 1998, Phoenix received a notice from Van Essen declaring a default
under the Van Essen Note and notifying Phoenix that if the scheduled payment is
not received by February 2, 1998, the entire unpaid principal balance of the Van
Essen Note will become due and payable and that Van Essen will pursue all
remedies available to her. Phoenix has not made the scheduled payment and
currently does not have sufficient cash to make the scheduled payment.

     From time to time Phoenix has been in violation of certain of its covenants
in the Phoenix Credit Facility. Phoenix has received waivers of its violations
of these covenants so long as it continues to meet the continuing requirements
of the Phoenix Credit Facility. Such requirements include (a) the execution of
the Merger Agreement by January 8, 1998; (b) the filing with the Commission of a
preliminary proxy statement with respect to the Merger Agreement by January 31,
1998; (c) the prompt response to any comments the Commission might have with
respect to such preliminary proxy statement; (d) the registration statement
filed by Qwest with respect to the offering of the securities of Qwest in
connection with the Merger being declared effective by the Commission by April
30, 1998; (e) the filing with the Commission of Phoenix's Annual Report on Form
10-K for the year ended December 31, 1997 by March 31, 1998; (f) the approval of
the Merger Agreement and Merger by the holders of a majority of the shares of
Phoenix Common Stock by April 30, 1998; and (g) the consummation of the Merger
by April 30, 1998. A failure by Phoenix to meet any of such requirements would
constitute an event of default under the Phoenix Credit Facility. In the future,
should Phoenix violate, or have a continuing violation of, any of the covenants
constituting an event of default under the Phoenix Credit Facility, there can be
no assurance that it will receive a waiver of such violation. Under the terms of
the Phoenix Credit Facility, upon the occurrence of an event of default, the
lender may, among other things, declare all amounts outstanding under the
Phoenix Credit Facility immediately due and payable, cease advancing money or
extending credit to Phoenix and/or during the continuance of an event of
default, increase the interest rate on amounts outstanding under the Phoenix
Credit Facility.

     As of March 2, 1998, $4,886,576 was outstanding under the line of credit
(including over-advances of $800,000, in the aggregate) provided by the Phoenix
Credit Facility and the interest rate was 10.25%. Average daily outstanding
borrowing for the year ended December 31, 1997 was $4,092,859. The highest
month-end balance outstanding for the year ended December 31, 1997 was
$5,621,926.

     As of March 2, 1998, Phoenix estimated that it will require financing
between $7 million and $10 million in order to repay the Bridge Loan Amount and
over-advances under the Phoenix Credit Facility and fund operating losses,
working capital requirements and capital expenditures during the remainder of
1998. This amount is in addition to funds provided by operations and funding
available, if any, under the Phoenix Credit Facility. The exact amount and
timing of these working capital requirements and Phoenix's ability to continue
as a going concern will be determined by numerous factors, including (i) the
revenue level of, and gross margin on, sales; (ii) the outcome of outstanding
contingencies and disputes, including the LDDS Litigation and other pending
lawsuits; (iii) payment terms achieved by Phoenix; (iv) Phoenix's ability to
manage selling, general and administrative expenses; and (v) the timing of
capital expenditures.

                                       21
<PAGE>
 
     If the Merger is not concluded, there can be no assurance that Phoenix will
be able to obtain additional equity or debt financing on terms that Phoenix will
find acceptable. Any additional equity or debt financing may involve substantial
dilution to the interests of Phoenix stockholders. If Phoenix is unable to
obtain sufficient funds to satisfy its cash requirements, it will be forced to
curtail operations, dispose of assets, seek extended payment terms from its
vendors or seek protection under federal bankruptcy laws. There can be no
assurance that Phoenix will be able to obtain additional working capital, reduce
expenses or successfully complete other steps necessary to continue as a going
concern.

     Given its history of operating losses and the expectation that the losses
will continue for the foreseeable future, Phoenix will need to raise additional
capital to cover its operating losses and continue to support its business. If
the Merger is not consummated, Phoenix will attempt to raise the capital by
either selling additional stock, expanding its borrowing from its lender or
arranging for more flexible payment terms with its major vendors. There can be
no assurance that Phoenix will be successful in any of these fund raising
efforts.

     For additional limitations on Phoenix's liquidity and capital resources,
see "RISK FACTORS--Risk Factors Relating to Phoenix and Its Busines--Substantial
Doubt about Ability to Continue as a Growing Concern; Need for Additional
Working Capital," "--Negative Cash Flow From Operations," "--History of
Operating Losses; Anticipated Future Losses," "--Possible Volatility of Stock
Price," "--Substantial Leverage" and "--Credit Facility Covenants" contained in
the Proxy Statement/Prospectus incorporated by reference herein.

SEASONALITY

     Phoenix's revenue, and thus its potential earnings, are affected by holiday
and seasonal variations. A substantial portion of Phoenix's revenue are
generated by direct dial domestic long distance business customers, and,
accordingly, Phoenix experiences a decrease in revenue around holidays,
particularly the quarter ending December 31, when business customers reduce
their usage. Phoenix's fixed operating expenses, however, do not decrease during
the fourth fiscal quarter. Accordingly, Phoenix has experienced, and may
continue to experience, lower revenue and earnings in its fourth fiscal quarter
when compared with the other fiscal quarters.

TAX BENEFIT

     As of December 31, 1997, Phoenix had available to offset future federal
taxable income, net operating loss carryforwards ("NOLs") of approximately $35.3
million which expire in varying amounts from 2002 through 2012. A portion of the
NOLs may be subject to limitations as a result of provisions of the Internal
Revenue Code of 1986, as amended, relating to changes in ownership and
utilization of losses by successor entities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements of the Company and the related report of
independent  accountants are included in this report beginning at page F-1:

     Report of Independent Certified Public Accountants

     Balance Sheets

     Statements of Operations

     Statement of Stockholders' Equity

     Statements of Cash Flows

     Notes to Financial Statements

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

     None.

                                       22
<PAGE>
 
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

     The names of the directors and executive officers of Phoenix and certain
information about them is set forth below:

<TABLE>
<CAPTION>
                    NAME                            AGE             Position
                    ----                            ---             --------
<S>                                                 <C> <C>
Thomas H. Bell(1)(3)(5)......................        50  Chairman of the Board and Director
James W. Gallaway(2).........................        57  Director
Merrill L. Magowan(2)(3).....................        59  Director
Wallace M. Hammond...........................        52  President, Chief Executive Officer and Director
David Singleton(1)(3)(4).....................        58  Director
Max E. Thornhill(2)(4).......................        65  Director
Charles C. McGettigan(1).....................        52  Director
J. Rex Bell(5)...............................        43  Senior Vice President
Jon Beizer...................................        32  Senior Vice President and Chief Financial Officer
</TABLE>

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
(4) Messrs. Singleton and Thornhill were elected to the Phoenix Board by the
    holders of Phoenix's Series F Preferred Stock. Effective in December, 1996,
    all of the Series F Preferred Stock was converted into Phoenix Common Stock.
    Messrs. Singleton and Thornhill tendered their resignations from the Phoenix
    Board, but the Phoenix Board elected not to accept such resignations.
(5) Thomas H. Bell, a director of Phoenix, and J. Rex Bell, Senior Vice
    President of Phoenix, are brothers. With the exception of that relationship,
    there are no other family relationships among officers or directors of
    Phoenix.

     Each director of the Company serves a one-year term.

     Thomas H. Bell is the founder of Phoenix. He has served as the Chairman of
the Phoenix Board since its inception under the name Phoenix Telcom, Inc. in
1985, as Phoenix's Chief Executive Officer from 1985 to January 1992, and as
President of Phoenix from 1985 to September 1990. Mr. Bell is also an
independent consultant in the telecommunications industry. Mr. Bell is the
brother of J. Rex Bell, Phoenix's Senior Vice President.

     James W. Gallaway has served as a director of Phoenix since July 1988. He
was a founder, director from 1984 to 1988, and Vice President from 1983 to 1986,
of Centex Telemanagement, Inc., a telecommunications company that resold local
telephone service. Since 1980, he has been the chairman of the board of
directors of Gallaway Enterprises, Inc., a telecommunications company. From
February 1988 through December 1994, he served as a director and Vice President
of StellarNet, Inc., an information management company in the health care
industry. Mr. Gallaway is a U.S. Marine Corps Reserve (Retired) Colonel.

     Merrill L. Magowan became a director of Phoenix in September 1990. Since
1982, Mr. Magowan has been a principal of S F Associates, a California
registered investment advisory firm (formerly known as Magowan Dirickson
Investment Company). He is also currently a director of Nordeman Grimm (since
1975), an executive search consulting firm. From 1968 to 1986, he was a director
of Safeway Stores, Inc., a retail grocery chain.

     Wallace M. Hammond joined Phoenix as Executive Vice President in February
1994. He was elected to the Phoenix Board and named President and Chief
Operating Officer of Phoenix in May 1994. Mr. Hammond was elected Chief
Executive Officer of Phoenix in December 1994. From 1992 to 1993, he was
President and Chief Executive Officer of ANSCO & Associates, Inc., a telephone
engineering and plant construction company. From 1979 to 1992, he was with
BellSouth Communication Systems, Inc., a nationwide division of BellSouth
Corporation involved in the customer premises equipment after-market, where he
was promoted to Vice President-Operations in 1989.

                                       23
<PAGE>
 
     David Singleton has served as a director of Phoenix since October 1995. He
was a founding director of WorldCom and served as a director of that company
from 1983 to 1992. Mr. Singleton also serves as a director of Red Fox
Environmental Services. Mr. Singleton has worked in personal and small business
financial planning for 25 years and currently manages a private portfolio.

     Max E. Thornhill has served as a director of Phoenix since October 1995. He
was a founding director of WorldCom and served as a director of that company
from 1983 to September 1993. Mr. Thornhill is currently the owner and president
of Mineral Resources, Inc., a company engaged in real estate development and oil
and gas exploration and production.

     Charles C. McGettigan served as a director of Phoenix from November 1990
through December 1991 and was re-elected as a director in September 1996. He was
a co-founder (in 1991) and presently is a general partner of Proactive
Investment Managers, L.P., which is the general partner of Proactive Partners,
L.P., a merchant banking fund. Mr. McGettigan was a co-founder (in 1988) and is
a managing director of McGettigan, Wick & Co., Inc., an investment banking firm.
From 1984 to 1988, he was a Principal, Corporate Finance, of Hambrecht & Quist,
Incorporated. Prior to that, Mr. McGettigan was a Senior Vice President of
Dillon, Read & Co. Inc. He currently serves on the boards of directors of
digital dictation, inc.; I-Flow Corporation; Modtech, Inc.; NDE Environmental
Corporation; Onsite Energy, Inc.; PMR Corporation; Sonex Research, Inc.; Wray-
Tech Instruments, Inc.; and Cuisine Solutions, Inc.

     J. Rex Bell has been Senior Vice President of Phoenix since May 1993. From
March 1991 to May 1993, he was Vice President of Operations. From January 1990
to March 1991, he held the position of Director of Marketing of Phoenix. Prior
to joining Phoenix, Mr. Bell was a Senior Telecommunications Consultant from
1984 to 1990 for two California consulting firms, COMSUL, Ltd. and Robin &
Dackerman, Inc. Between 1980 and 1984, he held management positions with MCI
Communications and Cable and Wireless, Ltd. Mr. Bell is the brother of Thomas H.
Bell, a director of Phoenix.

     Jon Beizer was promoted to Senior Vice President and Chief Financial
Officer in March 1997. Since joining Phoenix in July 1992, he has held various
management positions. Mr. Beizer holds an M.B.A. from Stanford University, where
he attended from 1990 to 1992. Mr. Beizer worked from 1987 through 1990 as a
consultant for Braxton Associates, a management consulting firm specializing in
corporate strategy.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Exchange Act requires Phoenix's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of Phoenix's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Phoenix
Common Stock and other equity securities of Phoenix. Officers, directors and
greater than ten percent (10%) Phoenix Stockholders are required by Commission
regulation to furnish Phoenix with copies of all Section 16(a) forms they file.

     To Phoenix's knowledge, based solely on a review of the copies of such
reports furnished to Phoenix and representations that no other reports were
required, during the fiscal year ended December 31, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent (10%) beneficial owners were complied with.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

     No cash fees are paid to directors for serving on the Phoenix Board. The
members of the Phoenix Board are, however, eligible for reimbursement for their
expenses incurred in connection with attendance at Phoenix Board and Committee
meetings in accordance with Phoenix policy. Furthermore, each non-employee
director of Phoenix also receives stock option grants under the 1992 Non-
Employee Directors' Stock Option Plan (the "Phoenix 1992 Plan"), as described
below. Directors who are employees of Phoenix are not eligible to participate in
the Phoenix 1992 Plan, but are eligible to participate in the 1989 Stock Option
Plan (the "Phoenix 1989 Plan"). See "--Compensation of Executive Officers--Stock
Option Grants and Exercises."

                                       24
<PAGE>
 
     Option grants under the Phoenix 1992 Plan are non-discretionary. Each
person who is elected or appointed on or after January 4, 1993 to be a non-
employee director of Phoenix is automatically granted an option to purchase
10,000 shares of Phoenix Common Stock. In addition, on the first business day of
each year thereafter, each non-employee director of Phoenix is automatically
granted an option to purchase shares of Phoenix Common Stock (rounded to the
nearest 100 shares) equal to the Proration Factor (as hereinafter defined)
multiplied by the sum of (i) 10,000 and (ii) 2,500 multiplied by the number of
full years such non-employee director has served in such capacity. The
"Proration Factor" is a fraction, the numerator of which is the number of
calendar days during the preceding year on which such person served as a non-
employee director and the denominator of which is 365. No other options may be
granted at any time under the Phoenix 1992 Plan. The exercise price of options
granted under the Phoenix 1992 Plan is equal to the fair market value of the
Phoenix Common Stock subject to the option on the date of grant. The number of
options granted under the Phoenix 1992 Plan is subject to certain anti-dilution
protections in favor of the participants, and options granted under the Phoenix
1992 Plan expire ten years from the date of grant. Options granted under the
Phoenix 1992 Plan vest and become exercisable at the rate of one-sixteenth of
the shares subject to such options per quarter for sixteen quarters following
the date of the grant.

COMPENSATION OF EXECUTIVE OFFICERS

     Summary of Compensation.   The following table shows for the fiscal years
ending December 31, 1997, 1996 and 1995, compensation awarded or paid to, or
earned by Phoenix's Chief Executive Officer and each other officer at December
31, 1997 who received total annual salary and bonus in excess of $100,000 for
the years ended December 31, 1997 (the "Named Executive Officers"):

                       SUMMARY ANNUAL COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       LONG-TERM
                                                                                      COMPENSATION
                                                                                         Awards
                                                                                  --------------------
                                                                                      SECURITIES
                                                                                      UNDERLYING
                                       YEAR ENDED      SALARY                         OPTIONS(1)/          ALL OTHER
NAME AND PRINCIPAL POSITION            DECEMBER 31     (1)($)        BONUS ($)        SARs(2) (#)       COMPENSATION(3)
---------------------------            -----------    --------       ---------    --------------------  ---------------
<S>                                    <C>            <C>            <C>          <C>                   <C>
Mr. Wallace M. Hammond.............        1997        275,000        60,000                 --                1,000
 President and Chief Executive             1996        252,500        60,000            400,000                   --
 Officer                                   1995        203,511        67,451            300,000                2,320
                                                                                                 
Mr. Jeffrey L. Bailey(4)...........        1997        110,910            --                 --               28,905
                                           1996        137,934            --             60,000               23,499
                                           1995        129,219        15,193             50,000                2,320
                                                                                                 
Mr. J. Rex Bell....................        1997        126,600            --                 --                1,000
 Senior Vice President                     1996        127,721            --             50,000               15,427
                                           1995        117,657        15,193             50,000                2,320
                                                                                                 
Mr. Jon Beizer.....................        1997        149,166        40,000                 --               11,964
 Senior Vice President and Chief           1996        105,417            --            125,000               10,544
 Financial Officer                         1995         96,418            --             60,000                   --
</TABLE>

(1) Includes amounts earned but deferred at the election of the executives. As
    permitted by Commission rules, no amounts are shown for certain perquisites,
    where such amounts do not exceed the lesser of 10% of bonus plus salary or
    $50,000.
(2) Repriced options treated as new grants. Phoenix has no stock appreciation
    rights (SARs).
(3) In each case, "All Other Compensation" includes $1,000 in matching Section
    401(k) plan contributions made by Phoenix in 1995,  $1,000 in 1996 and
    $1,000 in 1997. The balance in 1995 of the amount reported for each officer
    represents a reimbursement of parking expenses. In addition to a parking
    reimbursement, the balance of the amount reported for each officer in 1996
    represents relocation expenses paid for the officers' move to Colorado from
    California. The balance of the amount reported in 1997 for (i) Mr. Bailey
    includes relocation expenses paid for Mr. Bailey's move to California from
    Colorado and unused vacation time payments and (ii) Mr. Beizer includes
    relocation expenses for Mr. Beizer's move to California from Colorado.
(4) Mr. Bailey resigned as Senior Vice President and Chief Financial Officer of
    Phoenix effective March 31, 1997. The amount reported as salary in 1997
    includes $70,000 in severance payments made to Mr. Bailey.

                                       25
<PAGE>
 
     Employment Agreements.   Effective January 1, 1996, Phoenix and Mr. Hammond
entered into an employment agreement with a term beginning January 1, 1996 and
ending December 31, 1998 which superseded the previous employment agreement
between Phoenix and Mr. Hammond. Upon each annual anniversary of the agreement
the term of the agreement is automatically extended by one year so as to
continually extend the term of the agreement to include subsequent three year
periods, unless sooner terminated as provided in the agreement. The employment
agreement provides for a salary of $250,000 during 1996, $275,000 during 1997
and $300,000 during 1998 and each year thereafter for the duration of the
agreement, unless otherwise increased at the discretion of Phoenix, in exchange
for Mr. Hammond's services to Phoenix as President and Chief Executive Officer.
The agreement further provides for an option grant in 1996 of 200,000 shares of
Phoenix Common Stock vesting at the rate of 12,500 shares per calendar quarter
and an annual bonus equal to 1% of Phoenix's earnings before interest, taxes,
depreciation and amortization. In the event Mr. Hammond is terminated without
cause, the employment agreement provides that he is to receive a severance
amount equal to 18 months salary and bonus. Under terms of the employment
agreement, should an acquisition of Phoenix or a similar corporate event
constituting a "change of control" of Phoenix result in the termination of Mr.
Hammond's employment with Phoenix, any unvested options held by Mr. Hammond will
immediately vest. The Merger will constitute a change of control of Phoenix.
However, in the Merger all options held by Mr. Hammond will terminate on the day
preceding the consummation of the Merger. In the event Phoenix or Mr. Hammond
terminates Mr. Hammond's employment as a result of an acquisition of Phoenix or
a similar corporate event constituting a change of control of Phoenix, Mr.
Hammond shall receive a severance amount equal to the salary he would have
received had he remained employed for the then current three year term of the
employment agreement. In either a termination of Mr. Hammond's employment
without cause or the termination of his employment in the event of a change of
control of Phoenix, the agreement provides that Mr. Hammond shall receive
reimbursement from Phoenix for reasonable relocation expenses, not to exceed
$20,000.

     Effective February 1, 1997, Phoenix and Mr. Beizer entered into an
employment agreement with a term beginning February 1, 1997 and ending December
31, 1998. The employment agreement provides for an annual salary of $150,000
during the term of the agreement, unless otherwise increased at the discretion
of Phoenix, in exchange for Mr. Beizer's services to Phoenix as Senior Vice
President and Chief Financial Officer. The agreement further provides for an
annual bonus equal to .75% of Phoenix's earnings before interest, taxes,
depreciation and amortization. In the event Mr. Beizer is terminated without
cause, the employment agreement provides that he is to receive a severance
amount equal to the greater of 12 months salary or the balance of the salary for
the full term of the agreement and all unvested options held by Mr. Beizer will
immediately vest. Under terms of the employment agreement, should an acquisition
of Phoenix or a similar corporate event constituting a "change of control" of
Phoenix result in the termination of Mr. Beizer's employment with Phoenix, any
unvested options held by Mr. Beizer will immediately vest and will be
exercisable for a subsequent period of 36 months. The Merger will constitute a
change of control of Phoenix. Mr. Beizer has agreed to forfeit his rights with
regard to the options held by him and the options will terminate on the day
preceding the consummation of the Merger. In the event Phoenix or Mr. Beizer
terminates Mr. Beizer's employment as a result of an acquisition of Phoenix or a
similar corporate event constituting a change of control of Phoenix, Mr. Beizer
shall receive a severance amount equal to the greater of 18 months salary or the
balance of the salary for the full term of the agreement. In either a
termination of Mr. Beizer's employment without cause or the termination of his
employment in the event of a change of control of Phoenix, the agreement
provides that Mr. Beizer shall receive reimbursement from Phoenix for reasonable
relocation expenses, not to exceed $20,000. Mr. Beizer has previously relocated
and received reimbursement for such relocation. Mr. Beizer will not receive any
additional reimbursement for relocation expenses as a result of the Merger.

     Payment of Severance to Messrs. Hammond and Beizer.   In the Merger
Agreement, Qwest has agreed to pay (or cause the Surviving Corporation to pay)
all amounts then due to Wallace M. Hammond and Jon F. Beizer, respectively,
pursuant to their respective employment agreements by reason of the occurrence
of a change of control (as defined therein), subject in each case to all
necessary withholdings, and Qwest has also agreed to pay, or cause the Surviving
Corporation to pay, all reasonable out-of-pocket costs, fees and expenses of
such persons (including, without limitation, the reasonable fees and
disbursements to counsel and the expenses of litigation) incurred by them in
connection with collecting such amounts. Pursuant to the employment agreements,
the amounts payable to Mr. Hammond and Mr. Beizer are $875,000 (less any amounts
paid to Mr. Hammond as salary after January 31, 1998, which is approximately
$25,000 per month) and $225,000, respectively. Upon consummation of the Merger,
Mr. Hammond and Mr. Beizer will also be paid approximately $26,538 and $10,800,
respectively, in respect of accrued paid time off pursuant to the terms of their
respective employment agreements.

                                       26
<PAGE>
 
     Stock Option Grants and Exercises.   Phoenix grants options to its
executive officers under the Phoenix 1989 Plan.  As of December 31, 1997,
options to purchase a total of 1,830,633 shares were outstanding under the
Phoenix 1989 Plan and 1,084,395 shares remained available thereunder.

     For the fiscal year ended December 31, 1997 there were no options granted
to the Named Executive Officers.

                        AGGREGATED 1997 YEAR-END OPTIONS

<TABLE>
<CAPTION>
                                                                             NUMBER OF                VALUE OF UNEXERCISED 
                                                                          SHARES UNDERLYING         IN-THE-MONEY OPTIONS 
                                                                        UNEXERCISED OPTIONS AT       At December 31, 1997 
                                   SHARES              VALUE              December 31, 1997 (#)              ($)(2)        
                                 ACQUIRED ON          REALIZED      -----------------------------  -------------------------- 
Name                             EXERCISE (#)         ($)(1)         EXERCISABLE   UNEXERCISABLE   EXERCISABLE  UNEXERCISABLE
----                           ---------------        -------       --------------  -------------  -----------  --------------
<S>                            <C>                    <C>            <C>              <C>           <C>         <C>  
Jeffrey L. Bailey(3)......          110,000            244,375             110,000              0            0               0
Jon Beizer................           52,500             16,406              35,500         87,500            0               0
J. Rex Bell...............                0                  0             131,248         43,752            0               0
Wallace M. Hammond........           50,000             53,625             525,000        375,000            0               0

</TABLE>

(1) Value realized is based on the fair market value of Phoenix Common Stock on
    the date of exercise minus the exercise price and does not necessarily
    indicate that the optionee sold such stock.
(2) Fair market value of Phoenix Common Stock at December 31, 1997 ($0.375)
    minus the exercise price of the options.
(3) Mr. Bailey resigned as Senior Vice President and Chief Financial Officer of
    Phoenix effective March 31, 1997.

COMPENSATION COMMITTEE REPORT/1/

     The Compensation Committee consists of Messrs. Thomas Bell, David Singleton
and Charles McGettigan, all of whom are non-employee directors. The Compensation
Committee is responsible for setting Phoenix's policies governing employee
compensation, administering Phoenix's employee benefit plans and determining the
compensation of Phoenix's executive officers. The Compensation Committee
annually evaluates the performance, and determines the compensation, of the
Chief Executive Officer and the other executive officers of Phoenix based upon a
mix of the achievement of corporate goals, individual performance and
comparisons with comparable companies. The Chief Executive Officer and other
executive officers are not present during the discussion of their compensation.

     The Compensation Committee attempts to design compensation policies that
will attract and retain the highest quality executives and will reward them for
Phoenix's progress towards its long-term goal of increasing corporate revenue
and attaining profitability in line with averages for companies within the
telecommunications industry. The Compensation Committee considers a variety of
factors, both personal and corporate, in evaluating Phoenix's executive officers
and making its compensation decisions. These include the compensation paid by
comparable companies to individuals in comparable positions, the individual
contributions of each officer to Phoenix, and, most importantly, the progress of
Phoenix toward its long-term objectives. As Phoenix has progressed the measures
of this progress have changed, and the Compensation Committee expects them to
continue to change.

     The Compensation Committee has determined that the stock options granted
under the Phoenix 1989 Plan, as amended, with an exercise price at least equal
to the fair market value of Phoenix Common Stock on the date of grant generally
shall be treated as "incentive stock options" as that term is defined in Section
422 of the Code.

     Executive Officer Compensation.   Phoenix's executive officer compensation
program is comprised of base salary, annual cash incentive compensation in the
form of a bonus and long-term incentive compensation in the form of stock option
grants at current market prices.

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

/1/  The material in this report is not "soliciting material," is not deemed
filed with the Commission and is not to be incorporated by reference in any
filing of Phoenix under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the
date hereof and irrespective of any general incorporation language in any such
filing.

                                       27
<PAGE>
 
     Base Salary.   In establishing base salaries, the Compensation Committee
first considers a number of surveys of compensation levels at comparably-sized
companies in comparable industries, including companies in the
telecommunications industries. The companies included in the surveys are not
necessarily the same as the companies included in the market indices included in
the performance graph in this Annual Report.

     Based on the data generated in the surveys, the Compensation Committee then
sets a target base salary level applicable to all executive officers. The
Compensation Committee then considers the level of responsibility, experience
and contributions of each executive officer. The Compensation Committee then
sets each officer's base salary taking into account the target salary and the
Compensation Committee's evaluation of individual performance.

     Annual Cash Incentive Bonus.   There were no formal cash incentive bonus
programs in place for executive officers during 1995, 1996 or 1997. Under the
terms of the employment agreements described above in "--Compensation of
Executive Officers," Wallace M. Hammond and Jon Beizer are entitled to receive
bonuses based on Phoenix's operating results. As a result of Phoenix achieving
profitable operating results in the first, second and third quarters of 1995,
executive officers received a total of $24,439 in cash bonuses in 1995 relating
to Phoenix's 1995 performance. Phoenix did not achieve profitable operating
results during 1996 or 1997, and, accordingly, no performance bonuses were
declared with respect to such fiscal years.

     Stock Option Grants.   Phoenix grants stock options to its executive
officers in order to provide long-term incentives to executive officers and
align executive officer and stockholder long-term interests by creating a direct
link between executive compensation and stockholder return. Stock options are
granted at an option price equal to the fair market value of Phoenix Common
Stock on the date of grant. In order to facilitate long-term incentives through
the option grants, options are generally subject to ratable vesting over four
years.

     Executive officer awards are subjectively determined by the Compensation
Committee after considering stock option grant data taken from the compensation
surveys referred to above, as well as the level of responsibility, experience
and contributions of each executive officer. In determining the size of
individual grants, the Compensation Committee also considers the number of
shares subject to options previously granted to each executive officer,
including the number of such shares that have vested and that remain unvested.

     Chief Executive Officer Compensation.   In determining Mr. Hammond's
compensation package for 1995, Phoenix relied on a report prepared by an
independent executive compensation consulting firm which examined compensation
packages of chief executive officers and presidents of comparable companies. In
determining Mr. Hammond's compensation package for 1996, Phoenix relied on an
update to the report prepared in 1995 by the independent executive compensation
consulting firm. In determining Mr. Hammond's compensation package for 1997,
Phoenix relied on the reports previously prepared by the independent executive
compensation consulting firm.

                                       28
<PAGE>
 
     Option Repricing.   The Compensation Committee has from time to time
approved the repricing of option grants to employees, including executive
officers, based upon the Compensation Committee's determination of the value of
the employee's contribution to Phoenix. The intent of these repricings has been
to align the option exercise price with the fair market value of the underlying
Phoenix Common Stock as determined by the marketplace.

                                  Thomas H. Bell
                                  David Singleton
                                  Charles C. McGettigan


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Thomas H. Bell, who is Chairman of the Board of Phoenix and a member of the
Compensation Committee, was the Chief Executive Officer of Phoenix from
inception through January 1992 and of its predecessor from inception to 1989.
Mr. Bell was Phoenix's President from inception through September 1990 and the
President of its predecessor from 1985 to 1989. Under the terms of an agreement
between Phoenix and Mr. Bell, Mr. Bell is enrolled in Phoenix's health benefits
plans and Phoenix pays Mr. Bell's premiums which amounted to $3,994.00 in 1997.

                                       29
<PAGE>
 
PERFORMANCE MEASUREMENT COMPARISON(1)(2)(3)

     The following chart shows the CRSP Total Return Index from December 31,
1992 to December 31, 1997 for (i) Phoenix Common Stock, (ii) Nasdaq Stock Market
(US Companies) and (iii) Nasdaq Telecommunications Stocks. All values assume
reinvestment of the full amount of all dividends.


           COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN ON INVESTMENT

                             [GRAPH APPEARS HERE] 
<TABLE>
<CAPTION> 

                                       12/31/92   12/31/93   12/30/94   12/29/95   12/31/96   12/31/97
    <S>                                <C>        <C>        <C>        <C>        <C>        <C> 
    Phoenix Network, Inc.                 100.0      600.0      211.1      322.2      300.0       33.3
    Nasdaq Stock Market (US Companies)    100.0      114.8      112.2      158.7      195.2      239.5
    Nasdaq Telecommunications Stocks
    SIC 4800-4899 US & Foreign            100.0      154.2      128.7      168.5      172.3      254.5

</TABLE> 


(1) This Section is not "soliciting material," is not deemed filed with the
    Commission and is not to be incorporated by reference in any filing of
    Phoenix under the Securities Act of 1933, as amended, or the Securities
    Exchange Act of 1934, as amended, whether made before or after the date
    hereof and irrespective of any general incorporation language in any such
    filing.
(2) The CRSP Total Return on investment (change in month end stock price plus
    reinvested dividends) for Phoenix, the CRSP Total Return for The NASDAQ
    Stock Market (US Companies) and the CRSP Total Return Index for NASDAQ
    Telecommunications Stocks based on December 31, 1992 = 100.
(3) Phoenix Common Stock was traded in the over-the-counter market from
    Phoenix's initial public offering in 1983 and was quoted on the NASDAQ
    system under the Symbol "PHXN" from October 24, 1989 through October 4,
    1993. On October 5, 1993, Phoenix changed its listing to the American Stock
    Exchange and began trading under the symbol "PHX".

                                       30
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                     BENEFICIAL OWNERSHIP OF PHOENIX STOCK

     The following table sets forth certain information regarding the beneficial
ownership of Phoenix Common Stock as of February 9, 1997 by: (i) each director;
(ii) each executive officer named above; (iii) all executive officers and
directors of Phoenix as a group; and (iv) all those known by Phoenix to be
beneficial owners of more than five percent (5%) of any class of its voting
securities. Unless otherwise indicated, Phoenix believes that each of the
persons indicated below has sole voting and investment power with respect to the
shares owned by such person subject to community property laws where applicable.

<TABLE>
<CAPTION>
                                                                                AMOUNT AND NATURE       PERCENT
                                                                                  OF BENEFICIAL     OF OUTSTANDING
                                                                                    Ownership          Shares(1)
                                                                                -----------------  -----------------
5% Stockholders(2):
<S>                                                                             <C>                <C>
Global Capital Management Inc.
 601 Carlson Parkway, Suite 200
 Minnetonka, MN 55305.........................................................          2,364,900            6.58%
Proactive Investment Managers, L.P.(3)(4)
 50 Osgood Place
 San Francisco, CA 94133......................................................          1,864,760            5.16%
 
DIRECTORS AND EXECUTIVE OFFICERS:
Wallace M. Hammond(3).........................................................            591,534            1.62%
J. Rex Bell(3)................................................................            234,374               *
Jon F. Beizer(3)..............................................................             42,375               *
Thomas H. Bell(3).............................................................          2,752,056            7.65%
James W. Gallaway(3)..........................................................            502,205            1.39%
Merrill L. Magowan(3).........................................................            143,837               *
Charles C. McGettigan(3)......................................................             52,726               *
David Singleton(3)............................................................            193,792               *
Max E. Thornhill(3)(5)........................................................          1,136,527            3.15%
All directors and executive officers as a group (9 persons)(3)................          5,649,426           15.26%
</TABLE>

*   Less than one percent.
(1) Percentage of ownership is based on 35,898,958 shares of Phoenix Common
    Stock outstanding as of February 9, 1997.
(2) Pursuant to the Voting Agreements, Qwest has voting control of approximately
    21% of the outstanding shares of Phoenix Common Stock.
(3) Includes shares of Phoenix Common Stock which certain principal
    stockholders, directors and officers of Phoenix have the right to acquire
    within 60 days after the date of this table pursuant to outstanding options
    and warrants as follows: Proactive Investment Managers, L.P., 4,250;
    Proactive Partners, L.P., 200,225 shares; Fremont Proactive Partners, L.P.,
    2,000 shares; Wallace M. Hammond, 575,000 shares; J. Rex Bell, 134,374
    shares; Jon F. Beizer, 42,375 shares; Thomas H. Bell, 48,000 shares; James
    W. Gallaway, 131,655 shares; Merrill L. Magowan, 118,218 shares; Charles C.
    McGettigan, 24,000 shares; David Singleton, 23,112 shares; and Max E.
    Thornhill, 125,112 shares.
(4) Includes only shares held of record by Proactive Investment Managers, L.P.
    ("PIM"), Proactive Partners, L.P. ("PP") and Fremont Proactive Partners,
    L.P. ("FPP"), each California limited partnerships. The general partner of
    PP and FPP is PIM, of which Messrs. Charles McGettigan, Myron A. Wick III,
    Jon Gruber and J. Patterson McBaine are general partners. Messrs. Wick,
    Gruber and McBaine own of record 103,510, 45,840 and 19,460 shares of
    Phoenix Common Stock, respectively. In addition, Messrs. McGettigan and Wick
    hold options to purchase 24,000 and 28,000 shares of Phoenix Common Stock,
    respectively, that are exercisable within 60 days of the date of this table.
    Myron A. Wick III is the trustee of the Myron A. Wick III Trust. The Myron
    A. Wick III Trust owns of record 28,726 shares of Phoenix Common Stock.
    Messrs. Gruber and McBaine are also general partners of Lagunitas Partners,
    L.P., an entity that holds 721,334 shares of Phoenix Common Stock, as well
    as a warrant, exercisable within 60 days of the date of this table, to
    purchase an additional 12,000 shares of Phoenix Common Stock. Messrs. Gruber
    and McBaine are also directors and/or general partners of several entities
    that may own nominal amounts of Phoenix Common Stock. Due to these
    relationships, PIM may be deemed to beneficially own some or all of the
    shares of the capital stock of Phoenix held of record or beneficially by
    such persons and/or companies.
(5) Does not include 525,875 and 220,700 shares of Phoenix Common Stock held of
    record by Bonnie P. Thornhill, Mr. Thornhill's wife, and the Max E. & Bonnie
    P. Thornhill Foundations, respectively. Mr. Thornhill disclaims beneficial
    ownership of such shares.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

INDEMNIFICATION AGREEMENTS

     Phoenix has entered into indemnity agreements with certain officers and
directors which provide, among other things, that Phoenix will indemnify such
officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings to which he is or may be made a party
by reason of his position as a director, officer or other agent of Phoenix, and
otherwise to the fullest extent permitted under Delaware law and Phoenix's
bylaws.

                                       31
<PAGE>
 
     In connection with the acquisition of AmeriConnect, Inc., Phoenix agreed to
maintain all rights to indemnification existing on the date of the merger
agreement between Phoenix, Phoenix Merger Corp. and AmeriConnect, Inc. in favor
of the former directors and officers of AmeriConnect, Inc. and agreed that the
certificate of incorporation and bylaws of AmeriConnect, Inc., as a subsidiary
of Phoenix, would not be amended to reduce or limit such rights. In addition,
Phoenix agreed that AmeriConnect, Inc. will indemnify to the fullest extent
possible under its certificate of incorporation, its bylaws and applicable law
the present and former directors of AmeriConnect, Inc. against all losses,
damages, liabilities or claims made against them arising from their service in
such capacities prior to and including the effective time of the acquisition of
AmeriConnect, Inc. by Phoenix, to at least the same extent as such persons were
required to be indemnified pursuant to AmeriConnect Inc.'s certificate of
incorporation and bylaws prior to the acquisition of AmeriConnect, Inc. by
Phoenix. Phoenix also agreed, with respect to matters occurring prior to the
effective time of the acquisition of AmeriConnect, Inc. by Phoenix, that
AmeriConnect, Inc. will cause to be maintained in effect for three years from
the effective time of acquisition, directors' and officers' liability insurance
providing at least the same coverage with respect to AmeriConnect, Inc.'s
present and former officers and directors as the policies maintained by or on
behalf of AmeriConnect, Inc. on the date of the merger agreement between
Phoenix, Phoenix Merger Corp. and AmeriConnect, Inc. containing terms and
conditions which are substantially similar thereto, to the extent such insurance
is currently available on commercially reasonable terms with respect to such
matters.

ACQUISITION OF ACI

     In January 1996, Phoenix acquired from Van Essen all of the outstanding
shares of ACI, a Golden, Colorado facilities-based reseller of long distance
service. Consideration for the transaction was in the form of $4.0 million in
cash, 2,800,000 shares of Phoenix Common Stock valued at $10.5 million and the
issuance of a long-term note in the amount of $1.3 million (the "Van Essen
Note"). As a result of the transaction and her subsequent sale of certain shares
of Phoenix Common Stock, Van Essen held approximately 1,488,900 shares of
Phoenix Common Stock or 4.1% of the Phoenix Common Stock outstanding as of
January 27, 1998.

     On January 16, 1998, Phoenix failed to make a scheduled payment under the
Van Essen Note and is currently in default thereon. On January 17, 1998, Phoenix
received a notice from Van Essen declaring a default under the Van Essen Note
and notifying Phoenix that if the scheduled payment is not received by February
2, 1998, the entire unpaid principal balance of the Van Essen Note will become
due and payable and that Van Essen will pursue all remedies available to her.
Phoenix has not made the scheduled payment and currently does not have
sufficient cash to make the scheduled payment.

PREFERRED STOCK CONVERSIONS

     The remaining holders of Phoenix's Series A, B and D Preferred Stock
converted such Preferred Stock into Phoenix Common Stock during the first eight
months of 1997. Messrs. Magowan and McGettigan, directors of Phoenix, and
certain of their affiliates were the holders of shares of such Phoenix Preferred
Stock.

INVESTMENT BANKING SERVICES

     Charles C. McGettigan, a director of Phoenix, is a Managing Director of
McGettigan, Wick & Co., Inc. ("McGettigan Wick"). Phoenix entered into an
agreement with McGettigan Wick on August 11, 1997 pursuant to which McGettigan
Wick was engaged by Phoenix to provide advice and counsel to the Phoenix Board
regarding the financial terms of the then proposed business combination of
Phoenix and Midcom. In exchange for such services, McGettigan Wick was to
receive a fee of $125,000 only if the business combination with Midcom was
consummated. Since the Midcom merger was aborted, Phoenix did not pay such fee
to McGettigan Wick. Phoenix has agreed, however, to pay McGettigan Wick $125,000
for past services rendered and for providing advice and counsel to the Phoenix
Board regarding the financial terms of the Merger if the Merger is consummated.

                                       32
<PAGE>
 
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

     The following documents are filed as part of this Annual Report on Form 10-
K:
 
     (a) Financial Statements:  The financial statements and schedule filed as
part of this report are set forth following page F-1 of this report.
 
     (b) Reports on Form 8-K:   None

     (c) Exhibits:


          2.1 -- Amended and Restated Agreement and Plan of Merger dated as of
                 December 31, 1997 among Phoenix Network, Inc., Qwest
                 Communications International Inc. and Qwest 1997-5 Acquisition
                 Corp.(1)
          3.1 -- Restated Certificate of Incorporation of the Company, as
                 amended (15)
          3.2 -- Bylaws of the Company(2)
         10.1 -- 1989 Stock Option Plan(3)
         10.2 -- Forms of option grant pursuant to the 1989 Stock Option Plan(4)
         10.3 -- 1992 Non-Employee Directors' Stock Option Plan, as Amended(5)
         10.4 -- Form of option grant pursuant to the 1992 Non-Employee
                 Directors' Stock Option Plan(5)
         10.5 -- Series A Preferred Stock Purchase Agreement dated as of August
                 17, 1990(6)
         10.6 -- Series B Preferred Stock Purchase Agreement dated as of
                 December 27, 1991 with List of Purchasers(7)
         10.7 -- Series D Preferred Stock Purchase Agreement dated as of
                 December 15, 1992(5)
         10.8 -- Sublease and Consent between the Company and Richard Goldman &
                 Co. relating to the premises at One Maritime Plaza, San
                 Francisco, CA(6)
         10.9 -- Amended and Restated Loan and Security Agreement, among the
                 Company, Phoenix Network Acquisition Corp., AmeriConnect, Inc.
                 and Foothill Capital Corporation, dated September 26, 1995 (the
                 "Original Foothill Agreement")(8)
        10.10 -- Amendment Number One to the Original Foothill Agreement, dated
                 October 17, 1996(8)
        10.11 -- Amendment Number Two to the Original Foothill Agreement, dated
                 December 23, 1996(8)
        10.12 -- Amendment Number Three to the Original Foothill Agreement,
                 dated March 12, 1997(8)
        10.13 -- Amendment Number Four to the Original Foothill Agreement, dated
                 March 28,1997(9)
        10.14 -- Amendment Number Six to the Original Foothill Agreement, dated
                 September 1, 1997
        10.15 -- Amendment Number Seven to the Original Foothill Agreement,
                 dated December 12, 1997
        10.16 -- Amendment Number Eight to the Original Foothill Agreement,
                 dated December 31, 1997
        10.17 -- Amendment Number Nine to the Original Foothill Agreement, dated
                 February 2, 1997
        10.18 -- Office Lease Agreement with Itel Rail Corporation, dated June
                 8, 1994(10)
        10.19 -- Stockholders Agreement, dated October 20, 1995(11)
        10.20 -- Series F Preferred Stock and Warrant Purchase Agreement, dated
                 October 20, 1995(11)
        10.21 -- Communications Services Agreement, between the Company and US
                 ONE Communications Corp., dated May 22, 1996 (the "Original US
                 ONE Agreement")(12)
        10.22 -- Amendment No. 1 to the Original US ONE Agreement, dated October
                 11, 1996(8)
        10.23 -- Amendment No. 2 to the Original US ONE Agreement, dated October
                 11, 1996(8)
        10.24 -- Amendment No. 3 to the Original US ONE Agreement, dated January
                 3, 1997(8)
        10.25 -- Amendment No. 4 to the Original US ONE Agreement, dated
                 December 30, 1996(8)
        10.26 -- Amendment No. 5 to the Original US ONE Agreement, dated March
                 26, 1997(8)
        10.27 -- Amendment No. 6 to the Original US ONE Agreement, dated June
                 21, 1997(9)
        10.28 -- Telecommunications Services Agreement, between the Company and
                 Comdisco Disaster Recovery Services, a Division of Comdisco,
                 Inc., dated March 25, 1996(12)
        10.29 -- Employment Agreement, between the Company and Wallace M.
                 Hammond, dated January 1, 1996(8)
        10.30 -- Employment Agreement, between the Company and Jon Beizer, dated
                 February 1, 1997(9)
        10.31 -- Warrant to Purchase 200,000 Shares of Common Stock issued to
                 Foothill Capital Corporation, dated as of March 12, 1997(13)
        10.32 -- Convertible Preferred Stock Purchase Agreement between Phoenix
                 Network, Inc. and JNC Opportunity Fund Ltd., dated as of March
                 31, 1997(14)

                                       33
<PAGE>
 
        10.33 -- Registration Rights Agreement between Phoenix Network, Inc. and
                 JNC Opportunity Fund Ltd., dated as of March 31, 1997(14)
        10.34 -- Form of Warrant dated April 4, 1997, issued to Wharton Capital
                 Partners, Ltd. and Keith A. Rhodes and exercisable for 50,000
                 and 10,000 shares of common stock, respectively.
        10.35 -- Convertible Preferred Stock Purchase Agreement between Phoenix
                 Network, Inc. and JNC Opportunity Fund Ltd., dated as of July
                 17, 1997(15)
        10.36 -- Registration Rights Agreement between Phoenix Network, Inc. and
                 JNC Opportunity Fund Ltd., dated as of July 17, 1997(15)
        10.37 -- Form of Warrant issued to (i) JNC Opportunity Fund Ltd.,
                 Wharton Capital Partners Ltd. and Keith A. Rhodes, exercisable
                 for 45,000, 19,000 and 3,500 shares of common stock,
                 respectively, and dated July 17, 1997 and (ii) JNC Opportunity
                 Fund Ltd., Wharton Capital Partners Ltd. and Keith A. Rhodes,
                 exercisable for 30,000, 11,000 and 4,000 shares of common
                 stock, respectively, and dated July 23, 1997.
         11.1 -- Computation of earnings per share(16)
         18.1 -- Letter re change in accounting principles(17)
         21.1 -- Subsidiaries of Phoenix Network, Inc.(8)
         23.1 -- Consent of Grant Thornton LLP
         27.1 -- Financial Data Schedule
 __________

  (1)  Filed as Exhibit 2 to the Registration Statement on Form S-4 of Qwest
       Communications International Inc. declared effective on February 12, 1998
       (File No. 333-46145) and included as Exhibit A to the Proxy
       Statement/Prospectus included as part of such Registration Statement and
       incorporated herein by reference.
  (2)  Filed as an Exhibit to the Company's Registration Statement on Form S-3
       (file no. 333-20923), as filed with the Commission on January 31, 1997,
       and amended on Form S-3/A on February 12, 1997, and incorporated herein
       by reference.
  (3)  Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended October 31, 1990, and incorporated herein by reference.
  (4)  Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       fiscal year ended April 30, 1990, and incorporated herein by reference.
  (5)  Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       year ended December 31, 1992, and incorporated herein by reference.
  (6)  Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended July 31, 1990, and incorporated herein by reference.
  (7)  Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       transition period ended December 31, 1991, and incorporated herein by
       reference.
  (8)  Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       fiscal year ended April 30, 1996, and incorporated herein by reference.
  (9)  Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended June 30, 1997, and incorporated herein by reference.
  (10) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended June 30, 1994, and incorporated herein by reference.
  (11) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended September 30, 1995, and incorporated herein by
       reference.
  (12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended June 30, 1996, and incorporated herein by reference.
  (13) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended March 31, 1997, and incorporated herein by reference.
  (14) Filed as an Exhibit to the Company's Registration Statement on Form S-3
       (file no. 333-26023), as filed with the Commission on April 29, 1997, and
       amended on Forms S-3/A on June 18, 1997 and June 27, 1997, and
       incorporated herein by reference.
  (15) Filed as an Exhibit to the Company's Registration Statement on Form S-3
       (file no. 333-33091), as filed with the Commission on August 7, 1997, and
       amended on Form  S-3/A on September 12, 1997, and incorporated herein by
       reference.
  (16) This data appears in the Consolidated Statement of Operations included in
       the Company's Consolidated  Financial Statements.
  (17) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       year ended December 31, 1994, and incorporated herein by reference.

                                       34
<PAGE>
 
                                   SIGNATURES
                                        
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  PHOENIX NETWORK, INC.

                                  By:   /s/  WALLACE M. HAMMOND
                                     --------------------------
                                  Wallace M. Hammond
                                  Chief Executive Officer

Date: March 9, 1998

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

<TABLE>
<CAPTION>
 
          SIGNATURE                             Title                             Date
          ---------                             -----                             ----
<S>                                    <C>                                     <C>
                                                                             
/s/  THOMAS H. BELL                    Chairman of the Board                   March 9, 1998
-------------------                    and Director                          
Thomas H. Bell                                                               
                                                                            
/s/  WALLACE M. HAMMOND                President, Chief Executive              March 9, 1998
-----------------------                Officer (Principal                    
Wallace M. Hammond                     Executive Officer) and                
                                       Director                              
                                                                             
/s/ JON BEIZER                         Senior Vice President,                  March 9, 1998
--------------                         Chief Financial Officer                                                                     
Jon Beizer                             (Principal Financial and              
                                       Accounting Officer)                              
                                                                            
/s/  JAMES W. GALLAWAY                 Director                                March 9, 1998
----------------------                                                      
James W. Gallaway                                                           
                                                                            
/s/  MERRILL L. MAGOWAN                Director                                March 9, 1998
-----------------------                                                     
Merrill L. Magowan                                                          
                                                                            
/s/  CHARLES C. MCGETTIGAN             Director                                March 9, 1998
--------------------------                                                  
Charles C. McGettigan                                                       
                                                                            
/s/ MAX E. THORNHILL                   Director                                March 9, 1998
--------------------                                                        
Max E. Thornhill                                                            
                                                                            
/s/  DAVID SINGLETON                   Director                                March 9, 1998
--------------------
David Singleton

</TABLE>

                                       35
<PAGE>
 
                     CONSOLIDATED FINANCIAL STATEMENTS AND
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                             PHOENIX NETWORK, INC.
                                AND SUBSIDIARIES

                        December 31, 1995, 1996 and 1997
<PAGE>
 
                             REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS


To the Stockholders and Board of Directors
Phoenix Network, Inc.


We have audited the accompanying consolidated balance sheets of Phoenix Network,
Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the 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 financial position of Phoenix Network,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

The accompanying consolidated financial statements as of December 31, 1997 and
1996, have been prepared assuming that the Company will continue as a going
concern.  However, the Company has sustained substantial losses from operations
in recent years and has continually used, rather than provided, cash in its
operations.   Such losses, and other items discussed in note B, raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.  Management's plans in regard to
these matters are also discussed in note B.



GRANT THORNTON LLP


Denver, Colorado
February 19, 1998

                                      F-1
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,
<TABLE>
<CAPTION>
 
                                                                         1996           1997
                                                                     ------------   ------------
<S>                                                                  <C>            <C>           
                       ASSETS
 
CURRENT ASSETS
  Cash and cash equivalents                                          $  1,548,061   $    447,983
  Accounts receivable, net of allowance for doubtful accounts
   of $3,600,830 in 1996 and $1,280,444 in 1997                        14,419,829      9,623,721
  Prepaid carrier costs                                                         -      1,274,790
  Deferred commissions                                                    969,940        405,329
  Other current assets                                                    686,271        459,808
                                                                     ------------   ------------
      Total current assets                                             17,624,101     12,211,631
 
Furniture, equipment and data processing systems - at cost,
  less accumulated depreciation of $2,495,701 in 1996 and
  $3,479,973 in 1997                                                    5,522,771      3,078,020 
Deferred commissions                                                      414,873         71,617
Customer acquisition costs, less accumulated amortization                                                                       
  of $3,145,245 in 1996 and $4,664,092 in 1997                          2,725,275      1,177,043
Goodwill, less accumulated amortization of $1,059,613                                                                     
  in 1996 and $2,049,731 in 1997                                       18,553,332     17,816,119
Other assets                                                              953,831        779,245
                                                                     ------------   ------------
                                                                                                
                                                                     $ 45,794,183   $ 35,133,675
                                                                     ============   ============
          LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Current maturities of capital lease                                $          -   $    140,635  
  Current maturities of note payable to stockholder                             -      1,388,206
  Current maturities of note payable to finance company                   444,839        483,283
  Note payable to vendor                                                1,161,148              -
  Line of credit - finance company                                      4,698,645      6,663,349
  Accounts payable                                                     16,686,690     14,533,446 
  Accrued liabilities                                                   2,418,627      1,842,685
                                                                     ------------   ------------
      Total current liabilities                                        25,409,949     25,051,604
 
LONG-TERM DEBT
  Note payable to stockholder                                           1,388,206              -
  Note payable to finance company, less current maturities                824,306        355,364
  Capital lease, less current maturities                                        -         30,464
 
COMMITMENTS AND CONTINGENCIES                                                   -              -
 
STOCKHOLDERS' EQUITY
  Preferred stock - $.001 par value, authorized 5,000,000 shares,
   issued and outstanding 546,458 in 1996 and 39,500 in 1997, 
   liquidation preference aggregating $3,368,020 and $808,181 
   at December 31, 1996 and 1997, respectively                                546             39
  Common stock - $.001 par value, authorized 50,000,000 shares, 
   issued 25,851,894 in 1996 and 33,575,902 in 1997                        25,851         33,576
  Additional paid-in capital                                           45,225,554     52,587,282
  Accumulated deficit                                                 (27,077,707)   (42,922,132)  
  Treasury stock - 1,300 common shares at cost                             (2,522)        (2,522)
                                                                     ------------   ------------
                                                                       18,171,722      9,696,243
                                                                     ------------   ------------
 
                                                                     $ 45,794,183   $ 35,133,675
                                                                     ============   ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-2
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            Year ended December 31,
<TABLE>
<CAPTION>
 
 
                                                    1995          1996           1997
                                                ------------  -------------  -------------
<S>                                             <C>           <C>            <C>
 
Revenue                                         $75,854,969   $ 99,307,277   $ 76,947,454
Cost of revenue                                  53,775,779     73,438,757     57,195,121
                                                -----------   ------------   ------------
 
           Gross profit                          22,079,190     25,868,520     19,752,333
 
Selling, general and administrative expenses     22,323,202     31,114,723     25,940,774
Depreciation and amortization                     1,125,563      4,357,720      3,972,924
Relocation expenses                                       -      1,133,158              -
Acquisition expenses                                      -      1,308,634        513,457
Loss on abandonment of fixed assets               1,019,648         15,238      3,260,204
Aborted bond offering expenses                            -        246,083              -
                                                -----------   ------------   ------------
                                                 24,468,413     38,175,556     33,687,359
                                                -----------   ------------   ------------
 
           Operating loss                        (2,389,223)   (12,307,036)   (13,935,026)
 
Other income (expense)
   Interest income                                  103,125         84,627         70,518
   Interest expense                                (260,639)      (625,817)    (1,091,489)
   Miscellaneous income (expense)                    (6,767)         4,264         11,013
                                                -----------   ------------   ------------
 
           Loss before income taxes              (2,553,504)   (12,843,962)   (14,944,984)
 
Income tax expense                                 (500,000)             -              -
                                                -----------   ------------   ------------
 
           Net loss                             $(3,053,504)  $(12,843,962)  $(14,944,984)
 
Net loss attributable to common shares
   Net loss                                     $(3,053,504)  $(12,843,962)  $(14,944,984)
   Preferred dividends                             (594,381)    (1,206,042)      (179,126)
                                                -----------   ------------   ------------
 
                                                $(3,647,885)  $(14,050,004)  $(15,124,110)
                                                ===========   ============   ============
 
Basic loss per common share                          $(0.24)        $(0.68)        $(0.52)
                                                ===========   ============   ============
 
Weighted average common shares                   15,335,268     20,673,276     28,951,196
                                                ===========   ============   ============
 
</TABLE>



The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      Three years ended December 31, 1997
<TABLE>
<CAPTION>
 
                                                                   Additional
                                           Preferred     Common      paid-in     Accumulated   Treasury
                                             stock       stock       capital       deficit       stock
                                           ---------   ----------  -----------  ------------   --------
<S>                                        <C>         <C>         <C>          <C>            <C>
 
Balance at January 1, 1995                 $   1,622   $   13,825  $14,227,069  $ (9,728,142)  $ (2,522)
 
  Exercise of stock options and                                                                  
   warrants                                        -          418      525,914             -          -          
  Conversion of preferred                                                                                   
   stock into common stock                        (4)          24        7,200        (7,220)         -     
  Issuance of common stock,                                                                                 
   net of expenses                                 -        2,685    6,314,779             -          -     
  Issuance of preferred stock,                                                                              
   net of expenses, and                                                                                     
   conversion of Series E and                                                                               
   Series F                                    1,119            -   11,071,674             -          -     
  Preferred dividends                              -            -            -      (187,288)         -     
  Net loss                                         -            -            -    (3,053,504)         -     
                                           ---------   ----------  -----------  ------------   --------
 
Balance at December 31, 1995                   2,737       16,952   32,146,636   (12,976,154)    (2,522)
 
  Exercise of stock options and                                                                  
   warrants                                        -          792    1,327,243             -          -   
  Conversion of preferred                                                                                 
   stock into common stock                    (2,191)       5,307    1,254,475    (1,257,591)         -   
  Issuance of common stock in                                                                             
   connection with a business                                                                             
   acquisition                                     -        2,800   10,497,200             -          -   
  Net loss                                         -            -            -   (12,843,962)         -   
                                           ---------   ----------  -----------  ------------   --------
 
Balance at December 31, 1996                     546       25,851   45,225,554   (27,077,707)    (2,522)
 
  Exercise of stock options                                                                      
   and warrants                                    -          942      921,563             -          -          
  Conversion of preferred                                                                                       
   stock into common stock                      (782)       6,783      893,440      (899,441)         -         
  Issuance of preferred stock                    275            -    5,224,725             -          -         
  Issuance of 200,000 common                                                                                    
   stock purchase warrants                         -            -      322,000             -          -         
  Net loss                                         -            -            -   (14,944,984)         -         
                                           ---------   ----------  -----------  ------------   --------
 
Balance at December 31, 1997               $      39      $33,576  $52,587,282  $(42,922,132)  $ (2,522)
                                           =========   ==========  ===========  ============   ========
</TABLE>

The accompanying notes are an integral part of this statement.

                                      F-4
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,
<TABLE>
<CAPTION>
 
 
                                                                1995            1996           1997
                                                            -------------  --------------  -------------
<S>                                                         <C>            <C>             <C>
Cash flows from operating activities
  Cash received from customers                              $ 72,103,864   $  98,612,681   $ 78,250,720           
  Interest received                                               83,227          84,627         70,518           
  Cash paid to suppliers and employees                       (73,638,371)   (102,047,484)   (82,823,340)          
  Interest paid                                                 (259,919)       (625,817)    (1,091,489)          
  Cash paid for income taxes                                      (3,340)         (2,245)             -           
                                                            ------------   -------------   ------------            
            Net cash used in operating activities             (1,714,539)     (3,978,238)    (5,593,591)
 
Cash flows from investing activities
  Note receivable - director/shareholder                          (3,000)              -              -  
  Purchases of furniture, equipment and data 
   processing systems                                           (589,419)     (3,620,989)    (1,652,566) 
  Notes receivable - agents                                      (23,115)              -              -  
  Payments on agents notes receivable                             70,900               -              -  
  Customer base acquisitions                                  (1,553,238)       (468,002)             -  
  Business acquisitions, net of cash acquired                 (4,692,153)     (4,085,093)             -  
  Additions to goodwill                                                -               -       (252,907) 
                                                            ------------   -------------   ------------  
 
            Net cash used in investing activities             (6,790,025)     (8,174,084)    (1,905,474)
 
Cash flows from financing activities
  Proceeds from issuance of common stock, net of 
   offering costs                                              6,317,464               -              -           
  Proceeds from issuance of preferred stock, net of 
   offering costs                                             11,072,793               -      5,225,000           
  Proceeds from notes payable to bank and finance company      6,143,950       6,060,358      3,575,000           
  Payments on notes payable to bank and finance company       (8,686,625)       (134,036)    (2,040,794)          
  Payments on note payable to vendor                                   -      (1,851,977)    (1,161,148)          
  Payments on capital lease obligation                                 -               -       (121,576)          
  Preferred stock dividends                                     (187,288)              -              -           
  Proceeds from exercise of options and warrants                 526,332       1,328,035        922,505           
                                                            ------------   -------------   ------------            
            Net cash provided by financing activities         15,186,626       5,402,380      6,398,987
                                                            ------------   -------------   ------------
 
            NET INCREASE (DECREASE) IN CASH                    6,682,062      (6,749,942)    (1,100,078)
 
Cash and cash equivalents at beginning of year                 1,615,941       8,298,003      1,548,061
                                                            ------------   -------------   ------------
 
Cash and cash equivalents at end of year                    $  8,298,003   $   1,548,061   $    447,983
                                                            ============   =============   ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                            Year ended December 31,
<TABLE>
<CAPTION>
                                                               1995          1996           1997
                                                           ------------  -------------  -------------
<S>                                                        <C>           <C>            <C>
Reconciliation of net loss to net cash provided
  by (used in) operating activities                                                           
   Net loss                                                $(3,053,504)  $(12,843,962)  $(14,944,984)          
   Adjustments to reconcile net loss to                                                                        
    net cash used in operating activities                                                                      
      Provision for doubtful accounts                        2,689,250      3,147,077      3,407,842           
      Abandonment of fixed assets                            1,019,648         15,238      3,260,204           
      Depreciation and amortization                          1,125,563      4,357,720      3,972,924           
      Deferred taxes                                           500,000              -              -           
      Changes in assets and liabilities                                                                        
       Accounts receivable                                  (3,751,105)      (959,900)     1,388,266           
       Deferred commissions                                 (1,467,519)     1,718,450        907,867           
       Prepaid carrier costs                                         -              -     (1,274,790)          
       Other current assets                                   (163,740)      (217,473)       226,464           
       Other assets                                                511        (67,893)       191,802           
       Accounts payable and accrued liabilities              1,386,357        872,505     (2,729,186)          
                                                           -----------   ------------   ------------            
 
          Net cash used in operating activities            $(1,714,539)  $ (3,978,238)  $ (5,593,591)
                                                           ===========   ============   ============
 
Noncash financing and investing activities
------------------------------------------
 
   Conversion of preferred stock into common stock         $     7,224   $  1,259,782   $    900,223    
   Capital lease obligation                                          -              -        292,675          
   Noncash components of consideration issued                                                                 
    in connection with business combination                                                                   
      Common stock                                                   -     10,500,000              -          
      Note payable to stockholder                                    -      1,388,206              -          
      Assumption of net liabilities                                  -      1,603,576              -           
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES

  Phoenix Network, Inc. ("Phoenix" or the "Company") was a switchless reseller
  of long distance telecommunication services marketing primarily to small- to
  medium-sized commercial accounts located throughout the United States.
  Effective January 1, 1996, as a result of the acquisition of Automated
  Communications, Inc. ("ACI"), the Company became a facilities based
  reseller.  The Company provides its customers with long distance services
  utilizing the networks of facilities-based carriers such as AT&T Corporation,
  MCI Communications Corporation, Sprint Communications, L.P., Frontier Corp.,
  WorldCom, Inc. (formerly Wiltel, Inc.) and others, who handle the actual
  transmission services. The carriers bill Phoenix at contractual rates for the
  combined usage of Phoenix's customers utilizing their network. Phoenix then
  bills its customers individually at rates established by Phoenix.

  The following is a summary of the Company's significant accounting policies
  applied in the preparation of the accompanying consolidated financial
  statements.

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

  The consolidated financial statements include the accounts of the Company and
  its subsidiaries. All significant intercompany transactions are eliminated in
  consolidation.

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

  Revenue is recognized in the month in which the Company's customers
  complete the telephone call.

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

  The Company considers demand deposits, certificates of deposit and United
  States Treasury bills purchased with a maturity of three months or less as
  cash and cash equivalents.

  Prepaid Carrier Costs
  ---------------------

  Prepaid carrier costs consist of contract shortfall billings which are
  anticipated to be recovered through increased usage during the remaining term
  of the contract.

  Deferred Commissions
  --------------------

  Deferred commissions consist of direct commissions paid on a one-time
  basis to third parties upon the acquisition of new customers.  Deferred
  commissions are amortized on a four year sum-of-the-year's-digits method.

                                      F-7
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
         (CONTINUED)

  Furniture, Equipment and Data Processing Systems
  ------------------------------------------------

  Depreciation of furniture, equipment and data processing systems is provided
  utilizing the straight-line method over five years.

  Customer Acquisition Costs
  --------------------------

  Customer acquisition costs represent the value of acquired billing bases of
  customers and are amortized using the sum-of-the-years-digits method over a
  four-year period.

  Goodwill
  --------

  Goodwill represents the excess of cost over the fair value of the net assets
  acquired and is being amortized by the straight-line method over 20 years.

  Impairment of Long-Lived Assets
  -------------------------------

  In March 1995, the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standards 121, Accounting for the Impairment of Long-
  Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS 121). SFAS 121
  requires that long-lived assets and certain identifiable intangibles held and
  used by an entity be reviewed for impairment whenever events or changes in
  circumstances indicate that the carrying amount of an asset may not be
  recoverable. If the sum of the expected future cash flows (undiscounted and
  without interest) is less than the carrying amount of the asset, an impairment
  loss is recognized. Measurement of that loss would be based on the fair value
  of the asset. SFAS 121 also generally requires that long-lived assets and
  certain identifiable intangibles to be disposed of be reported at the lower of
  the carrying amount or the fair value, less cost to sell. SFAS 121 is
  effective for the Company's 1997 fiscal year end. Any impairment provisions
  recognized in accordance with SFAS 121 are permanent and may not be restored
  in the future. No impairment expense was recognized in the years ended
  December 31, 1997 and 1996.

  Use of Estimates
  ----------------

  In preparing financial statements in conformity with generally accepted
  accounting principles, management is required to make estimates and
  assumptions that affect the reported amounts of assets and liabilities and the
  disclosure of contingent assets and liabilities at the date of the financial
  statements, as well as revenue and expenses during the period. Significant
  estimates made by management include the allowance for doubtful accounts,
  estimated carrier credits, and the amortization periods related to acquired
  customers and goodwill. Actual results could differ from those estimates.

                                      F-8
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
         (CONTINUED)

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

  Deferred income taxes are recognized for tax consequences of temporary
  differences by applying current enacted tax rates to differences between the
  financial reporting and the tax basis of existing assets and liabilities.

  Loss per Common Share
  ---------------------

  The Financial Accounting Standards Board recently issued Statement of
  Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128).  SFAS
  128 requires the presentation of basic earnings per share (EPS) and, for
  companies with potentially dilutive securities such as convertible debt,
  options and warrants, diluted EPS.

  EPS is computed in accordance with SFAS 128 by dividing net income by
  the weighted average number of shares outstanding during the period.  All
  outstanding securities at the end of 1997 which could be converted into common
  shares are anti-dilutive (see note I).  Therefore, the basic and diluted EPS
  are the same.  There is no impact on EPS for prior years as a result of the
  adoption of SFAS 128.


NOTE B - REALIZATION OF ASSETS

  The accompanying consolidated financial statements have been prepared in
  accordance with generally accepted accounting principles, which contemplate
  continuation of the Company as a going concern. However, the Company has
  sustained substantial losses from operations in recent years and has
  continually used, rather than provided, cash in its operations.  In addition,
  the Company is delinquent on a payment of approximately $230,000 on a note
  payable to a shareholder, which constitutes a default, rendering the entire
  amount of the note payable (approximately $1.4 million) due and payable.

  In view of the matters described in the preceding paragraph, recoverability of
  a major portion of the recorded asset amounts shown in the accompanying
  balance sheet is dependent upon continued operations of the Company, which in
  turn is dependent upon the Company's ability to meet its financial
  requirements on a continuing basis, to maintain present financing and to
  succeed in its future operations. The financial statements do not include any
  adjustments relating to the recoverability and classification of recorded
  asset amounts or amounts and classifications of liabilities that might be
  necessary should the Company be unable to continue in existence.

  In 1998, management entered into a merger agreement with a subsidiary
  of Qwest Communications International Inc., a facilities-based provider of
  multi-media communications services to interexchange carriers and to
  businesses and consumers. The merger, subject to approval by Phoenix's
  shareholders on March 30, 1998, would result in Phoenix shareholders receiving
  stock of Qwest with an aggregate market value of approximately $28.5 million,
  subject to certain adjustments and limitations described in the merger
  agreement, and up to $4 million in cash, contingent upon the outcome of
  certain litigation.

                                      F-9
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C - POOLING-OF-INTERESTS, ACQUISITIONS, AND MERGERS

  On October 8, 1996, Phoenix Merger Corp., a wholly-owned subsidiary of
  Phoenix, was merged with and into Americonnect, Inc. and 2,663,810 shares of
  the Company's common stock were issued in exchange for all of the outstanding
  common stock of Americonnect. The merger was accounted for as a pooling-of-
  interests and, accordingly, the accompanying financial statements have been
  restated to include the accounts and operations of Americonnect for all
  periods prior to the merger.

  Separate results of the combining entities for the year ended December
  31, 1995, are as follows (amounts in 000s):

          Net sales
           Phoenix              $ 58,755
           Americonnect           17,100
                                  ------
                                $ 75,855
                                  ======

          Net income (loss)
           Phoenix              $ (1,334)
           Americonnect           (1,719)
                                  ------ 
                                $ (3,053)
                                  ====== 

  In connection with the merger, approximately $1.3 million of merger costs and
  expenses were incurred and have been charged to expense in the Company's
  fourth quarter of 1996.

  In August 1995, the Company acquired in purchase transactions the customer
  bases and substantially all of the assets and liabilities of Tele-Trend
  Communications, LLC ("Tele-Trend"), a Denver based switchless reseller, and
  Bright Telecom L.P. ("Bright"), an international call-back provider, for
  $4,369,317 and $356,388, respectively. The operations of Tele-Trend and Bright
  are included from August 1, 1995. Additionally, during 1995, the Company
  acquired three customer bases at a cost of $2,078,238.

  In January 1996, the Company acquired, in a purchase transaction, Automated
  Communications, Inc. (ACI), a Golden, Colorado, facilities-based long distance
  phone service carrier operating switching centers in Colorado Springs,
  Minneapolis, and Phoenix. Consideration for the acquisition was in the form of
  $4,085,093 in cash, 2,800,000 shares of the Company's common stock valued at
  approximately $10,500,000, a long-term note of $1,388,206 bearing interest at
  9%, and the assumption of net liabilities of $1,603,576. The Company's
  consolidated results of operations include ACI from January 1, 1996, the
  effective date of the purchase transaction. The excess of the purchase price
  over the fair market value of the assets and liabilities acquired has been
  allocated to customer acquisition costs ($1,950,000) and to goodwill
  ($15,626,875). Customer acquisition costs are amortized over four years using
  the sum-of-the-years-digits method, and goodwill is amortized on a straight-
  line basis over 20 years.

                                      F-10
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C - POOLING-OF-INTERESTS, ACQUISITIONS, AND MERGERS (CONTINUED)

  The following unaudited condensed pro forma information presents the
  results of operations of the Company as if the acquisition of ACI and Tele-
  Trend had occurred on January 1, 1995.

                                                Year ended December 31, 1995
                                                ----------------------------

          Revenue                                       $ 104,729,000
          Net loss                                      $  (4,428,000)
          Net loss attributable to common shares        $  (5,603,000)
          Basic loss per common share                   $       (0.31)
 
          Weighted average number of shares outstanding    18,135,000


NOTE D - FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS

  Furniture, equipment and data processing systems consist of the
  following:
 
                                                    December 31,
                                             --------------------------
                                                 1996          1997
                                             ------------  ------------
 
            Data processing systems          $ 4,872,174   $ 3,012,879
            Switching equipment                1,898,593     2,160,972
            Furniture and fixtures               710,234       462,282
            Other equipment                      537,471       921,860
                                             -----------   -----------
                                               8,018,472     6,557,993
            Less accumulated depreciation     (2,495,701)   (3,479,973)
 
                                              $5,522,771   $ 3,078,020
                                              ===========  ===========
 

  The loss on abandonment of assets in 1995 primarily relates to a write-off of
  billing and customer service software development costs. Management decided to
  minimize the risk of development and to have access to a new system on a more
  timely basis and, accordingly, decided to license an existing billing and
  customer service system from a vendor at a cost of approximately $3,000,000.
  During the fourth quarter of 1997, management abandoned the current billing
  system project, resulting in a loss on abandonment of assets in 1997 of
  $3,260,204.

                                      F-11
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E - LINE OF CREDIT AND BRIDGE LOAN -- FINANCE COMPANY

  In September 1995, the Company renewed its Loan and Security Agreement
  (the "Agreement") with a finance company to make available to the Company a
  line of credit of up to $10,000,000.  The Company may borrow up to the lesser
  of $10,000,000 or its borrowing base, which is defined as a percentage of its
  eligible receivables.  The amended term of the Agreement is five years,
  expiring October 2000, with automatic renewal options.  There are penalties
  for early termination by the Company.  Borrowings bear interest at 1.75% over
  the "reference rate," as defined.  In connection with the renewal, fees and
  transaction costs were incurred, which are being amortized on a straight-line
  basis over the term of the agreement.  The loan is collateralized by the
  Company's accounts receivable, equipment, general intangibles and other
  personal property assets.  Among other provisions, the Company must maintain
  certain minimum financial covenants, is prohibited from paying dividends
  without the approval of the finance company, and is subject to limits on
  capital expenditures.  At December 31, 1997, the Company was in violation of
  certain financial covenants.  The finance company has waived the covenant
  violations in connection with a restructuring of the line of credit agreement.
  At December 31, 1997, $6,663,349 was outstanding under the line and the
  interest rate was 10.25%.

  On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
  $2,000,000 bridge loan with the principal amount to be paid in eight equal
  monthly installments between July 1, 1997 and January 1, 1998. The amendment
  included the issuance of 200,000 common stock purchase warrants to the finance
  company. Phoenix made installment payments of $250,000 in June, July and
  August 1997. On September 1, 1997, the parties entered into an amendment to
  provide for a temporary moratorium on payments on the bridge loan with a final
  payment of all outstanding principal and accrued and unpaid interest being due
  on January 9, 1998. On December 12, 1997, the Phoenix Credit Facility was
  again amended to provide for an additional bridge loan of $1,825,000 and the
  retention of an over-advance of $300,000. On December 31, 1997, the Phoenix
  Credit Facility was further amended to provide that Foothill Capital
  Corporation may, in its sole discretion, lend Phoenix an additional amount of
  up to $1.25 million, to be treated either as an increase to the bridge loan
  amount or as an over-advance. The bridge loan and any overadvance amounts must
  be repaid on the earliest to occur of (a) April 30, 1998, (b) the effective
  time of the proposed merger with the subsidiary of Qwest, or (c) termination
  of the Phoenix Credit Facility. On February 2, 1998, the Phoenix Credit
  Facility was amended to provide for an additional over-advance of $500,000 and
  to reduce the amount that Foothill Capital Corporation may lend Phoenix from
  $1.25 million to $750,000.

  Average daily outstanding borrowings for the year ended December 31, 1997, was
  $4,092,859 at a weighted average interest rate of 10.25%. The highest month-
  end balance outstanding for the year ended December 31, 1997 was $5,621,926.

                                      F-12
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE F - LONG-TERM DEBT

  During 1996, the Company entered into a note payable with a finance company to
  fund the cost of new billing and customer service software. The note agreement
  requires twelve quarterly payments of $138,854 plus accrued interest at 10.5%
  commencing July 1996 through July 1999.

  In addition, as part of the acquisition of Automated Communications, Inc., on
  January 1, 1996, the Company issued a 9% note payable for $1,388,206 to a
  current stockholder, which was payable in annual installments through 2001.
  However, in January 1998, the Company failed to make the first installment on
  the note and is currently in default thereon. On January 17, 1998, Phoenix
  received a notice declaring a default under the note and notifying Phoenix
  that if the scheduled payment is not received by February 2, 1998, the entire
  unpaid principal balance of the note will become due and payable and that
  available remedies would be pursued. Foothill Capital Corporation has waived
  the resulting cross default in the Phoenix Credit Facility.

  During 1997, the Company entered into a capital lease for the acquisition of
  equipment with a cost of $292,675. The lease is payable in monthly
  installments of $12,266 through March 1999.

  Future minimum payments on long-term debt at December 31, 1997 are as follows:

 
    Year ended     Note payable to    Note payable      Capital               
    December 31,   finance company   to stockholder      lease        Total   
    ------------   ---------------   ---------------   ---------   -----------
                                                                              
        1998       $       483,283   $     1,388,206   $ 140,635   $ 2,012,124
        1999               355,364                 -      30,464       385,828
                   ---------------   ---------------   ---------   -----------
 
                   $       838,647   $     1,388,206   $ 171,099   $ 2,397,952
                   ===============   ===============   =========   ===========
 

NOTE G - LEASES

  The Company has operating leases for office space and equipment which
  expire on various dates through 2001 and which require that the Company pay
  certain maintenance, insurance and other operating expenses.  Rent expense for
  the years ended December 31, 1995, 1996 and 1997 was $1,028,462, $1,331,911
  and $1,162,274, respectively.

  Future minimum lease payments for years ending December 31, are as follows:


                     1998                       $1,896,558
                     1999                        1,680,892
                     2000                          820,160
                     2001                          358,386
                                                ----------

                                                $4,755,996
                                                ==========

                                      F-13
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H - COMMITMENTS AND CONTINGENCIES

  Carrier Contracts
  -----------------

  The Company has contracts with its major vendors to provide telecommunications
  services to its customers. The agreements cover the pricing of the services
  and are for various periods. Among other provisions, the agreements contain
  minimum usage requirements which must be met to receive the contractual price
  and to avoid shortfall penalties. The Company is currently in compliance with
  the contractual requirements. Total future minimum usage commitments at
  December 31, 1997 are as follows:

            Year ending December 31,               Commitment
            ------------------------              -----------

            1998                                  $18,350,000
            1999                                    1,000,000
                                                  -----------
 
            Total                                 $19,350,000
                                                  ===========

  Litigation
  ----------

  WorldCom, Inc. (formerly LDDS Communications, Inc.) commenced an action
  against ACI and its former owner asserting claims relating to alleged breaches
  of noncompete and confidentiality agreements signed in connection with two
  transactions in which WorldCom was involved. The case was tried in federal
  court in Jackson, Mississippi in October 1996. The trial judge has found that
  ACI and its former owner breached the parties contracts, but has not ruled on
  whether these breaches caused damage or, if so, in what amount. Damages in
  excess of $4 million have been requested by WorldCom. Phoenix believes it is
  entitled to be indemnified for any liability with respect to the LDDS
  litigation pursuant to an Indemnification and Hold Harmless Agreement entered
  into between ACI and its former owner as part of the ACI merger. The ultimate
  liability to Phoenix, if any, is not determinable at this time, nor is there
  any assurance that the former owner of ACI has adequate financial resources to
  pay Phoenix any or all amounts that may be owed pursuant to the
  Indemnification and Hold Harmless Agreement. No provision has been made in the
  consolidated financial statements for any potential loss related to this
  contingency.

  In addition, Phoenix is a party, from time to time, in litigation incident to
  its business. Management and legal counsel do not believe that any additional
  current or pending litigation exists which will have a material adverse affect
  on the Company's financial condition.

                                      F-14
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - CAPITAL STOCK

  Preferred Stock
  ---------------

  The Company's certificate of incorporation authorizes it to issue up
  to 5,000,000 shares of $.001 par value preferred stock.  At December 31, 1997,
  the Company's authorized preferred stock is allocated as follows:
 
                                              Authorized  Issued and   
                                                shares    outstanding  
                                              ----------  -----------  
            Reserved shares:                                           
              Series A                           300,000            -  
              Series B                           200,000            -  
              Series C                         1,000,000            -  
              Series D                           666,666            -  
              Series F                         1,200,000            -  
              Series G                           150,000            -  
              Series I                           125,000       39,500  
            Undesignated shares                1,358,334            -  
                                               ---------  -----------  
                                                                       
            Total                              5,000,000       39,500  
                                               =========  ===========   


  Series A Preferred Stock ("Series A"), which were fully converted into common
  stock as of December 31, 1997, were entitled to 9% cumulative dividends and
  voting rights and were convertible into common stock subject to certain anti-
  dilution provisions. In connection with the initial offering, the Company also
  issued a warrant for 62,200 shares of common stock with an exercise price of
  $2.50 per share to an investment banking firm, controlled by an individual,
  who was subsequently elected to the Company's Board of Directors. The warrant
  expired in February 1997. During 1995, 3,000 shares of Series A were converted
  into 14,449 shares of common stock. During 1996, 3,125 shares of Series A were
  converted into 16,664 shares of common stock. During 1997, 98,625 shares of
  Series A were converted into 564,779 shares of common stock. The conversions
  also include unpaid dividends.

  Series B Preferred Stock ("Series B"), which were fully converted into common
  stock as of December 31, 1997, were entitled to 9% cumulative dividends and
  voting rights and were convertible into shares of common stock subject to
  certain anti-dilution provisions. In connection with the initial offering, the
  Company issued a warrant to an investment banking firm, controlled by one of
  the Company's directors, for 69,750 shares of common stock, with an exercise
  price of $2.00 per share. The warrant expired in February 1997. During 1996,
  11,750 shares of Series B were converted into 98,717 shares of common stock.
  During 1997, 114,500 shares of Series B were converted into 1,055,410 shares
  of common stock. The conversions also include unpaid dividends.

  In November 1992, the Company issued 1,000,000 shares of its Series C
  Preferred Stock ("Series C") to one of its major vendors as collateral for
  amounts due the vendor for services provided. The Company was released from
  all collateral requirements during 1996 and the preferred stock reverted back
  to the Company.

                                      F-15
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - CAPITAL STOCK (CONTINUED)

  Preferred Stock (Continued)
  ---------------            

  Series D Preferred Stock, which were fully converted into common stock as of
  December 31, 1997, were entitled to 6% noncumulative dividends, when and if
  declared by the Board of Directors and only after payment of dividends on
  previously issued series of preferred stock. These shares were nonvoting and
  convertible into 333,333 shares of common stock subject to certain anti-
  dilution provisions. In connection with the initial offering, the Company
  issued a warrant to an investment banking firm, controlled by one of the
  Company's directors, for 22,000 shares of common stock, with an exercise price
  of $1.50 per share. The warrant expired in December 1997.

  In September 1994, the Company issued 55,893 shares of Series E Preferred
  Stock at $10 per share under an agreement to convert a note payable to
  stockholder, with a principal balance of $500,000 and accrued interest of
  $58,930. In connection with the issuance of the stock, the Company issued the
  stockholder a five-year warrant for 100,000 shares of the Company's common
  stock which was canceled when the Series E shares were converted to Series F
  Preferred Stock (see below).

  During the period July 1995 through October 1995, the Company raised
  approximately $11,024,207, net of offering costs of $129,963, through a
  private placement of 1,115,417 shares of its Series F Preferred Stock at $10
  per share. Additionally, the holder of the Company's Series E Preferred Stock
  exchanged their Series E shares, plus accumulated and unpaid dividends of
  $47,467, for 60,639 shares of Series F Preferred Stock.  The Series F shares
  are entitled to 9% cumulative dividends, voting rights, demand registration
  rights for the underlying common shares after six months and are convertible
  initially into 4,704,224 shares of common stock, subject to anti-dilution
  provisions.  The holders of the Series F also received warrants for the
  purchase of 470,422 shares of common stock with an exercise price of $3.00 per
  share which expire in October 2000.  The Series F shareholders have the right
  to place two directors on the Company's board (the "Series F Directors") and
  the Company is subject to certain covenants requiring it to obtain the consent
  of the Series F Directors for certain transactions including mergers,
  acquisitions and incurring additional indebtedness in excess of $20,000,000.
  During December 1996, the outstanding Series F Preferred shares were converted
  into 5,191,064 shares of common stock.  This conversion also included unpaid
  dividends.

  In March 1997, the Company raised $2,850,000 through a private placement of
  150,000 shares of its Series G Preferred Stock at $20 per share. The shares
  are entitled to cumulative dividends at a rate per share of 5% per annum when
  and as declared by the Board of Directors. These shares are nonvoting and
  convertible into common stock subject to certain anti-dilution provisions. In
  connection with the initial offering, the Company issued warrants for 60,000
  shares of common stock with an exercise price of $2.34 per share. The warrants
  expire in April 2002. During 1997, all outstanding shares of Series G
  Preferred Stock were converted to 2,491,879 shares of common stock.

  In July 1997, the Company raised $2,375,000 through a private placement of
  125,000 shares of its Series I Preferred Stock at $20 per share. The shares
  are entitled to cumulative dividends at a rate per share of 5% per annum when
  and as declared by the Board of Directors. These shares are nonvoting and
  convertible into common stock subject to certain anti-dilution provisions. In
  connection with the initial offering, the Company issued warrants for 112,500
  shares of common stock, with an exercise 

                                      F-16
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - CAPITAL STOCK (CONTINUED)

  Preferred Stock (Continued)
  ---------------            

  price of $2.00 per share.  The warrants expire in July 2002.  During
  1997, 85,500 shares of Series I Preferred Stock were converted to 2,337,355
  shares of common stock.  At December 31, 1997, the outstanding Series I
  Preferred shares are convertible into 2,349,011 shares of common stock.

  The common shares reserved for issuance upon the conversion of the remaining
  Series I Preferred Stock have been registered for resale with the Securities
  and Exchange Commission.

  At December 31, 1997, the Company had cumulative, unpaid dividends on Series I
  Preferred Stock of $18,072 ($.46 per share).

  Common Stock
  ------------

  In May 1995, the Company closed a private placement of its common stock which
  raised $727,519, net of offering costs of $119,481. The Company sold 385,000
  units, at $2.20 per unit, in an off-shore financing pursuant to Regulation S
  under the Securities Act of 1933. A unit consists of one share of common stock
  and a five-year warrant for one-half share of common stock. Two warrants can
  be exercised to purchase 38,500 units at $2.42 per unit. The Company closed
  another private placement of its common stock under Regulation S in September
  1995. In this transaction, the Company sold 2,300,000 shares of common stock
  for $2.75 per share. Proceeds to the Company, net of offering costs of
  $735,055, were $5,589,945.

  Stock Options and Warrants
  --------------------------

  The Company has various stock option plans accounted for under APB Opinion 25
  and related interpretations. The options generally have a term of ten years
  when issued, and generally vest over two to four years. No compensation cost
  has been recognized for the plans. Had compensation cost for the plan been
  determined based on the fair value of the options at the grant dates
  consistent with the method of Statement of Financial Accounting Standards 123,
  Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net loss
  and loss per common share would have been increased to the pro forma amounts
  indicated below. Pro forma results for 1996 and 1997 may not be indicative of
  pro forma results in future periods because the pro forma amounts do not
  include pro forma compensation cost for options granted prior to January 1,
  1996.

                                           1996           1997       
                                       ------------   ------------
        Net loss attributable to                                     
         common shares                                               
          As reported                  $(14,050,004)  $(15,124,110)  
          Pro forma                     (14,474,477)   (15,745,339)  
                                                                     
        Basic loss per common share                                  
          As reported                  $      (0.68)  $      (0.52)  
          Pro forma                           (0.70)         (0.54)   


                                      F-17
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - CAPITAL STOCK (CONTINUED)

  Stock Options and Warrants (Continued)
  --------------------------            

  The fair value of each option grant is estimated on the date of grant
  using the Black-Scholes options-pricing model with the following weighted-
  average assumptions used for grants in 1996 and 1997, respectively: no
  expected dividends; expected volatility of 107%; weighted average risk-free
  interest rate of 6.3%; and expected lives of four years.

  In 1987, the Company granted certain directors stock options to purchase up to
  900,000 shares of common stock at a price of $0.10 per share, expiring no
  earlier than ten years from the grant date. All options have been exercised as
  of December 31, 1997.

  The Company's 1989 Stock Option Plan authorizes the grant of incentive
  stock options or supplemental stock options for up to 5,000,000 shares of
  common stock.  The exercise price of each incentive stock option shall be not
  less than 100% of the fair market value of the stock on the date the option is
  granted.  The exercise price of each supplemental stock option shall be not
  less than eighty-five percent (85%) of the fair market value of the stock on
  the date the option is granted.

  In November, 1992, the Board of Directors approved the 1992 Non-Employee
  Directors' Stock Option Plan. Under the Plan, 480,000 shares of common stock
  have been reserved for issuance to non-employee directors of the Company.
  Options are granted annually based upon length of service at fair market value
  at date of grant.

  The Company's subsidiary, Americonnect, had two stock option plans. All
  options have been converted into options for the Company common stock and are
  included in the following summary. The options were granted at prices from
  $0.08 to $2.06 per share of Company common stock.

  A summary of the status of the Company's fixed stock option plans as of
  December 31, 1997, and changes during each of the three years in the period
  ended December 31, 1997 is presented below.
 
                                                            Weighted
                                                             average
                                               Number         price
                                              of shares     per share
                                              ---------     ---------
 
          Outstanding at January 1, 1995      2,660,065     $  1.58
            Exercised                          (382,851)       1.16   
            Granted                             898,414        2.58   
            Canceled                           (156,458)       2.43   
                                              ---------               
                                                                      
          Outstanding at December 31, 1995    3,019,170        1.91   
            Exercised                          (724,567)       1.64   
            Granted                           1,017,500        3.27   
            Canceled                           (177,951)       3.23   
                                              ---------               
                                                                      
          Outstanding at December 31, 1996    3,134,152        2.32   
            Exercised                          (869,521)        .91   
            Granted                             127,500        3.38   
            Canceled                           (151,479)       3.33   
                                              ---------               
                                                                      
          Outstanding at December 31, 1997    2,240,652        2.89    
                                              =========

                                      F-18
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - CAPITAL STOCK (CONTINUED)

  Stock Options and Warrants (Continued)
  --------------------------            

<TABLE>
<CAPTION>
                                                                                         Weighted
                                                                                         average
                                                  Range        Options     Proceeds    exercise price
                                              -------------   ---------   ----------   --------------
<S>                                           <C>             <C>        <C>           <C>
     Exercisable at December 31, 1997         $1.00 - $2.38     475,558   $  798,937      $  1.68
                                              $2.39 - $4.38     878,600    2,688,516         3.06
                                              $4.39 - $6.38      56,890      356,131         6.26
                                                              ---------   ----------  
 
                                                              1,411,048   $3,843,584         2.72
</TABLE>

  Weighted average fair value of options granted during 1995, 1996 and 1997 is
  $1.42, $1.70, and $2.51 per share, respectively.

  The following information applies to options outstanding at December 31, 1997:

 
     Range of exercise prices     $1.00-$2.38   $2.39-$4.38   $4.38-$6.38
         Options outstanding          566,077     1,608,025        66,550     
         Weighted average                                          
          exercise price          $      1.79   $      3.15   $      6.05     
         Weighted average                                            
          remaining contractual                                      
          life (years)                      6             8             7     
         Options exercisable          475,558       878,600        56,890     
         Weighted average                           
          exercise price          $      1.68   $      3.06   $      6.26      


                                      F-19
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE I - CAPITAL STOCK (CONTINUED)

  Stock Options and Warrants (Continued)
  --------------------------            

  Common shares subject to warrants are summarized below:

 
                                                 Number       Price       
                                               of shares    per share     
                                               ----------  -----------
                                                                           
      Outstanding at January 1, 1995             511,533   $1.50-$7.00   
       Exercised                                 (34,675)  $      2.42   
       Granted                                   720,672   $2.42-$3.00   
       Canceled                                 (100,000)  $      3.25   
                                               ---------                   
                                                                           
      Outstanding at December 31, 1995         1,097,530   $1.50-$7.00   
       Exercised                                 (58,825)  $      2.42   
       Granted                                         -             -   
       Canceled                                        -             -   
                                               ---------                   
                                                                           
      Outstanding at December 31, 1996         1,038,705   $1.50-$7.00   
       Exercised                                 (46,700)  $1.81-$2.20   
       Granted                                   372,500   $2.00-$2.94   
       Canceled                                 (114,750)  $1.81-$2.20   
                                               ---------                   
                                                                           
      Outstanding at December 31, 1997         1,249,755   $1.50-$7.00   
                                               =========                    

  All warrants are exercisable at grant.


NOTE J - INCOME TAXES

  The Company accounts for income taxes under the liability method. Under this
  method, deferred tax assets and liabilities are determined based on
  differences between financial reporting and tax bases of assets and
  liabilities and are measured using current enacted tax rates. A valuation
  allowance is established to reduce net deferred tax assets to their estimated
  realizable value.

  As of December 31, 1997, the Company has available to offset future federal
  taxable income, net operating loss carryforwards (NOLs) of approximately $35.3
  million which expire in varying amounts from 2002 through 2012. The NOLs may
  be subject to limitations as a result of provisions of the Internal Revenue
  Code relating to changes in ownership and utilization of losses by successor
  entities.

                                      F-20
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J - INCOME TAXES (CONTINUED)

  The Company's effective income tax rate is different from the Federal
  statutory income tax rate because of the following factors:

 
                                                       Year ended December 31,  
                                                     --------------------------
                                                       1995      1996     1997 
                                                     --------  -------  -------
                                                                               
     Federal tax rate applied to loss before taxes     (34.0)%  (34.0)%  (34.0)%
     State tax rate applied to allowable carry-                                
       forward losses                                   (5.9)    (4.6)    (4.6)
     Valuation allowance for deferred taxes             59.5     38.6     38.6 
                                                     --------  -------  -------
                                                                               
     Effective tax rate                                19.6%        - %      - %
                                                     ========  =======  =======
 

  Deferred federal and state tax assets and valuation allowance are as follows:

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

     Current                                                           
       Allowance for bad debts                      $  1,326,000   $    531,000
                                                                            
     Noncurrent                                                             
       Noncurrent assets                               1,187,000      2,232,000
       Net operating loss carryforward                 8,496,000     14,774,000
                                                    ------------   ------------
                                                       9,683,000     17,006,000
                                                    ------------   ------------
                                                      11,009,000     17,537,000
       Valuation allowance                           (11,009,000)   (17,537,000)
                                                    ------------   ------------
                                                    $          -   $          - 
                                                    ============   ============ 


  In 1993, the Company's subsidiary, Americonnect, Inc., reduced its valuation
  allowance by $500,000 due to changes in circumstances subsequent to adoption
  of SFAS No. 109. The changes in circumstances related to increased cash flows,
  increased profitability, and anticipated continued increases. Due to operating
  losses in 1995, Americonnect was no longer able to determine if it was more
  likely than not that it would realize the deferred asset. As a result of this
  change in estimate, the valuation allowance was increased by $500,000.

                                      F-21
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J - INCOME TAXES (CONTINUED)

  The components of income tax benefit (expense) are as follows:


                                 Year ended December 31,     
                             -------------------------------  
                               1995        1996       1997    
                             ---------   --------   --------  
                                                              
        Current              $       -   $      -   $      -  
        Deferred              (500,000)         -          -  
                             ---------   --------   --------  
                                                              
                             $(500,000)  $      -   $      -  
                             =========   ========   ========  


  The increase in the valuation allowance was approximately $1,917,000,
  $5,080,000 and $6,528,000 for the years ended December 31, 1995, 1996 and
  1997, respectively.


NOTE K - EMPLOYEE BENEFIT PLANS

  On June 1, 1993, the Company established a 401(k) tax savings plan for all
  employees. Employer and participant contributions to the plan vest
  immediately. The plan is a defined contribution plan covering all of its
  employees. Under this plan, employees with a minimum of one year of qualified
  service can elect to participate by contributing a minimum of one percent of
  their gross earnings up to a maximum of 20 percent.

  For those eligible plan participants, the Company will contribute an amount
  equal to 100 percent of each participant's personal contribution up to an
  annual maximum of $1,000. The Company's contributions to the 401(k) plan for
  the years ended December 31, 1995, 1996 and 1997, were approximately $59,000,
  $109,000 and $95,000, respectively.

NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

  The following methods and assumptions were used to estimate the fair value of
  each class of financial instrument for which it is practicable to estimate
  that value:
 
        Cash and cash 
        equivalents    -       Carrying amount approximates fair value because
                               of the short-term maturity of this instrument
 
        Line of credit -       Carrying amount approximates fair value because
                               of the short-term maturity of this instrument
 
        Long-term debt -       Carrying amount approximates fair value because
                               the interest rate at December 31, 1997
                               approximates the market rate.

NOTE M - FOURTH QUARTER ADJUSTMENTS

  During the fourth quarter of 1997, the Company recorded adjustments
  increasing their net loss by $3,260,204 related to the write-off of an
  abandoned billing system.

                                      F-22
<PAGE>
 
                        REPORT OF INDEPENDENT CERTIFIED
                         PUBLIC ACCOUNTANTS ON SCHEDULE



Board of Directors
Phoenix Network, Inc.


In connection with our audit of the consolidated financial statements of Phoenix
Network, Inc., and Subsidiaries referred to in our report dated February 19,
1998, which is included in the Company's annual report on Form 10-K, we have
also audited Schedule II for the years ended December 31, 1995, 1996 and 1997.
In our opinion, this schedule presents fairly, in all material respects, the
information to be set forth therein.



Denver, Colorado
February 19, 1998

                                      S-1
<PAGE>
 
                     Phoenix Network, Inc. and Subsidiaries

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  Years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
 
 
            Column A                Column B     Column C       Column D       Column E
---------------------------------  -----------  -----------  --------------  -------------
                                                 Additions
                                   Balance at    charged to
                                    beginning    costs and                     Balance at
           Description              of period    expenses    Deductions (1)  end of period
---------------------------------  -----------  -----------  --------------  -------------
<S>                                <C>          <C>          <C>             <C>
 
Allowance for doubtful accounts
 
     December 31, 1995              $1,452,700   $2,689,250     $2,492,937      $1,649,013       
     December 31, 1996              $1,649,013   $3,147,077     $1,195,260      $3,600,830       
     December 31, 1997              $3,600,830   $3,407,842     $5,728,228      $1,280,444        
</TABLE>

(1)  Write-offs of uncollectible accounts, net of recoveries.

                                      S-2