<PAGE>   1
                                                                      Exhibit 13

[back cover]

[Pioneer Logo]
The Pioneer Group, Inc.
60 State Street                                                        0398-4750
Boston, MA  02109                                    (C) The Pioneer Group, Inc.


[front cover]

[Photo: ship lantern]

[Photo: elaborate globe]

[Photo: compass]


THE PIONEER GROUP, INC.
'97
ANNUAL REPORT
<PAGE>   2
THE COMPANY

The Pioneer Group, Inc., and its subsidiaries (collectively, the "Company"), are
engaged in financial services businesses in both the United States and in many
foreign countries and in a number of natural resource development projects in
locales as diverse as the Republic of Ghana and the Russian Far East.

In the United States, the Company conducts four lines of financial services
businesses: (i) investment manager to the U.S. registered investment companies
comprising the Pioneer Family of Mutual Funds, and institutional accounts, (ii)
distributor of shares of the Pioneer Family of Mutual Funds, (iii) venture
capital investor and manager, and (iv) shareholder servicing agent for the
Pioneer Family of Mutual Funds.

The Company's international financial services businesses include investment
operations in: (i) Warsaw, Poland, where the Company manages and distributes
units of four mutual funds, owns 50% of a unitholder servicing agent, manages an
institutional venture capital fund and owns a majority interest in a brokerage
operation, (ii) Dublin, Ireland, where the Company distributes shares of,
manages and services six offshore investment funds, sold primarily in Western
Europe, and (iii) Moscow, Russia, where the Company provides financial services,
including investment advisory, investment banking, brokerage and transfer agency
services, distributes shares of, manages, and services, Pioneer First, one of
the first open-end mutual funds available to Russian citizens, and owns 51% of
the First Voucher Fund, the largest Russian voucher investment fund. In
addition, the Company has investment operations in the Czech Republic and has
invested in investment management operations in India and Taiwan.

The Company's subsidiary, Pioneer Goldfields Limited (PGL), conducts mining and
exploration activities in the Republic of Ghana and exploration activities
elsewhere in Africa. PGL's principal asset is its ownership of 90% of the
outstanding shares of Teberebie Goldfields Limited, which operates a gold mine
in the western region of the Republic of Ghana.

The Company's subsidiary, Pioneer Forest, Inc. (Pioneer Forest), conducts timber
harvesting and timber development activities in the Russian Far East. Pioneer
Forest's principal asset is its ownership of 95% of the outstanding shares of
Closed Joint-Stock Company "Forest-Starma," which harvests timber in the Russian
Far East and which commenced commercial production on January 1, 1997.

Wholly and Majority Owned Subsidiaries

Pioneering Management Corporation, Pioneer Funds Distributor, Inc., Pioneering
Services Corporation, Pioneer Capital Corporation, Pioneer SBIC Corp., Pioneer
Associates, Inc., Pioneer Fonds Marketing GmbH, Pioneer International
Corporation, Pioneer First Polish Investment Fund Joint Stock Company S.A.,
Pioneer Polski Dom Maklerski, S.A. Pioneer Investment Poland Ltd., Pioneer
Management (Ireland) Limited, Pioneer Omega, Inc., Pioneer First Russia, Inc.,
"First Voucher Fund," "Pioneer Bank" (Joint Stock Company), Closed Joint Stock
Company "Pioneer Securities," UKS Securities Limited, Closed Joint Stock Company
"Pioneer Services," Closed Joint Stock Company "Pioneer First," "Pioneer
Investments," Pioneer Czech Investment Company, A.S., Pioneer Goldfields
Holdings, Inc., Pioneer Goldfields Limited, Teberebie Goldfields Limited,
Pioneer Forest, Inc., Closed Joint-Stock Company "Forest-Starma," Closed
Joint-Stock Company "Amgun-Forest," Closed Joint-Stock Company "Udinskoye,"
Closed Joint-Stock Company "Pioneer Starma Equipment," Pioneer Metals and
Technology, Inc., Closed Joint-Stock Company "Pioneer Metals International,"
PIOGlobal Corporation, Pioneer Real Estate Advisors, Inc., Pioneer Investments
Corporation, PIOGlobal Insurance Company Ltd., Pioneer Explorer, Inc., Pioneer
Real Estate Advisors, sp Z.O.O.

Joint Ventures

Financial Services Limited, Kothari Pioneer AMC Ltd., Core Pacific Securities
Investment Trust Co., Ltd., International Joint-Stock Company "Starma Holding,"
Closed Joint-Stock Company "Tas-Yurjah Mining Company."

Legal Counsel
Hale and Dorr LLP
Boston, Massachusetts

Transfer Agent
State Street Bank and Trust Company
Boston, Massachusetts

Independent Public Accountants
Arthur Andersen LLP
Boston, Massachusetts

The Company has filed an Annual Report on Form 10-K with the Securities and
Exchange Commission for the year ended December 31, 1997. A copy of that Report
is available, free of charge, to stockholders of the Company, upon request to
William H. Keough, Senior Vice President and Chief Financial Officer, 60 State
Street, Boston, MA 02109.
<PAGE>   3
[Photo: compass]

Pioneer's commitment to expanding and improving our financial services
businesses, both in the U.S. and abroad, served us well in 1997: It was the
second-most profitable year ever, despite disappointing results from our natural
resource businesses.

New ventures are important, but the further development of our core investment
management business must continue apace -- both are crucial if we are to succeed
in the next century.

John F. Cogan, Jr.
President


 Table of Contents

 Chairman's Letter               2

 Pioneer at a Glance             4

 U.S. Investment Management      6

 International Investment
 Management                      8

 Natural Resource Development   10

 Financial Snapshot             12

 Management's
 Discussion & Analysis          14

                                                                               1
<PAGE>   4
[photo: John F. Cogan, Jr.]

FELLOW STOCKHOLDERS:

The major earnings trends reported in our 1996 annual report continued through
1997, as our U.S. investment management business again nearly doubled its
earnings while declining earnings from our natural resource operations turned
into losses. Reflected in our results is the positive contribution of our more
mature businesses, such as the U.S. mutual fund and venture capital businesses,
both of which required significant investments in prior years, contrasted with
the struggles experienced by our more recent ventures in emerging markets
overseas.

The favorable trends carried far more weight than the difficulties,
however, resulting in earnings of $1.14 per share, compared to 74 cents per
share in 1996.

Overall revenues grew 43% to $342.8 million, including a 50% gain from financial
services revenues to $241.5 million.

1997 Overview

Here are the main components of Pioneer's earnings picture in 1997:

Earnings from the domestic investment management business were $1.25 per share,
compared to 68 cents in 1996. These earnings stemmed principally from a 24%
increase in assets under management to $21 billion as of December 31, 1997.
Asset growth was buoyed by another strong year on Wall Street and a 10% increase
in sales of U.S. mutual funds. Assets continued to grow in early 1998 and were
over $23 billion at this writing.

Our U.S. venture capital unit, Pioneer Capital Corp. (PCC), earned 25 cents
per share, up from 18 cents in 1996. Pioneer's other venture capital operations
in Central and Eastern Europe lost 5 cents per share. Unlike PCC, which has been
enjoying profits from maturing investments, these are relatively new operations
whose start-up and infrastructure costs weigh more heavily on results.

Our financial services operations in Russia and Central Europe, for the most
part, showed favorable trends. Russian financial services earned 21 cents per
share, compared to 5 cents in 1996, principally from our brokerage operations
there. In Poland, financial services posted profits of 4 cents per share,
compared to a loss of 3 cents per share in 1996. Operations in the

2
<PAGE>   5
Czech Republic lost 5 cents per share, improving significantly from an 11 cents
loss in 1996. Lastly, our relatively young real estate management arm, which
operates in Warsaw, St. Petersburg, and Moscow, lost 7 cents per share, compared
to a loss of 1 cent in 1996.

Gold mining lost 11 cents per share in 1997, compared to earnings of 10 cents in
1996. Gold mining operations at Teberebie Goldfields Ltd. ("TGL") were
break-even (versus earnings of 13 cents in 1996), as the 1997 losses represented
exploration costs. In 1997 the prior mine expansion began to produce results:
production was boosted by 29% to 263,000 ounces, cash production costs per ounce
were cut by more than 13%, to $230 per ounce, and revenues increased by 14% to
$89.5 million. Unfortunately, increased production could not make up for the
impact of materially lower gold prices.

One of 1997's biggest disappointments came from Forest-Starma, our timber
operation in the Russian Far East. This operation, which completed its first
full year of commercial production, was hindered by economic weakness in Japan,
our primary market. Severely depressed timber prices in Japan, combined with
lower-than-anticipated productivity, led to a loss for Forest-Starma of 26 cents
per share, compared to a loss of 2 cents in 1996.

A Look Ahead

Our focus in 1998 will be to maintain the momentum of our investment management
businesses, continue to improve the results from our emerging markets financial
services operations and do all we can to return the natural resource operations
to profitability.

New projects will be focused primarily on leveraging resources and opportunities
related to existing operations. For example, this year we expect to move forward
with plans developed in 1997 for increased institutional activity in Central and
Eastern Europe, including venture capital and real estate funds.

Closer to home, in 1998 we are devoting significant efforts to building our
presence in the institutional marketplace, and to "re-launching" Pioneer Fund,
which celebrates its 70th birthday this year, having achieved exceptional
performance over the last several years. We also expect to introduce our
offshore fund family to new markets.

New ventures are important, but the further development of our core investment
management business must continue apace -- both are crucial if we are to succeed
in the next century. We are optimistic that the combination of established and
emerging businesses we have developed will produce continued growth in
stockholder value. The pages that follow describe in more detail the results of
various business segments.

Sincerely,
/s/ John F. Cogan, Jr.
John F. Cogan, Jr.
President
March 25, 1998


                                                                             3
<PAGE>   6
PIONEER AT A GLANCE


The profit potential of The Pioneer Group, Inc., can be gauged by any number of
measures. We are pleased to report steadily upward trends in sales, revenues,
assets under management and stockholders' equity.

The charts also show significant resumption of earnings growth in 1997. It's
worth noting that the sharp earnings peak of 1994 was due, in part, to a
one-time tax gain of 16 cents a share.

------------------------------[BAR CHARTS]--------------------------------------

<TABLE>
<CAPTION>
                             U.S. Mutual Fund Sales
                             Dollars in Millions

<S>                                    <C>
                             1993      $1,076
                             1994      $1,499
                             1995      $1,752
                             1996      $2,602
                             1997      $2,866
</TABLE>

<TABLE>
<CAPTION>

                             Assets Under Management
                             Dollars in Millions

<S>                                    <C>
                             1993      $10,766
                             1994      $11,103
                             1995      $13,745
                             1996      $16,981
                             1997      $21,041
</TABLE>



4
<PAGE>   7
------------------------------[BAR CHARTS]--------------------------------------

<TABLE>
<CAPTION>
                             Gold Production
                             Ounces

<S>                                    <C>
                             1993      164,900
                             1994      176,400
                             1995      235,500
                             1996      203,100
                             1997      263,000
</TABLE>

<TABLE>

                             Earnings Per Share
                             Dollars

<S>                                    <C>
                             1993      0.72
                             1994      1.32
                             1995      0.90
                             1996      0.74
                             1997      1.14
</TABLE>

<TABLE>
<CAPTION>

                             Stockholders' Equity
                             Dollars in Thousands

<S>                                    <C>
                             1993      $107,174
                             1994      $134,422
                             1995      $150,343
                             1996      $162,473
                             1997      $183,687
</TABLE>

<TABLE>
<CAPTION>


                             Cash Dividends
                             Dollars

<S>                                    <C>
                             1993      0.225
                             1994      0.315
                             1995      0.40
                             1996      0.40
                             1997      0.40
</TABLE>

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

                                                                              5
<PAGE>   8
[Photo: ship lantern]

Pioneer's core U.S. operations involve managing more than $21 billion for more
than a million investors through 24 mutual funds, 10 variable annuity
portfolios, and institutional accounts.

Mutual fund sales grew by 10% to a record $2.9 billion, while redemptions edged
up 2 percentage points to 12% of assets, substantially below the industry
average of about 15%.

6
<PAGE>   9
U.S. INVESTMENT MANAGEMENT

1997 Overview:

In 1997, Pioneer began or built upon several initiatives that contributed to the
year's record mutual fund sales levels and strong profitability. These
initiatives include:

Investment Management Depth. For 70 years, proprietary fundamental research has
been a Pioneer hallmark. In 1997, we continued to add depth and expertise to our
investment staff, bringing our global total to more than 75 professionals.

As Pioneer has grown, we have also reconfigured the professional staff to ensure
that maximum resources are brought to bear on every portfolio we manage. Our
investment professionals perform in teams, composed of analysts and portfolio
managers, which support the manager of each portfolio. We currently have four
teams covering the U.S. equity markets -- core value, aggressive value, core
growth and a specialized funds group -- along with international equity and
global fixed income teams.

An excellent example of the team approach is Pioneer Micro-Cap Fund, which
joined Pioneer's line-up of "aggressive value" funds in 1997. Micro- and
small-capitalization stocks represent the most research-intensive sector of the
U.S. capital markets. Pioneer Micro-Cap Fund and Pioneer Small Company Fund are
backed by a dedicated team of analysts and portfolio managers experienced at
working with smaller companies. Both funds contribute to Pioneer's stature as a
premier value manager.

Technology.  The intelligent use of technology is critical to all of our
investment operations, from analysis, to decision-making, to implementation. In
1997, we made considerable progress in introducing technology across the
investment landscape.

We are developing a state of the art internal management system to deliver
global information rapidly to our professional teams and to provide advanced
tools for stock analysis and portfolio management. We are installing an
electronic trading system that will link portfolio managers, traders and fund
accountants to help us lower costs, eliminate errors and trade more effectively.


Pioneer's investments in staffing and technological resources contributed to
excellent performance in 1997 of five Pioneer funds, which finished within the
top 20% of their fund categories.

Institutional Investment Management.  Pension fund assets in the U.S. total in
excess of $6 trillion, with another $7 trillion in assets outside this country.
In 1997, we sharpened our focus on this growing, worldwide market with the
formation of Pioneer Global Institutional Advisors (PGIA).

Pioneer's investment resources are dedicated to serving a range of institutional
investors, including pension funds, municipalities, endowments and corporations.
PGIA is expanding Pioneer's sales force, coordinating investment management
responsibilities, and identifying areas of opportunity within the institutional
marketplace. We believe that Pioneer's strengths as an investment manager -- our
reputation for integrity, consistent style, value orientation, and team approach
-- are in great demand in this marketplace.

Venture Capital. Pioneer Capital Corp., our venture capital arm, has
successfully built a portfolio of New England-based companies, several of which
have recently had initial public offerings. In 1997, PCC invested $15 million in
its portfolio of companies.

[Photo: ship's charts]

Mutual Fund Distribution.  A major initiative in recent years has been to
broaden mutual fund distribution among brokers, banks, financial planners and
insurance companies -- particularly those with a national distribution base. In
1997, for the fourth year in a row, sales among national brokers and banks
increased, as did the number of dealers selling $1 million or more. One benefit
of our wider sales base was that our record mutual fund sales in 1997 were much
more evenly distributed than in previous years.

Retirement plans.  Pioneer offers a range of retirement services, including
401(k), SIMPLE, and age-weighted profit sharing plans, principally to small- and
mid-size companies. Pioneer provides our corporate clients the highest levels of
expertise and support. Assets held in 401(k) and similar retirement accounts
grew by 25% in 1997.

Pioneer Vision Variable Annuity.  Pioneer Vision offers individuals more than a
tax-advantaged way to invest for retirement -- it allows them to do so through
10 investment portfolios that are patterned after Pioneer funds with which they
may already be comfortable. In 1997, two new investment portfolios were added.
Assets in Pioneer Vision's portfolios more than doubled in 1997.

Roth IRA. Created by Congress in August 1997, Roth IRAs offer another attractive
way to save for retirement on a tax-advantaged basis. After enactment, Pioneer
moved quickly to present the merits of Roth, Traditional, and Education IRAs to
our investment professional clients. Roth IRAs proved to be extremely popular,
and they will remain a significant focus for Pioneer in 1998.



                                                                              7
<PAGE>   10
Pioneer's international financial services continue to play a growing role in
the success of our business. In 1997, we increased both the volume of business
conducted internationally and variety of products and services offered at both
the retail and institutional level.

[Photo: elaborate globe]


8
<PAGE>   11
INTERNATIONAL INVESTMENT MANAGEMENT

1997 Overview:

Institutional Investment Management.  Pioneer's global institutional offerings
include a direct equity fund in Russia and a real estate fund in Poland. In
1998, we will continue our focus on new opportunities in Central and Eastern
Europe.

Pioneer Real Estate Advisors (PREA) was formed in 1996 to manage properties and
real estate investment portfolios for institutional and corporate clients
worldwide. In addition to Pioneer's home office in Boston, PREA currently has
offices in Moscow, St. Petersburg and Warsaw. Pioneer's Meridian office building
in Moscow, discussed in more detail below, is an example of the kinds of
properties PREA will develop and manage.

Western Europe.  Pioneer introduced three new offshore funds in 1997, bringing
to six the number of Dublin-based funds. Dublin is the site of Pioneer's
international processing facility that began operations in 1995. Our offshore
funds provide excellent examples of how we seek to leverage our investment
management expertise on a global scale. Along with these offshore products,
Western Europe remains an important sales channel for our U.S.-registered mutual
funds.

Central Europe.  Pioneer established the first mutual fund in Poland in 1992,
and we have steadily increased our presence as Poland's capital markets have
grown and matured, offering financial services for individuals, institutions and
corporations. In 1997, we expanded our offerings to include a wider range of
equity and fixed-income funds, and a cash management program. Pioneer also
manages a local mutual fund in the Czech Republic.

Russia.  Pioneer made history in 1996 with Pioneer First Fund, Russia's first
open-end mutual fund, which invests principally in government bonds. We began
work on another mutual fund in 1997, focusing on blue-chip Russian companies.

This product joins Pioneer's First Voucher Fund (FVF), Russia's largest
privatization fund with 2.1 million shareowners. Pioneer, through a subsidiary,
is majority owner of FVF, and our Russian investment management company serves
as FVF's adviser.

FVF is a unique business venture in several respects. For example, Pioneer is
represented on the boards of about 30 of the 125 companies held by FVF. This
role affords Pioneer an invaluable position from which to expand our expertise
about the dynamics of the emerging capitalist Russian economy.

Pioneer believes that there is significant unrealized value in the assets
included in FVF's portfolio, based on available market quotations. Although
FVF's assets are carried on our books at cost, we believe that as of the end of
1997, our stake was worth approximately four times the price we purchased it for
in 1995.

Through FVF, Pioneer also acquired the Meridian office building in Moscow, a
220,000 square-foot structure that was partially complete when purchased in
1995. At the end of 1997, the building was completed and approaching fully
leased status, with a roster of tenants that include Lucent, Halliburton, and
Mary Kay Cosmetics.

Pioneer's Russian financial services companies also include a bank and a
securities brokerage house. Securities trading proved to be very active and
profitable in 1997, buoyed by strong increases in the Russian market throughout
most of the year.

                                                                              9
<PAGE>   12
Pioneer's Ghanaian gold mine produced 263,000 ounces in 1997, and achieved a
significant milestone with production of its one-millionth ounce -- a threshold
achieved in January 1997. Our timber operation in the Russian Far East completed
its first full year of commercial operations, with shipment of 194,000 cubic
meters of timber.

[Photo: ship bell]

10
<PAGE>   13
NATURAL RESOURCE DEVELOPMENT

1997 Overview:

Pioneer Goldfields Limited. Pioneer Goldfields Limited (PGL) owns 90% of
Teberebie Goldfields Limited (TGL), our gold mine located in Tarkwa, Ghana, and
is carrying out exploration in West Africa and Russia.

The TGL Phase III mine expansion reached operating capacity, with the first gold
pour in April 1997. The expansion included a further heap leach operation, a new
near-pit gyratory crusher that serves both the West Plant and the new South
Plant, modifications to the West Plant conveyer systems, and a new and larger
mining fleet.

We are pleased to report that the Phase III mine expansion, along with increases
in operating efficiency, helped boost production by 29% to 263,000 ounces. Cash
production costs per ounce were cut by more than 14% to $230 per ounce and
revenues were increased by 14% to $89.5 million. As a result, TGL broke even
(compared to a 13 cent gain in 1996) despite last year's major decline in gold
prices. TGL's increases in production were partially offset by a 12% decrease in
average realized gold prices to $340 per ounce.

Overall, gold mining lost 11 cents a share in 1997, compared to a gain of 10
cents in 1996. Although TGL broke even in 1997, gold mining had losses due to
exploration costs in West Africa and Russia.

[Photo: old flying goggles]

In 1997, TGL began implementing a new mine plan, utilizing a more sophisticated
operating model based on historical production data. This plan implements a
change in fundamental mining method from selective mining to bulk mining. As a
result of the new mine plan, combined with lower gold prices, and the normal
reduction for gold produced in the last two years, TGL's proven and probable
reserve estimates have been reduced to 6.1 million ounces. Please refer to the
detailed explanation in the Management's Discussion and Analysis section of this
report.

Pioneer recognizes the variable nature of gold prices, and believes
firmly in the long-term profit potential of a world-class gold mine like TGL.

Pioneer Forest, Inc. Pioneer Forest was established to hold majority interests
in three companies in the Russian Far East's Khabarovsk Territory:
Forest-Starma, Amgun-Forest, and Udinskoye, which were formed to develop timber
production. Forest-Starma, in its first full year of commercial production,
shipped FOB Siziman 194,000 cubic meters of timber, at an average realized price
of $61 per cubic meter. Results for Forest-Starma were disappointing for two
reasons: economic weakness in Japan, our principal market for timber, which led
to very weak log prices, particularly in the fourth quarter of 1997, and
lower-than-anticipated productivity.

The three timber companies, in the aggregate, hold long-term leaseholds
to 926,400 hectares (2.3 million acres) and annual cutting rights of 1,011,000
cubic meters. Feasibility studies are underway for both Amgun-Forest and
Udinskoye, which are still in their development stage. For a number of reasons,
but principally due to current depressed market prices for the larch species of
timber that predominates these two concessions, we are not likely to commence
full-scale development of them in the near term.

Increasing productivity is Pioneer's key goal for Forest-Starma in 1998. We are
optimistic about the long-term potential of this operation.

Pioneer Metals International. High technology metal alloys and powders are one
of the strengths of Russian industry. Pioneer Metals International collaborates
with Russian metallurgical concerns, providing them with marketing skills and
financing necessary to compete in Western markets.

Pioneer continues to look for the opportunities served by a growing global
economy, building on a diverse array of financial services and natural resource
ventures.

                                                                             11
<PAGE>   14
FINANCIAL SNAPSHOT

-----------------------------[BAR CHART]----------------------------------------

<TABLE>
<CAPTION>
                         Assets Under Management
                         Dollars in millions

<S>                                    <C>
                         1993        $10,766
                         1994        $11,103
                         1995        $13,745
                         1996        $16,981
                         1997        $21,041
</TABLE>

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

Assets Under Management at December 31:
Dollars in Millions

<TABLE>
<CAPTION>
                                                 1997     1996     1995     1994     1993
                                               -------  -------  -------  -------  -------
<S>                                            <C>      <C>      <C>      <C>      <C>
 U.S. Registered Mutual Funds ..............   $19,635  $15,704  $12,701  $ 9,925  $ 9,854
 Non-U.S. Registered Mutual Funds ..........       715      502      280      589      388
                                               -------  -------  -------  -------  -------
 Total Registered Mutual Funds .............    20,350   16,206   12,981   10,514   10,242
  Closed-end and subadvised funds
         and private institutional accounts*       691      775      764      589      524
                                               -------  -------  -------  -------  -------
 Total .....................................   $21,041  $16,981  $13,745  $11,103  $10,766
                                               =======  =======  =======  =======  =======
</TABLE>

*    Excludes assets of funds managed by foreign joint ventures and venture
     capital pools.

Sales of Mutual Fund Shares:
Dollars in Millions

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                               1997     1996     1995     1994     1993
                                              ------   ------   ------   ------   ------
<S>                                            <C>      <C>      <C>      <C>      <C>
U.S. Registered Mutual Funds:

Sales* .....................................   $2,866   $2,602   $1,752   $1,499   $1,076
Redemption of shares .......................    2,106    1,431    1,050      860      714
                                               ------   ------   ------   ------   ------
Net sales of shares .......................    $  760   $1,171   $  702   $  639   $  362
                                               ======   ======   ======   ======   ======

                                                           Year Ended December 31,
                                               1997     1996     1995     1994     1993
                                              ------   ------   ------   ------   ------
Non-U.S. Registered Mutual Funds:

Sales* .....................................   $  410   $  217   $   25   $  734   $  429
Redemption of shares .......................      147       81      381      584       34
                                               ------   ------   ------   ------   ------
 Net sales (redemptions) of shares .........   $  263   $  136   $ (356)  $  150   $  395
                                               ======   ======   ======   ======   ======
</TABLE>

*    Includes reinvestment of dividends, but excludes money market funds and
     funds managed by foreign joint ventures.

-----------------------------[BAR CHART]----------------------------------------

<TABLE>
<CAPTION>
                         Sales of U.S. Registered
                         Mutual Fund Shares
                         Dollars in Millions

<S>                                    <C>
                         1993        $1,076
                         1994        $1,499
                         1995        $1,752
                         1996        $2,602
                         1997        $2,866
</TABLE>

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

12
<PAGE>   15
-----------------------------[BAR CHART]----------------------------------------

<TABLE>
<CAPTION>
                         Gross Revenues and Sales
                         Dollars in Thousands

<S>                                    <C>
                         1993        $129,403
                         1994        $171,702
                         1995        $198,717
                         1996        $239,112
                         1997        $342,840
</TABLE>

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

Quarterly Results:

<TABLE>
<CAPTION>
Dollars in Thousands Except Per Share Amounts
                            Total
                          and Sales       Net     Earnings
                          Revenues      Income    Per Share
<S>                       <C>           <C>          <C>
 1997 by Quarter
  March 31 ............   $ 70,111      $ 7,309      $0.29
  June 30 .............     80,030        4,975       0.19
  September 30 ........     98,820        9,522       0.37
  December 31 .........     93,879        7,360       0.29
                          --------      -------      -----
                          $342,840      $29,166      $1.14
                          ========      =======      =====
 1996 by Quarter
  March 31 ............   $ 56,475      $ 5,114      $0.20
  June 30 .............     56,911        3,520       0.14
  September 30 ........     62,500        5,091       0.20
  December 31 .........     63,226        5,112       0.20
                          --------      -------      -----
                          $239,112      $18,837      $0.74
                          ========      =======      =====

</TABLE>

---------------------------[BAR CHART]------------------------------------------

<TABLE>
<CAPTION>
                         Cash Dividends Per Share

<S>                                  <C>
                         1993        $0.225
                         1994        $0.315
                         1995        $0.40
                         1996        $0.40
                         1997        $0.40
</TABLE>

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

Five Year Summary of Selected Financial Data:
Dollars in Thousands Except Per Share Amounts

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                   1997           1996           1995           1994          1993
                                               ----------     ----------     ----------     ----------    ----------
<S>                                            <C>            <C>            <C>            <C>           <C>
Results of Operations
 Revenues and sales ........................   $  342,840     $  239,112     $  198,717     $  171,702    $  129,403
 Costs and expenses ........................      296,489        212,692        158,908        119,568        94,142
 Unrealized and realized (gains) losses
   on venture capital and marketable
   securities investments, net .............      (27,460)       (12,279)        (9,345)           946        (3,468)
 Interest expense ..........................       11,395          3,318          1,024          1,305         2,388
 Public offering costs .....................           --             --          4,863             --            --
 Other, net ................................          606          1,716            735            112           480
                                               ----------     ----------     ----------     ----------    ----------
 Income before provision for federal,
   state and foreign income
   taxes and minority interest .............       61,810         33,665         42,532         49,771        35,861
 Net provision for federal, state and
    foreign income taxes ...................       27,547         11,548         16,598         14,182        16,322
                                               ----------     ----------     ----------     ----------    ----------
 Income before minority interest ...........       34,263         22,117         25,934         35,589        19,539
 Minority interest .........................        5,097          3,280          3,123          2,129         1,409
                                               ----------     ----------     ----------     ----------    ----------
 Net income ................................   $   29,166     $   18,837     $   22,811     $   33,460    $   18,130
                                               ==========     ==========     ==========     ==========    ==========
 Diluted earnings per share* ...............   $     1.14     $     0.74     $     0.90     $     1.32    $     0.72
                                               ==========     ==========     ==========     ==========    ==========
 Cash dividends per share* .................   $     0.40     $     0.40     $     0.40     $    0.315    $    0.225
                                               ==========     ==========     ==========     ==========    ==========
 Diluted shares outstanding* ...............   25,630,000     25,460,000     25,311,000     25,354,000    24,976,000
 Long-term notes payable ...................   $  168,424     $  149,500     $   11,048     $    9,101    $   13,306
 Total assets ..............................   $  603,793     $  490,712     $  319,069     $  202,085    $  172,295
 Stockholders' equity ......................   $  183,687     $  162,473     $  150,343     $  134,422    $  107,174
 Stockholders' equity per share* ...........   $     7.28     $     6.50     $     6.05     $     5.45    $     4.36
 Return on average stockholders' equity ....           17%            12%            16%            28%           18%
 Return on revenues ........................            9%             8%            11%            19%           14%
</TABLE>

* Adjusted for December 1, 1994, and September 1, 1993, 2-for-1 stock splits
  effected in the form of 100% stock dividends.



                                                                             13
<PAGE>   16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS


-----------------------------[BAR CHART]----------------------------------------

<TABLE>
<CAPTION>
                         Earnings Per Share
                         Dollars

<S>                                    <C>
                         1993          0.72
                         1994          1.32
                         1995          0.90
                         1996          0.74
                         1997          1.14
</TABLE>

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


Overview

The consolidated financial statements of The Pioneer Group, Inc. (the "Company")
include the Company's worldwide financial services businesses and natural
resource development businesses. Management's Discussion and Analysis of
Financial Condition and Results of Operations is presented in three sections:
Results of Operations, Liquidity and Capital Resources-General, and Future
Operating Results.

Results of Operations

Consolidated Operations

The Company achieved record revenues and its second highest earnings in 1997.
The year's performance reflected significant gains from the Company's worldwide
financial services operations, which more than offset losses suffered in its
natural resources operations.

Revenues rose to $342.8 million in 1997, up 43% over 1996 and 73% over 1995.
This growth resulted from increases in both the domestic investment management
business and the Russian financial services operations together with timber
revenues, which were included in the Company's results for the first time in
1997 as the timber project went into commercial production.

Net income in 1997 was $29.2 million. Earnings per share of $1.14 in 1997
increased by 40 cents over 1996 and by 24 cents over 1995. The earnings in both
1997 and 1996 reflected significantly higher earnings from worldwide financial
services operations. In both years, the higher worldwide financial services
earnings were partially offset by declining earnings and/or losses in the
Company's natural resources operations: (i) gold mining operations earned 56
cents per share in 1995, 10 cents in 1996 and lost 11 cents in 1997; and (ii)
Russian timber operations incurred significant losses in 1997.

Table 1 details earnings per share by business segment for 1997 versus 1996 and
for 1996 versus 1995.

Worldwide Financial Services Businesses
1997 Compared to 1996

The Company's worldwide financial services businesses have three principal
sources of revenues: fees from managing the 34 U. S. registered investment
companies (mutual funds) in the Pioneer Family of Mutual Funds and institutional
accounts, fees from underwriting and distributing mutual fund shares, and fees
from acting as mutual fund shareholder servicing agent. The Company earns
similar revenues from its international investment operations in Poland, Russia,
Ireland, and the Czech Republic, and from its joint venture in India. The
Company also earns revenues from its Russian and Polish brokerage operations and
from Pioneer Bank in Russia, in which the Company had a 57.7% interest at
December 31, 1997.

Table 1 - Total Year Earnings Per Share

<TABLE>
<CAPTION>
Business Segment                        1997    1996    1995      1997 vs 1996    1996 vs 1995
                                        ----    ----    ----      ------------    ------------
                                                                   Inc./(Dec.)     Inc./(Dec.)
                                                                   -----------     -----------
<S>                                     <C>     <C>     <C>       <C>             <C>
Domestic investment management .......  $1.25   $0.68   $0.35        $0.57           $0.33
Venture capital:
  U.S. ...............................   0.25    0.18    0.09         0.07            0.09
  Central and Eastern Europe .........  (0.05)  (0.05)  (0.03)         --            (0.02)
Financial services:
  Russia .............................   0.21    0.05    0.06         0.16           (0.01)
  Poland .............................   0.04   (0.03)   0.01         0.07           (0.04)
  Czech Republic .....................  (0.05)  (0.11)    --          0.06           (0.11)
Real estate services .................  (0.07)  (0.01)    --         (0.06)          (0.01)
                                        -----   -----   -----        -----          ------
  Worldwide financial services .......   1.58    0.71    0.48         0.87            0.23
                                        -----   -----   -----        -----          ------
Gold mining ..........................  (0.11)   0.10    0.56        (0.21)          (0.46)
Russian timber .......................  (0.26)  (0.02)    --         (0.24)          (0.02)
Miscellaneous-other ..................  (0.07)  (0.05)  (0.14)       (0.02)           0.09
                                        -----   -----   -----        -----          ------
  Total ..............................  $1.14   $0.74   $0.90        $0.40          $(0.16)
                                        =====   =====   =====        =====          ======
</TABLE>


14
<PAGE>   17
In 1997, the Company's worldwide financial services businesses had revenues of
$241.5 million, $80.7 million, or 50%, higher than revenues of $160.8 million in
1996. Net income of $40.5 million in 1997, or $1.58 per share, was more than
double 1996 net income and earnings per share of $18.0 million and 71 cents,
respectively.

Worldwide assets under management were $21.0 billion at December 31, 1997,
compared to $17.0 billion at December 31, 1996. The increase in assets under
management was principally attributable to a higher U.S. stock market. Assets
under management have further increased to approximately $23.2 billion at March
15, 1998.

Table 2 details revenues and net income in 1997 and 1996 for the various
segments of the Company's worldwide financial services businesses.


Table 2 - Revenues and Net Income
(Dollars in Millions)

<TABLE>
<CAPTION>
Business Segment                              Revenues            Net income
                                              --------            ----------
                                          1997       1996        1997     1996
                                         ------     ------      -----    -----
<S>                                      <C>        <C>         <C>      <C>
 Domestic investment management .......  $168.5     $126.4      $32.1    $17.4
 Venture capital:
   U.S ................................     1.8        2.0        6.3      4.5
   Central and Eastern Europe .........     0.5        0.6       (1.4)    (1.4)
 Financial services:
   Russia .............................    54.5       21.1        5.3      1.3
   Poland .............................    14.5       10.4        1.3     (0.7)
   Czech Republic .....................     1.0        0.2       (1.2)    (2.9)
 Real estate services .................     0.5        0.1       (1.9)    (0.2)
 Other ................................     0.2        --         --       --
                                         ------     ------      -----    -----
Total worldwide financial services ....  $241.5     $160.8      $40.5    $18.0
                                         ======     ======      =====    =====
</TABLE>


Domestic Investment Management

Revenues from the Company's domestic investment management business of $168.5
million in 1997 increased by $42.1 million. Net income nearly doubled in 1997
versus 1996, increasing by $14.7 million, or 57 cents per share, to $32.1
million, or $1.25 per share.

Management fee revenues of $110.9 million increased by $31.4 million,
principally reflecting higher assets under management resulting from strong U.S.
stock market performance. For 1997, distribution fees and underwriting
commissions of $20.8 million were $6.0 million, or 40%, higher than comparable
fees and commissions earned in 1996. A significant majority of the increase
related to distribution fees which increased by $5.3 million as a result of the
increase in average assets under management of mutual funds which offer back-end
load shares. In 1997, the Company had U.S. registered mutual fund sales
(including reinvested dividends) of $2.9 billion (up 10%), and net sales of $0.8
billion compared to net sales of $1.2 billion in 1996.

Shareholder services fee revenues of $27.3 million in 1997 increased by $2.0
million, as a result of an increase in the number of shareholder accounts.
Trustee fee revenues increased by $0.5 million to $4.3 million in 1997, as a
result of an increase in the number of qualified plan shareholder accounts.

Costs and expenses increased by $20.0 million in 1997 to $116.3 million. Nearly
half of the increase in expenses, or $9.9 million, resulted from higher payroll
costs, part of which related to the Company's efforts to strengthen its
investment management staff. An additional 15% of the increase in expenses, or
$3.1 million, resulted from higher expenses associated with the amortization of
dealer advances resulting from sales of back-end load mutual fund shares. These
amortization expenses were more than offset by the increase in distribution fees
of $5.3 million. Another 5% of the increase in expenses, or $1.1 million,
resulted from higher office space costs.

The domestic investment management business segment includes net gains from the
Company's investments in its own mutual funds, principally during start-up,
which were $0.5 million in 1997 versus $0.2 million in 1996.

Venture Capital

Net income from the Company's U.S. venture capital operations increased by $1.8
million, or 7 cents per share, to $6.3 million, or 25 cents per share, in 1997
versus 1996, resulting from significant gains


                                                                             15
<PAGE>   18
MANAGEMENT'S DISCUSSION (CONTINUED)

recorded from two of the Company's portfolio companies, one of which conducted a
public offering in late 1996 and one in late 1997. The Company had net venture
capital investment portfolio gains (excluding operating expenses) of $16.3
million in 1997 compared to net gains of $11.4 million in 1996. The Company's
Central and Eastern Europe venture capital operations lost $1.4 million, or 5
cents per share, in each of 1997 and 1996, principally associated with
development costs of the Company's venture capital funds.

Russian Financial Services

Revenues from the Company's Russian financial services operations of $54.5
million in 1997 increased by $33.4 million. These operations reported net income
of $5.3 million, or 21 cents per share, in 1997, principally from brokerage
operations. In 1996, the Company earned $1.3 million, or 5 cents per share, in
the same segment, primarily from banking activities.

In 1997, the Company's Russian brokerage activities had revenues of $34.2
million, principally derived from trading activities, compared to $1.6 million
in 1996. Over the course of the year, the Company benefited from the record
volume experienced in the Russian stock market. Costs and expenses associated
with the Russian brokerage business were $19.1 million in 1997, compared to $1.3
million in 1996. Approximately two-thirds of the increased expenses, or $11.2
million, represented commissions paid to traders.

The Company reported revenues from Pioneer Bank of approximately $12.3 million
in 1997, compared to nearly $15.0 million in 1996. These revenues are derived
from (i) interest earned on Russian government and corporate debt securities,
(ii) realized and unrealized gains and losses on debt and equity securities and
(iii) interest income from loans. Decreases in revenues principally reflect the
impact of less favorable interest rates which affect the realized and unrealized
gains earned on the Russian government securities. In the second quarter of
1997, Pioneer Bank did not renew its license with the Russian Central Bank to
deal in these government securities. Interest expenses of $7.7 million in 1997
increased by $1.6 million.

The Company reported net realized gains of $9.5 million in 1997 and $0.9 million
in 1996, respectively, from investments sold by the First Voucher Fund (the
"Voucher Fund"), the Russian voucher investment fund in which the Company has a
51% interest.

Polish Financial Services

Revenues from the Company's Polish financial services operations of $14.5
million in 1997 increased by $4.1 million. These operations had net income of
$1.3 million, or 4 cents per share, in 1997, compared to losses of $0.7 million,
or 3 cents, in 1996.

Management fee revenues increased by $2.5 million to $10.0 million, as a result
of higher average assets under management. Losses from the brokerage business
increased as a result of a $1.3 million increase in expenses offset partially by
a $1.0 million increase in revenues.

At December 31, 1997, assets under management in the Company's four Polish
mutual funds were $446 million, virtually unchanged from the December 31, 1996
level. Although Polish mutual fund sales increased from $169 million in 1996 to
$203 million in 1997, net sales were $74 million in 1997 compared to $90 million
in 1996.

Czech Republic Financial Services

The Company's Czech Republic financial services operations reported losses of
$1.2 million, or 5 cents per share, in 1997, compared to losses of $2.9 million,
or 11 cents per share, in 1996. Revenues from management fees and underwriting
commissions increased by $0.8 million in 1997 and costs and


16
<PAGE>   19
expenses decreased by $1.0 million. The Company incurred significant start-up
costs in 1996 associated with this operation. The Czech Republic mutual fund had
$43 million of assets under management at December 31, 1997, an increase of $36
million over the 1996 year-end level. The Company believes that this operation
will reach break-even status in the second half of 1998.

Real Estate Services

The Company's real estate services operations reported losses of $1.9 million,
or 7 cents per share, in 1997, compared to losses of $0.2 million or 1 cent in
1996. Most of the losses were attributable to costs associated with the
development of the Company's Polish and Russian real estate investment, and
property and facilities management operations.

Taxes

The Company's effective tax rate for 1997 for the worldwide financial services
businesses was 40% compared to 34% in 1996. The 1996 results included
significant tax exempt income associated with Pioneer Bank in Russia.

1996 Compared to 1995

In 1996, the Company's worldwide financial services businesses had revenues of
$160.8 million, $52.3 million, or 48%, higher than revenues of $108.5 million in
1995. Net income was $18 million in 1996, or 71 cents per share, compared to
$12.2 million, or 48 cents in 1995.

Worldwide assets under management of just under $17.0 billion at December 31,
1996, increased by $3.2 billion over the 1995 year-end level. The increase in
assets under management was principally attributable to a higher stock market
and strong U.S. mutual fund net sales.

Table 3 details revenues and net income in 1996 and 1995 for the various
segments of the Company's worldwide financial services businesses.

Table 3 - Revenues and Net Income
(Dollars in Millions)

<TABLE>
<CAPTION>
Business Segment                               Revenues          Net income
                                               --------          ----------
                                           1996      1995       1996     1995
                                          ------    ------     -----    -----
<S>                                       <C>        <C>       <C>       <C>
Domestic investment management            $126.4     $92.2     $17.4     $8.9
Venture capital:
  U.S                                        2.0       1.0       4.5      2.3
  Central and Eastern Europe                 0.6       0.8      (1.4)    (0.6)
Financial services:
  Russia                                    21.1       5.8       1.3      1.4
  Poland                                    10.4       8.7      (0.7)     0.2
  Czech Republic                             0.2       --       (2.9)     --
Real estate services                         0.1       --       (0.2)     --
                                          ------    ------     -----    -----
Total worldwide financial services        $160.8    $108.5     $18.0    $12.2
                                          ======    ======     =====    =====
</TABLE>

Domestic Investment Management

Revenues from the Company's domestic investment management business of $126.4
million in 1996 increased by $34.2 million. Net income nearly doubled in 1996
versus 1995, increasing by $8.5 million, or 33 cents per share, to $17.4
million, or 68 cents.

Management fee revenues increased by $23.1 million to $79.5 million. The
increase in management fees earned from the U.S. registered mutual funds
resulted from an increase in assets under management and a management fee rate
increase for the Company's two largest mutual funds. The shareholders of the
Company's two largest U.S. registered mutual funds approved management fee rate
increases effective May 1, 1996. As a result, the Company earned an additional
$5.9 million of management fees.

For 1996, distribution fees and underwriting commissions of $14.8 million were
$6.4 million, or 76%, higher than comparable fees and commissions earned in
1995. Distribution fees increased by $5.2 million as a result of the increase in
average assets under management of the Company's mutual funds which offer
back-end load shares. In 1996, the Company had U.S. registered mutual fund sales
(including reinvested dividends) of $2.6 billion (up 50%), and net sales of $1.2
billion compared to net sales of $0.7 billion in 1995.


                                                                            17
<PAGE>   20
MANAGEMENT'S DISCUSSION (CONTINUED)

Shareholder services fee revenues of $25.3 million in 1996 increased by $2.9
million, as a result of an increase in the number of shareholder accounts and a
cost-of-living service fee increase for certain U.S. registered mutual funds
effective January 1, 1996. Trustee fee revenues increased by $0.2 million to
$3.9 million in 1996, as a result of an increase in the number of qualified plan
shareholder accounts.

Costs and expenses increased by $19.1 million in 1996 to $96.3 million.
Approximately 30% of the increase in expenses, or $5.9 million, resulted from
higher payroll costs. In addition, approximately 10% of the increase in
expenses, or $2.4 million, resulted from higher costs related to mutual fund
distribution (including printing and mailing of sales literature, paying
commissions earned by the sales force, mutual fund advertising, and public
relations). Approximately 20%, or $4.1 million, of the increase resulted from
higher expenses associated with the amortization of dealer advances resulting
from sales of back-end load mutual fund shares. These amortization expenses were
more than offset by the increase in distribution fees of $5.2 million. Another
approximately 5% of the increase in expenses, or $0.9 million, resulted from
higher office space costs.

Net gains from the Company's investments in its own mutual funds, were $0.2
million in 1996 versus $0.7 million in 1995.

Venture Capital

Net income from the Company's U.S. venture capital operations increased by $2.2
million, or 9 cents per share, to $4.5 million, or 18 cents per share, in 1996
versus 1995. The Company reported net venture capital investment portfolio gains
of $11.4 million (excluding operating expenses) in 1996 compared to net gains of
$5.1 million in 1995.

The Company's Central and Eastern Europe venture capital operations lost $1.4
million, or 5 cents per share, in 1996, and $0.6 million, or 2 cents, in 1995,
principally associated with infrastructure development costs of the Company's
venture capital funds.

Russian Financial Services

Revenues from the Company's Russian financial services operations of $21.1
million in 1996 increased by $15.3 million. These operations reported net income
of $1.3 million, or 5 cents per share, in 1996, principally from its banking
activities. In 1995, the Company earned $1.4 million, or 6 cents per share.

The Company reported revenues from Pioneer Bank of approximately $15.0 million
in 1996 as a result of the acquisition and subsequent sale of Russian government
securities and interest income from loans. Revenues from Pioneer Bank in 1995
were $2.4 million and were included in other income. The Company also had
interest expense on deposits and short-term debt of $6.1 million in 1996 related
to Pioneer Bank.

The Company reported net realized gains of $0.9 million in 1996 and $3.5 million
in 1995 from investments sold by the Voucher Fund.

Polish Financial Services

Revenues from the Company's Polish financial services operations of $10.4
million in 1996 increased by $1.7 million. These operations had losses of $0.7
million, or 3 cents per share, in 1996, compared to net income of $0.2 million
or 1 cent in 1995.

Sales of the Company's Polish mutual funds were $169 million in 1996 versus $21
million in 1995. As a result of the increase in Polish mutual fund sales,
underwriting commissions increased by $1.6 million.


18
<PAGE>   21
Czech Republic Financial Services

The Company's Czech Republic financial services operations, which commenced
commercial operations in January 1996, reported losses of $2.9 million, or 11
cents per share, in 1996, principally from start-up costs.

Taxes

The Company's effective tax rate for 1996 for the worldwide financial services
businesses was 34% compared to 43% in 1995. The 1996 results included
significant tax exempt income associated with Pioneer Bank in Russia.

-----------------------------[BAR CHART]----------------------------------------

<TABLE>
<CAPTION>
                         Stockholders' Equity
                         Dollars in Thousands

<S>                                     <C>
                         1993           $107,174
                         1994           $134,422
                         1995           $150,343
                         1996           $162,473
                         1997           $183,687
</TABLE>

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

Liquidity and Capital Resources

IRS regulations require that, in order to serve as trustee, the Company must
maintain a net worth of at least 2% of the assets of Individual Retirement
Accounts and other qualified retirement plan accounts at year end. At December
31, 1997, the Company served as trustee for $6.3 billion of qualified plan
assets and the ratio of net worth to qualified assets was 2.9%. The Company's
stockholders' equity of $183.7 million at December 31, 1997, would permit it to
serve as trustee for up to $9.2 billion of qualified plan assets.

The Company has established a multi-class share structure for the Pioneer Family
of Mutual Funds. Under this arrangement, the funds offer both traditional
front-end load shares (Class A shares) and back-end load shares (Class B and C
shares). On back-end load shares, the investor does not pay any sales charge
unless there is a redemption before the expiration of the minimum holding period
(which ranges from three to six years in the case of Class B shares and is one
year in the case of Class C shares), in which case the shareholder would pay a
contingent deferred sales charge ("CDSC"). The Company, however, pays "up-front"
commissions to broker-dealers ("Dealer Advances") related to sales and service
of the back-end load shares ranging from 2% to 4% of the sales transaction
amount on Class B shares and of 1% on Class C shares. The funds pay the Company
distribution fees of 0.75%, and service fees of 0.25%, per annum of their
respective net assets invested in Class B and Class C shares, subject to annual
renewal by the trustees of the funds. Class B shares were introduced in April
1994 and Class C shares were introduced in January 1996. Sales of back-end load
shares were $699 million in 1997 versus $763 million in 1996. Dealer Advances
totaled $17.2 million in 1997 versus $23.9 million in 1996. Dealer Advances
related to Class B shares (which are amortized to operations over the life of
the CDSC period) were $41.9 million at December 31, 1997. The Company intends to
continue to finance this program, in part, through the credit facilities
described in the section entitled "Liquidity and Capital Resources - General."

In April 1995, the Company acquired approximately 51% of the shares of Voucher
Fund, the largest voucher investment fund established in Russia in connection
with that country's privatization program. The shares were issued by the Voucher
Fund to two newly-formed subsidiaries of Pioneer Omega, Inc. ("Pioneer Omega"),
a subsidiary of the Company. In addition to acquiring shares in the Voucher
Fund, Pioneer Omega, acting through a subsidiary, Pioneer First Russia, Inc.
("PFR"), acquired a Russian company that holds the right to manage the Voucher
Fund's investments. Pioneer Omega paid $2 million in cash and issued preferred
shares (the "Omega shares") valued at $6 million as consideration for the
acquisition of the management company and related rights. The holder of the
Omega shares has the right to cause the Company to purchase such shares (the
"put option") and the Company has a corresponding right to purchase such shares
from the holder (the "call option"). The put and call options are each
exercisable with respect to one-third of the Omega shares on the first, second
and


                                                                            19
<PAGE>   22
MANAGEMENT'S DISCUSSION (CONTINUED)

third anniversaries of the closing of the transaction. The put and call option
exercise price is $2 million per tranche, plus a 5% per annum premium on the
option exercise price. The Company will pay a total of $6.6 million for the
Omega shares over a three-year period as the put and/or call options are
exercised. The Company has exercised its options and purchased the first two
tranches of Omega shares for $4.3 million and intends to exercise the final
option in April 1998.

The Company, through Pioneer Omega, has secured Overseas Private Investment
Corporation ("OPIC") "political risk" insurance covering the Voucher Fund and
PFR's subsidiaries subject to annual elections up to a ceiling amount of $75
million which would protect 90% of the Company's equity investment and a
proportionate share of cumulative retained earnings.

Recent Developments

The Company believes that there is significant unrealized value in the assets
included in the Voucher Fund's securities portfolio. In accordance with
Generally Accepted Accounting Principles (FAS 115 -- Accounting for Certain
Investments in Debt and Equity Securities), the securities in the Voucher Fund
reflect the cost rather than "fair value" until such time as the breadth and
scope of the Russian securities markets develop to certain quantifiable levels.
The Company believes that these markets are rapidly approaching this point, at
which time the "fair value" of securities held by the Voucher Fund would be
reflected in the Company's financial statements.

The Voucher Fund's assets consist of cash and cash equivalents, securities (both
liquid and illiquid), real estate holdings and other miscellaneous assets. The
cost of the securities portion of the portfolio on the Company's balance sheet
at December 31, 1997, was approximately $16 million. At January 29, 1998, the
value of these securities (based on market quotations if available) was
approximately $67 million, which represents an increase of approximately $51
million. The Company's pre-tax interest in this increase, at 51%, would be
approximately $26 million. The cost of the cash and cash equivalents, real
estate and miscellaneous assets of the Voucher Fund on the Company's balance
sheet at December 31, 1997, was approximately $2 million, $24 million and $3
million, respectively.

Currently, the Company recognizes realized gains or losses on its income
statement only when Voucher Fund securities are sold. Once the Russian
securities market develops to the requisite level, unrealized gains and losses
(such as the $51 million described above) would be reflected in long-term
investments in the Company's balance sheet with a corresponding after-tax
increase or decrease in stockholders' equity for the Company's 51% interest with
the remainder recorded as minority interest. The Company will continue to
recognize realized gains and losses in income upon the sale of such securities.


The Russian securities markets are significantly smaller and less liquid than
the securities markets in the United States. Liquidity and volumes fluctuate
significantly and are strongly influenced by global market trends. In 1997, the
number of issues actively traded on the Russian Trading System increased
substantially until the end of October when, after the Asian crisis, meaningful
trading was confined to four to five blue chip stocks. The market in 1998 has
been volatile. The relative lack of liquidity may result in the Voucher Fund
selling a portfolio security at a price that does not reflect its underlying
value. Accordingly, fair values are not necessarily indicative of the amount
that could be realized in a short period of time on large volumes of
transactions. In addition, the securities investments in the Voucher Fund may be
negatively affected by adverse economic, political and social developments in
Russia including changes in government and government policies, taxation,
currency instability, interest rates and inflation levels and developments in
law and regulations affecting securities issuers and their shareholders and
securities markets. As a result of the foregoing, there can be no assurance that
the Company will be able to realize the values described above.


20
<PAGE>   23
Natural Resource Development Businesses

-----------------------------[BAR CHART]----------------------------------------

<TABLE>
<CAPTION>
                         Gold production
                         Ounces

<S>                                     <C>
                         1993           164,900
                         1994           176,400
                         1995           235,500
                         1996           203,100
                         1997           263,000
</TABLE>

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


                              Gold Mining Business

The results of the gold mining business are substantially attributable to the
operations of Teberebie Goldfields Limited ("TGL"), the principal operating
subsidiary of the Company's wholly owned subsidiary, Pioneer Goldfields Limited
("PGL"). The Company's reported earnings give effect to the 10% minority
interest in TGL held by the Government of Ghana. Gold mining results are also
affected by PGL's exploration activity in Africa and by the exploration
activities in the Russian Far East of Closed Joint-Stock Company, "Tas-Yurjah
Mining Company" ("Tas-Yurjah"), the Company's majority owned (52.5%) Russian
subsidiary. Exploration costs are charged to operations as incurred.

Financial Results

In 1997, the gold mining segment lost $2.9 million, or 11 cents per share, a
decrease of 21 cents compared with 1996 earnings of 10 cents. In 1995, the gold
mining business earned 56 cents per share. The effective tax rates for the
segment in 1997, 1996 and 1995 were a 15% benefit, a 32% provision and a 35%
provision, respectively.

Table 4 details the earnings per share for the gold mining segment for 1997
versus 1996 and for 1996 versus 1995.

TGL earns all of its revenues in U. S. dollars and the majority of its
transactions and costs are denominated in U. S. dollars or are based in U. S.
dollars. Consequently, Ghanaian inflation has not had a material effect on TGL's
operations. Ghanaian cedi denominated costs such as fuel, wages, power and local
purchases are affected, in dollar terms, when currency devaluation does not
offset changes in the relative inflation rates in the U.S. and Ghana. Since
Ghana has experienced significant inflation over the last three years, the cedi
has devalued continuously against the dollar.

Table 4
<TABLE>
<CAPTION>
                                   Twelve months ended December 31
                                   -------------------------------
                                                   1997 vs 1996   1996 vs 1995
                            1997    1996    1995    Incr./(Decr.)  Incr./(Decr.)
                            ----    ----    ----    -------------  -------------
<S>                         <C>    <C>     <C>     <C>            <C>
African Operations (TGL).   $--    $0.13   $0.57       $(0.13)        $(0.44)
African Exploration .....  (0.04)  (0.03)  (0.01)       (0.01)         (0.02)
                           -----    ----    ----        -----          -----
PGL Total ...............  (0.04)   0.10    0.56        (0.14)         (0.46)
                           -----    ----    ----        -----          -----
Russian Exploration .....  (0.07)    --      --         (0.07)           --
                           -----    ----    ----        -----          -----
    Total ............... $(0.11)  $0.10   $0.56       $(0.21)        $(0.46)
</TABLE>

TGL - 1997 Compared to 1996

Gold Sales. Revenues increased by $11 million to $89.5 million as gold shipments
increased by 59,900, or 29%, to 263,000 ounces. The average realized price of
gold decreased by $45 to $340 per ounce. In 1997, the average realized price of
gold includes proceeds of $4.0 million, or $15 per ounce, from the sale of floor
program options.

During 1997, TGL experienced several negative factors which caused production to
fall short of the forecasted level. The most significant was the delay in
commissioning the Phase III expansion and achieving design throughputs at the
new South and modified West crushing plants. These delays added to the time lag
inherent in bringing new heaps into full production. Other contributing items
include a shortage of diesel fuel early in the year and heavy rains in June.
Issues which adversely affected TGL's 1996 production are described in detail
below in the section entitled "TGL -- 1996 compared to 1995."


                                                                             21
<PAGE>   24
MANAGEMENT'S DISCUSSION (CONTINUED)

Table 5 provides production results and compares TGL's cash cost and total cost
per ounce for 1997 with the prior year.

Table 5
<TABLE>
<CAPTION>
                                   Twelve months ended
                                   -------------------
                                       December 31
                                       -----------
                                     1997          1996     Increase/(Decrease)
                                     ----          ----     -------------------
<S>                                 <C>           <C>       <C>
Production (ounces) ............... 263,000       203,100         59,900
                                    =======       =======         ======
Cash costs:
  Production costs ................    $189          $218           ($29)
  Royalties .......................      10            12             (2)
  General and administrative ......      31            36             (5)
                                    -------       -------         ------
     Cash costs per ounce .........     230           266            (36)
                                    -------       -------         ------
Non-cash costs:
   Depreciation and amortization         87            81              6
   Other ..........................       5             4              1
                                    -------       -------         ------
     Cost of production per ounce       322           351            (29)
                                    -------       -------         ------
Interest and other costs ..........      15            10              5
                                    -------       -------         ------
     Total costs per ounce ........    $337          $361           ($24)
                                    =======       =======         ======
</TABLE>

Production Costs. Production costs represent costs attributable to mining ore
and waste and processing the ore through crushing and processing facilities.
TGL's costs of production are affected by ore grade, gold recovery rates, the
waste to ore ("stripping") ratio, the age and availability of equipment, weather
conditions, availability and cost of labor, haul distances, foreign exchange
fluctuations and the inherent lag in gold production from heap leaching
operations. In 1997, production costs decreased by $29 to $189 per ounce
compared with 1996, principally because of the economies of scale realized upon
completion of the Phase III mine expansion, coupled with the decision to
decrease the stripping ratio to ensure a sufficient ore feed to the crushing
plants. The introduction of bulk zone mining and the elimination of run-of-mine
dump leaching also contributed to a reduction in the stripping ratio and the
elimination of run-of-mine processing costs. In response to lower gold prices,
significant emphasis was placed on mining in the South pit where ore grades are
marginally higher. This emphasis favorably affected costs on a
unit-of-production basis. During 1997, TGL also experienced a decrease in the
cost per tonne hauled because of lower explosives costs.

A comparison of key production statistics for the twelve months ended December
31, 1997 and 1996 is shown on Table 6.

<TABLE>
<CAPTION>
Table 6                                                Twelve months ended
                                                       -------------------
                                                           December 31
                                                           -----------
                                                       1997           1996
                                                       ----           ----
<S>                                                   <C>            <C>
Tonnes mined (in thousands):
Waste .............................................   27,824         21,068
Run-of-mine .......................................      610          6,209
                                                      ------         ------
  Tonnes Waste and Run-of-Mine ....................   28,434         27,277
Ore ...............................................    9,096          7,036
                                                      ------         ------
  Total Tonnes Mined ..............................   37,530         34,313
                                                      ======         ======
Stripping Ratio
((waste+run-of-mine)/ore) .........................   3.13:1         3.88:1
Ore Processed .....................................    9,072          6,540
Process Grade (grams/tonne) .......................     1.29           1.26
                                                      ======         ======
</TABLE>

Royalties. Under the Ghanaian Minerals and Mining Law, royalties are levied at
rates ranging from 3% to 12% of operating revenues as determined by reference to
an operating ratio. Such operating ratio represents the percentage that the
operating profits, after giving effect to capital allowances and interest
expense (as permitted by TGL's Deed of Warranty), bears to gold sales. In 1997
and 1996, the royalty rate payable by TGL remained at 3% of operating revenues,
the minimum permitted by law, principally because of a sustained level of
capital expenditures, and associated capital allowances, since the inception of
the project.

General and Administrative Costs. General and administrative costs consist
principally of administrative salaries and related benefits, travel expenses,
insurance, utilities, legal costs, employee meals, rents and vehicle
expenditures. Since these costs are primarily fixed and unrelated to production
levels, the decrease in the cost per ounce was attributable principally to a 29%
increase in gold production. Actual 1997 costs, however, increased by
approximately $3 per ounce because of higher benefits costs associated with
TGL's collective bargaining agreement with the Ghana Mineworkers' Union ("GMU"),
consulting costs, and personnel-driven infrastructure costs associated with the
Phase III mine expansion, such as employee meals, personal safety supplies, and
local transportation costs.

Depreciation and Amortization.

Depreciation and amortization is calculated using units-of-production and
straight-line methods designed to fully depreciate property, plant, and
equipment over the lesser of their estimated useful lives or ten years. In 1997,
these costs increased by $6 per ounce prin-


22
<PAGE>   25
cipally because of mining and crushing equipment additions associated with the
Phase III mine expansion. Increases were also experienced in run-of-mine leach
pad depreciation and capitalized rebuilds, however, such increases were largely
offset by lower development cost amortization.

Other. Other costs represent a provision for future reclamation costs and
supplies inventory obsolescence and costs related to exploration activities
conducted by TGL at the Teberebie concession and elsewhere in Ghana. The
increase of $1 per ounce in 1997 compared with 1996 was attributable to an
increase in exploration costs.

Interest and Other Costs. Interest and other costs include interest expense,
foreign exchange gains and losses, political risk insurance premiums, floor
program option sales which are unrelated to shipments, and goodwill
amortization. The $5 per ounce increase in interest and other costs in 1997
compared with 1996 was attributable to interest expense associated with the
Phase III expansion ($10 per ounce). These increases were offset partially by a
decrease associated with relatively fixed costs such as political risk insurance
premiums and goodwill amortization ($3 per ounce), and proceeds from floor
program sales and foreign exchange gains ($2 per ounce).

Income Taxes. The statutory tax rate for mining companies in Ghana in 1997 and
1996 was 35%.

TGL - 1996 Compared to 1995

Gold Sales. TGL's gold shipments decreased by 32,400 to 203,100 ounces resulting
in a decrease in revenues of approximately $12 million to $78.3 million. The
average realized price of gold increased by $2 to $385 per ounce.

During 1996, TGL experienced several negative factors which caused actual
production to be substantially below forecasted production, including: (i)
abnormally heavy rainfall resulting in excessive dilution in the gold production
process, (ii) equipment availability problems resulting primarily from
breakdowns and maintenance problems with the older equipment, and (iii)
difficulty in hiring and training experienced supervisors for mining operations.
The excessive dilution contributed to a decrease in the gold recovery rate from
78% to 69%. In addition, the amount of ore TGL processed decreased by 0.5
million tonnes and TGL experienced a decrease in the ore grade from 1.28 to 1.26
grams per tonne. An 11,400 ounce increase in run-of-mine production partially
offset these production declines.

Table 7 provides production results and compares TGL's cash cost and total cost
per ounce for 1996 with the prior year.

<TABLE>
<CAPTION>
Table 7
                                      Twelve months ended
                                      -------------------
                                          December 31
                                          -----------
                                       1996        1995      Increase/(Decrease)
                                       ----        ----      -------------------
<S>                                   <C>         <C>              <C>
Production (ounces) ...............   203,100     235,500          (32,400)
                                      =======     =======          ========
Cash costs:
     Production costs .............      $218        $160              $58
     Royalties ....................        12          11                1
     General and administrative ...        36          27                9
                                      -------     -------          --------
       Cash costs per ounce .......       266         198               68
                                      -------     -------          --------
Non-cash costs:
     Depreciation and amortization         81          67               14
     Other ........................         4           3                1
                                      -------     -------          --------
       Cost of production per ounce       351         268               83
                                      -------     -------          --------
Interest and other costs ..........        10           9                1
                                      -------     -------          --------
       Total costs per ounce ......      $361        $277              $84
                                      =======     =======          ========
</TABLE>

Production Costs. In 1996, production costs increased by $58 per ounce to $218
per ounce compared with 1995, principally because of a 14% decrease in gold
production and the anticipated increase in the stripping ratio from 2.75:1 to
3.88:1. The relatively high level of fixed costs tends to result in an increase
in the cost per ounce when gold production declines. TGL also experienced
unexpected increases in equipment maintenance costs and labor costs associated
with TGL's collective bargaining agreement with the GMU.


                                                                            23
<PAGE>   26
MANAGEMENT'S DISCUSSION (CONTINUED)

A comparison of key production statistics for the twelve months ended December
31, 1996 and 1995 is shown in Table 8.

<TABLE>
<CAPTION>
Table 8                                             Twelve months ended
                                                    -------------------
                                                       December 31
                                                       -----------
                                                     1996         1995
                                                     ----         ----
<S>                                                 <C>          <C>
Tonnes mined (in thousands):
Waste ...........................................   21,068       14,174
Run-of-mine .....................................    6,209        5,223
                                                    ------       ------
   Tonnes Waste and Run-of-Mine .................   27,277       19,397
Ore .............................................    7,036        7,061
                                                    ------       ------
   Total Tonnes Mined ...........................   34,313       26,458
                                                    ======       ======
Stripping Ratio
((waste+run-of-mine)/ore) .......................   3.88:1       2.75:1

Ore Processed ...................................    6,540        7,068
Processed Grade (grams/tonne) ...................     1.26         1.28
</TABLE>

Royalties. In 1996 and 1995, the royalty rate payable by TGL remained at 3% of
revenues, the minimum permitted by law, principally because of a sustained level
of capital expenditures, and associated capital allowances, since the inception
of the project.

General and Administrative Costs. Since these costs are primarily fixed and
unrelated to production levels, the increase in the cost per ounce was
attributable, in part, to a 14% decrease in gold production. In addition, costs
increased by approximately $4 per ounce because of higher labor and benefits
costs associated with TGL's collective bargaining agreement with the GMU and
increases in commercial insurance premiums, employee meals, and employee
transportation costs.

Depreciation and Amortization. Depreciation and amortization increased by $14
per ounce principally because of mining equipment additions and higher
capitalized rebuild expenditures which increased depreciation expense by
approximately $6 per ounce and $2 per ounce, respectively. In addition,
increases in run-of-mine leach pad depreciation associated with the start-up of
the West Plant run-of-mine pad in 1996 and leach pad and pond depreciation
aggregated approximately $4 per ounce.

Other. Other costs increased by $1 per ounce in 1996 compared with 1995
principally because of the establishment of an inventory obsolescence provision.

Interest and Other Costs. The $1 per ounce increase in interest and other costs
in 1996 compared with 1995 was attributable to lower production levels and an
increase in political risk insurance premiums.

Income Taxes. The statutory tax rate for mining companies in Ghana in 1996 and
1995 was 35%.

Exploration Activities

Since the end of 1993, in addition to continuing to develop the Teberebie mine,
PGL has increased its exploration activities in the Republic of Ghana and other
African countries. These activities are currently conducted by TGL in Ghana and
by PGL or its local subsidiary in countries outside of Ghana. In 1997, PGL
incurred exploration costs of approximately $1.9 million, approximately $1.8
million of which related to exploration activities outside of Ghana.

In 1994, the Company entered into a joint venture, Tas-Yurjah, to explore
potential gold mining properties in the Khabarovsk Territory of Russia. In 1995,
Tas-Yurjah secured a license to conduct exploration activities over a 240 square
kilometer area (the "licensed area"). During 1997, Tas-Yurjah conducted
exploration drilling and geochemical and geological surveys to further examine
anomalies located in the licensed area. In 1997, the Company expended
approximately $1.7 million for exploration work related to Tas-Yurjah.

Liquidity and Capital Resources

Cash Flow. The cash balances of the gold mining segment increased by $6.6
million to $7.6 million during 1997. Thirty-two percent, or $2.4 million, of
TGL's cash balances remain in escrow and are unavailable to pay short-term
obligations. Cash generated from operating activities aggregated $20.6


24
<PAGE>   27
million while capital expenditures and loan principal payments were $20.8
million and $6.7 million, respectively. Major capital expenditures during the
year included $8.3 million for processing equipment and pad and pond
development, including $3.6 million for crushing, electrical, and other
processing equipment expenditures associated with the Phase III mine expansion;
$7.4 million for mining equipment; capitalized rebuilds of $1.7 million and
capitalized interest and financing costs associated with the Phase III mine
expansion of $1.6 million. During 1997, TGL secured approximately $5.8 million
in third-party financing for the purchase of replacement mining equipment. In
addition, the Company provided financing of approximately $7.7 million,
comprised of $4.2 million to satisfy TGL's short-term liquidity needs and $3.5
million to fund the exploration activities of PGL and Tas-Yurjah.

Third-Party Debt. At the end of 1997, third-party debt aggregated $53.5 million,
including $19 million from OPIC for which the Company is subject to limited
recourse (described in the "Financing Facilities" section of this report) and
$0.9 million from other sources which is guaranteed by the Company. Scheduled
third-party debt service for 1998 is expected to aggregate $15.4 million.

Phase III Mine Expansion. In July 1995, the Board of Directors of TGL approved
the Phase III expansion of the Teberebie mine. Phase III included a further heap
leach operation and a near-pit gyratory crushing facility which acts as the
primary crushing facility for both the existing West Plant and the new South
Plant. The Phase III expansion is expected to increase annual crushing capacity
to 12 million tonnes of ore. Construction work on the project has been completed
and the first gold bar at the South Plant was poured in April 1997. The cost of
the expansion aggregated approximately $56 million, including 1997, 1996, and
1995 capital expenditures of $5.4 million, $48.1 million, and $2.6 million,
respectively.

Financing Facilities. At inception, financing requirements for the Phase III
mine expansion were estimated at $54 million. By December 31, 1996, third-party
financing of approximately $54.2 million had been secured, of which $53.6
million was drawn down, and $46.9 million remained outstanding at December 31,
1997. In December 1997, TGL secured $5.8 million of additional financing for
replacement mining equipment.

Skandinaviska Enskilda Banken/Swedish Export Credits Board. In March 1996, TGL
executed a loan agreement with Enskilda, a division of Skandinaviska Enskilda
Banken, pursuant to which Enskilda agreed to provide a direct loan of SEK 94.5
million (approximately $14.2 million) bearing interest at a fixed rate of 6.42%
to finance the gyratory crusher and related equipment procured from Svedala
Crushing and Screening AB. The loan is guaranteed by the Swedish Export Credits
Board. As of December 31, 1997, $12.7 million of this facility remained
outstanding.

In connection with the purchase of TGL's Phase I crusher plant, a loan of $0.9
million, secured in 1989, remained outstanding at December 31, 1997, bearing an
interest rate of 0%, which is guaranteed by the Company.

Caterpillar Financial Services Corporation. In April 1996, TGL obtained credit
approval from Caterpillar Financial Services Corporation ("Caterpillar"),
pursuant to which Caterpillar agreed to provide a revolving credit facility of
up to $21 million, subsequently increased to $23 million in September 1997, to
finance the purchase of replacement mining equipment. The revolving credit
facility is subject to renewal in May 1998. In the event that the credit
facility is not renewed, 85% of the outstanding loan balances (approximately $20
million) will continue to be repaid over a five year term, while the remainder
will be repaid over a three year term. At December 31, 1997, Caterpillar had
issued disbursements, at TGL's request, for $26.3 million of such facility,
bearing interest at fixed rates ranging from 7.85% to 8.30%, of which $5.4
million had been repaid.


                                                                            25
<PAGE>   28
MANAGEMENT'S DISCUSSION (CONTINUED)

Overseas Private Investment Corporation. In October 1996, TGL and the Company
executed definitive loan agreements with OPIC pursuant to which OPIC agreed to
provide financing of up to $19 million with respect to the Phase III expansion.
Disbursements under this facility occurred in November 1996. The underlying note
is payable in twelve equal semiannual installments from March 15, 1998 through
September 15, 2003, and bears a fixed interest rate of 6.37% In addition, a
spread of 2.65% on outstanding borrowings is payable to OPIC. As a condition to
the financing, the Company was required to execute a Project Completion
Agreement pursuant to which the Company would advance funds, as necessary (to
the extent of dividends received during the construction stage of the Phase III
expansion), to permit TGL to fulfill all of its financial obligations, including
cost overruns related to project development. Under the Project Completion
Agreement, the Company is also obligated to advance the lesser of $9 million and
any deficit with respect to a defined cash flow ratio in the event of a payment
default. The foregoing obligations of the Company continue to exist until such
time as TGL satisfies a production test and certain financial and project
development benchmarks. In addition, the Company has agreed that if the
percentage of gold proceeds that TGL must convert to Ghanaian Cedis increases
above a certain threshold and, as a result of regulatory and other restrictions,
TGL is unable to convert such proceeds to satisfy its debt service obligations
to OPIC, it shall cover up to $10 million of such obligations. The Company has
secured insurance for 90% of this obligation.

Subordinated Debt. In addition to third-party financing facilities, the Company
provided $4.2 million in bridge financing to TGL during 1997 to satisfy its
short-term liquidity needs.

Risk Management. In the fourth quarter of 1996, TGL purchased a series of put
options which secured a minimum selling price of $340 per ounce to cover 1997
estimated production. When the market price of gold declined below $340 per
ounce between February and December 1997, the Company continued to ship gold to
refineries and sold the put options, receiving payment for the difference
between the market price of gold and approximately $340 per ounce. In May 1997,
TGL purchased additional options at an exercise price of $320 per ounce to cover
estimated production for the first four months of 1998.

The Company maintains $65.5 million of "political risk" insurance principally
from OPIC covering 90% of its equity and loan guarantees. The insurance also
covers 90% of the Company's proportionate share of TGL's cumulative retained
earnings. The OPIC equity and retained earnings coverage is presently limited to
a ceiling of $63.1 million; however, the Company will apply to increase the
ceiling in 1998. There can be no assurance that such OPIC insurance will become
available in 1998. The Company has also secured $9 million of foreign exchange
exposure insurance from another source to hedge 90% of its exposure to a limited
recourse provision contained in the OPIC Phase III expansion financing
(discussed in more detail above). In addition to other commercial insurance
policies, TGL has secured business interruption coverage of up to $19 million
for losses associated with machinery breakdown and property damage and to defray
continuing infrastructure and interest costs.

Recent Developments

Reserves

Table 9 sets forth the proven and probable gold reserves of TGL as of December
31, 1997 which have been audited by an independent mining consultant. The design
cut-off grade used to delineate the reserves is 0.58 grams per tonne of ore at a
gold price of $340 per ounce.

<TABLE>
<CAPTION>
Table 9
                                   Proven and Probable Reserves($340/oz)
                                   -------------------------------------

                             Tonnes, ore    Grade, g/t    Contained Gold, Ounces
                             -----------    ----------    ----------------------
<S>                          <C>               <C>             <C>
Total Reserves               159,180,000       1.19            6,090,000
</TABLE>

TGL's last reported proven and probable reserve estimate was 9.1 million ounces
as of December 31, 1995. Approximately 1.7 million ounces of the decrease is
attributable primarily to the use in the mine model of a lower gold price ($340
per ounce versus $385 per ounce) and the normal reduction for



26
<PAGE>   29
gold production during 1996 and 1997. The balance of the difference is
attributable to allowances for previously reported slope instability issues,
haul road refinements and physical mine design parameters, and miscellaneous
refinements associated with the transition to more comprehensive mine modeling
software. Based on current mining methods (bulk mining and heap leaching), it is
estimated that recoverable gold from these open pit reserves will aggregate
approximately 4.9 million ounces.

In early 1998, the Republic of Ghana experienced power shortages which adversely
affected TGL's ability to crush and process ore. Presently, certain processes at
the mine are supported by back-up power generation equipment. TGL is in the
process of leasing additional equipment to support all of its power generation
requirements. The use of such equipment will increase the power costs per tonne
processed.

TGL estimates 1998 gold production at approximately 340,000 ounces. The estimate
has been decreased by 20,000 ounces from TGL's previously reported target of
360,000 ounces reflecting lower than expected crushing equipment availability in
the first quarter of 1998. TGL's gold production is dependent upon a number of
factors that could cause actual gold production to differ materially from
projections, including obtaining and maintaining necessary equipment, accessing
key supplies, including electrical power and fuel, and hiring and training
supervisory personnel and skilled workers. Gold production is also affected by
the time lag inherent in heap leaching technology, subject to changing weather
conditions, dependent on the continued political stability in the Republic of
Ghana and subject to the additional risk factors detailed below in the section
entitled "Future Operating Results."

                                Timber Business

The Company's Russian venture, Closed Joint-Stock Company "Forest-Starma", in
which Pioneer Forest, Inc. (a wholly owned subsidiary of the Company) has a 95%
direct interest is pursuing the development of timber production under a
long-term lease comprising 240,000 hectares (approximately 593,000 acres) in the
aggregate with annual cutting rights of 361,000 cubic meters awarded to the
venture in the Khabarovsk Territory of Russia. Forest-Starma is in the process
of finalizing lease agreements for additional leasehold rights that will give
Forest-Starma total cutting rights of approximately 555,000 cubic meters over a
territory of 390,100 hectares (approximately 964,000 acres). Forest-Starma has
developed a modern logging camp, including a harbor facility, from which it
exports timber for markets in the Pacific Rim, primarily Japan. Forest-Starma is
expected to produce approximately 360,000 cubic meters of timber in 1998.

In the first quarter of 1995, Forest-Starma commenced the harvesting of timber
which was acquired in the development phase. Forest-Starma's first shipments of
timber, totaling approximately 30,000 cubic meters, occurred in the second half
of that year. In 1996, Forest-Starma shipped approximately 133,000 cubic meters
of timber. Since Forest-Starma remained in the development stage through the end
of 1996, timber proceeds aggregating $10.1 million were used to offset
capitalized interest and development costs.

1997 Compared to 1996

Forest-Starma recorded losses of $6.6 million, or 26 cents per share, on
revenues of $11.9 million in 1997. This represents a decline of $6.1 million, or
24 cents per share, compared to 1996 losses of 2 cents per share. The losses
were attributable to lower than expected timber prices in the Japanese market
and lower than expected operating productivity and shipments. In January 1997,
Forest-Starma


                                                                             27
<PAGE>   30
MANAGEMENT'S DISCUSSION (CONTINUED)

commenced commercial operations, producing approximately 257,000 cubic meters of
timber during the year. Timber shipments for the twelve months ended December
31, 1997 aggregated 194,000 cubic meters.

Forest-Starma values its inventory at the lower of cost or market using the full
absorption accounting method. Accordingly, costs of goods sold of $13.2 million
in 1997 included all operating costs such as payroll, fuel, spare parts, site
related general and administrative expenses, amortization, depreciation and
other taxes. During 1997, the average realized selling price was $61 per cubic
meter, roughly equivalent to the average production cost of $60 per cubic meter.
Average realized timber prices dropped steadily throughout most of 1997;
however, as a result of a significant price decline at the end of 1997, finished
goods inventory was restated to market value at $50 per cubic meter. Inventory
market adjustments throughout 1997 aggregated approximately $1 million and were
recorded in cost of goods sold. Approximately 73,000 cubic meters of timber
remained in inventory at the end of 1997.

Marketing, sales and related expenses of approximately $0.6 million in 1997 were
attributable largely to sales commissions. Other expenses of $4.7 million for
the twelve months ended December 31, 1997 included interest, management fees,
foreign exchange losses and bad debt expense. The statutory tax rate in Russia
is 35%.

Liquidity and Capital Resources

Project Financing. Capital required by this venture is now projected at
approximately $59.9 million through the end of 1998. At December 31, 1997,
project financing aggregated $54.3 million including $38.2 million in
subordinated debt and accrued interest provided by the Company, $8.7 million in
unpaid liabilities to the Company for ongoing operating expenses and $7.4
million in outstanding third party financing. The Company expects to convert
approximately $15 million of subordinated debt to equity in 1998. Forest-Starma
completed a $9.3 million project financing with OPIC in July 1996, of which $7.4
million remained outstanding at December 31, 1997. The underlying note is
payable in thirteen remaining semiannual installments through December 15, 2003,
and bears interest at a fixed rate of 7.20%. In addition, a spread of 2.75% on
outstanding borrowings is payable to OPIC prior to project completion,
increasing to 5.125% after project completion when the Company ceases to be an
obligor in the transaction. As a condition to the OPIC financing, the Company
was required to execute a Project Completion Agreement pursuant to which the
Company would advance funds to Forest-Starma, as necessary, to permit
Forest-Starma to fulfill all of its financial obligations, including cost
overruns related to project development, until such time as Forest-Starma
satisfies a production test and certain financial and project development
benchmarks. Scheduled third-party debt service for 1998 is expected to aggregate
$2 million.

Direct Investment and Risk Management. Direct investment in Forest-Starma by the
Company aggregated $38.3 million at December 31, 1997. In connection with its
investment in Forest-Starma, the Company has secured OPIC political risk
insurance in an amount of up to $47 million which would protect 90% of the
Company's equity investment and loans and a proportionate share of cumulative
retained earnings. In addition, the Company has secured OPIC business income
loss insurance of up to $5 million for Forest-Starma.

Other Ventures. In 1995, Closed Joint-Stock Company "Amgun-Forest" and Closed
Joint-Stock Company "Udinskoye," the Company's other Russian timber ventures,
each executed a long-term lease (50 years) relating to timber harvesting. The
Amgun-Forest lease covers 485,400 hectares (approximately 1,200,000 acres) with
annual cutting rights of 350,000 cubic meters while the Udinskoye lease covers
201,000 hectares (approximately 497,000 acres) with annual cutting rights of
300,000 cubic meters. Pioneer Forest, Inc. has an 80.6% direct interest and 7.1%
indirect interest in Amgun-Forest and a 72% direct


28
<PAGE>   31
interest and 4.2% indirect interest in Udinskoye. The feasibility study on
Amgun-Forest is being reviewed, and the Udinskoye feasibility study is in the
early stages of development. The studies will form the basis for estimating
capital requirements for these projects. Depending upon factors such as capital
availability, management resources, market demand and the stabilization of larch
prices, the predominant timber species in both concessions, the Company may
elect to develop these projects in the future. Since inception, the Company
provided funding and services to these projects aggregating $3.8 million,
including $1 million in 1997.

Miscellaneous -- Other Operations

The Company reported losses of 7 cents per share as "other" in 1997, principally
from $2.1 million of unallocated interest expense, or 5 cents, and $0.5 million,
or 2 cents, of losses from its Russian powdered metals business. Other losses
were 5 cents per share in 1996, half of which resulted from losses from the
Russian powdered metals business. Other losses were 14 cents per share in 1995,
and included a loss of 12 cents per share related to expenses the Company
incurred in connection with its unsuccessful effort to sell, in a global
offering, approximately 20% of its shares of PGL.

Liquidity and Capital Resources -- General

The Company's liquid assets consisting of cash and marketable securities
(exclusive of gold mining and timber operations) increased by $38.5 million in
1997 to $95.9 million principally from increased cash and investments held by
the Russian investment operations.

The Company entered into an agreement in June 1996 with a syndicate of
commercial banks for a senior credit facility (the "Credit Facility"). Under the
Credit Facility, the Company may borrow up to $60 million (the "B-share
Revolver") to finance Dealer Advances relating to sales of back-end load shares
of the Company's domestic mutual funds. The B-share Revolver is subject to
annual renewal by the Company and the commercial banks. In the event the B-share
Revolver is not renewed at maturity, it will automatically convert into a
five-year term loan. Advances under the B-share Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus 1.25%. The Credit Facility also
provides that the Company may borrow up to $80 million for general corporate
purposes (the "Corporate Revolver"). The Corporate Revolver is payable in full
on June 11, 2001. Advances under the Corporate Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus the applicable margin, tied to
the Company's financial performance, of either 0.75%, 1.25%, 1.50% or 1.75%. The
Credit Facility provides that the Company must pay additional interest at the
rate of 0.375% per annum of the unused portion of the facility and an annual
arrangement fee of $35,000. At December 31, 1997, the Company had borrowed $41
million under the B-share Revolver and $55 million under the Corporate Revolver.

The Credit Facility contains restrictions that limit, among other things,
encumbrances on the assets of the Company's domestic mutual fund subsidiaries
and certain mergers and sales of assets. Additionally, the Credit Facility
requires that the Company meet certain financial covenants including covenants
that require the Company to maintain certain minimum ratios with respect to debt
to cash flow and interest payments to cash flow and a minimum tangible net
worth, all as defined in the Credit Facility. As of December 31, 1997, the
Company was in compliance with all applicable covenants.

Under the Credit Facility, the Company is required to maintain interest rate
protection agreements covering at least 60% of the outstanding indebtedness
under the B-share Revolver. As of December 31, 1997, the Company had entered
into six five-year interest rate swap agreements with a member of the Company's
banking syndicate which has effectively fixed the interest rate on notional
amounts totaling $100 million. Under these agreements, the Company will pay the
bank a weighted average fixed rate


                                                                             29
<PAGE>   32
MANAGEMENT'S DISCUSSION (CONTINUED)

of 6.76%, plus the applicable margin (ranging from 0.75% to 1.75%), on the
notional principal. The bank will pay the Company interest on the notional
principal at the current variable rate stated under the B-share Revolver. The
fair value of these swap agreements was approximately $2.6 million at December
31, 1997, which amount represents the estimated amount the Company would be
obligated to pay to terminate the agreements.

In August 1997, the Company entered into an agreement (the "Note Agreement")
with a commercial lender pursuant to which the Company issued to the lender
Senior Notes in the aggregate principal amount of $20 million. The Senior Notes,
which bear interest at the rate of 7.95% per annum, have a maturity of seven
years. The restrictions and financial covenants under the Note Agreement are
substantially similar to the restrictions and financial covenants in the Credit
Facility. The Company used the proceeds of this financing to reduce the amount
outstanding under the Corporate Revolver.

Future Operating Results

Certain of the information contained in this Annual Report, including
information with respect to the Company's plans and strategies for its worldwide
financial services and natural resource development businesses, consists of
forward-looking statements. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "projects," "estimates" and similar expressions are intended
to identify forward-looking statements. Important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements include, but are not limited to, the following:

The Company is presently in the process of evaluating its information technology
infrastructure for Year 2000 compliance at all of its worldwide operations. The
Company does not anticipate that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not expect any material
disruption in its operations as a result of any failure by the Company to be
Year 2000 compliant. The Company is currently evaluating the Year 2000
compliance of its vendors and financial institutions with which it conducts
business to ensure that the Company's continued operations will not be adversely
affected. There can be no assurance that the Company's Year 2000 compliance
efforts will be successful or that cost estimates will not change as the
evaluation process continues.

The Company derives a significant portion of its revenues from investment
management fees, underwriting and distribution fees and shareholder services
fees. Success in the investment management and mutual fund share distribution
businesses is substantially dependent on investment performance. Good
performance stimulates sales of shares and tends to keep redemptions low. Sales
of shares result in increased assets under management, which, in turn, generate
higher management fees and distribution fees. Good performance also attracts
institutional accounts. Conversely, relatively poor performance results in
decreased sales and increased redemptions and the loss of institutional
accounts, with corresponding decreases in revenues to the Company. Investment
performance may also be affected by economic or market conditions which are
beyond the control of the Company. In addition, three of the Company's mutual
funds (including the two largest funds) have management fees which are adjusted
based upon the funds' performance relative to the performance of an established
index. As a result, management fee revenues may be subject to unexpected
volatility.

The mutual fund industry is intensely competitive. Many organizations in this
industry are attempting to sell and service the same clients and customers, not
only with mutual fund investments but with other financial services products.
Some of the Company's competitors have more products and product


30
<PAGE>   33
lines and substantially greater assets under management and financial resources.

As described above, the Company offers a multi-class share structure on its
domestic mutual funds. Under such structure, the Company pays to dealers a
commission on the sale of back-end load shares but the investor does not pay any
sales charge unless it redeems before the expiration of the minimum holding
period, which ranges from three to six years in the case of Class B Shares and
which is one year in the case of Class C Shares. The Company's cash flow and
results of operations may be adversely affected by vigorous sales of back-end
load shares because its recovery of the cost of commissions paid up front to
dealers is spread over a period of years. During this period, the Company bears
the costs of financing and the risk of market decline.

The businesses of the Company and its domestic financial services subsidiaries
are primarily dependent upon their associations with the Pioneer Family of
Mutual Funds with which they have contractual relationships. In the event any of
the management contracts, underwriting contracts or service agreements was
canceled or not renewed pursuant to the terms thereof, the Company may be
substantially adversely affected.

The Securities and Exchange Commission has jurisdiction over registered
investment companies, registered investment advisers, broker-dealers and
transfer agents and, in the event of a violation of applicable rules or
regulations by the Company or its subsidiaries, may take action which could have
a serious negative effect on the Company and its financial performance.

Because a significant portion of the Company's revenues are derived from the
mining and sale of gold by TGL, the Company's earnings are directly related to
gold production, the cost of such production, and the price of gold. TGL's gold
production is dependent upon a number of factors that could cause actual gold
production to differ materially from projections, including obtaining and
maintaining necessary equipment, accessing key supplies, and hiring and training
supervisory personnel and skilled workers. Gold production is also affected by
the time lag inherent in heap leaching technology, subject to weather conditions
and dependent on the continued political stability in the Republic of Ghana.
Gold prices have historically fluctuated significantly and are affected by
numerous factors, including expectations for inflation, the strength of the U.S.
dollar, global and regional demand, central bank gold supplies and political and
economic conditions. If, as a result of a decline in gold prices, TGL's revenues
from gold sales were to fall below cash costs of production, and to remain below
cash costs of production for any substantial period, the Company could determine
that it is not economically feasible for TGL to continue commercial production.

TGL is dependent upon a number of key supplies for its mining operations,
including cement, diesel fuel, electricity, explosives, lubricants, tires and
sodium cyanide. There can be no assurance that a disruption in the supplies to
TGL of these key materials will not occur and adversely affect the Company's
operations.

The operations at TGL depend on its ability to recruit, train and retain
employees with the requisite skills to operate large-scale mining equipment.
Although TGL offers its employees an attractive compensation package,
competition for skilled labor is strong among the various mines in Ghana. There
can be no assurance that the Company's operations will not be adversely affected
by a shortage of skilled laborers or by an increase in the time required to
fully train new employees.

During 1997, the Company derived significant revenues and net income from its
Russian financial services operations. Given the volatility of the Russian
financial markets, and the effect such volatility may have on the Company's
Russian businesses, there can be no assurance that these sources of revenue and
net income will continue or that they will continue at current levels.


                                                                             31
<PAGE>   34
MANAGEMENT'S DISCUSSION (CONTINUED)

The Company has incurred considerable expenses in connection with the
Forest-Starma timber project located in the Russian Far East. Forest-Starma has
commenced harvesting and has made shipments of timber. The commercial
feasibility of Forest-Starma is, however, dependent upon a number of factors
which are not within the control of the Company including the price of timber,
the weather, political stability in Russia and the strength of the Japanese
economy, the primary market for Forest-Starma's timber. While the Company
continues to believe that the project will achieve commercial feasibility, there
can be no assurance that it will do so.

The Company has a significant number of operations and investments located
outside of the U. S., including the gold mining operation at TGL and the timber
and investment management operations in Russia. Foreign operations and
investments may be adversely affected by exchange controls, currency
fluctuations, taxation, political instability and laws or policies of the
particular countries in which the Company may have operations. There is no
assurance that permits, authorizations and agreements to implement plans at the
Company's projects can be obtained under conditions or within time frames that
make such plans economically feasible, that applicable laws or the governing
political authorities will not change or that such changes will not result in
the Company's having to incur material additional expenditures.

The Company believes that it is in sound financial condition, that it has
sufficient liquidity from operations and financing facilities to cover
short-term commitments and contingencies and that it has adequate capital
resources to provide for long-term commitments.


32
<PAGE>   35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
of The Pioneer Group, Inc.:

We have audited the accompanying consolidated balance sheets of The Pioneer
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
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 from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Pioneer Group, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.


                                                           ARTHUR ANDERSEN LLP


Boston, Massachusetts,
February 3, 1998

                                                                              33
<PAGE>   36
Consolidated Statements of Income

Dollars in Thousands Except Per Share Amounts

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                              1997           1996           1995
                                                         ------------    ------------    ------------
<S>                                                      <C>              <C>            <C>
 Revenues and sales:
  Investment management fees .........................       $121,372         $87,843         $64,604
  Underwriting commissions and distribution fees .....         23,322          16,636           8,515
  Shareholder services fees ..........................         28,002          25,340          22,447
  Revenues from brokerage activities .................         35,570           2,232              --
  Revenues from banking activities ...................         12,324          14,966              --
  Trustee fees and other income ......................         20,884          13,816          12,909
                                                         ------------    ------------    ------------
   Revenues from financial services businesses .......        241,474         160,833         108,475
  Gold sales .........................................         89,487          78,279          90,242
  Timber sales .......................................         11,879              --              --
                                                         ------------    ------------    ------------
   Total revenues and sales ..........................        342,840         239,112         198,717
                                                         ------------    ------------    ------------
 Costs and expenses:
  Management, distribution, shareholder service
    and administrative expenses ......................        184,419         133,331          94,003
  Interest expense--banking activities ...............          7,676           6,068              --
  Gold mining operating costs and expenses ...........         88,915          72,563          64,905
  Timber operating costs and expenses ................         15,479             730              --
                                                         ------------    ------------    ------------
   Total costs and expenses ..........................        296,489         212,692         158,908
                                                         ------------    ------------    ------------
 Other (income) expense:
  Unrealized and realized gains on venture capital and
   marketable securities investments, net ............        (27,460)        (12,279)         (9,345)
  Interest expense ...................................         11,395           3,318           1,024
  Public offering costs ..............................             --              --           4,863
  Other, net .........................................            606           1,716             735
                                                         ------------    ------------    ------------
   Total other (income) expense ......................        (15,459)         (7,245)         (2,723)
                                                         ------------    ------------    ------------
 Income before provision for federal, state and
   foreign income taxes and minority interest ........         61,810          33,665          42,532
 Provision for federal, state and foreign income taxes         27,547          11,548          16,598
                                                         ------------    ------------    ------------
 Income before minority interest .....................         34,263          22,117          25,934
                                                         ------------    ------------    ------------
 Minority interest ...................................          5,097           3,280           3,123
                                                         ------------    ------------    ------------
 Net income ..........................................        $29,166         $18,837         $22,811
                                                         ============    ============    ============
 Basic earnings per share ............................          $1.17           $0.77           $0.93
                                                         ============    ============    ============
 Diluted earnings per share ..........................          $1.14           $0.74           $0.90
                                                         ============    ============    ============
 Basic shares outstanding ............................     24,873,000      24,620,000      24,407,000
                                                         ============    ============    ============
 Diluted shares outstanding ..........................     25,630,000      25,460,000      25,311,000
                                                         ============    ============    ============
 </TABLE>


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

34
<PAGE>   37
Consolidated Balance Sheets

Dollars in Thousands Except Per Share Amount

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                                 1997           1996
                                                                                             ------------   ------------
<S>                                                                                          <C>            <C>
Assets
Current assets:
Cash and cash equivalents, at cost which approximates fair value .........................     $ 58,802       $ 30,813
Restricted cash ..........................................................................        8,431          1,664
Investment in marketable securities, at fair value .......................................       38,341         27,542
Receivables:
 From securities brokers and dealers for sales of mutual fund shares .....................       11,752          9,010
 From Pioneer Family of Mutual Funds .....................................................       17,428         13,978
 For securities sold .....................................................................       11,466          2,600
 For gold shipments ......................................................................        3,451          2,686
 Other ...................................................................................       12,695         14,912
Mining inventory .........................................................................       22,032         23,502
Timber inventory .........................................................................        5,897          1,406
Other current assets .....................................................................       11,957         12,607
                                                                                               --------       --------
   Total current assets ..................................................................      202,252        140,720
                                                                                               --------       --------
Noncurrent assets:
Mining operations:
 Mining equipment and facilities (net of accumulated depreciation
  of $76,060 in 1997 and $56,143 in 1996) ................................................       99,164        107,807
 Deferred mining development costs (net of accumulated amortization
  of $16,177 in 1997 and $13,455 in 1996) ................................................       17,521         10,675
Cost of acquisitions in excess of net assets acquired (net of accumulated
  amortization of $12,083 in 1997 and $9,268 in 1996) ....................................       20,216         22,945
Long-term venture capital investments, at fair value (cost $71,754 in 1997
  and $46,651 in 1996) ...................................................................       95,382         59,872
Long-term investments, at cost ...........................................................       15,671         15,996
Timber operations:
 Timber equipment and facilities (net of accumulated depreciation of $1,260 in 1997) .....       17,898         13,952
 Deferred timber development costs (net of accumulated amortization of $1,611 in 1997) ...       21,264         22,897
Building (net of accumulated depreciation of $598 in 1997) ...............................       25,087         22,777
Furniture, equipment and leasehold improvements (net of accumulated depreciation and
 amortization of $8,565 in 1997 and $13,293 in 1996) .....................................       17,030         13,931
Loans to bank customers ..................................................................        9,152          6,632
Dealer advances (net of accumulated amortization of $17,366 in 1997 and $8,613 in 1996) ..       41,871         34,293
Other noncurrent assets ..................................................................       21,285         18,215
                                                                                               --------       --------
   Total noncurrent assets ...............................................................      401,541        349,992
                                                                                               --------       --------
                                                                                               $603,793       $490,712
                                                                                               ========       ========
Liabilities and Stockholders' Equity
Current liabilities:
Payable to funds for shares sold .........................................................     $ 11,766       $  8,996
Accounts payable .........................................................................       18,724         25,633
Accrued expenses .........................................................................       29,760         22,251
Customer deposits ........................................................................       23,584         15,328
Brokerage liabilities ....................................................................       14,702          2,040
Short-term borrowings--banking activities ................................................       12,083          5,573
Accrued income taxes .....................................................................        7,641          1,690
Current portion of notes payable .........................................................       17,411         10,002
                                                                                               --------       --------
   Total current liabilities .............................................................      135,671         91,513
                                                                                               --------       --------
Noncurrent liabilities:
Notes payable, net of current portion ....................................................      168,424        149,500
Deferred income taxes, net ...............................................................       29,334         25,569
                                                                                               --------       --------
   Total noncurrent liabilities ..........................................................      197,758        175,069
                                                                                               --------       --------
   Total liabilities .....................................................................      333,429        266,582
                                                                                               --------       --------
Minority Interest ........................................................................       86,677         61,657
                                                                                               --------       --------
Commitments and Contingencies (Note 10)
Stockholders' Equity:
 Common stock, $0.10 par value; authorized 60,000,000 shares;
  issued 25,219,567 shares in 1997 and 25,013,763 in 1996 ................................        2,522          2,501
 Paid-in capital .........................................................................       15,912         11,450
 Retained earnings .......................................................................      171,558        152,457
 Treasury stock at cost, 2,670 shares in 1997 and 910 shares in 1996 .....................          (65)           (16)
 Cumulative translation adjustment .......................................................       (1,277)            --
                                                                                               --------       --------
                                                                                                188,650        166,392
 Less--Deferred cost of restricted common stock issued ...................................       (4,963)        (3,919)
                                                                                               --------       --------
    Total stockholders' equity ...........................................................      183,687        162,473
                                                                                               --------       --------
                                                                                               $603,793       $490,712
                                                                                               ========       ========
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.                 35
<PAGE>   38
Consolidated Statements of Changes in Stockholders' Equity

Dollars in Thousands Except Per Share Amounts


<TABLE>
<CAPTION>
                                                                              Common Stock
                                                                     -------------------------------
                                                                        Shares              Paid-in    Retained
                                                                        Issued     Amount   Capital    Earnings
                                                                     ------------ -------- --------- ------------
<S>                                                                   <C>          <C>      <C>       <C>
Balance, December 31, 1994 .........................................  24,697,960   $2,470   $ 3,599   $ 130,715
                                                                      ----------   ------   -------   ---------
Add (Deduct):
 Net income ........................................................          --       --        --      22,811
 Dividends paid--$0.40 per share ...................................          --       --        --      (9,923)
 Shares awarded under the 1990 and 1995 restricted stock plans,
  (127,337 shares) .................................................      94,003        9     2,468          --
 Shares purchased under the 1995 employee stock purchase plan
  (18,228 shares) ..................................................      16,880        1       398          --
 Amortization of deferred cost of restricted common stock issued ...          --       --        --          --
 Additional tax benefits from stock plans ..........................          --       --     1,049          --
 Forfeitures of shares awarded under the 1990 restricted stock
  plan (6,245 shares) ..............................................          --       --        --          --
 Exercise of stock options awarded under the 1988 stock option
  plan (25,000 shares) .............................................      24,665        3       146          --
                                                                      ----------   ------   -------   ---------
Balance, December 31, 1995 .........................................  24,833,508   $2,483   $ 7,660   $ 143,603
                                                                      ----------   ------   -------   ---------
Add (Deduct)
 Net income ........................................................          --       --        --      18,837
 Dividends paid--$0.40 per share ...................................          --       --        --      (9,983)
 Shares awarded under the 1995 restricted stock plan (78,137
  shares) ..........................................................      74,667        8     2,041          --
 Shares purchased under the 1995 employee stock purchase plan
  (33,433 shares) ..................................................      17,368        2       351          --
 Amortization of deferred cost of restricted common stock issued ...          --       --        --          --
 Additional tax benefits from stock plans ..........................          --       --       664          --
 Forfeiture of shares awarded under the 1990 and 1995 restricted
  stock plans (12,225 shares) ......................................          --       --        --          --
 Shares issued and returned to treasury ............................      10,070       --       273          --
 Exercise of stock options awarded under the 1988 stock option
  plan (80,000 shares) .............................................      78,150        8       461          --
                                                                      ----------   ------   -------   ---------
Balance, December 31, 1996 .........................................  25,013,763   $2,501   $11,450   $ 152,457
                                                                      ----------   ------   -------   ---------
Add (Deduct)
 Net income ........................................................          --       --        --      29,166
 Dividends paid--$0.40 per share ...................................          --       --        --     (10,065)
 Shares awarded under restricted stock plans (162,207 shares) ......     156,945       16     3,679          --
 Shares purchased under the 1995 employee stock purchase plan
  (34,527 shares) ..................................................      17,682        2       330          --
 Amortization of deferred cost of restricted common stock issued ...          --       --        --          --
 Additional tax benefits from stock plans ..........................          --       --       306          --
 Forfeiture of shares awarded under restricted stock plans (38,690
  shares) ..........................................................          --       --        --          --
 Exercise of stock options awarded under the 1988 stock option
  plan (46,000 shares) .............................................      31,177        3       147          --
 Cumulative translation adjustment .................................          --       --        --          --
                                                                      ----------   ------   -------   ---------
Balance, December 31, 1997 .........................................  25,219,567   $2,522   $15,912   $ 171,558
                                                                      ==========   ======   =======   =========

</TABLE>

<TABLE>
<CAPTION>
                                                                                                Deferred
                                                                                                  Cost        Total
                                                                                  Cumulative       of         Stock-
                                                                      Treasury   Translation   Restricted    holders'
                                                                        Stock     Adjustment      Stock       Equity
                                                                     ---------- ------------- ------------ -----------
<S>                                                                  <C>        <C>           <C>          <C>
Balance, December 31, 1994 .........................................   $ (167)    $     --      $ (2,195)   $ 134,422
                                                                       ------     --------      --------    ---------
Add (Deduct):
 Net income ........................................................       --           --            --       22,811
 Dividends paid--$0.40 per share ...................................       --           --            --       (9,923)
 Shares awarded under the 1990 and 1995 restricted stock plans,
  (127,337 shares) .................................................      220           --        (2,609)          88
 Shares purchased under the 1995 employee stock purchase plan
  (18,228 shares) ..................................................       17           --            --          416
 Amortization of deferred cost of restricted common stock issued ...       --           --         1,329        1,329
 Additional tax benefits from stock plans ..........................       --           --            --        1,049
 Forfeitures of shares awarded under the 1990 restricted stock
  plan (6,245 shares) ..............................................      (72)          --            72           --
 Exercise of stock options awarded under the 1988 stock option
  plan (25,000 shares) .............................................        2           --            --          151
                                                                       ------     --------      --------    ---------
Balance, December 31, 1995 .........................................   $   --     $     --      $ (3,403)   $ 150,343
                                                                       ------     --------      --------    ---------
Add (Deduct)
 Net income ........................................................       --           --            --       18,837
 Dividends paid--$0.40 per share ...................................       --           --            --       (9,983)
 Shares awarded under the 1995 restricted stock plan (78,137
  shares) ..........................................................       66           --        (1,951)         164
 Shares purchased under the 1995 employee stock purchase plan
  (33,433 shares) ..................................................      365           --            --          718
 Amortization of deferred cost of restricted common stock issued ...       --           --         1,221        1,221
 Additional tax benefits from stock plans ..........................       --           --            --          664
 Forfeiture of shares awarded under the 1990 and 1995 restricted
  stock plans (12,225 shares) ......................................     (214)          --           214           --
 Shares issued and returned to treasury ............................     (273)          --            --           --
 Exercise of stock options awarded under the 1988 stock option
  plan (80,000 shares) .............................................       40           --            --          509
                                                                       ------     --------      --------    ---------
Balance, December 31, 1996 .........................................   $  (16)    $     --      $ (3,919)   $ 162,473
                                                                       ------     --------      --------    ---------
Add (Deduct)
 Net income ........................................................       --           --            --       29,166
 Dividends paid--$0.40 per share ...................................       --           --            --      (10,065)
 Shares awarded under restricted stock plans (162,207 shares) ......      103           --        (3,673)         125
 Shares purchased under the 1995 employee stock purchase plan
  (34,527 shares) ..................................................      350           --            --          682
 Amortization of deferred cost of restricted common stock issued ...       --           --         1,821        1,821
 Additional tax benefits from stock plans ..........................       --           --            --          306
 Forfeiture of shares awarded under restricted stock plans
  (38,690 shares) ..................................................     (808)          --           808           --
 Exercise of stock options awarded under the 1988 stock option
  plan (46,000 shares) .............................................      306           --            --          456
 Cumulative translation adjustment .................................       --       (1,277)           --       (1,277)
                                                                       ------     --------      --------    ---------
Balance, December 31, 1997 .........................................   $  (65)    $ (1,277)     $ (4,963)   $ 183,687
                                                                       ======     ========      ========    =========
</TABLE>


36                The accompanying notes are an integral part
                  of these consolidated financial statements.
<PAGE>   39
Consolidated Statements of Cash Flows

Dollars in Thousands

<TABLE>
<CAPTION>
                                                                                                  Year Ended December 31,
                                                                                               1997         1996         1995
                                                                                           ------------ ------------ ------------
<S>                                                                                        <C>          <C>          <C>
Cash flows from operating activities:
 Net income ..............................................................................  $  29,166    $   18,837   $  22,811
                                                                                            ---------    ----------   ---------
 Adjustments to reconcile net income to net cash provided by operating activities:
  Depreciation and amortization ..........................................................     45,090        29,952      23,667
  Unrealized and realized gains on venture capital and marketable securities
  investments, net .......................................................................    (27,460)      (12,279)     (9,345)
  (Equity in earnings of) provision on other investments .................................      2,710           107        (438)
  Restricted stock plan expense ..........................................................      1,821         1,221       1,329
  (Prepaid) deferred income taxes ........................................................      3,765        11,066      (2,404)
  Minority interest ......................................................................      5,097         3,280       3,123
 Changes in operating assets and liabilities:
  Investments in marketable securities, net ..............................................    (10,266)      (19,216)       (422)
  Receivable from securities brokers and dealers for sales of mutual fund shares .........     (2,742)        3,375      (4,979)
  Receivables for securities sold ........................................................     (8,866)       (2,600)         --
  Receivables for gold shipments .........................................................       (765)        2,724      (1,017)
  Receivables from Pioneer Family of Mutual Funds and other ..............................     (1,514)      (14,805)     (2,547)
  Mining inventory .......................................................................      1,470        (7,897)     (3,724)
  Timber inventory .......................................................................     (4,491)           81      (1,487)
  Other current assets ...................................................................       (110)       (4,626)     (2,163)
  Other noncurrent assets ................................................................       (895)       (3,858)       (898)
  Payable to funds for shares sold .......................................................      2,770        (3,373)      5,294
  Accrued expenses and accounts payable ..................................................        600        18,937       6,853
  Brokerage liabilities ..................................................................     13,232         2,040          --
  Accrued income taxes ...................................................................      6,257         1,185       1,470
                                                                                            ---------    ----------   ---------
   Total adjustments .....................................................................     25,703         5,314      12,312
                                                                                            ---------    ----------   ---------
   Net cash provided by operating activities .............................................     54,869        24,151      35,123
                                                                                            ---------    ----------   ---------
Cash flows from investing activities:
 Purchase of mining equipment and facilities .............................................    (11,520)      (74,789)    (15,601)
 Deferred mining development costs .......................................................     (9,568)       (3,088)       (959)
 Additions to furniture, equipment and leasehold improvements ............................     (9,053)       (5,309)     (6,592)
 Building ................................................................................     (2,865)      (10,101)     (7,909)
 Long-term venture capital investments ...................................................    (26,945)      (14,256)    (26,564)
 Proceeds from sale of long-term venture capital investments .............................      6,688         9,576       6,985
 Loans to bank customers .................................................................     (2,520)       (6,632)         --
 Deferred timber development costs .......................................................       (354)       (6,716)     (8,633)
 Timber equipment and facilities .........................................................     (5,206)       (2,466)     (7,001)
 Other investments .......................................................................     (5,871)       (1,824)     (4,086)
 Proceeds from sales of other investments ................................................      1,732            --          --
 Cost of acquisition in excess of net assets acquired ....................................        (87)         (928)        (96)
 Acquisition of Russian investment operations, net of cash acquired ......................         --            --       4,180
 Long-term investments ...................................................................     (4,026)       (5,353)     (7,791)
 Proceeds from sale of long-term investments .............................................     13,884         7,200       8,935
                                                                                            ---------    ----------   ---------
   Net cash used in investing activities .................................................    (55,711)     (114,686)    (65,132)
                                                                                            ---------    ----------   ---------
Cash flows from financing activities:
 Dividends paid ..........................................................................    (10,065)       (9,983)     (9,923)
 Distributions to minority interestholders subsidiary ....................................         --          (354)       (350)
 Distributions to limited partners of venture capital subsidiary .........................        (94)          (23)        (11)
 Amounts raised by venture capital investment partnerships ...............................     21,024         7,848      20,839
 Additional minority interest capital raised by foreign subsidiaries .....................         --         6,269          --
 Employee stock purchase plan ............................................................        682           718         416
 Exercise of stock options ...............................................................        456           509         151
 Restricted stock plan award .............................................................        125           164          88
 Dealer advances .........................................................................    (16,331)      (23,247)    (14,913)
 Customer deposits .......................................................................      7,686        15,328          --
 Short-term borrowings--banking activities ...............................................      6,510         5,573          --
 Revolving credit agreement borrowings, net ..............................................      8,500        35,500      42,000
 Borrowings of notes payable .............................................................     28,420        62,960          --
 Repayments of notes payable .............................................................    (10,587)       (6,059)     (3,597)
 Reclassification of restricted cash .....................................................     (6,767)       (1,664)         --
                                                                                            ---------    ----------   ---------
   Net cash provided by financing activities .............................................     29,559        93,539      34,700
                                                                                            ---------    ----------   ---------
Effect of foreign currency exchange rate changes on cash and cash equivalents ............       (728)           --          --
Net increase in cash and cash equivalents ................................................     27,989         3,004       4,691
Cash and cash equivalents at beginning of year ...........................................     30,813        27,809      23,118
                                                                                            ---------    ----------   ---------
Cash and cash equivalents at end of year .................................................  $  58,802    $   30,813   $  27,809
                                                                                            =========    ==========   =========
</TABLE>

                  The accompanying notes are an integral part
                   of these consolidated financial statements.                37
<PAGE>   40
Notes to Consolidated Financial Statements

December 31, 1997

Note 1-- Nature of Operations and Organization

The Pioneer Group, Inc., and its subsidiaries (collectively, the "Company"),
are engaged in financial services businesses in the United States and several
foreign countries and in a number of natural resource development projects,
including a gold mining venture in the Republic of Ghana and three timber
ventures in the Russian Far East.

      In the United States, the Company conducts four lines of financial
services businesses: (i) Pioneering Management Corporation ("PMC") serves as
investment manager to the 34 U.S. registered investment companies in the
Pioneer Family of Mutual Funds and several institutional accounts, (ii) Pioneer
Funds Distributor, Inc. ("PFD") serves as distributor of shares of the Pioneer
Family of Mutual Funds, (iii) Pioneer Capital Corporation ("PCC"), and its
subsidiaries, engage in venture capital investing and management activities,
and (iv) Pioneering Services Corporation serves as shareholder servicing agent
for the Pioneer Family of Mutual Funds.

      The Company's international financial services businesses include
investment operations in: (i) Warsaw, Poland, where the Company manages and
distributes units of four mutual funds, owns 50% of a unitholder servicing
agent, manages an institutional venture capital fund and owns a majority
interest in a brokerage operation, (ii) Dublin, Ireland, where the Company
distributes shares of, manages and services six offshore investment funds, sold
primarily in Western Europe, and (iii) Moscow, Russia, where the Company
provides financial services, including banking, investment advisory, investment
banking and brokerage and transfer agency services, distributes shares of,
manages, and services, Pioneer First, one of the first open-end mutual funds
available to Russian citizens, and where the Company owns 51% of the First
Voucher Fund, the largest Russian voucher investment fund. In addition, the
Company has investment operations in the Czech Republic and has invested in
investment management operations in India and Taiwan.

      The Company's Russian investment operations are consolidated under
Pioneer First Russia, Inc. ("PFR"). In 1996, PFR entered into a subscription
agreement with the International Finance Corporation ("IFC") for the sale of up
to $4 million of its common stock. Simultaneously, the Company also entered
into a put and call agreement for this common stock. The put allows the holder
of the shares to put them to PFR for the greater of the IFC shares net asset
value, as defined in the agreement, or twelve times PFR's average earnings, as
defined in the agreement, during the period from four years to eight years from
the date of the initial closing. The call feature allows the Company to call
the shares for the same amount, beginning eight years and ending ten years from
the date of the initial closing.

      In 1996, the IFC advanced $2 million to PFR, pursuant to the subscription
agreement. The balance of the commitment was received by PFR in 1997. The
entire commitment is included in minority interest liability. Adjustments are
made to the carrying amount of this liability to reflect the IFC's interest
under the put and call agreement.

      The Company's wholly owned subsidiary, Pioneer Goldfields Limited
("PGL"), conducts mining and exploration activities in the Republic of Ghana
and exploration activities elsewhere in Africa. PGL's principal asset is its
ownership of 90% of the outstanding shares of Teberebie Goldfields Limited
("TGL"), which operates a gold mine in the western region of the Republic of
Ghana. The Republic of Ghana owns the remaining 10% of TGL. In addition, the
Company's majority-owned subsidiary Closed Joint-Stock Company "Tas-Yurjah
Mining Company" conducts mining exploration activities in the Russian Far East.

      The Company's wholly owned subsidiary, Pioneer Forest, Inc. ("Pioneer
Forest"), conducts timber harvesting and timber development activities in the
Russian Far East. Pioneer Forest's principal asset is its ownership of 95% of
the outstanding shares of Closed Joint-Stock Company "Forest-Starma", which
harvests timber in the Russian Far East and which commenced commercial
production on January 1, 1997.

Note 2-- Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of the
Company, its wholly owned and majority-owned subsidiaries and certain
partnerships that the Company controls. The Company has consolidated the
Pioneer Ventures Limited Partnership II, Pioneer Poland U.S. L.P. and Pioneer
Poland U.K. L.P. in which the Company's ownership interest is 14.0%, 7.2% and
9.2%, respectively. Control is defined by several factors, including, but not
limited to, the fact that the Company is the general partner, the general
partner has absolute and unilateral authority to make investment decisions, the
limited partners may not remove the general partner and the general partner has
absolute and unilateral authority to declare, or not declare, distributions of
partnership income to the partners. All material intercompany balances and
transactions have been eliminated in consolidation.

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to these consolidated financial statements
relates to the valuation of venture capital investments, other investments and
the estimated future cash flows of the Company's natural resource operations,
as discussed herein.

      Certain reclassifications have been made to 1996 and 1995 amounts to
conform with the 1997 presentation.

Consolidated Statements of Cash Flows

Cash and cash equivalents consist primarily of cash on deposit in banks and
amounts invested in commercial paper, Pioneer money market mutual funds and
U.S. Treasury bills with original maturities of three months or less.

      Restricted cash consists of cash on deposit in banks, use of which is
restricted by certain loan covenants, cash reserved for the exclusive benefit
of brokerage customers and cash on deposit with the Central Bank of Russia.

      Income taxes paid were approximately $18,719,000, $1,149,000 and
$16,617,000 in 1997, 1996 and 1995,


38
<PAGE>   41
Notes to Consolidated Financial Statements

(Continued)

respectively. In addition, $13,146,000, $7,263,000 and $2,587,000 of interest
was paid in 1997, 1996 and 1995, respectively. The amounts paid in 1997, 1996
and 1995 include approximately $1,353,000, $4,800,000 and $1,800,000,
respectively, of interest that was capitalized related to the development of
the Company's building, Russian timber operations and the mining Phase III
expansion operations.

      The Company purchased 51% of the First Voucher Fund and certain Russian
investment operating entities in 1995 for approximately $20 million. In
conjunction with the acquisition, liabilities were assumed as follows:

<TABLE>
<CAPTION>
<S>                                        <C>
Fair value of assets acquired ..........   $42,899
Cash paid ..............................   (14,004)
                                           -------
Liabilities assumed ....................   $28,895
</TABLE>
                                           =======

Marketable Securities, at Fair Value

Included in marketable securities, at fair value, are principally investments
in certain Russian government securities, including GKO and OFZ bonds, and
certain equity and debt securities of companies based in Russia. The Russian
securities, except for those securities issued by the Russian government, are
carried at cost, adjusted for impairment losses. In accordance with the
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities", these securities are
carried at cost, adjusted for impairment losses, rather than fair value until
such time as the breadth and scope of the Russian securities markets develop to
certain quantifiable levels. These securities are held for trading purposes,
and accordingly all realized and unrealized gains and losses are included in
the accompanying consolidated statements of income under income from banking
and income from brokerage activities. Additionally, the Company's investments
in the Pioneer Family of Mutual Funds are included in this amount.

Recognition of Revenues

Investment management, shareholder services, trustee and other fees are
recorded as income during the period in which services are performed.
Agreements with certain of the Pioneer Family of Mutual Funds provide for fee
reductions, which are based on the excess of annual expenses of each mutual
fund over certain limits. Fee reductions are recorded on an accrual basis.

      Underwriting commissions earned from the distribution of the Pioneer
Family of Mutual Fund shares and the systematic investment plan are recorded as
income on the trade (execution) dates.

      Distribution fees are earned based on 0.75% of certain Pioneer Family of
Mutual Fund net assets.

      Revenues from brokerage activities are derived from net realized and
unrealized gains and losses from securities trading activities. The Company's
principal brokerage activities relate to the purchase and sale of Russian
securities, including Russian government debt securities and the equity and
debt securities of companies based in Russia.

      Revenues from banking activities are related to the Bank's securities
trading and lending activities. The Bank trades in certain Russian government
securities including GKO and OFZ bonds as well as Russian equity and debt
securities, and also conducts a modest amount of commercial lending. Income
includes interest earned on the bonds while they are held, net realized gains
and losses on the sale of the bonds and equity securities to third parties, net
unrealized gains and losses associated with marking the portfolio to market at
the end of the period, and interest income on loans. Interest expense on the
Bank's customer deposits and short-term borrowings is recorded on the accrual
basis.

      The Company records sales of gold at sales value net of refining costs
when gold is shipped to a refinery.

      The Company has purchased put options as "insurance" against significant
declines in the market price of gold below $320 per ounce. The put options have
been purchased from a bank, and the premium paid is amortized monthly.
Unamortized premiums are included in other current assets in the accompanying
consolidated balance sheets. The put options are in place for estimated monthly
planned production aggregating 120,000 ounces through the four months ending
April 30, 1998. No put options have been purchased to cover production after
April 30, 1998. The put options only require an initial cash outlay (the
premium amount), which amounted to approximately $252,000, $255,000 and
$150,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Put options represent a right and not an obligation. As such, the Company has
neither ongoing exposure (other than credit exposure) nor upside potential with
respect to the put options. When the market price of gold declines below $320
per ounce, the Company continues to ship gold to refineries and exercises the
put options, receiving payment for the difference between the market price of
gold and $320. These receipts are included as gold sales in the accompanying
consolidated statements of income. During 1997, put option proceeds of
approximately $4 million were received.

      The Company records timber sales when timber is shipped.

Public Offering Costs

Public offering costs consists of expenses incurred in connection with the
Company's unsuccessful effort to sell, in a global offering, approximately 20%
of the shares of its gold mining subsidiary PGL. The expenses relate primarily
to marketing expenses and the fees of professional advisers.

Building

The building represents the Meridian Commercial Tower in Russia. The Meridian
Commercial Tower is an office building which is wholly owned by the First
Voucher Fund. The Company owns a 51% interest in the First Voucher Fund.

Furniture, Equipment and Leasehold Improvements

Depreciation and amortization are provided for financial reporting purposes on
a straight-line basis over the following estimated useful lives: furniture and
equipment, 3-5 years, and leasehold improvements, over the term of the lease.
In the event of retirement or other disposition of furniture and equipment, the
cost of the assets and the related accumulated depreciation and amortization
amounts are removed from the accounts, and any resulting gains or losses are
reflected in earnings.


                                                                              39
<PAGE>   42
Notes to Consolidated Financial Statements

(Continued)

Mining Inventory

Gold bullion inventory and gold-in-process contained in the processing plant
are valued at the lower of cost or market.

      Material and supplies are valued at the lower of average cost or
replacement cost.

Mining Equipment and Facilities

Processing plant and equipment is recorded at cost and is depreciated on a
units-of-production basis, which anticipates recovery over ten years or less.

      Mining equipment (rolling stock) is recorded at cost and is depreciated
on a units-of-production basis which anticipates recovery over seven years or
less.

      Buildings and housing units are recorded at cost and are depreciated on a
straight-line basis over ten years.

      Leach pads are recorded at cost and are depreciated on a
units-of-production basis.

      All other equipment and facilities are recorded at cost and are
depreciated over their estimated useful lives on a straight-line basis ranging
from three to ten years. Depreciation begins at the time construction is
completed and the assets are placed into service.

Deferred Mining Development Costs

Deferred mining development costs, which include the cost of site development,
capitalized interest and infrastructure costs during the development and
construction phases of the project, are recorded at cost and amortized on a
units-of-production basis, which anticipates recovery over ten years or less.
Costs incurred to develop economically viable ore bodies, to further define
mineralization in existing ore bodies, or to secure rights to proven reserves
are capitalized as development costs.

      Exploration costs associated with the initial identification of ore
reserves are expensed. Property and lease acquisition costs incurred in the
process of acquiring exploration mineral rights are expensed as incurred.

Mining Reclamation Costs

Estimated future reclamation costs are based principally on anticipated
environmental and regulatory requirements and are accrued and charged to
expense over the expected operating life of the mine on a units-of-production
basis. The accrual is maintained on an undiscounted basis.

Deferred Timber Development Costs

Deferred timber development costs principally consist of construction and
engineering expenditures and infrastructure costs incurred in developing the
site, the roads, capitalized interest, legal, timber rights and organizational
costs. In the first quarter of 1997, the Company commenced commercial
production of timber and amortization of these development costs. These costs
are amortized on a units-of-production basis which anticipates recovery
principally over ten years.

Timber Equipment and Facilities

Timber equipment and facilities consist of logging machinery and building and
housing units. These costs are principally depreciated on a units-of-production
basis which anticipates recovery over five to twenty years.

Cost in Excess of Net Assets Acquired

Cost in excess of net assets acquired is amortized on a straight-line basis
over five to fifteen years.

      In connection with the purchase of the Russian investment operations in
1995 (see Note 14), the Company allocated cost in excess of net assets acquired
in the amount of $2,858,000.

      Cost in excess of net assets acquired, net, as reflected in the
accompanying consolidated balance sheets, consists of the following:

<TABLE>
<CAPTION>
                                               December 31,
                                             1997         1996
                                           -------      -------
                                          (Dollars in thousands)
<S>                                       <C>          <C>
Mutual of Omaha Fund
  Management Company ..................   $16,530      $18,649
Russian investment operations .........     2,163        2,458
Gold mining operations ................     1,217        1,592
Polish brokerage operations ...........       306          246
                                          -------      -------
                                          $20,216      $22,945
                                          =======      =======
</TABLE>

Valuation of Long-Term Venture Capital Investments

The Company's long-term venture capital investments consist of the following
(in thousands):

<TABLE>
<CAPTION>
                          December 31,
                       1997         1996
                     -------      -------
<S>                  <C>          <C>
Domestic .........   $68,937      $47,354
Non-U.S. .........    26,445       12,518
                     -------      -------
                     $95,382      $59,872
                     =======      =======
</TABLE>

      The Company's domestic venture capital investments are in companies that
are primarily engaged in bringing new technology to market as well as more
mature companies in need of capital for expansion, acquisitions, management
buyouts or recapitalizations. At the time the investments are made, the
Company's investments are primarily in the form of unregistered common and
preferred stock, warrants and promissory notes. Most securities are valued at
fair value, as determined in good faith by management and approved by the Board
of Directors, when market quotes are not available. Of the total domestic
venture capital value at December 31, 1997, the value of securities for which
market quotes are not available was $43,629,000. In addition, total domestic
venture capital investments included cash that has been restricted for the
future purchase of venture capital investments of $3,654,000.

      In addition, non-U.S. venture capital investments are the investments
held by certain consolidated partnerships. These venture capital investments
are in companies that are domiciled in Poland. Of the total non-U.S. venture
capital value at December 31, 1997, the value of securities for which market
quotes are not available was $15,689,000. In addition, total non-U.S. venture
capital investments included cash that has been restricted for the future
purchase of venture capital investments of $10,756,000.

      In determining fair value, investments are initially stated at cost until
significant subsequent events require a change in


40
<PAGE>   43
Notes to Consolidated Financial Statements

(Continued)

valuation. The Company considers the financial condition and operating results
of the investee, prices paid in subsequent private offerings of the same or
similar securities, the amount that the Company can reasonably expect to
realize upon the sale of these securities, and any other factors deemed
relevant. Securities for which market quotations are available are valued at
the closing price as of the valuation date with an appropriate discount, if
restricted.

Long-term Investments

Long-term investments consists mainly of Russian investments of the First
Voucher Fund. These securities are classified as available for sale.

      The Company believes that there is a significant unrealized value in the
assets included in the Voucher Fund's securities portfolio. In accordance with
SFAS 115, the securities in the Voucher Fund reflect the cost rather than "fair
value" until such time as the breadth and scope of the Russian securities
markets develop to certain quantifiable levels. The Company believes that these
markets are approaching this point, at which time the "fair value" of
securities held by the Voucher Fund would be reflected in the Company's
financial statements.

      The Voucher Fund's assets consist of cash and cash equivalents,
securities (both liquid and illiquid), real estate holdings and other
miscellaneous assets. The cost of the securities portion of the portfolio on
the Company's balance sheet at December 31, 1997, was approximately $16
million. As of January 29, 1998, the value of these securities (based on market
quotations if available) was approximately $67 million, which represents an
increase of approximately $51 million, since the date of the acquisition. The
Company's pre-tax interest in this increase, at 51%, would be approximately $26
million. The cost of the cash and cash equivalents, real estate and
miscellaneous assets of the Voucher Fund on the Company's balance sheet at
December 31, 1997, was approximately $2 million, $24 million and $3 million,
respectively.

      Currently, the Company recognizes realized gains and losses in its income
statement only when Voucher Fund securities are sold. Once the Russian
securities market develops to the requisite level, unrealized gains and losses
(such as the $51 million described above) would be reflected in long-term
investments in the Company's balance sheet with a corresponding after-tax
increase or decrease in stockholder's equity for the Company's 51% interest
with the remainder recorded as minority interest. The Company will continue to
recognize realized gains and losses in income upon the sale of such securities.

      The Russian securities markets are significantly smaller and less liquid
than the securities markets in the United States. The relative lack of
liquidity may result in the Voucher Fund selling a portfolio security at a
price that does not reflect its underlying value. Accordingly, fair values are
not necessarily indicative of the amount that could be realized in a short
period of time on large volumes of transactions. In addition, the securities
investments in the Voucher Fund may be negatively affected by adverse economic,
political and social developments in Russia including changes in government and
government policies, taxation, currency instability, interest rates and
inflation levels and developments in law and regulations affecting securities
issuers and their shareholders and securities markets. As a result of the
foregoing, there can be no assurance that the Company will be able to realize
the values described above.

Valuation of Financial Instruments

The Company considers the liquid nature and readily available market quotations
when estimating fair value of financial instruments. As stated in the
accompanying consolidated balance sheets, the carrying values of the Company's
financial instruments approximate fair value, except for the long-term
investments of the Voucher Fund, as discussed above.

Earnings Per Share

In March 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share." It is effective for fiscal years ending after December
15, 1997. SFAS 128 requires the replacement of earnings per share ("EPS") with
basic EPS. Basic EPS is computed by dividing reported earnings available to
stockholders by weighted average shares outstanding not including contingently
issuable shares. No dilution for potentially dilutive securities is included.
Fully diluted EPS, called diluted EPS under SFAS 128, is still required.
Amounts for 1996 and 1995 have been restated to conform to this presentation.
The computations for basic earnings per share and diluted earnings per share
are as follows:

<TABLE>
<CAPTION>
                                                           Earnings
                                 Net Income     Shares     Per Share
                                ------------   --------   ----------
For the year ended 12/31/97       (Dollars and shares in thousands
-----------------------------        except per share amounts)
<S>                             <C>            <C>        <C>
Basic earnings per share
  calculation ...............   $29,166        24,873     $ 1.17
                                                          ======
Options .....................        --           692
Restricted stock ............        --            65
                                -------        ------
Diluted earnings per share
  calculation ...............   $29,166        25,630     $ 1.14
                                =======        ======     ======
For the year ended 12/31/96
------------------------------
Basic earnings per share
  calculation ...............   $18,837        24,620     $ 0.77
                                                          ======
Options .....................        --           745
Restricted stock ............        --            95
                                -------        ------
Diluted earnings per share
  calculation ...............   $18,837        25,460     $ 0.74
                                =======        ======     ======
For the year ended 12/31/95
------------------------------
Basic earnings per share
  calculation ...............   $22,811        24,407     $ 0.93
                                                          ======
Options .....................        --           750
Restricted stock ............        --           154
                                -------        ------
Diluted earnings per share
  calculation ...............   $22,811        25,311     $ 0.90
                                =======        ======     ======
</TABLE>

Foreign Currency Translation

In accordance with SFAS 52, "Foreign Currency Translation", the functional
currency of the Company's natural resource operations is


                                                                              41
<PAGE>   44
Notes to Consolidated Financial Statements

(Continued)

the U.S. dollar, as the revenues, costs of capital equipment and financing
costs are principally denominated in U.S. dollars. The functional currency of
the Company's financial services operations is generally the currency of the
country in which those operations are conducted. However, some of those
operations are conducted in countries having highly inflationary economies and
as a result the functional currency is currently the U.S. dollar. For those
entities, the gains and losses which result from remeasuring into the U.S.
dollar for reporting purposes are included in the accompanying consolidated
statements of income. The net foreign currency losses were $1.7 million in 1997
and $1.3 million in 1996. The net foreign currency amount in 1995 was
immaterial. For those entities for which the functional currency is the local
currency, the gains and losses which result from translating into the U.S.
dollar for reporting purposes are included in the accompanying consolidated
balance sheets' stockholders' equity section as a cumulative translation
adjustment.

Long-Lived Assets

The Company periodically reviews its long-lived assets which it continues to
hold and use for potential impairment. Those long-lived assets held and used in
connection with the Company's natural resource operations are reassessed
whenever there is a significant change in the market price of the goods
produced, and continuously during capital intensive periods of expansion.
Additionally, the building is reassessed for potential impairment when there
are significant changes in market rental rates or market values of comparable
buildings. The Company assesses the future useful life of these assets whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired businesses in assessing the recoverability of these assets.

      During 1997, the Company experienced declines in the market prices of
both gold and timber. At this time it is the Company's intention to continue to
hold and use the long-lived assets used in the production of both gold and
timber. An impairment analysis was performed consistent with the Company's
intentions with no impairment identified.

Concentration of Risk

The Company performs ongoing evaluations of its subsidiaries and investments
and obtains political risk insurance which mitigates its exposure in foreign
countries.

Note 3-- Mining Inventory

Mining inventories consist of the following:

<TABLE>
<CAPTION>
                                       December 31,
                                     1997        1996
                                   -------     -------
                                  (Dollars in Thousands)
<S>                                <C>         <C>
Gold-in-process ................   $ 1,998     $ 1,658
Materials and supplies .........    20,034      21,844
                                   -------     -------
                                   $22,032     $23,502
                                   =======     =======
</TABLE>

<TABLE>
<CAPTION>
Note 4-- Mining Equipment and Facilities

                                                   December 31,
                                              1997           1996
                                            -------        --------
                                             (Dollars in Thousands)
<S>                                         <C>            <C>
Mobile mine equipment ...................   $70,163        $ 62,177
Crusher .................................    38,252          22,550
Processing plant and laboratory .........    18,500           5,040
Leach pads and ponds ....................    26,685          19,318
Building and civil works ................    13,987          10,813
Office furniture and equipment ..........     2,089           1,798
Motor vehicles ..........................     3,201           2,307
Construction in progress ................        69          37,937
Other assets ............................     2,278           2,010
                                            -------        --------
Total cost ..............................   175,224         163,950
Accumulated depreciation ................   (76,060)        (56,143)
                                            -------        --------
                                            $99,164        $107,807
                                            =======        ========
</TABLE>

Note 5-- Income Taxes

The following is a summary of the components of income before provision for
federal, state and foreign income taxes and minority interest for financial
reporting purposes:

<TABLE>
<CAPTION>
                       1997         1996         1995
                      -------      -------      -------
                           (Dollars in Thousands)
<S>                   <C>          <C>          <C>
 Domestic .........   $51,394      $26,484      $10,824
 Foreign ..........    10,416        7,181       31,708
                      -------      -------      -------
                      $61,810      $33,665      $42,532
                      =======      =======      =======
</TABLE>

The components of the provision for federal, state and foreign income taxes
consist of:

<TABLE>
<CAPTION>
                           1997         1996          1995
                         --------     -------       -------
                               (Dollars in Thousands)
<S>                      <C>          <C>           <C>
Current:
 Federal ..........     $13,328       $ 1,197       $   260
 State ............       2,188           376            68
 Foreign ..........       8,266        (1,091)       18,674
Deferred (Prepaid):
 Federal ..........       4,536         6,326         4,072
 State ............          (2)        2,531         1,438
 Foreign ..........        (769)        2,209        (7,914)
                        --------      -------       -------
                        $27,547       $11,548       $16,598
                        ========      =======       =======
</TABLE>

      Income taxes, as stated as a percentage of income before provision for
federal, state and foreign income taxes, are comprised of the following:
<TABLE>
<CAPTION>

                                           1997         1996         1995
                                        ----------   ----------   ----------
<S>                                     <C>          <C>          <C>
Federal statutory tax rate ..........       35.0%        35.0%        35.0%
Increases (decreases) in tax
  rate resulting from:
 State income tax (net of
   effect on federal
   income tax) ......................        2.3          5.6          2.3
 Foreign income taxes ...............        6.2         (3.6)         2.5
 Tax exempt income ..................         --         (4.2)          --
 Other, net .........................        1.1          1.5         (0.8)
                                            ----         ----         ----
 Effective tax rate .................       44.6%        34.3%        39.0%
                                            ====         ====         ====
</TABLE>

42
<PAGE>   45
Notes to Consolidated Financial Statements

(Continued)

      The approximate income tax effect of each type of temporary difference is
as follows:

<TABLE>
<CAPTION>
                                                 1997           1996
                                              --------       --------
                                              (Dollars in Thousands)
<S>                                          <C>            <C>
Deferred taxes related to foreign
  mining operations ......................   $ (7,637)      $ (9,628)
Net operating losses of foreign
  subsidiaries ...........................      4,600             --
Deferred rent ............................        499            464
Restricted stock .........................        774            848
Reserves .................................      1,041          1,669
Dealer advances ..........................    (16,347)       (14,244)
Venture capital and other investments.....     (8,732)        (5,206)
Other temporary differences, net .........      1,068            528
                                             --------       --------
                                              (24,734)       (25,569)
Valuation allowance ......................     (4,600)            --
                                             --------       --------
Net deferred tax liability ...............   $(29,334)      $(25,569)
                                             ========       ========
</TABLE>

      U.S. Federal income taxes have been provided on all foreign earnings
except for the amount considered to be permanently invested outside the U.S.
which approximates $50,000,000 at December 31, 1997.

Note 6-- Stock Plans

The Company has a Stock Incentive Plan (the "1997 Plan") to provide incentives
to certain employees who have contributed and are expected to contribute
materially to the success of the Company and its subsidiaries. An aggregate
total of 1,500,000 shares of the Company's common stock may be awarded to
participants under the 1997 Plan. Under the 1997 Plan, the Company may grant
restricted stock, stock options and other stock based awards. The 1997 Plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee"). The 1997 Plan expires in February 2007. The Company's 1995
Restricted Stock Plan (the "1995 Plan") and 1988 Stock Option Plan (the "1988
Option Plan") were terminated upon the approval of the 1997 Plan by the
stockholders of the Company on May 20, 1997. The Company's 1990 Restricted
Stock Plan (the "1990 Plan") expired in January 1995. The 1997 Plan, 1995 Plan
and the 1990 Plan are collectively referred to as the "Plans."

      Restricted stock is granted at a price to be determined by the Board of
Directors, generally $.10 per share. The following tables summarize restricted
stock plan activity for the Plans during 1997.

<TABLE>
<CAPTION>
                                                Unvested Shares
                           -----------------------------------------------------
                            1997 Plan     1995 Plan      1990 Plan         Total
                           -----------   -----------   -------------   ---------
<S>                        <C>            <C>           <C>             <C>
Balance at 12/31/96 ....       --          69,680       259,841         329,521
 Awarded ...............   27,875         134,332            --         162,207
 Vested ................   (2,520)           (240)     (123,682)       (126,442)
 Forfeited .............       --          (8,415)      (30,275)        (38,690)
                           ------         -------      --------        --------
Balance at 12/31/97 ....   25,355         195,357       105,884         326,596
                           ======         =======      ========        ========
</TABLE>

<TABLE>
<CAPTION>
                                             Vested Shares
                           --------------------------------------------------
                            1997 Plan     1995 Plan     1990 Plan      Total
                           -----------   -----------   -----------   --------
<S>                        <C>           <C>           <C>           <C>
Balance at 12/31/96 ....         --      10,089        485,658       495,747
 Vested ................      2,520         240        123,682       126,442
                              -----      ------        -------       -------
Balance at 12/31/97 ....      2,520      10,329        609,340       622,189
                              =====      ======        =======       =======
</TABLE>

      The Company awarded 78,137 shares in 1996 and 3,937 shares in 1995 under
the 1995 Plan. The Company awarded 123,400 shares in 1995 under the 1990 Plan.

      The participant's right to sell the awarded stock under the Plans is
generally restricted as to 100% of the shares awarded during the first two
years following the award, 60% during the third year and 20% less each year
thereafter. The Company may repurchase unvested restricted shares at $0.10 per
share upon termination of employment. Awards under the Plans are compensatory,
and accordingly, the difference between the award price and the market value of
the shares under the Plans at the award date, is being amortized on a
straight-line basis over a five-year period.

      Options issuable under the 1997 Plan become exercisable as determined by
the Committee not to exceed ten years from the date of grant. Options granted
to date vest over five years at an annual rate of 20% on each anniversary date
of the date of grant. Prior to the adoption of the 1997 Plan, options were
granted under the 1988 Option Plan. As of December 31, 1997, 1,139,625 shares
of the Company's common stock remain available for grant under the 1997 Plan.

      In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(the "1995 Purchase Plan"), which qualifies as an "Employee Stock Purchase
Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986.
An aggregate total of 500,000 shares of common stock have been authorized for
issuance under the 1995 Purchase Plan, to be implemented through one or more
offerings, each approximately six months in length beginning on the first
business day of each January and July. The price at which shares may be
purchased during each offering will be the lower of (i) 85% of the closing
price of the common stock as reported on the NASDAQ National Market (the
"closing price") on the date that the offering commences or (ii) 85% of the
closing price of the common stock on the date the offering terminates. In 1997,
1996 and 1995, the Company issued 34,527, 33,433 shares and 18,228 shares under
the 1995 Purchase Plan, respectively.

      The Company records stock compensation in accordance with Accounting
Principles Board ("APB") Opinion 25. Had the compensation cost for these plans
been determined consistent with SFAS 123, "Accounting for Stock-Based
Compensation", the Company's net income and earnings per share would have been
the following pro forma amounts:

<TABLE>
<CAPTION>
                                     1997           1996           1995
                                 ------------   ------------   ------------
<S>                              <C>            <C>            <C>
Net income:      As reported     $29,166        $18,837        $22,811
                 Pro forma       $28,327        $18,369        $22,718
Diluted EPS:     As reported     $  1.14        $  0.74        $  0.90
                 Pro forma       $  1.11        $  0.72        $  0.90
</TABLE>

      The weighted-average grant-date fair value of options granted during
1997, 1996 and 1995 was approximately $4,651,000, $2,952,000 and $2,528,000,
respectively.

      For purposes of the pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:


                                                                              43
<PAGE>   46
Notes to Consolidated Financial Statements

(Continued)

<TABLE>
<CAPTION>
                                 1997            1996             1995
                               ---------       ---------       ---------
<S>                            <C>             <C>             <C>
Volatility                         36%              34%             36%
Risk-Free interest rate           5.8%             6.6%            5.6%
Dividend yield                   1.43%            1.71%           1.71%
Expected life of options       9 years          9 years         9 years
</TABLE>

      The fair value of the "look-back" option feature of the 1995 Purchase
Plan is valued as the sum of its two separate components. The first component
is 15% of the value of a share of unvested common stock, and the second
component is 85% of the fair value of an option to purchase a share of common
stock at the market price on the date of grant. The following assumptions were
used for "look-back" option grants made under the 1995 Purchase Plan:

<TABLE>
<CAPTION>
                                 1997            1996             1995
                               ---------       ---------       ---------
<S>                            <C>             <C>             <C>
Volatility                          28%             18%             28%
Risk-Free interest rate            5.7%            5.8%            5.6%
Dividend yield                    1.43%           1.71%           1.71%
Expected life of options       6 months        6 months        6 months
</TABLE>

      Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

      The following table summarizes the Option Plans activity for the three
years ended December 31, 1997.

<TABLE>
<CAPTION>
                                                      Weighted average
                                       Number of       exercise price
                                         shares          per share
                                     -------------   -----------------
<S>                                  <C>             <C>
Outstanding at December 31, 1994      1,794,500          $  7.35
Granted                                 207,500          $ 27.48
Exercised                               (25,000)         $  6.03
                                      ---------          -------
Outstanding at December 31, 1995      1,977,000          $  9.30
Granted                                 268,500          $ 24.88
Exercised                               (80,000)         $  6.34
                                      ---------          -------
Outstanding at December 31, 1996      2,165,500          $ 11.51
Granted                                 345,000          $ 29.52
Exercised                               (46,000)         $  9.89
Terminated                              (26,500)         $ 19.24
                                      ---------          -------
Outstanding at December 31, 1997      2,438,000          $ 13.60
Exercisable at year end               1,662,800          $  7.69
</TABLE>

      1,662,800 of the 2,438,000 options outstanding at December 31, 1997 have
exercise prices between $4.1875 and $28.625, with a weighted average exercise
price of $7.69 and a weighted average remaining contractual life of 3.8 years.
All of these options are exercisable. The remaining 775,200 options have
exercise prices between $7.0625 and $29.875, with a weighted average exercise
price of $26.26 and a weighted average remaining contractual life of 9 years.

Note 7-- Net Capital

As a broker-dealer, PFD is subject to the Securities and Exchange Commission's
("SEC") regulations and operating guidelines which, among other things,
requires PFD to maintain a specified amount of net capital, as defined, and a
ratio of aggregate indebtedness to net capital, as defined, not exceeding 15 to
1. Net capital and the related ratio of aggregate indebtedness to net capital
may fluctuate on a daily basis. PFD's net capital, as computed under Rule
15c3-1, was $3,565,383 at December 31, 1997, which exceeded required net
capital of $1,134,105 by $2,431,278. The ratio of aggregate indebtedness to net
capital at December 31, 1997 was 4.77 to 1.

      PFD is exempt from the reserve requirements of Rule 15c3-3, since its
U.S. broker-dealer transactions are limited to the purchase, sale and
redemption of redeemable securities of registered investment companies. All
customer funds are promptly transmitted and all securities received in
connection with activities as a broker-dealer are promptly delivered. PFD does
not otherwise hold funds or securities for, or owe money or securities to,
customers.

Note 8-- Benefit Plans

The Company and its subsidiaries have two defined contribution plans for
eligible employees: a retirement benefit plan and a savings and investment plan
("the Benefit Plans") qualified under Section 401 of the Internal Revenue Code.
The Company makes contributions to a trustee, on behalf of eligible employees,
to fund both the retirement benefit and the savings and investment plans. The
Company's expenses under the Benefit Plans were approximately $2,666,000 in
1997, $2,531,000 in 1996 and $1,930,000 in 1995.

      Both of the Company's qualified Benefit Plans described above cover all
full-time employees who have met certain age and length-of-service
requirements. Regarding the retirement benefit plan, the Company contributes an
amount which would purchase a certain targeted monthly pension benefit at the
participant's normal retirement date. In connection with the savings and
investment plan, participants can voluntarily contribute up to 10% of their
compensation to the plan, and the Company will match this contribution up to
2%.

Note 9-- Related Party Transactions

Certain officers and/or directors of the Company and its subsidiaries are
officers and/or trustees of the Pioneer Family of Mutual Funds and the
Company's international mutual funds. Investment management fees earned from
the mutual funds were approximately $118,851,000 in 1997, $84,178,000 in 1996
and $60,832,000 in 1995. Underwriting commissions and distribution fees earned
from the sales of mutual fund shares were approximately $23,322,000 in 1997,
$16,636,000 in 1996 and $8,515,000 in 1995. Shareholder services fees earned
from the mutual funds were approximately $28,002,000 in 1997, $25,340,000 in
1996 and $22,447,000 in 1995.

      Within the Pioneer Family of Mutual Funds, total revenues from Pioneer II
were approximately $50,933,000 in 1997, $39,102,000 in 1996 and $32,244,000 in
1995.

      Certain partners of Hale and Dorr LLP, the Company's legal counsel, are
officers and/or directors of the Company and its subsidiaries. Amounts paid to
Hale and Dorr LLP consist of legal fees of approximately $635,000 in 1997,
$1,189,000 in 1996 and $1,587,000 in 1995.

      Hale and Dorr LLP is a partner in the law firm Brobeck Hale and Dorr
International. The Company paid legal fees in the amount of approximately
$76,000 in 1997, $188,000 in 1996 and $1,355,000 in 1995 to Brobeck Hale and
Dorr International.


44
<PAGE>   47
Notes to Consolidated Financial Statements

(Continued)

Note 10--Commitments

U.S. rental expense amounted to approximately $3,766,000 in 1997, $2,977,000 in
1996 and $3,007,000 in 1995, respectively. Future minimum payments under the
leases amount to approximately $4,702,000 in 1998, $4,642,000 in 1999,
$4,514,000 in 2000, $4,608,000 in 2001, $1,979,000 in 2002 and $1,490,000
thereafter. These future minimum rental payments include estimated annual
operating and tax expenses of approximately $1,973,000.

      Rental expense for the Polish Mutual Fund operations amounted to
approximately $956,000, $963,000 and $863,000 in 1997, 1996 and 1995,
respectively. The lease is open-ended and can be terminated by either the
Company or the lessor upon 90 days notice.

      The Company is contingently liable to the Investment Company Institute
Mutual Insurance Company for unanticipated expenses or losses in connection
with its mutual fund operations in an amount not to exceed $500,000. Two thirds
of this amount is secured by an irrevocable standby letter of credit with a
bank.

      The Company is committed to additional capital contributions of $1.2
million to Pioneer Poland U.S. L.P. and $1.2 million to Pioneer Poland U.K.
L.P. These contributions are due upon call by Management as prior contributions
become 80% invested. At December 31, 1997, the Company was committed to
additional capital contributions of $1.5 million to Pioneer Ventures Limited
Partnership II, a U.S. venture capital fund.

      The Company acts as a passive, non-bank trustee for retirement plan
accounts. IRS regulations and operating guidelines allow a passive, non-bank
trustee to accept fiduciary accounts only if the trustee's net worth
(determined as of the end of the most recent taxable year) exceeds the greater
of (1) $100,000 or (2) two percent of the net assets of fiduciary accounts. At
December 31, 1997, the Company's net worth of $183.7 million was 2.9% of the
net assets of fiduciary accounts.

Note 11-- Notes Payable

Notes payable of the Company consist of the following:

<TABLE>
<CAPTION>
                                                        December 31,
                                                     1997           1996
                                                 ------------   ------------
                                                   (Dollars in Thousands)
<S>                                              <C>            <C>
Revolving Credit Agreement ...................   $ 96,000       $ 87,500
Senior note payable to a commercial
  lender, principal payable on August 15,
  2004, interest payable at 7.95%. ...........     20,000             --
Preferred shares financing related to the
  Russian investment operations, principal
  payable in three annual installments of
  $2,000,000 through 1998, interest
  payable at 5% ..............................      2,000          4,000
Small Business Administration ("SBA")
  financing, notes payable to a bank,
  interest payable semi-annually at rates
  ranging from 6.12% to 9.8%, principal
  due in 1998 through 2003 ...................      4,950          4,950
Note payable to a bank, interest payable
  quarterly at the three month LIBOR rate
  plus 6%, principal due in eight quarterly
  installments through January, 1999,
  secured by lease rental payments and
  proceeds from insurance policies ...........      1,897             --
Note payable to a bank, guaranteed by
  the Swedish Exports Credits Guarantee
  Board, interest payable at 5.77%,
  secured by equipment .......................         --            812
Notes payable to a bank, guaranteed
  by the Company, principal payable in
  semi-annual installments, of $214,000
  through November 30, 1999, no interest
  payable, secured by equipment ..............        858          1,286
Note payable to a bank, guaranteed by the
  Swedish Exports Credits Guarantee Board,
  principal payable in semi-annual
  installments of $1,415,000 through
  January 31, 2002, interest payable at
  6.42%, secured by equipment ................     12,732         14,147
Note payable to a supplier, principal
  payable in quarterly installments of
  $336,000 through April 15, 2001,
  interest payable at 7.85%, secured
  by equipment ...............................      4,699          6,042


                                                        December 31,
                                                     1997           1996
                                                 ------------   ------------
                                                   (Dollars in Thousands)

Note payable to a supplier, principal and
  interest payable in quarterly installments
  of $102,000 through April 15, 2001,
  interest payable at 7.85%, secured
  by equipment ...............................      1,239          1,535
Note payable to a supplier, principal
  payable in quarterly installments of
  $285,000 through May 30, 2001,
  interest payable at 8.00%, secured
  by equipment ...............................      3,988          5,128
Note payable to a supplier, principal
  payable in quarterly installments of
  $338,000 through December 15, 2001,
  interest payable at 8.25%, secured by
  equipment ..................................      5,237          6,422
Note payable to a supplier, principal
  payable in semiannual installments of
  $637,000 through April 15, 2003,
  interest payable at 8.30%, secured by
  equipment ..................................      5,795             --
Note payable to a bank, guaranteed by
  OPIC, principal payable in twelve equal
  semi-annual installments of $1,583,000
  commencing March 15, 1998, interest
  payable at 6.37% ...........................     19,000         19,000
Project financing, guaranteed by OPIC,
  payable in semiannual installments of
  $620,000 through December 15, 2003,
  interest payable at 7.20% ..................      7,440          8,680
                                                 --------       --------
                                                  185,835        159,502
Less: Current portion ........................    (17,411)       (10,002)
                                                 --------       --------
                                                 $168,424       $149,500
                                                 ========       ========
</TABLE>

                                                                              45
<PAGE>   48
Notes to Consolidated Financial Statements

(Continued)

      In June 1996, the Company entered into an agreement with a syndicate of
commercial banks for a senior credit facility (the "Credit Facility"). Under
the Credit Facility, the Company may borrow up to $60 million (the "B-share
Revolver") to finance dealer advances relating to sales of back-end load shares
of the Company's domestic mutual funds. See Note 15 below for further
discussion on dealer advances. The B-share Revolver is subject to annual
renewal by the Company and the commercial banks. In the event the B-share
Revolver is not renewed at maturity it will automatically convert into a
five-year term loan. Advances under the B-share Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus 1.25%. The Credit Facility also
provides that the Company may borrow up to $80 million for general corporate
purposes (the "Corporate Revolver"). The Corporate Revolver is payable in full
on June 11, 2001. Advances under the Corporate Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus the applicable margin tied to
the Company's financial performance, of either 0.75%, 1.25%, 1.50% or 1.75%.
The Credit Facility provides that the Company must pay additional interest at
the rate of 0.375% per annum of the unused portion of the facility and an
annual arrangement fee of $35,000. The commitment fees were approximately $0.7
million. At December 31, 1997, the Company had borrowed $55 million under the
Corporate Revolver and $41 million under the B-share Revolver. For the years
ended December 31, 1997, 1996 and 1995, the weighted average interest rate on
the borrowings under the Credit Facility and lines of credit outstanding was
8.0%, 7.3% and 7.1%, respectively.

      The Credit Facility contains restrictions that limit, among other things,
encumbrances on the assets of the Company's domestic mutual fund subsidiaries
and certain mergers and sales of assets. Additionally, the Credit Facility
requires that the Company meet certain financial covenants including covenants
that require the Company to maintain certain minimum ratios with respect to
debt to cash flow and interest payments to cash flow and a minimum tangible net
worth, all as defined in the Credit Facility. As of December 31, 1997, the
Company was in compliance with all applicable covenants of the Credit Facility.

      Under the Credit Facility, the Company is required to maintain interest
rate protection agreements covering at least 60% of the outstanding
indebtedness under the B-share Revolver. As of December 31, 1997, the Company
entered into six five-year interest rate swap agreements with a member of the
Company's banking syndicate which has effectively fixed the interest rate on
notional amounts totaling $100 million. Under these agreements, the Company
will pay the bank a weighted average fixed rate of 6.76%, plus the applicable
margin (ranging from 0.75% to 1.75%), on the notional principal. The bank will
pay the Company interest on the notional principal at the current variable rate
stated under the B-share Revolver. The Company has incurred approximately
$976,000 and $499,000 of interest expense on these swap agreements during 1997
and 1996, respectively. The fair value of these agreements was $2,639,000, at
December 31, 1997, which represents the estimated amount the Company would be
obligated to pay to terminate the agreements.

      In August 1997, the Company entered into an agreement (the "Note
Agreement") with a commercial lender pursuant to which the Company issued to
the lender Senior Notes in the aggregate principal amount of $20 million. The
Senior Notes, which bear interest at the rate of 7.95% per annum, have a
maturity of seven years. The restrictions and financial covenants under the
Note Agreement are substantially similar to the restrictions and financial
covenants under the Credit Facility. The Company used the proceeds of this
financing to reduce the amount outstanding under the Corporate Revolver.

      In March 1996, TGL executed a loan agreement with Enskilda, a division of
Skandinaviska Enskilda Banken, pursuant to which Enskilda agreed to provide a
direct loan of SEK 94.5 million (approximately $14.2 million) bearing interest
at a fixed rate of 6.42% to finance the gyratory crusher and related equipment
procured from Svedala Crushing and Screening AB. This loan is guaranteed by the
Swedish Export Credits Board. As of December 31, 1997, TGL has drawn down SEK
93.8 million (or approximately $14.1 million) of which $1.4 million had been
repaid.

      In April 1996, TGL obtained credit approval from Caterpillar Financial
Services Corporation ("Caterpillar"), pursuant to which Caterpillar agreed to
provide a revolving credit facility of up to $21 million, subsequently
increased to $23 million in September 1997, to finance the purchase of
replacement mining equipment. The revolving credit facility is subject to
renewal in May 1998. In the event the credit facility is not renewed at
maturity, most of the outstanding loan balances (approximately $20 million)
will continue to be repaid over a five year term. At December 31, 1997,
Caterpillar had issued disbursements, at TGL's request, for $26.3 million of
such facility bearing interest at fixed rates ranging from 7.85% to 8.30%, of
which $5.4 million had been repaid.

      In October 1996, TGL and the Company executed definitive loan agreements
with the Overseas Private Investment Corporation ("OPIC") pursuant to which
OPIC agreed to guarantee financing up to $19 million with respect to the Phase
III expansion. Disbursement under this facility occurred in November 1996. The
underlying note is payable in twelve equal semiannual installments from March
15, 1998, through September 15, 2003, and bears a fixed interest rate of 6.37%.
In addition, a spread of 2.65% on outstanding borrowings is payable to OPIC. As
a condition to such OPIC financing, the Company was required to execute a
Project Completion Agreement pursuant to which the Company would advance funds,
as necessary (to the extent of dividends received during the construction stage
of the Phase III Expansion), to permit TGL to fulfill all of its financial
obligations, including cost overruns related to project development. Under the
Project Completion Agreement, the Company is also obligated to advance the
lesser of $9 million and any deficit with respect to a defined cash flow ratio
in the event of a payment default. The foregoing obligations of the Company
continue to exist until such time as TGL satisfies a production test and
certain financial and project development benchmarks. In addition, the Company
has guaranteed that if the percentage of gold proceeds that TGL must convert to
Ghanaian cedis increases above a certain threshold, and, as a result of
regulatory or other restrictions, TGL is unable to convert such proceeds to
satisfy its debt service obligations to OPIC, the Company shall cover up to $10
million of such obligations. The Company insured 90% of this obligation in
January 1997. In addition to third party financing facilities, the Company
provided $4.25 million in bridge financing to TGL in 1997 to satisfy TGL's
short term liquidity needs.

46
<PAGE>   49
Notes to Consolidated Financial Statements

(Continued)

      Forest-Starma completed a $9.3 million project financing, guaranteed by
OPIC, in July 1996, of which $7.4 million was outstanding at December 31, 1997.
The underlying note is payable in twelve remaining equal semiannual
installments through December 15, 2003, and bears interest at a fixed rate of
7.20%. In addition, a guarantee fee of 2.75% on outstanding borrowings is
payable to OPIC prior to project completion, increasing to 5.125% after project
completion when the Company ceases to be an obligor in the transaction. As a
condition to OPIC's guarantee, the Company was required to execute a Project
Completion Agreement pursuant to which the Company would advance funds to
Forest-Starma, as necessary, to permit Forest-Starma to fulfill all of its
financial obligations, including cost overruns related to project development,
until such time as Forest-Starma satisfies a production test and certain
financial and project development benchmarks.

      Maturities of notes payable at December 31, 1997, for each of the next
five years and thereafter are as follows (dollars in thousands):

<TABLE>
<CAPTION>
<S>                                          <C>
1998 .....................................   $ 17,411
1999 .....................................     14,326
2000 .....................................     13,470
2001 .....................................     66,663
2002 .....................................      7,555
Thereafter ...............................     66,410
                                             --------
                                             $185,835
                                             ========
</TABLE>

Note 12-- Minority Interest

The Company's minority interest liability includes the interests of the
minority equity holders of the Company's consolidated entities. The liability
for each entity is recorded based upon the net book value of that entity at the
balance sheet date, except for those instances in which agreements could result
in the Company redeeming those interests at amounts greater than their share of
the net book value. In those instances, adjustments are made to the liability
to reflect the minority equity holders' economic interests under those
agreements. As of December 31, 1997 and 1996, the Company's minority interest
liability consisted of the following:

<TABLE>
<CAPTION>
                                               1997        1996
                                            -------     -------
<S>                                         <C>         <C>
Gold mining operations                      $ 7,958     $ 7,514
Russian investment operations                26,091      24,495
Polish brokerage operations                      13         194
Poland Fund--venture capital                 24,269      11,443
Pioneer Ventures Limited
  Partnerships--venture capital              28,346      18,011
                                            -------     -------
Totals                                      $86,677     $61,657
                                            =======     =======
</TABLE>

Note 13-- Major Customers

During the year ended December 31, 1997, gold sales aggregated $89.5 million.
During 1997, gold shipments from TGL in Ghana to two unaffiliated European
refiners accounted for $43.9 million and $41 million, respectively,
representing 95% of such total sales.

      During the year ended December 31, 1996, gold sales aggregated $78.3
million. During 1996, gold shipments from TGL in Ghana to two unaffiliated
European refiners accounted for $41.2 million and $37.1 million, respectively,
representing 100% of such total sales.

      During the year ended December 31, 1995, gold sales aggregated $90.2
million. During 1995, gold shipments from TGL in Ghana to two unaffiliated
European refiners accounted for $51.0 million and $39.2 million, respectively,
representing 100% of such total sales.

Note 14-- Acquisitions

Russian Investment Operations

On April 11, 1995, the Company completed its acquisition of the First Voucher
Fund and related financial entities. The Company financed the acquisition
through the use of its lines of credit in the amount of approximately $14
million and the issuance of preferred share financing in the amount of $6
million. Results of operations are included in the accompanying consolidated
statements of income commencing April 11, 1995. This transaction was accounted
for under the purchase method. Pro forma results of operations have not been
presented since the amounts are not material to the consolidated financial
statements.

Note 15-- Dealer Advances

Certain of the Pioneer Family of Mutual Funds maintain a multi-class share
structure, whereby the participating funds offer both the traditional front-end
load shares (Class A shares) and back-end load shares (Class B and Class C
shares). Back-end load shares do not require the investor to pay any sales
charge unless there is a redemption before the expiration of the minimum
holding period which ranges from three to six years in the case of Class B
shares and is one year in the case of Class C shares. However, the Company pays
upfront sales commissions (dealer advances) to broker-dealers ranging from 2%
to 4% of the sales transaction amount on Class B shares and 1% on Class C
shares. The participating Funds pay the Company distribution fees of 0.75% and
service fees of 0.25%, per annum of their net assets invested in Class B and
Class C shares, subject to annual renewal by the participating Fund's Board of
Trustees. In addition, the Company is paid a contingent deferred sales charge
(CDSC) on B and C shares redeemed within the minimum holding period. The CDSC
is paid based on declining rates ranging from 2% to 4% on the purchases of
Class B shares and 1% for Class C shares.

      The Company capitalizes and amortizes Class B dealer advances for
financial statement purposes over periods which range from three to six years
depending on the participating Fund. The Company capitalizes and amortizes
Class C share dealer advances for financial statement purposes over a twelve
month period. The Company deducts the dealer advances in full for tax purposes
in the year such advances are paid. Distribution fees received by the Company
from participating Funds are recorded in income as earned. CDSC received by the
Company from redeeming shareholders reduce unamortized dealer advances
directly. In 1997, 1996 and 1995, the Company paid B-share dealer advances in
the amount of $16.3 million, $23.2 million and $14.9 million, respectively.

Note 16-- Financial Information by Business Segment

The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in these consolidated financial statements. SFAS 131
requires companies to present segment information using the management
approach. The management approach is based on the way that management organizes
the segments within a Company for making operating decisions and assessing
performance. The Company's operating segments are organized around services and
products provided, as well as geographic regions. The segment information for
1996 and 1995 has been restated to conform to these requirements. The
intersegment transactions are for management services and the secondment of
employees. These transactions are generally priced on a cost or cost plus
basis.


                                                                              47
<PAGE>   50
Notes to Consolidated Financial Statements

(Continued)

Note 16-- Financial Information by Business Segment (Continued)

Total revenues and income (loss) by business segment and geographic region,
excluding intersegment transactions (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                      Financial Services
                                                                             -------------------------------------
                                                                 Domestic
                                                                Investment                                Czech
                                                                Management      Russia       Poland     Republic
                                                              -------------- ------------ ----------- ------------
<S>                                                             <C>            <C>          <C>         <C>
Year ended December 31, 1997:
 Gross revenues and sales ...................................   $  176,900     $ 54,708     $14,542     $  1,046
                                                                ==========     ========     =======     ========
 Intersegment eliminations ..................................   $   (8,427)    $   (188)    $    --     $     --
                                                                ==========     ========     =======     ========
 Net revenues and sales .....................................   $  168,473     $ 54,520     $14,542     $  1,046
                                                                ==========     ========     =======     ========
 Income (loss) before income taxes and minority interest ....   $   52,146     $ 12,811     $ 2,409     $ (1,406)
                                                                ==========     ========     =======     ========
 Taxes ......................................................   $   20,086     $  5,411     $ 1,114     $   (162)
                                                                ==========     ========     =======     ========
 Minority interest ..........................................   $       --     $  2,086     $   (52)    $     --
                                                                ==========     ========     =======     ========
 Net income (loss) ..........................................   $   32,060     $  5,314     $ 1,347     $ (1,244)
                                                                ==========     ========     =======     ========
 Depreciation and amortization ..............................   $   17,358     $  1,673     $   625     $    280
                                                                ==========     ========     =======     ========
 Interest expense ...........................................   $    2,885     $  7,902     $     6     $     --
                                                                ==========     ========     =======     ========
 Capital expenditures .......................................   $    6,986     $  3,749     $   322     $     --
                                                                ==========     ========     =======     ========
 Gross identifiable assets at December 31, 1997 .............   $  263,073     $135,809     $16,308     $    237
                                                                ==========     ========     =======     ========
 Intersegment eliminations ..................................   $ (127,705)    $ (3,877)    $    --     $     --
                                                                ==========     ========     =======     ========
 Net identifiable assets at December 31, 1997 ...............   $  135,368     $131,932     $16,308     $    237
                                                                ==========     ========     =======     ========
Year ended December 31, 1996:
 Gross revenues and sales ...................................   $  130,854     $ 21,147     $10,374     $    245
                                                                ==========     ========     =======     ========
 Intersegment eliminations ..................................   $   (4,474)    $     --     $    --     $     --
                                                                ==========     ========     =======     ========
 Net revenues and sales .....................................   $  126,380     $ 21,147     $10,374     $    245
                                                                ==========     ========     =======     ========
 Income (loss) before income taxes and minority interest ....   $   27,683     $  2,655     $  (885)    $ (3,172)
                                                                ==========     ========     =======     ========
 Taxes ......................................................   $   10,246     $ (1,806)    $   (72)    $   (272)
                                                                ==========     ========     =======     ========
 Minority interest ..........................................   $       --     $  3,125     $   (83)    $     --
                                                                ==========     ========     =======     ========
 Net income (loss) ..........................................   $   17,437     $  1,336     $  (730)    $ (2,900)
                                                                ==========     ========     =======     ========
 Depreciation and amortization ..............................   $   13,312     $    577     $    --     $     --
                                                                ==========     ========     =======     ========
 Interest expense ...........................................   $    2,328     $  6,518     $    --     $     --
                                                                ==========     ========     =======     ========
 Capital expenditures .......................................   $    3,599     $ 10,716     $   213     $    631
                                                                ==========     ========     =======     ========
 Gross identifiable assets at December 31, 1996 .............   $  211,661     $ 92,353     $ 9,507     $    313
                                                                ==========     ========     =======     ========
 Intersegment eliminations ..................................   $  (96,894)    $ (3,092)    $    --     $     --
                                                                ==========     ========     =======     ========
 Net identifiable assets at December 31, 1996 ...............   $  114,767     $ 89,261     $ 9,507     $    313
                                                                ==========     ========     =======     ========
Year ended December 31, 1995:
 Gross revenues and sales ...................................   $   95,375     $  5,762     $ 8,649     $     --
                                                                ==========     ========     =======     ========
 Intersegment eliminations ..................................   $   (3,144)    $     --     $    --     $     --
                                                                ==========     ========     =======     ========
 Net revenues and sales .....................................   $   92,231     $  5,762     $ 8,649     $     --
                                                                ==========     ========     =======     ========
 Income (loss) before income taxes and minority interest ....   $   15,065     $  5,020     $   798     $     --
                                                                ==========     ========     =======     ========
 Taxes ......................................................   $    6,213     $  2,156     $   592     $     --
                                                                ==========     ========     =======     ========
 Minority interest ..........................................   $       --     $  1,449     $    --     $     --
                                                                ==========     ========     =======     ========
 Net income (loss) ..........................................   $    8,852     $  1,415     $   206     $     --
                                                                ==========     ========     =======     ========
 Depreciation and amortization ..............................   $    8,597     $    218     $    --     $     --
                                                                ==========     ========     =======     ========
 Interest expense ...........................................   $      341     $     --     $     3     $     --
                                                                ==========     ========     =======     ========
 Capital expenditures .......................................   $    5,676     $  8,000     $   646     $     --
                                                                ==========     ========     =======     ========
 Gross identifiable assets at December 31, 1995 .............   $  151,826     $ 48,957     $ 5,432     $     --
                                                                ==========     ========     =======     ========
 Intersegment eliminations ..................................   $  (66,594)    $     --     $    --     $     --
                                                                ==========     ========     =======     ========
 Net identifiable assets at December 31, 1995 ...............   $   85,232     $ 48,957     $ 5,432     $     --
                                                                ==========     ========     =======     ========

</TABLE>
<TABLE>
<CAPTION>

                                                                   Venture Capital
                                                              --------------------------
                                                                           Cent. & East.
                                                                Domestic      Europe
                                                              ----------- --------------
<S>                                                             <C>          <C>
Year ended December 31, 1997:
 Gross revenues and sales ...................................   $ 1,828      $    603
                                                                =======      ========
 Intersegment eliminations ..................................   $    --      $    (81)
                                                                =======      ========
 Net revenues and sales .....................................   $ 1,828      $    522
                                                                =======      ========
 Income (loss) before income taxes and minority interest ....   $14,678      $ (2,454)
                                                                =======      ========
 Taxes ......................................................   $ 4,348      $    297
                                                                =======      ========
 Minority interest ..........................................   $ 4,005      $ (1,386)
                                                                =======      ========
 Net income (loss) ..........................................   $ 6,325      $ (1,365)
                                                                =======      ========
 Depreciation and amortization ..............................   $   176      $    214
                                                                =======      ========
 Interest expense ...........................................   $   402      $     --
                                                                =======      ========
 Capital expenditures .......................................   $    38      $     34
                                                                =======      ========
 Gross identifiable assets at December 31, 1997 .............   $77,101      $ 28,767
                                                                =======      ========
 Intersegment eliminations ..................................   $    (7)     $     --
                                                                =======      ========
 Net identifiable assets at December 31, 1997 ...............   $77,094      $ 28,767
                                                                =======      ========
Year ended December 31, 1996:
 Gross revenues and sales ...................................   $ 1,989      $    594
                                                                =======      ========
 Intersegment eliminations ..................................   $    --      $     --
                                                                =======      ========
 Net revenues and sales .....................................   $ 1,989      $    594
                                                                =======      ========
 Income (loss) before income taxes and minority interest ....   $ 9,272      $ (3,689)
                                                                =======      ========
 Taxes ......................................................   $ 2,964      $    (90)
                                                                =======      ========
 Minority interest ..........................................   $ 1,804      $ (2,210)
                                                                =======      ========
 Net income (loss) ..........................................   $ 4,504      $ (1,389)
                                                                =======      ========
 Depreciation and amortization ..............................   $   124      $     --
                                                                =======      ========
 Interest expense ...........................................   $   403      $     --
                                                                =======      ========
 Capital expenditures .......................................   $    14      $     24
                                                                =======      ========
 Gross identifiable assets at December 31, 1996 .............   $58,454      $ 15,603
                                                                =======      ========
 Intersegment eliminations ..................................   $    (7)     $     --
                                                                =======      ========
 Net identifiable assets at December 31, 1996 ...............   $58,447      $ 15,603
                                                                =======      ========
Year ended December 31, 1995:
 Gross revenues and sales ...................................   $ 1,016      $    817
                                                                =======      ========
 Intersegment eliminations ..................................   $    --      $     --
                                                                =======      ========
 Net revenues and sales .....................................   $ 1,016      $    817
                                                                =======      ========
 Income (loss) before income taxes and minority interest ....   $ 3,732      $   (850)
                                                                =======      ========
 Taxes ......................................................   $ 1,581      $   (250)
                                                                =======      ========
 Minority interest ..........................................   $  (133)     $     --
                                                                =======      ========
 Net income (loss) ..........................................   $ 2,284      $   (600)
                                                                =======      ========
 Depreciation and amortization ..............................   $   109      $     --
                                                                =======      ========
 Interest expense ...........................................   $   402      $     --
                                                                =======      ========
 Capital expenditures .......................................   $    49      $     14
                                                                =======      ========
 Gross identifiable assets at December 31, 1995 .............   $39,562      $ 16,869
                                                                =======      ========
 Intersegment eliminations ..................................   $    (1)     $     --
                                                                =======      ========
 Net identifiable assets at December 31, 1995 ...............   $39,561      $ 16,869
                                                                =======      ========
</TABLE>

48
<PAGE>   51
Notes to Consolidated Financial Statements

(Continued)

<TABLE>
<CAPTION>
                     -Subtotal-
 Real Estate          Worldwide            Gold
   Services      Financial Services       Mining         Timber          Other          Total
-------------   --------------------   ------------   ------------   ------------   -------------
  <S>                <C>                 <C>            <C>           <C>            <C>
  $    543           $  250,170          $ 89,487       $ 11,879      $   9,667      $  361,203
  ========           ==========          ========       ========      =========      ==========
  $     --           $   (8,696)         $     --       $     --      $  (9,667)     $  (18,363)
  ========           ==========          ========       ========      =========      ==========
  $    543           $  241,474          $ 89,487       $ 11,879      $      --      $  342,840
  ========           ==========          ========       ========      =========      ==========
  $ (2,939)          $   75,245          $ (2,818)      $ (6,996)     $  (3,621)     $   61,810
  ========           ==========          ========       ========      =========      ==========
  $ (1,035)          $   30,059          $   (426)      $   (270)     $  (1,816)     $   27,547
  ========           ==========          ========       ========      =========      ==========
  $     --           $    4,653          $    444       $     --      $      --      $    5,097
  ========           ==========          ========       ========      =========      ==========
  $ (1,904)          $   40,533          $ (2,836)      $ (6,726)     $  (1,805)     $   29,166
  ========           ==========          ========       ========      =========      ==========
  $     55           $   20,381          $ 23,260       $  2,871      $     399      $   46,911
  ========           ==========          ========       ========      =========      ==========
  $     --           $   11,195          $  2,766       $  3,045      $   2,065      $   19,071
  ========           ==========          ========       ========      =========      ==========
  $    344           $   11,473          $ 11,520       $  5,206      $     177      $   28,376
  ========           ==========          ========       ========      =========      ==========
  $  7,173           $  528,468          $152,866       $ 50,998      $  24,199      $  756,531
  ========           ==========          ========       ========      =========      ==========
  $ (1,847)          $ (133,436)         $     --       $     --      $ (19,302)     $ (152,738)
  ========           ==========          ========       ========      =========      ==========
  $  5,326           $  395,032          $152,866       $ 50,998      $   4,897      $  603,793
  ========           ==========          ========       ========      =========      ==========
  $    104           $  165,307          $ 78,279       $     --      $   2,679      $  246,265
  ========           ==========          ========       ========      =========      ==========
  $     --           $   (4,474)         $     --       $     --      $  (2,679)     $   (7,153)
  ========           ==========          ========       ========      =========      ==========
  $    104           $  160,833          $ 78,279       $     --      $      --      $  239,112
  ========           ==========          ========       ========      =========      ==========
  $   (463)          $   31,401          $  4,737       $   (729)     $  (1,744)     $   33,665
  ========           ==========          ========       ========      =========      ==========
  $   (186)          $   10,784          $  1,519       $   (246)     $    (509)     $   11,548
  ========           ==========          ========       ========      =========      ==========
  $     --           $    2,636          $    644       $     --      $      --      $    3,280
  ========           ==========          ========       ========      =========      ==========
  $   (277)          $   17,981          $  2,574       $   (483)     $  (1,235)     $   18,837
  ========           ==========          ========       ========      =========      ==========
  $      2           $   14,015          $ 16,371       $    116      $     671      $   31,173
  ========           ==========          ========       ========      =========      ==========
  $     --           $    9,249          $    137       $     --      $      --      $    9,386
  ========           ==========          ========       ========      =========      ==========
  $     14           $   15,211          $ 74,789       $  2,466      $     199      $   92,665
  ========           ==========          ========       ========      =========      ==========
  $  2,692           $  390,583          $149,613       $ 43,367      $  18,209      $  601,772
  ========           ==========          ========       ========      =========      ==========
  $     --           $  (99,993)         $     --       $     --      $ (11,067)     $ (111,060)
  ========           ==========          ========       ========      =========      ==========
  $  2,692           $  290,590          $149,613       $ 43,367      $   7,142      $  490,712
  ========           ==========          ========       ========      =========      ==========
  $     --           $  111,619          $ 90,242       $     --      $      --      $  201,861
  ========           ==========          ========       ========      =========      ==========
  $     --           $   (3,144)         $     --       $     --      $      --      $   (3,144)
  ========           ==========          ========       ========      =========      ==========
  $     --           $  108,475          $ 90,242       $     --      $      --      $  198,717
  ========           ==========          ========       ========      =========      ==========
  $     --           $   23,765          $ 24,365       $     --      $  (5,598)     $   42,532
  ========           ==========          ========       ========      =========      ==========
  $     --           $   10,292          $  8,521       $     --      $  (2,215)     $   16,598
  ========           ==========          ========       ========      =========      ==========
  $     --           $    1,316          $  1,807       $     --      $      --      $    3,123
  ========           ==========          ========       ========      =========      ==========
  $     --           $   12,157          $ 14,037       $     --      $  (3,383)     $   22,811
  ========           ==========          ========       ========      =========      ==========
  $     --           $    8,924          $ 15,744       $     --      $     328      $   24,996
  ========           ==========          ========       ========      =========      ==========
  $     --           $      746          $    278       $     --      $      --      $    1,024
  ========           ==========          ========       ========      =========      ==========
  $     --           $   14,385          $ 15,601       $  7,001      $     116      $   37,103
  ========           ==========          ========       ========      =========      ==========
  $     --           $  262,646          $ 82,782       $ 33,212      $  12,703      $  391,343
  ========           ==========          ========       ========      =========      ==========
  $     --           $  (66,595)         $     --       $     --      $  (5,679)     $  (72,274)
  ========           ==========          ========       ========      =========      ==========
  $     --           $  196,051          $ 82,782       $ 33,212      $   7,024      $  319,069
  ========           ==========          ========       ========      =========      ==========
</TABLE>

                                                                              49
<PAGE>   52
Information Relating to Shares

      The Company's common stock is quoted on the NASDAQ National Market under
the symbol PIOG. At March 1, 1998, the Company had approximately 5,000
shareholders. The price range of the common stock and the dividends paid to
shareholders during each quarter of the last two years were as follows:

Price Range of Common Stock*

<TABLE>
<CAPTION>
                                   1997                1996
                            ------------------- -------------------
                               High      Low       High      Low
                            --------- --------- --------- ---------
<S>                         <C>       <C>       <C>       <C>
January--March ............  $26-3/4    $22-7/8    $30-1/2    $26-3/8
April--June ...............   26-1/2     23         28-3/4     26-1/4
July--September ...........   32-1/2     22-3/4     27         25-3/4
October--December .........   33-3/8     27-1/8     26-3/4     21-3/4
</TABLE>

* Prices reflect the closing price of the Company's common stock on the
  NASDAQ National Market.

Dividends on Common Stock

<TABLE>
<CAPTION>
                                                      Per Share
Record Date                       Payable Date         Amount
---------------------------   --------------------   ----------
<S>                           <C>                    <C>
March 1, 1996 .............       March 11, 1996     $ .10
June 3, 1996 ..............        June 12, 1996       .10
September 3, 1996..........   September 10, 1996       .10
December 2, 1996 ..........    December 10, 1996       .10
March 10, 1997 ............       March 17, 1997       .10
June 2, 1997 ..............         June 9, 1997       .10
September 2, 1997..........   September 10, 1997       .10
December 1, 1997 ..........     December 9, 1997       .10
March 2, 1998 .............       March 10, 1998       .10
</TABLE>


50
<PAGE>   53
[INSIDE BACK COVER]

THE PIONEER GROUP, INC. AND SUBSIDIARIES
Directors and Executive Officers*

Philip L. Carret, Director Emeritus.
Trustee Emeritus of certain of the Pioneer Family of Mutual Funds; Founder
Chairman of Carret & Company.

John F. Cogan, Jr., Chairman of the Board, Director and President. Chairman of
the Board, President and Trustee of each of the Pioneer Family of Mutual Funds;
President and Director of Pioneer Omega, Inc., Pioneer First Russia, Inc.,
Pioneer International Corporation and Pioneer Metals and Technology, Inc.;
Director of Pioneer Real Estate Advisors, Inc., Pioneer Capital Corporation,
Pioneer Management (Ireland) Limited, "Pioneer Investments," Pioneering Services
Corporation and Pioneer Forest, Inc.; Chairman of the Board and Director of
Pioneering Management Corporation, Pioneer Funds Distributor, Inc., Closed Joint
Stock Company "Pioneer Metals International," Closed Joint-Stock Company
"Forest-Starma," Teberebie Goldfields Limited and Pioneer Goldfields Limited;
Chairman of the Supervisory Board of Pioneer Fonds Marketing GmbH, Pioneer First
Polish Investment Fund Joint Stock Company S.A. and Pioneer Czech Investment
Company, A.S.; and Partner, Hale and Dorr LLP.

Robert L. Butler, Director and Executive Vice President. President and Director
of Pioneer Funds Distributor, Inc.; Director of Pioneering Management
Corporation, Pioneering Services Corporation, Pioneer Real Estate Advisors,
Inc., Pioneer International Corporation and Pioneer Management (Ireland)
Limited; Vice Chairman of the Supervisory Board of Pioneer Fonds Marketing GmbH;
and Member of the Supervisory Board of Pioneer First Polish Investment Fund
Joint Stock Company S.A. and Pioneer Czech Investment Company, A.S.

Maurice Engleman, Director. Chairman and CEO of Professional Equity Corporation
and Marketing Two, Inc., and Principal, Engleman & Associates.

Alan J. Strassman, Director. Partner and Chairman of the Board of Martingale
Asset Management; Treasurer and Member of the Board of Trustees of the Museum of
Fine Arts, Boston and a member of the Board of WGBH (public television and
radio)

Jaskaran S. Teja, Director. Senior Vice President of Pioneer International
Corporation; and Director of "Pioneer Investments," Pioneer Goldfields Limited
and Closed Joint Stock Company "Pioneer Metals International."

David D. Tripple, Director and Executive Vice President. Executive Vice
President and Trustee of each of the Pioneer Family of Mutual Funds; President
and Director of Pioneering Management Corporation; Director of Pioneer Capital
Corporation, Pioneer Real Estate Advisors, Inc., Pioneer International
Corporation, Pioneer Management (Ireland) Limited, "Pioneer Investments,"
Pioneer Funds Distributor, Inc., and Pioneer First Russia, Inc.; Member of
Supervisory Board of Pioneer First Polish Investment Fund Joint Stock Company
S.A. and Pioneer Czech Investment Company A.S.; and Director and Vice President
of Pioneer Omega, Inc.

John H. Valentine, Director. Director of Pioneer Capital Corporation; Director
of Entrepreneurial Management of Health Policy Institute; Director of
Visualization Technology, Inc.; Overseer of Hurricane Island/Outward Bound
School and Trustee of Thompson Island Outward Bound Education Center; and
Vice-Chairman of the Board of Boston Medical Center.

William H. Keough, Senior Vice President, Chief Financial Officer and Treasurer;
Treasurer of each of the Pioneer Family of Mutual Funds; an Treasurer of
Pioneering Management Corporation, Pioneering Services Corporation, Pioneer Real
Estate Advisors, Inc., Pioneer Capital Corporation, Pioneer SBIC Corp., Pioneer
Funds Distributor, Inc., Pioneer International Corporation, Pioneer Metals and
Technology, Inc., Pioneer First Russia, Inc. and Pioneer Omega, Inc.

Timothy T. Frost, Vice President. Director and Vice President of Pioneer Omega,
Inc. and Pioneer First Russia, Inc.; Director of "Pioneer Investments;" Senior
Vice President of Pioneer International Corporation; and Vice President of
Pioneer Real Estate Advisors, Inc.

Lucien Girard, III, Vice President. Managing Director and Chief Executive of
Pioneer Goldfields Limited; Managing Director of Teberebie Goldfields Limited;
and Director of Pioneer Metals and Technology, Inc.

Stephen G. Kasnet, Vice President. President and Director of Pioneer Real Estate
Advisors, Inc.; Trustee and Vice President of Pioneer Real Estate Shares; and
President of Pioneer Real Estate Advisors Poland, s.p. Z.O.O.

John F. Lawlor, Vice President. Vice President of Pioneering Management
Corporation; Director of Pioneer Goldfields Limited, Teberebie Goldfields
Limited, Pioneer Management (Ireland) Limited, Closed Joint Stock Company
"Pioneer Metals International" Pioneer Forest, Inc. and Closed Joint-Stock
Company "Forest-Starma;" and Vice President and Director of Pioneer Metals and
Technology, Inc.

Alicja K. Malecka, Vice President. President of Pioneer First Polish Investment
Fund Joint Stock Company S.A. and Pioneer Investment Poland Ltd.; Senior Vice
President of Pioneer International Corporation; Member of Supervisory Board of
Pioneer Czech Investment Company, A.S.; Director of "Pioneer Investments" and
Pioneer Polski Dom Maklerski S.A.; and Vice President of Pioneer Real Estate
Advisors, Inc.

Frank M. Polestra, Vice President. President and Director of Pioneer Capital
Corporation and Pioneer SBIC Corp.

William H. Smith, Jr., Vice President. President and Director of Pioneering
Services Corporation; Director and Vice President of Pioneer International
Corporation; Director of Pioneer Management (Ireland) Limited; and Member of
Supervisory Board of Pioneer Czech Investment Company, A.S.

Joseph P. Barri, Secretary. Secretary of each of the Pioneer Family of Mutual
Funds and the Company's subsidiaries; and Partner, Hale and Dorr LLP.

Robert P. Nault, General Counsel and Assistant Secretary. Assistant Secretary of
each of the Pioneer Family of Mutual Funds and the Company's subsidiaries.



* As defined pursuant to Section 16 of the Securities Exchange Act of 1934.

60 State Street, Boston Massachusetts 02109