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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997.

[ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___ to ____.

                        Commission file number 000-21463

                       Murdock Communications Corporation
                    ----------------------------------------
        (Exact name of small business issuer as specified in its charter)


          Iowa                                        42-1337746
-------------------------------              --------------------------------
(State or other jurisdiction of             (IRS Employer Identification No.)
 incorporation or organization)

                    1112 29th Avenue S.W., Cedar Rapids, Iowa     52404
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          (Address of principal executive offices)               (Zip Code)

          Issuer's telephone number, including area code: 319-362-6900
                                                          ------------
      Securities registered pursuant to Section 12(b) of the Exchange Act:

                                                     Name of each exchange on
         Title of each class                             which registered
                  NA                                           NA
          ----------------------                      -----------------------

      Securities registered pursuant to Section 12(g) of the Exchange Act:

                           Common Stock, No Par Value
                         ---------------------------------
                                (Title of class)

                    Redeemable Common Stock Purchase Warrants
                    ------------------------------------------
                                (Title of class)


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     Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes  X  No
                                                                       ---   ---
     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of Issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to the Form 10-KSB. 
[ ]

     State the issuer's revenues for its most recent fiscal year. $8,417,120.

     The aggregate market value of the common stock held by nonaffiliates of the
issuer as of March 30, 1998 was $5,883,675.

     On March 30, 1998, there were outstanding 4,858,439 shares of the issuer's
no par value common stock.

     Transitional Small Business Disclosure Format (check one): Yes     No  X 
                                                                    ---    ---
DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement for the 1998 Annual Meeting of the
Shareholders of the issuer are incorporated by reference into Part III of this
report.


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                                     PART I

         Unless indicated otherwise, the information in this report with respect
to Murdock Communications Corporation and its subsidiaries ("MCC" or the
"Company") gives effect to (i) the acquisition (the "PIC Acquisition") by MCC on
October 31, 1997 of two affiliated companies, Priority International
Communications, Inc. ("PIC") and PIC Resources Corp. ("PICR"), and (ii) the
acquisition (the "Incomex Acquisition") by MCC on February 13, 1998 of Incomex,
Inc. ("Incomex"). PIC, PICR and Incomex are sometimes collectively referred to
herein as the "Acquired Companies."

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         MCC is a provider of telecommunications services primarily to payphone
operators, hotels, consumers and businesses. MCC's telecommunications service
offerings include automated and operator assisted long distance services,
calling card billing services and telecommunications management and consulting
services, including the MCC Telemanager(TM) system. During 1997, MCC's revenues
were generated primarily through the Lodging Partnership program with AT&T Corp.
("AT&T") pursuant to which the Company routes collect, calling card and operator
assisted calls from hotel and motel properties to the AT&T long distance
network. Following the completion of the PIC Acquisition, the completion of the
Incomex Acquisition and the commercial introduction of the MCC Telemanager
system, the Company anticipates that the percentage of the Company's revenues
derived from the Lodging Partnership will decline substantially in 1998. See
"Forward-Looking Statements."

         PIC ACQUISITION. The Company completed the PIC Acquisition in October
1997. PICR, through its wholly owned subsidiary ATN Communications Incorporated
("ATN"), operates an operator services center and contracts through PIC to
provide automated and operator assisted long distance services to payphone
operators, consumer service providers, hotels and other institutions. Through
ATN's live operator services, the Company offers valued added customer service,
technology and account management to its customers. During 1997, the Company
also provided automated operator and call processing services ("OSP Services")
to certain hotels not enrolled in the Lodging Partnership. OSP Services consist
of reselling credit card and collect calls originating at the hotel property and
providing a commission to the hotel property. With the completion of the PIC
Acquisition, the Company is in the process of discontinuing its OSP Services and
replacing such services with ATN's live operator services.

         INCOMEX ACQUISITION. The Company completed the Incomex Acquisition in
February 1998. Incomex contracts with Mexican resort hotels to provide
international long distance operator services, primarily to the United States.
Incomex currently uses a U.S. long distance operator services company to process
the calls received from the 


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hotels. During 1998, the Company anticipates that Incomex will move a
substantial portion of its call processing volume from this operator services
company to ATN's live operator services. Through Incomex, the Company offers
value added customer services, training and technology to enhance the
profitability of the telephone departments of Mexican resort hotels.

         MCC TELEMANAGER. In September 1997, the Company commenced offering the
MCC Telemanager system after testing in key pilot sites since 1996. The MCC
Telemanager uses proprietary computer software to monitor telephone activity at
a hotel and enable the hotel to identify problems and opportunities for revenue
growth by producing reports reflecting an analysis of the costs and revenues
derived from the hotel's telecommunications system. The Company anticipates that
the MCC Telemanager will generate revenues through a one-time fee for the
initial installation and audit and a monthly service fee. At December 31, 1997,
there were 67 MCC Telemanager units installed with tests pending with respect to
approximately 20 additional placements.

         AT&T LODGING PARTNERSHIP. Through the Lodging Partnership, the Company
offers AT&T's operator services bundled with value-added services provided by
MCC. The Company receives recurring revenue in the form of commissions and bonus
payments from AT&T for calling card, collect and other operator assisted
long-distance calls placed from hotel rooms subscribing to this program.
Effective January 16, 1998, the Company entered into a new agreement with AT&T
(the "New AT&T Agreement") to restructure the Company's arrangements with AT&T
principally to increase average commissions per call, provide additional bonus
opportunities based on call volume and eliminate minimum requirements with
respect to call volume and the number of hotel rooms enrolled in the Lodging
Partnership.

         MCC'S MARKETS. Based on the Company's internal market research,
management estimates that there are over 2.3 million payphones in the United
States, with over 500,000 operated by independent payphone operators and the
remainder operated by Regional Bell Operating Companies such as Bell Atlantic or
local service providers such as GTE. As of December 31, 1997, the Company
provided services to 3,698 payphones in the United States. Based on the
Company's internal market research, management estimates that there are
approximately 60,000 hotels and motels in the United States, of which
approximately 20,000 properties with approximately 3,000,000 to 3,500,000 rooms
are in the Company's targeted market of hotels that have more than 100 rooms or
owners that control more than one property. As of December 31, 1997, MCC
provided services to approximately 126,179 rooms, which includes approximately
103,728 rooms through the Lodging Partnership, 13,369 rooms through the
Company's OSP Services and 9,082 rooms through PIC and ATN. The completion of
the Incomex Acquisition in February 1998 added approximately 18,000 rooms in
Mexican hotels and resorts.


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BUSINESS STRATEGY

         The Company's objective is to become a leading provider of operator
services to the North American payphone, consumer services, hotel and
institutional markets and to be a market leader in providing telecommunications
management to businesses through proprietary software and services. During 1997,
the Company developed a strategic plan to focus on growth through acquisitions
and new software product development. The principal elements of the Company's
business strategy include:

         EXPAND MARKETS SERVED. The Company intends to focus its expansion on
providing operator services to payphones, consumer services providers, hotels
and institutions in expanding geographic markets. The Incomex Acquisition
provides the Company with an entry into the hotel and resort market in Mexico
and the PIC Acquisition added operator services to payphones and institutions.

         FOCUS ON REVENUE OPPORTUNITIES FROM THE MCC TELEMANAGER SYSTEM. The
Company has decided to focus its product development resources on the
development and implementation of the MCC Telemanager system. Based on its
experience in marketing telecommunications services to hotel and motel
properties, the Company believes that the MCC Telemanager system provides the
Company with a unique way to monitor and report to customers with respect to the
efficiency and the profitability of the customer's telecommunications system and
increase revenues both for the customer and MCC. The Company anticipates that
the MCC Telemanager will generate revenues through a one-time fee for the
initial installation and audit and a monthly service fee. Subject to the
availability of sufficient capital and the Company's progress with respect to
its other strategic objectives, the Company intends to continue to develop other
new technology and services to attract and retain customers and to increase the
sources of revenues to the Company.

         INTEGRATE ACQUIRED COMPANIES. Execution of the Company's strategy will
require that the operations of the Acquired Companies be effectively integrated
with the Company. The Company believes that the combination of the Company and
the Acquired Companies will enable the Company to achieve certain operating
efficiencies and market growth. The Company plans to move long distance services
for a number of hotel rooms in the United States and Mexico from the Lodging
Partnership or the Company's OSP Services to ATN's live operator services. The
Company believes that moving services to ATN will provide increased margins by
reducing license, equipment and other third party fees and through more
advantageous pricing. In addition, the Company believes that the hotels serviced
by Incomex in Mexico offer a good market for the MCC Telemanager based upon
operating inefficiencies in the telecommunications systems at a number of these
hotels. As part of its ongoing integration of the Acquired Companies, the
Company will attempt to identify and achieve additional operating efficiencies
which would not otherwise be available to the Company or any of the Acquired
Companies on an individual basis.



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         RESTRUCTURE AT&T AGREEMENT. The Company has offered telecommunications
services to hotels through the Lodging Partnership with AT&T since October 1994.
The Lodging Partnership provides an association of the Company's services with
the value of the AT&T brand name. Effective January 16, 1998, the Company
entered into the New AT&T Agreement to restructure its agreement with AT&T
principally to increase average commissions per call, provide additional bonus
opportunities based on call volume and eliminate minimum requirements with
respect to call volume and the number of hotel rooms enrolled in the Lodging
Partnership. Prior to entering into the New AT&T Agreement, the Company had
concluded that minimum room requirements under the old agreement with AT&T
forced the Company to keep a number of hotels in the Lodging Partnership where
the incremental costs to provide services to such hotels exceeded the revenues
generated by the Company from such hotels. In addition, declining call volumes
due to "dial around" undercut the commission pricing structure under the old
AT&T agreement from the Company's point of view. The Company believes that the
New AT&T Agreement gives the Company more flexibility to move hotels from the
Lodging Partnership to the Company's OSP Services or live operator services, or
to cease providing services to these hotels, based upon the Company's evaluation
of the potential gross profits under the available service alternatives. The
Company also believes that the New AT&T Agreement will increase average revenue
per call with respect to the hotels that remain in the Lodging Partnership.

         The Company's ability to complete its strategic plan is subject to a
number of risks and uncertainties including, without limitation, those described
under "Forward-Looking Statements" below.

RECENT DEVELOPMENTS

         PIC ACQUISITION. On October 31, 1997, the Company consummated the PIC
Acquisition. Pursuant to the PIC Acquisition, MCC Acquisition Corp., a wholly
owned subsidiary of the Company ("MCC Sub"), acquired all of the outstanding
capital stock of two affiliated companies, PIC and PICR. PIC sells long distance
operator services to pay phones, hotels, hospitals, consumer service providers,
universities, condominiums and other institutions. PICR, operating through its
wholly owned subsidiary, ATN, is a provider of long distance operator services.

         Pursuant to the Stock Purchase Agreement, dated as of August 22, 1997,
as amended (the "PIC Agreement"), among MCC Sub, PIC and certain shareholders of
PIC, MCC Sub acquired all of the outstanding capital stock of PIC in exchange
for a cash payment at closing of $500,000 and the issuance by MCC Sub to certain
of the PIC shareholders of a promissory note in the principal amount of $840,000
originally due March 1, 1998 (the "Short-Term Note") and promissory notes with
an aggregate principal amount of $1,910,000 due in six installments commencing
on January 31, 1998 through April 30, 1999 (the "Long-Term Notes" and,
collectively with the Short-Term Note, the "PIC Notes"). Pursuant to the Stock
Purchase Agreement, dated as of August 22, 1997, as amended (the "PICR
Agreement"), among MCC Sub, PICR, ATN and the shareholders 


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of PICR, MCC Sub acquired all of the outstanding capital stock of PICR in
exchange for a cash payment at closing of $30,000 and the issuance by the
Company of an aggregate of 300,000 shares of the Company's no par value common
stock (the "Common Stock"). In connection with the PIC Acquisition, the Company
also loaned $400,000 to ATN for capital expenditures, provided $800,000 to
refinance certain notes held by officers of PICR and agreed to provide at least
$1,050,000 in cash or Common Stock to finance future acquisitions or growth by
PIC and PICR.

         The PICR Agreement provides that the Company will issue additional
shares of Common Stock to the extent that the combined earnings before interest,
taxes, depreciation and amortization ("EBITDA") of PIC and PICR for either of
the first two full twelve-month periods after closing exceeds $1,000,000. Shares
of Common Stock with a market value of $1.25 per share based on average trading
value will be issued for each dollar of EBITDA over $1,000,000 during either of
the twelve-month periods. The Company granted piggyback registration rights to
the PICR shareholders with respect to secondary offerings of Common Stock made
within three years after the closing of the PIC Acquisition.

         MCC Sub's obligations under the PIC Notes have been guaranteed by the
Company and are subject to a security interest in the shares of PIC stock and
PICR stock acquired by MCC Sub pursuant to the PIC Acquisition. In the event
that MCC Sub defaults with respect to the repayment of the Short-Term Note, the
holders of the PIC Notes will have the right to rescind the PIC Acquisition by
surrendering the shares of Common Stock issued in the PIC Acquisition and the
PIC Notes to MCC Sub in exchange for the return of all of the shares of PIC
stock and PICR stock. In addition, if the PIC Acquisition is rescinded, the
shareholders of PIC and PICR would retain the $530,000 cash payments made at
closing and the $400,000 advanced to ATN. If the Company completes any primary
offering of its equity securities during the term of the PIC Notes (other than
pursuant to employee options or outstanding warrants), the Company must apply at
least 67% of the net proceeds of such offering in excess of $500,000 to repay
the Short-Term Note and then 50% of the net proceeds received after March 1,
1998 to repay the Long-Term Notes.

         Effective February 27, 1998, the holders of the Short-Term Note agreed
to extend the due date of the principal and interest under the Short-Term Note
from March 1, 1998 to June 30, 1998. On June 30, 1998, the Company will be
obligated to pay $840,000 under the Short-Term Note. Two of the holders of the
Long-Term Notes (whose notes represent approximately 98.1% of the total
principal amount represented by the Long-Term Notes) also agreed to extend the
first due date of principal under the Long-Term Notes from January 31, 1998 to
February 27, 1998. On February 27, 1998, the Company made a payment of $187,361
to these two holders for the first payment of principal under the Long-Term
Notes.


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         INCOMEX ACQUISITION. On February 13, 1998, MCC completed its
acquisition of Incomex. Incomex is a provider of international operator services
to resort hotels in Mexico. Incomex specializes in providing operator services
from Mexican hotels to the United States, and, as of February 13, 1998, provided
these services to more than 80 hotel and resort properties representing more
than 18,000 rooms.

         Pursuant to the Stock Purchase Agreement, dated as of February 13, 1998
(the "Incomex Agreement"), among MCC Sub, Incomex and the shareholders of
Incomex, MCC Sub acquired all of the outstanding capital stock of Incomex in
exchange for the issuance at closing of 400,000 shares of Common Stock.

         Under the Stock Purchase Agreement, the Incomex shareholders also have
the right to receive additional consideration based on the net income before
income taxes ("IBT") of Incomex during certain periods after closing. The
Incomex shareholders will receive cash consideration equal to 60% of the IBT of
Incomex during the period from February 1, 1998 through July 31, 1998. In
addition, the Incomex shareholders will receive additional shares of Common
Stock at the end of each of the two periods of 12 consecutive full calendar
months during the 24 month period beginning August 1, 1998 to the extent that
Incomex's IBT exceeds $400,000 during either such 12 month period. Shares of
Common Stock with a market value of $1.50 per share based on average trading
value will be issued for each dollar of IBT over $400,000 during either of the
twelve month periods.

THE AT&T AGREEMENT

         The Company entered into the New AT&T Agreement effective January 16,
1998, superseding the Company's previous agreement with AT&T (the "Old AT&T
Agreement"). The New AT&T Agreement requires that the Company route collect,
calling card and operator assisted calls from hotel and motel properties
included in the Lodging Partnership program through AT&T's long-distance
network. The Company is entitled to receive three different types of payments
from AT&T under the New AT&T Agreement: call processing commissions, compliance
incentive bonuses and quarterly call volume bonuses. AT&T also paid a $200,000
signing bonus to the Company in the fourth quarter of 1997. The Company derived
54% and 63% of its revenues from AT&T for the years ended December 31, 1997 and
1996, respectively.

         Call processing commissions are payable monthly, based upon the number
of completed calls directed by the Company to the AT&T long-distance network
under the New AT&T Agreement. For the year ended December 31, 1997, the Company
earned $2.9 million in call processing commissions from AT&T.

         Under the New AT&T Agreement, AT&T will pay to the Company a quarterly
compliance incentive bonus based on the number of completed calls directed by
the 

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Company to the AT&T long-distance network for each month during the quarter.
For the year ended December 31, 1997, the Company earned compliance incentive
bonuses of $1.2 million.

         The New AT&T Agreement also provides for an additional quarterly bonus
of $100,000 if certain call volume targets are met for the quarter. The Old AT&T
Agreement did not provide the Company with a comparable bonus. If the Company
terminates the AT&T Agreement for any reason prior to the expiration of its
initial term on January 16, 2000, the Company must reimburse AT&T for all
quarterly incentive bonuses paid to the Company under the New AT&T Agreement.

         AT&T may conduct audits of a sample of hotel and motel properties
included in the Lodging Partnership program to determine if the Company's system
complies with certain standards as set forth in the New AT&T Agreement. These
standards include matters such as identifying AT&T as the provider of operator
services, providing dialing instructions near each telephone, assuring the
quality of telephone service and minimum standards for connection. Based on the
results of these audits, the compliance incentive bonus may be reduced by up to
100% depending on the percentage of noncomplying locations. For purposes of the
AT&T compliance audits, any hotel and motel property with one or more
noncomplying rooms is considered to be noncomplying in its entirety.
Accordingly, the Company would not be entitled to commissions or bonus payments
with respect to calls from rooms in any such hotel property until the hotel
property was brought into full compliance. AT&T has generally performed
compliance audits on a monthly basis and, as of December 31, 1997, had not
notified the Company of any noncomplying locations.

         The New AT&T Agreement expires on January 16, 2000, and is
automatically renewed for an additional two-year period unless either party
thereto terminates the New AT&T Agreement by providing written notice to the
other party within 30 days of the expiration date. AT&T has also reserved a
number of grounds to terminate the New AT&T Agreement prior to its expiration,
including (1) the receipt by AT&T of complaints regarding MCC, (2) claims made
against AT&T arising from MCC's acts or omissions, and (3) if AT&T determines
that its tariffed services or its public image or goodwill may be adversely
affected by the New AT&T Agreement.

TELECOMMUNICATIONS MANAGEMENT AND CONSULTING  SERVICES

        The Company  intends to offer a wide array of telecommunications
software and consulting services to hotels, institutions and other businesses.
At present, the Company's most significant consulting service offering is
the MCC Telemanager system. The MCC Telemanager  was introduced to the market
in September 1997 and, as of December 31, 1997, there were 67 units installed
with tests pending with respect to approximately 20 additional placements.

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         The MCC Telemanager provides the Company's customers with information
regarding the hotel's telecommunications system in management reports which are
easy to read and understand by persons lacking specialized expertise in
telecommunications. MCC generates this information by remotely accessing
information from the hotel's private automatic branch exchange ("PABX"),
premise-based call processing equipment. The information is then analyzed based
on proprietary computer software programs developed by MCC. The results of this
analysis are summarized in reports and graphs that are remotely transmitted to
the hotel or motel. Thus, MCC can provide hotel and motel general managers with
succinct and useful information on a daily, weekly or monthly basis, including
evaluations and recommendations regarding system performance and an analysis of
equipment, service and billings. The MCC Telemanager allows hotels to monitor
the accuracy of costs charged and revenues and refunds paid by telephone
carriers.

         Initially, the Company expects to market the MCC Telemanager to the
entire North American hospitality industry with special emphasis toward hotels
participating in the Lodging Partnership program, hotels and resorts in Mexico
under contract with Incomex and hotels using the Company's OSP services. The
Company anticipates that the MCC Telemanager will generate revenues through a
one-time fee for the initial installation and audit and a monthly service fee.
In future periods, the Company anticipates expanding the market for the MCC
Telemanager and its other telecommunications consulting services outside of the
hospitality industry to include other businesses. See "Forward-Looking
Statements."

THE COMPANY'S SERVICES AND TECHNOLOGY

         MCC generally provides telecommunications services to payphone
operators and hotel properties pursuant to one-year contracts. These contracts
normally are negotiated with a management company or owner for multiple
payphones or properties. MCC provides telecommunications services to payphone
operators through ATN's live operator services. MCC generally provides operator
services to hotel rooms either through ATN's live operator services or through
the Lodging Partnership using AT&T operator services. In all cases, MCC
generally utilizes an "intelligent" call processing system to process the calls.
This equipment is attached by MCC technicians directly to the payphone or the
hotel's telephone trunk lines. The microcomputer in the call processing system
is programmed with procedures defining how to route and process calling card and
collect calls depending on which operator service program the property utilizes.
The Company pays commissions to payphone operators or the hotel management based
on calling card and collect calls.

         CALL PROCESSING THROUGH ATN OPERATOR SERVICES. If the Company's call
processing equipment is used in conjunction with ATN's live operator services,
the Company's equipment routes all calling card and collect calls to the
Company's operator services center. Generally, calls to the operator services
center are handled by live operators. The Company then processes and bills the
calls to the end user and is 

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responsible for the collection of the amounts billed. Because the ATN
operator services use live operators rather than automated equipment, the
Company generally does not pay equipment and license fees as it does for calls
processed through the Company's OSP Services.

         CALL PROCESSING THROUGH THE LODGING PARTNERSHIP. If the Company's call
processing equipment is used in conjunction with the Lodging Partnership, the
equipment routes all calling card and collect calls to the AT&T network. AT&T   
then processes and bills the calls to the end user and is  responsible for the
collection of the amounts billed. The Company's equipment stores the
origination and destination number and the length, date and time of the call.
This information is sent by modem to MCC's Cedar Rapids facility where it is
compared to the calls AT&T shows as being processed. On a monthly basis AT&T
remits commissions, fees and management bonuses to the Company.

         CALL PROCESSING THROUGH OSP SERVICE. Most calling card and collect
calls through the Company's OSP Services have been handled on an automated basis
using equipment that provides dialing instructions via digitized voice messages,
identifies the long distance carrier as MCC, validates the calling card being
used and stores the billing information of the call. With the completion of the
PIC Acquisition, the Company is in the process of discontinuing its OSP Services
and replacing such services with ATN's live operator services.

         CHARGED SERVICES. In addition to call processing services, the Company
also charges its institutional customers for certain other technology and other
services offered by the Company.

         Equipment Sales. MCC provides its customers with telecommunications
technology and support, including voice mail and PABX. MCC generally owns or
leases the telephone equipment. MCC also provides lease financing (through
Berthel Fisher & Company, Inc. and its subsidiaries and their affiliated leasing
partnerships ("Berthel")) to its customers for the equipment and installs the
equipment on the hotel's premises. Berthel held approximately 9.2% of the Common
Stock outstanding as of December 31, 1997.

         One-plus Services. Hotel and motel properties using MCC's call
processing services for calling card, collect and operator assisted calls can
continue to access long distance carriers for direct dial (one-plus) calls
through their own arrangements with a preferred long-distance carrier. MCC,
however, provides one of its customers access to long distance carriers for
one-plus services. These one-plus services are outside the scope of the Lodging
Partnership program with AT&T. In providing one-plus services, MCC arranges
access with the long distance carrier and resells long distance access to its
customer at a price greater than MCC's cost.

         VALUE-ADDED TECHNOLOGY AND SERVICES. Along with operator services, MCC
also provides its customers with technical expertise, equipment maintenance
services and 

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other value-added offerings without additional charge. These value-added
offerings include answer detection, fraud deterrence, equipment maintenance and
consulting and management reporting aimed at improving the profitability of
hotel telecommunications departments.

         Answer Detection. The Company's call processing equipment provides
answer detection to ensure that all room-billed calls are timed correctly.
Answer detection not only makes hotel and motel properties more money by
ensuring that all room-billed calls are charged to the guest, but also ensures
that uncompleted calls do not appear on the guest's folio at check out. If
answer detection were not provided by MCC's equipment, hotel and motel
properties would need to invest in expensive stand-alone equipment to receive
this same benefit.

         Fraud Deterrence. MCC's equipment can be programmed to provide fraud
control by denying completion of certain collect 1-800 and 1-900 calls.

         Equipment Maintenance. Equipment located on customer premises can be
accessed remotely by MCC technicians, enabling rapid response to customer
problems. All technicians are trained and manufacturer certified to service and
install equipment manufactured by leading industry vendors, such as Mitel, Xiox,
Amtel and Innovations, thus enabling MCC to diagnose problems with all types of
telecommunications equipment. Technicians are on-call 24 hours a day and can be
dispatched immediately to the customer site. Additionally, MCC maintains a
relationship with qualified technicians located in all regions of the United
States who also are on-call 24 hours a day.

         Consulting and Management Assistance. MCC provides its customers with a
wide variety of assistance in the management of a customer's telecommunications
system. As MCC contracts with a new customer, it provides assistance in
determining the selection of services. Thereafter, MCC serves as a single point
of contact to support the customer's telecommunications needs and to address
problems, including service issues relating to third party vendors of
telecommunications equipment or services. MCC expects that the new MCC
Telemanager program will complement its traditional consulting and management
services.

         GUIDE*STAR JOINT VENTURE. During the fourth quarter of 1997, the
Company decided to wind up Guide*Star, LLC (the "Joint Venture"), a joint
venture formed with MatrixMedia Holdings, Inc. ("MMH") in March 1997 to market
access telephones. In forming the Joint Venture, the Company contributed
contractual rights to use the Company's speed dial access phones and the IVR
technology to the Joint Venture, including the Company's rights pursuant to an
Audiotext Services Agreement, dated December 13, 1996 (the "ICI Agreement"),
between the Company and Interactive Communications, Inc. ("ICI"). Effective
November 30, 1997, the Company agreed to pay approximately $317,000 to ICI in
connection with the Company's termination of the ICI Agreement.

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         INTERNET ACCESS. Since 1996, the Company has been developing a program
to provide special Internet access from designated hotel rooms. The purpose of
the program is to equip designated hotel rooms with more efficient, high speed
telephone lines designed to better accommodate Internet use and to provide
hotels with the opportunity to derive additional income from guests interested
in improved Internet access. The Company has decided to suspend development of
its Internet access program in order to focus on developing the MCC Telemanager,
integrating the PIC Acquisition and the Incomex Acquisition with the Company's
operations and implementing the other elements of the Company's business
strategy. No prediction can be made at this time as to when, if ever, the
Company will resume development of an Internet access program.

         NETWORK SERVICES. The Company, along with another call processing
services provider (the "DSP Provider"), had been developing an off-premise
network-based technology referred to as the Digital Services Platform ("DSP") to
deliver the same value added services currently provided by the Company's
premise-based equipment. The DSP Provider utilizes its own proprietary system
which potentially could facilitate the development of a DSP system for the
hospitality market. The DSP technology was designed to create economies of scale
for the Company by concentrating call traffic over existing carrier facilities.
The Company and the DSP Provider have decided to terminate the development of a
DSP system for the Company. This decision reflects principally the Company's
intent to focus its capital resources and management attention on the
development of the MCC Telemanager and on an acquisition program and the
Company's belief that the development of network services through the Internet
could provide an attractive alternative to the development of DSP technology.
The Company is currently examining the feasibility of providing private network
services through the Internet. However, the Company does not currently have any
definitive time frame for developing private network services through the
Internet and no prediction can be made at this time as to when, if ever, the
Company will develop such a system.

THE COMPANY'S EXISTING MARKETS

         MCC currently markets telecommunications services primarily to payphone
operators and hotels. With the PIC Acquisition in October 1997, the commercial
introduction of MCC Telemanager in September 1997 and the Incomex Acquisition in
February 1998, the Company has changed its strategic focus from concentrating on
expanding the Lodging Partnership program to hotels in the United States to
providing operator services and telecommunications management and consulting
services to a broader market including payphone operators, hotels, consumer
service providers and other businesses.

         PIC AND PICR. PIC is a sales and marketing company which sells value
added services through operator services contracts with payphone operators,
hotels, hospitals, universities, condominiums and other institutions. PICR,
operating through its wholly owned subsidiary, ATN, is a provider of long
distance operator services which has historically provided operator services to
many of PIC's customers.

                                       13
<PAGE>   14

         INCOMEX. Incomex contracts with Mexican resort hotels to provide
international long distance operator services, primarily to the United States.
As of February 13, 1998, Incomex provided telecommunications services to more
than 80 hotel and motel resort properties representing approximately 18,000
rooms. Incomex's target market includes 1,300 Mexican resort hotels representing
approximately 325,000 rooms.

         TELECOMMUNICATIONS MANAGEMENT AND CONSULTING SERVICES.  The Company
markets the MCC Telemanager to the entire North American hospitality industry
with special emphasis toward hotels participating in the Lodging Partnership
program and hotels and resorts in Mexico. In future periods, the Company
anticipates expanding the market for the MCC Telemanager and its other
telecommunications consulting services outside of the hospitality industry to
include other businesses. See "Forward-Looking Statements."

         LODGING PARTNERSHIP. The Company markets its telecommunications
services through the Lodging Partnership to hotel chains and management groups
controlling multiple properties. The Company concentrates on groups with
properties having 100 or more rooms. MCC has been able to develop relationships
with many of these owners and managers by providing the Company's value-added
services along with AT&T operator services through the Lodging Partnership.
Through the Lodging Partnership, MCC provides services to hotels and motels in
40 states and the District of Columbia. These customers range from properties
primarily serving the business traveler in metropolitan areas to resort
properties serving the vacationing public. Although there are many independent
hotels and motels in MCC's customer base, the majority of the properties are
affiliated with one of the more well-known franchisors, including Holiday Inn,
Marriott, Radisson, Sheraton, Hilton and Embassy Suites

COMPETITION

         The Company's markets are highly competitive. The Company's call
processing services and operator services compete for hospitality long distance
business with a variety of long distance interexchange carriers, including
Sprint, MCI and AT&T. Each of the major long distance interexchange carriers
provide guests with the ability to "dial around" hotel telephone systems by
using special codes such as 10-ATT or 1-800 phone numbers. See "Forward-Looking
Statements - Declining Call Volumes." Secondarily, MCC also competes with
traditional OSP service companies who specialize in providing services to
hotels, pay phone providers and other institutions. Should Sprint, MCI or AT&T
choose to compete directly with the Company in providing bundled telephone
services to the hospitality industry, such entity would be capable of devoting
substantially greater financial, lobbying, technical and marketing resources to
such a venture than the Company is capable of providing. There can be no
assurance that the Company will be able to compete successfully in its markets.
Start-up companies may also choose to enter into the Company's markets with
similar products. Any of these companies could form a strategic alliance with a
significant partner, such as the Company's relationship with AT&T, and establish
itself as a formidable competitor. In addition, the Company may 



                                       14
<PAGE>   15

face competition from alternative technologies which are currently under
development or which may be developed in the future.

         Competition to provide telecommunications services to payphone
operators and the hospitality industry is based principally on price, quality,
reliability and customer service. The Company believes that customer service is
a particularly significant factor because many hotel and motel property managers
and owners have recognized that the costs and complications of operating a
telecommunications system for their guests may outweigh the revenue
opportunities for the hotel. The Company seeks to assist its customers in
maximizing their telecommunications revenue and simplifying telecommunications
management.

MARKETING AND SALES

         The Company will seek to expand its business based on the development
and delivery to its customers of value-added services, proprietary software
technology and value-added equipment and management offerings.

         VALUE-ADDED EQUIPMENT AND MANAGEMENT OFFERINGS. By including
value-added equipment offerings as a part of its long distance offerings, MCC
believes that it is able to meet the total telecommunications needs of payphone
operators, hotel properties and other institutions and businesses more fully
than either the interexchange carriers or the OSP Service companies. MCC's
value-added equipment offerings include telephone call accounting, direct dial
answer detection, voice mail and proprietary telemanagement services, including
the MCC Telemanager.

         Additionally, the Company offers its customers a single point of
contact management program. MCC coordinates the efforts of various suppliers and
vendors to resolve any telecommunications problems and issues on behalf of
individual businesses. Management believes this program is particularly
appealing to the hotel industry which has been confounded by the multiple vendor
environment created by deregulation.

         RELATIONSHIP WITH AT&T. Through the Lodging Partnership with AT&T, MCC
is able to associate its telecommunications services with the AT&T brand name
and to participate in AT&T's cooperative advertising program. Under this
program, AT&T substantially shares in the costs of promoting MCC and AT&T
services to the traveling public. This cost-sharing arrangement enables MCC to
undertake a national advertising program at dramatically reduced costs.

         MCC'S SALES FORCE. The Company has an internal sales staff which
consists of six persons as of December 31, 1997. The Company's sales force
provides direct customer contact with each of the Company's hotel and motel
accounts. The sales force works in tandem with the Company's technicians to
design an appropriate telecommunications program for the customer, including
deciding whether to provide services through the Lodging Partnership or the
ATN's live operator services and 

                                     15
<PAGE>   16

demonstrating the Company's telecommunications management and consulting
services such as the MCC Telemanager.

REGULATION

         OVERVIEW. The Company's services are subject to federal and state
regulation. The Federal Communications Commission (the "FCC") exercises
jurisdiction over all facilities of, and services offered by, telecommunications
common carriers to the extent those facilities are used to provide, originate or
terminate interstate or international communications. State regulatory
commissions retain some jurisdiction over the same facilities and services to
the extent they are used to originate or terminate intrastate common carrier
communications. The Company holds various federal and state regulatory
authorizations. Incomex is subject to regulation by Mexican regulatory
authorities and holds a Mexican regulatory authorization.

         FEDERAL REGULATION. The Telecommunications Act of 1996 (the
"Telecommunications Act") became effective February 8, 1996. The
Telecommunications Act preempts state and local laws to the extent that they
prevent competitive entry into the provision of any telecommunications service.
Subject to this limitation, however, state and local governments retain most of
their existing regulatory authority. The Telecommunications Act imposes a
variety of new duties on incumbent local exchange carriers in order to promote
competition in local exchange and access services. The Company does not believe
that the Telecommunications Act has had a significant effect on the Company's
operations.

         The Company also makes informational filings with the FCC with respect
to all tariffs charged for OSP services. The FCC may request further information
with respect to, or otherwise challenge, any tariffs that the FCC considers to
be unreasonably high. As of December 31, 1997, the FCC had not commented on or
challenged the Company's tariffs.

         STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utilities commissions subject OSP service providers
such as the Company to some form of certification requirement, which requires
providers to obtain authority from the state public utilities commission prior
to the initiation of service. In most states, the Company also is required to
file tariffs setting forth the terms, conditions and prices for OSP services
that are classified as intrastate (for example, inter-LATA calls that are within
a single state). The Company also is required to update or amend its tariffs
when it adjusts its rates or adds new products, and is subject to various
reporting and record-keeping requirements. Accordingly, each time the Company
changes its tariffs with respect to intrastate OSP services, it must obtain the
necessary regulatory approvals from the state. The length of time required to
obtain certification or approval for a tariff varies from state to state, but
generally does not exceed a period of between 90 days and 6 months. Because the
state requirements regarding tariff filings do not apply to the 

                                       16
<PAGE>   17

Company's services provided through the Lodging Partnership, the Company does
not believe that such regulations have a material effect on the Company's
business.

         Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state laws and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to the Company's compliance with applicable laws or
regulations.

EMPLOYEES

         As of December 31, 1997, MCC had 103 full-time employees and 15
part-time employees. The Company believes its relationships with its employees
are good. None of the Company's employees is subject to a collective bargaining
agreement.

YEAR 2000 COMPLIANCE

         Management believes that the MCC Telemanager and all related software
and hardware are in compliance with respect to the year 2000 issue. The Company
has initiated a review of its other computer applications and currently is
unable to determine the effect on the Company of year 2000 compliance with
respect to such applications.

ITEM 2.  DESCRIPTION OF PROPERTY

         MCC maintains its principal business offices in Cedar Rapids, Iowa,
where it owns and occupies approximately 8,000 square feet of combined office
and warehouse space, subject to a first mortgage held by Venture Investments, an
unrelated third party. The Company believes that this space is adequate for the
Company's present needs.

         The following sets forth certain information with respect to the
significant facilities leased by the Company through PIC, PICR and Incomex.

<TABLE>
<CAPTION>

                                                    CURRENT                            
                                  APPROX. SQUARE    MONTHLY
LOCATION                              FOOTAGE        RENT     LESSOR                  LEASE TERMINATION
--------------------------------- --------------   --------   ------                  -----------------
<S>                                   <C>             <C>     <C>                       <C>
Austin, Texas                          2,100          $3,240  Kucera                    June 1, 2001

San Antonio, Texas                     1,100          $1,408  Texas "NAME" Ltd.         June 30, 1998

Mobile, Alabama                       11,820          $1,252  Sunmed Management Inc.    May 31, 2002

Huntington Beach, California             850          $1,223  Make-up Artist Agency     August 1, 2000
</TABLE>


                                       17
<PAGE>   18

ITEM 3.  LEGAL PROCEEDINGS

         There are no material proceedings pending, or known to be contemplated
by any governmental authority, to which the Company is a party, or to which any
of its properties are subject, and the Company knows of no material pending
legal proceedings or judgments entered against any director or officer of the
Company in his capacity as such.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.


                                       18
<PAGE>   19


                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY

         During all of 1997, the Common Stock was traded on the Nasdaq SmallCap
Market under the symbol "MURC" and the Company's Redeemable Common Stock
Purchase Warrants ("Warrants") were traded on the Nasdaq SmallCap Market under
the symbol "MURCW." Effective January 2, 1998, the Common Stock and the Warrants
were delisted from the Nasdaq SmallCap Market and commenced trading on the
Nasdaq Bulletin Board under the same trading symbols. The following table sets
forth the high and low bid quotations for the Common Stock and Warrants as
reported by Nasdaq. Such transactions reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                       Common Stock                         Warrants
                                                       ------------                         ---------
                  Quarter                          High              Low              High              Low
                  -------                          ----              ---              ----              --- 
<S>                                              <C>               <C>               <C>               <C>
FISCAL 1996
Fourth (from October 21, 1996)                    4-1/2             2-3/8            1-5/8              3/8

FISCAL 1997
First                                             4-3/4             3-1/8            1-1/2              3/4
Second                                           4-11/16            2-7/8            1-1/8             9/16
Third                                             3-1/2            2-7/16            15/16             5/16
Fourth                                           3-13/16            11/16             7/8               1/4
</TABLE>

         At December 31, 1997, there were approximately 122 holders of record of
Common Stock.

         The Company has not paid any cash dividends on the Common Stock in the
last three years. The Company intends to retain any earnings for use in the
operation and expansion of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

         In September 1997, the Company commenced an offering of up to
$5,000,000 of its Series A Convertible Preferred Stock (the "Convertible
Preferred Stock") in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Rule 506 of Regulation D under the Securities Act. The Company paid
commissions of up to 7% of the gross proceeds of the offering to its placement
agent. As of December 31, 1997, the Company had sold a total of 16,250 shares of
Convertible Preferred Stock in the offering and received gross cash 

                                       19
<PAGE>   20

proceeds of $1,625,000, paid commissions of $64,750, paid other expenses of
$23,250 and received net proceeds of approximately $1,537,000 from the issuance
and sale of shares of Convertible Preferred Stock pursuant to the offering.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS

OVERVIEW

         The Company is a provider of telecommunications services primarily to
payphone operators, hotels, consumers and businesses. From its inception in 1989
through 1994, the Company's primary source of revenue was generated by providing
operator services to the hospitality industry as an OSP Services provider.
Initially, the Company entered into contracts with hotels or motels pursuant to
which the Company carried call traffic and recorded the entire gross price of
the call as revenue. The Company then processed and billed the end user through
a third party billing and collection company. The Company's gross margin was the
gross price of the calls, less the costs of commissions paid to the hotels and
motels, transmission, maintenance and billing and collection.

         By late 1994, the Company recognized that the number of calls placed
through OSP service companies had been decreasing dramatically due to the use of
proprietary calling cards and other dial-around activities (such as 1-800-CALL
ATT). Additionally, due in part to the negative publicity caused by the
unethical practices of some OSP service companies and the intense advertising
directed at the traveling public by interexchange companies (primarily AT&T),
hotel and motel properties had become increasingly more reluctant to sign
long-term agreements with OSP service companies. In response to this fundamental
change in the industry, the Company entered into a contract with AT&T in October
1994 to route operator services traffic to AT&T through the Lodging Partnership
program.

         The Lodging Partnership program with AT&T changed the way that MCC
recorded revenue on each call. Under the Lodging Partnership, AT&T carries the
traffic, processes the calls and bills the end user. In return, AT&T pays MCC
commissions on the calls dialed. Rather than recording the gross revenue per
call, MCC records the net commission per call received from AT&T. The gross
margin for calls routed over the AT&T network consists of the net commissions
and bonuses paid by AT&T, less the cost of commissions paid to hotel and motel
properties and maintenance. This change resulted in lower gross margins,
partially offset by larger call volumes with existing customers and growth in
new customers.

         Effective January 16, 1998, the Company entered into the New AT&T
Agreement to restructure its agreement with AT&T principally to increase average
commissions per call, provide additional bonus opportunities based on call
volume and eliminate minimum requirements with respect to call volume and the
number of hotel rooms enrolled in the Lodging Partnership. Prior to entering
into the New AT&T Agreement, the Company 


                                       20
<PAGE>   21

had concluded that minimum room requirements under the Old AT&T Agreement forced
the Company to keep a number of hotels in the Lodging Partnership where the
incremental costs to provide services to such hotels exceeded the revenues
generated by the Company from such hotels. In addition, declining call volumes
due to "dial around" undercut the commission pricing structure under the old
AT&T agreement from the Company's point of view. The Company believes that the
New AT&T Agreement gives the Company more flexibility to move hotels from the
Lodging Partnership to the Company's OSP Services or live operator services, or
to cease providing services to hotels, based upon the Company's evaluation of
the available service alternatives and the preferences of the hotel. The Company
also believes that the New AT&T Agreement will increase average revenue per call
with respect to hotels that remain in the Lodging Partnership. See
"Forward-Looking Statements." The number of rooms in the Lodging Partnership
were approximately 103,728 as of December 31, 1997 (approximately 82% of the
total number of rooms serviced by the Company).

         With the commercial introduction of the MCC Telemanager in September
1997, the completion of the PIC Acquisition in October 1997 and the completion
of the Incomex Acquisition in February 1998, the Company expects that the
percentage of its revenues derived from the Lodging Partnership will decline
substantially in 1998. See "Forward-Looking Statements." The Company expects
that its operating results in 1998 will be significantly affected by the
operations of the Acquired Companies. The Company currently conducts its
business through (i) the Murdock Operating Unit, which includes
telecommunications management and consulting services, call processing services
primarily through the Lodging Partnership program with AT&T, one-plus services
and related value added services, (ii) the PIC/ATN group, which provides
operator services and related valued added services, and (iii) Incomex, which
provides long distance services to Mexican resort hotels.



                                       21
<PAGE>   22




RESULTS OF OPERATIONS

         The following table sets forth statements of operations items and the
percentages that such items bear to revenues:

<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                                     -----------------------------------------------
                                                      1997                1996                 1995
                                                      ----                ----                 ----

<S>                                                   <C>               <C>                  <C>
Revenues   ................................             100%              100%                 100%
Cost of sales   ...........................              75                64                   57
Selling, general, and administrative.......              56                34                   26
Depreciation and amortization .............              25                28                   31
Loss from joint venture  ..................              12                --                   --
Loss from impairment of property,
  equipment and intangible assets .........              16                --                   --
                                                      -----             -----                -----
Total operating expenses  .................             184%              126%                 114%
Operating (loss)...........................             (84)              (26)                 (14)
Interest expense...........................              10                18                   14
Income taxes   ............................              --                --                   --
Extraordinary gain  .......................              --                13                   --
                                                         --                --                   -- 
                                                      -----             -----                -----
Net (loss)  ...............................             (94)%             (31)%                (28)%
                                                      =====             =====                =====
</TABLE>


     The information for the year ended December 31, 1997 in the preceding table
includes statement of operations data for PIC and PICR after the consummation of
the PIC Acquisition on October 31, 1997.

Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended 
December 31, 1996

     REVENUES. Consolidated call processing revenues increased $1.2 million, or
19%, to $7.6 million for the twelve months ended December 31, 1997 from $6.4
million for the twelve months ended December 31, 1996. The completion of the PIC
Acquisition in October 1997 resulted in call processing revenues of $1.4 million
over approximately two months. Call processing revenues derived from the Murdock
Operating Unit were $6.2 million for the twelve months ended December 31, 1997
compared to $6.4 million for the twelve months ended December 31, 1996. One-plus
revenues declined $100,000, or 13%, to $700,000 for the twelve months ended
December 31, 1997 from $800,000 for the twelve months ended December 31, 1996.
The decrease in one-plus revenues was due to the continued decline in rooms
managed by Larken, Inc., the hotel management company that purchases the
Company's one-plus services. Calling commissions primarily from AT&T decreased
$100,000, or 3%, to $2.9 million for the twelve months ended December 31, 1997
from $3.0 million for the twelve months ended December 31, 1996. This decrease
was primarily caused by a decrease in the average call count per room from an
average of approximately 6 calls per month for the twelve months ended December
31, 1996 to an average of approximately 5 calls per month for the twelve months
ended December 31, 1997, partially offset by an increase in the average number
of hotel rooms under contract through the Lodging Partnership.

                                       22
<PAGE>   23

In addition to call processing commissions based on call volumes, the
Company's old agreement with AT&T, which was in effect during 1997 and 1996,
provided the Company monthly compliance bonuses for the attaining specific call
volume thresholds from rooms that complied with certain requirements under the
contract and signing bonuses based on reaching thresholds with respect to the
number of rooms under contract and enrolled in the Lodging Partnership program.
The compliance bonuses were $1.2 million for the twelve months ended December
31, 1997 and $1.2 million for the twelve months ended December 31, 1996. Signing
bonuses from AT&T decreased $800,000, or 80%, to $200,000 for the twelve months
ended December 31, 1997 from $1.0 million for the twelve months December 31,
1996.

     Effective January 16, 1998, the Company and AT&T entered into the New AT&T
Agreement. The New AT&T Agreement restructures the Company's arrangements with
AT&T principally to eliminate minimum requirements with respect to call volume
and the number of hotel rooms enrolled in the Lodging Partnership, increase
rates for call processing commissions, increase rates for compliance incentive
bonuses and provide a quarterly bonus of $100,000 if certain call volume targets
are met for the quarter.

     The Murdock Operating Unit provided services to 117,097 rooms as of
December 31, 1997, as compared to the 96,000 rooms under contract as of December
31, 1996.

     Equipment sales by the Murdock Operating Unit generated a net profit of
$128,000 for the twelve months ended December 31, 1997, as compared to a net
profit of $58,000 for the twelve months ended December 31, 1996, an increase of
$70,000 or 121%. This increase was primarily due to increased sales efforts with
respect to equipment sales.

     COST OF SALES. The consolidated cost of sales for call processing increased
$1.1 million, or 23%, to $5.9 million for the twelve months ended December 31,
1997 from $4.8 million for the twelve months ended December 31, 1996. The
completion of the PIC Acquisition in October 1997 resulted in call processing
costs of $875,000 over approximately two months. Costs associated with the
transmission of OSP and one-plus services for the Murdock Operating Unit
decreased $259,000, or 28%, to $673,000 for the twelve months ended December 31,
1997 from $932,000 for the twelve months ended December 31, 1996. This decrease
was primarily due to a reduction in the number of properties under contract for
OSP Services. The cost of calling commissions and related bonuses with respect
to the Lodging Partnership increased $400,000, or 11%, to $4.1 million for the
twelve months ended December 31 1997 from $3.7 million for the twelve months
ended December 31, 1996. This increase was primarily due to increased signing
and agent bonuses and commissions. With the New AT&T Agreement in 1998, the
Company intends eliminate unprofitable hotels from the Lodging Partnership where


                                       23
<PAGE>   24

practicable and to decrease its reliance on call processing in favor of a
greater focus on the MCC Telemanager product and services. See "Forward-Looking
Statements."

     GROSS OPERATING PROFIT. Consolidated gross operating profit decreased
$800,000, or 28%, to $2.1 million for the twelve months ended December 31, 1997
from $2.9 million for the twelve months ended December 31, 1996. Gross operating
profit was adversely affected primarily by the unfavorable trend in signing
bonuses earned by the Murdock Operating Unit.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general
and administrative expenses increased $1.9 million, or 68%, to $4.7 million for
the twelve months ended December 31, 1997 from $2.8 million for the twelve
months ended December 31, 1996. The completion of the PIC Acquisition in October
1997 resulted in selling, general and administrative expenses of $402,000 over
approximately two months. Employee compensation increased by $341,000 in 1997 as
compared to 1996, primarily due to the addition of the Company's Chief Executive
Officer in April 1997 and expanded staff in connection with the commercial
introduction of the MCC Telemanager. Travel expenses increased by $87,000 in
1997 as compared to 1996, primarily due to the PIC Acquisition and sales efforts
in presenting the MCC Telemanager to the hotel industry. Advertising and
marketing expenses increased by $157,000 in 1997 as compared to 1996, primarily
due to an effort in the fourth quarter of 1997 to enroll hotels in the AT&T
Lodging Partnership in order to exceed room thresholds required to earn bonuses
and the marketing of the MCC Telemanager. Expenses relating to professional
services increased by $285,000 in 1997 as compared to 1996, primarily
representing legal and accounting fees as well as technical support in the
development of the MCC Telemanager. Expenses related to repairs of equipment
required for OSP and related transmission services increased by $83,000 in 1997
as compared to 1996. Bonus payments and other costs associated with signing
hotels under the Lodging Partnership increased by $411,000 in 1997 as compared
to 1996. Reserves for bad debts increased $77,000, to $97,000 at December 31,
1997 from $20,000 December 31, 1996. 

     DEPRECIATION AND AMORTIZATION EXPENSES. Consolidated depreciation and
amortization expenses decreased $200,000, or 9%, to $2.1 million for the twelve
months ended December 31, 1997 from $2.3 million for the twelve months ended
December 31, 1996. The completion of the PIC Acquisition in October 1997
resulted in depreciation and amortization expenses of $73,000 for approximately
two months. This decrease was due to certain of the Company's assets becoming
fully depreciated during 1997.

     LOSS FROM JOINT VENTURE. On December 13, 1996, the Company purchased all
rights and interests in interactive voice response hardware from ICI for a cash
price of $361,600. Subsequently, on January 31, 1997, the Company entered into
an agreement with an unrelated third party to form a joint venture, Guide*Star,
L.L.C. The Company contributed assets with a carrying value of $349,574 in
exchange for a 50% ownership interest and a preferential distribution of
$496,934. During the fourth quarter of 1997, 


                                       24
<PAGE>   25

due to the non-performance of the joint venture, management decided to cease the
operations of the joint venture. All assets, tangible and intangible, of the
joint venture were written off resulting in a loss to the Company of $993,329
for the year ended December 31, 1997.

     LOSS FROM IMPAIRMENT OF PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS. For the
twelve months ended December 31, 1997, the Company recorded a write-down of $1.4
million from asset impairment. This impairment is due to the PIC Acquisition and
the determination that equipment and intangible assets related to processing OSP
calls were no longer needed or became functionally obsolete after the transfer
of call traffic to ATN.

     INTEREST EXPENSE. Consolidated interest expense decreased $600,000, or 43%,
to $800,000 for the twelve months ended December 31, 1997 from $1.4 million for
the twelve months ended December 31, 1996. Approximately $3.3 million of the
Company's debt was retired with the proceeds from the October 24, 1996 initial
public offering in fourth quarter 1996.

     EXTRAORDINARY GAIN. The Company recorded an extraordinary gain on debt
restructuring with a related party of $1.1 million in 1996. There were no
extraordinary transactions for the twelve months ended December 31, 1997.

Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended 
December 31, 1995

     REVENUES. Call processing revenues decreased to $6.3 million for the twelve
months ended December 31, 1996 from $6.9 million for the twelve months ended
December 31, 1995, representing a decrease of $600,000 or 9%. This decrease was
primarily caused by the decrease in OSP calls carried by the Company as it
converted customers into the Lodging Partnership program with AT&T because the
Company receives a commission on a per call basis under the Lodging Partnership
rather than recording the gross amount of the phone call based on the phone
calls' duration. OSP revenues decreased to $1.2 million for the twelve months
ended December 31, 1996, from $3.2 million for the twelve months ended December
31, 1995, representing a decrease of $2 million or 63%. OSP revenues decreased
because the Company moved hotel and motel rooms from its OSP services to the
Lodging Partnership program with AT&T. Calling commissions primarily from AT&T
increased to $4.2 million for the twelve months ended December 31, 1996 from
$2.6 million for the twelve months ended December 31, 1995, an increase of $1.6
million or 65%. This increase was primarily due to the increased number of rooms
and to an increased commission per call. In December 1995, the Company entered
into an agreement with AT&T that provided for recurring payments made to the
Company based upon the number of calls carried by AT&T from hotels in the
Lodging Partnership. The Company recorded $1 million under this arrangement for
the twelve months ended December 31, 1996. One-plus revenues decreased to
$800,000 for the twelve months ended December 31, 1996 from $1.1 million 


                                       25
<PAGE>   26

for the twelve months ended December 31, 1995, representing a decrease of
$300,000 or 27%. The decrease was attributable to a decrease in the number of
hotel or motel properties provided one-plus services, from 38 to 26, as a result
of the reduction in the number of properties owned by Larken, Inc., the hotel
management company that purchases the Company's one-plus services.

     Signing commissions and bonuses from AT&T decreased to $1.0 million for the
twelve months ended December 31, 1996 from $1.25 million for the twelve months
ended December 31, 1995, a decrease of $250,000 or 20%. For the twelve months
ended December 31, 1996, the Company earned a nonrecurring guest room attainment
bonus of $1 million for placing more than 100,000 rooms in the Lodging
Partnership program prior to July 1, 1996. For the twelve months ended December
31, 1995, the Company earned nonrecurring guest room attainment bonuses of
$500,000 for placing more than 75,000 rooms in the Lodging Partnership program,
and $750,000 for placing more than 90,000 rooms in the Lodging Partnership
program.

     The Company provided services to a total of 96,000 hotel and motel rooms as
of December 31, 1996, as compared to 90,000 hotel and motel rooms as of December
31, 1995.

     Equipment sales generated a net profit of $58,000 for the twelve months
ended December 31, 1996, and a net profit of $124,000 for the twelve months
ended December 31, 1995, or a decrease of $66,000 or 53%.

     Other income increased to $196,000 for the twelve months ended December 31,
1996 from $64,000 for the twelve months ended December 31, 1995, an increase of
$132,000 or 206%. This increase was primarily derived from an increase in
equipment rentals of $87,000 and an increase in service income of $63,000.

     COST OF SALES. Cost of sales for call processing was $4.8 million for the
twelve months ended December 31, 1996, and $4.8 million for the twelve months
ended December 31, 1995. Cost of transmission associated with providing OSP
services and one-plus services decreased to $932,000 for the twelve months ended
December 31, 1996, from $1.26 million for the twelve months ended December 31,
1995, for a decrease of $328,000 or 26%. Other expenses of providing OSP
services decreased to $74,000 for the twelve months ended December 31, 1996,
from $293,000 for the twelve months ended December 31, 1995, for a decrease of
$219,000 or a decrease of 75%. These decreases were offset by an increase in the
cost of commissions resulting from the Company's decision to move hotels and
motels to the Lodging Partnership. Commissions paid to hotels and motels
increased to $3.7 million for the twelve months ended December 31, 1996 from
$3.3 million for the twelve months ended December 31, 1995, and increased as a
percent of revenues to 45% for the twelve months ended December 31, 1996, from
37% for the twelve months ended December 31, 1995. Commissions paid to certain
hotels and motels which were transferred to the Lodging Partnership program 



                                       26
<PAGE>   27

from the Company's OSP program are based on historical gross profits derived
with respect to that property regardless of whether services are provided
through OSP or the Lodging Partnership. The commission expense was approximately
$274,000 more than if these properties were paid under a typical Lodging
Partnership program. Cost of sales as a percentage of revenues increased to 65%
for the twelve months ended December 31, 1996, from 59% for the twelve months
ended December 31, 1995.

     GROSS OPERATING PROFIT. Gross operating profit decreased from $3.8 million
for the twelve months ended December 31, 1995 to $2.9 million for the twelve
months ended December 31, 1996, representing a decrease of $900,000 or 24%. This
decrease was primarily due to the higher commissions of approximately $274,000
paid to certain hotels and motels described above, a decrease of $250,000 in
nonrecurring AT&T bonuses and lower margins on rooms switched from OSP services
to the Lodging Partnership program of approximately $375,000.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, increased to $2.7 million for the twelve months ended
December 31, 1996, from $2.3 million for the twelve months ended December 31,
1995, an increase of $400,000 or 17%. This increase was due primarily to normal
salary increases, the addition of four full time employees and the establishment
of an office and warehouse in Dallas, Texas. Selling, general and administrative
expenses include expenses incurred as the Company expands its customer base.
Adding new customers to the Company's base generally requires up-front selling
expenses and equipment installation expenses which may vary significantly
depending on the customer.

     DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
decreased to $2.3 million for the twelve months ended December 31, 1996 from
$2.7 for the twelve months ended December 31, 1995. During 1995, the Company
adopted Statement of Accounting Standards No. 121 "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption of this
standard resulted in the reduction in carrying amount of idle telecommunications
equipment under capital lease in the amount of $400,000. No impairment-related
expense was recorded in 1996.

     INTEREST EXPENSE. Interest expense increased to $1.45 million for the
twelve months ended December 31, 1996, from $1.29 million for the twelve months
ended December 31, 1995, an increase of $160,000 or 12%. The increase was
attributable to additional borrowings in the form of notes payable and new lease
obligations with Berthel, bridge financing and the corresponding discounts and
fees, and additional notes from financial institutions.

     EXTRAORDINARY GAIN. In 1996, the Company repaid certain obligations to
Intellicall, Inc. resulting in an extraordinary gain on debt restructuring of
$1.1 million. This was a one time gain resulting from a 1994 restructuring of
debt and the purchase price of a group of assets purchased from Intellicall,
Inc. by the Company. The gain was 



                                       27
<PAGE>   28

deferred pending payment of all amounts due under a note issued in connection
with the restructuring. This note was repaid on June 29, 1996.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Company's current liabilities of $6.5 million
exceeded current assets of $1.5 million resulting in a working capital deficit
of $5.0 million. During 1997, the Company used $1.2 million in cash for
operating activities, and used $1.7 million in investing activities, primarily
the purchase of equipment and the PIC Acquisition. The Company received proceeds
from new debt financing of $1.5 million and repaid borrowings on notes payable
and made payments on capital lease obligations of $800,000. During 1997, the
Company received $1.6 million in proceeds from the sale of the Convertible
Preferred Stock and paid $90,000 in offering costs (including sales
commissions). These activities resulted in an decrease in available cash of
$700,000 for the twelve months ended December 31, 1997.

     The Company's principal sources of capital to date have been public and
private offerings of debt and equity securities and lease and debt financing
arrangements with Berthel to purchase telecommunications equipment. The total
amount of lease and debt financing with Berthel at December 31, 1997 was $5.9
million. The Company currently makes monthly lease and debt payments of
approximately $75,000, in the aggregate, pursuant to these financing
arrangements.

     As of December 31, 1997, the Company had borrowed $475,000 under two
revolving credit facilities with one financial institution which were past due
and $400,000 under a $400,000 revolving credit facility with another financial
institution due March 28, 1998. The Company's anticipated debt service
obligations in 1998 under its existing credit facilities, lease and debt
financing with Berthel and the PIC Notes are approximately $3.1 million.

     The Company does not believe that its existing capital and anticipated
funds from operations will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures in 1998, including approximately $1.5
million that the Company estimates will be required in 1998 to proceed with the
scheduled implementation of the MCC Telemanager system, approximately $3.1
million of debt service obligations in 1998 and up to $2.0 million for
telecommunications equipment for PIC, PICR and Incomex. The Company currently
estimates that it will need at least $6.6 million in debt or equity financings
in 1998, or through cash flows from operations, to fund its working capital
needs, debt obligations and capital expenditures. No assurance can be given
that the Company will be able to raise adequate funds through such financings
or generate sufficient cash flows to meet the Company's cash needs.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its market development plans or otherwise may have a material
adverse effect on the Company. See "Forward-Looking Statements" below. 



                                       28
<PAGE>   29

FORWARD-LOOKING STATEMENTS

     This report contains certain forward-looking statements and is subject to
certain risks and uncertainties that could cause actual future results and
developments to differ materially from those currently projected. Such
statements include statements identified as based on the Company's belief,
expectation or plans and in each case precede a cross-reference to this section.
The following discussion highlights some of the risks and uncertainties.

     OPERATING LOSSES AND WORKING CAPITAL DEFICIT. The Company incurred net
losses of $2,524,407, $2,487,639 and $7,900,008 for the years ended December 31,
1995, 1996 and 1997, respectively, and had a working capital deficiency at
December 31, 1997 of $4,971,012. No assurance can be given that the Company will
achieve or sustain profitability. If the Company cannot achieve operating
profitability or positive cash flows, it may not be able to meet its debt
service or working capital requirements, which could have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

     FUTURE CAPITAL REQUIREMENTS. The Company's business is capital intensive
and requires substantial capital investment to achieve growth. In addition, the
Company has incurred significant losses over the last three years. As a result,
the Company does not believe that its existing capital and anticipated funds
from operations will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures. The Company believes that it will
require additional capital in 1998 for working capital and to finance its
continuing expansion, the development of new products and services, including
the implementation of the MCC Telemanager system and repayment of the PIC Notes.
Adequate funds may not be available when needed, or in an amount or on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale back or eliminate some or all of its product or market development plans
or otherwise have a material adverse effect on the Company. In addition, the
failure to repay the PIC Notes when due could permit the PIC shareholders to
rescind the PIC Acquisition or attach the shares of PIC stock and PICR stock
pledged by MCC Sub as collateral for the PIC Notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Description
of Business -- Recent Developments -- PIC Acquisition."

     IMPLEMENTATION OF MCC TELEMANAGER SYSTEM. The Company will be dependent in
part on the successful implementation of the MCC Telemanager system to achieve
profitability and positive cash flows over the next two years. The Company's
ability to implement its marketing plans for the MCC Telemanager system is
subject to a number of uncertainties, including its ability to raise adequate
capital to fund the implementation of the MCC Telemanager system, market
acceptance of the MCC Telemanager system and the capability of the MCC
Telemanager technology to work for its intended purpose. Any delays in the
implementation of the MCC Telemanager system or any failure of the MCC
Telemanager system to achieve market acceptance could have 



                                       29
<PAGE>   30

a material adverse effect on the Company. See "--Implementation of New
Technology" and "--Future Capital Requirements."

     DECLINING CALL VOLUMES. A significant percentage of the Company's revenues
has been dependent upon the amount of call traffic processed by the Company
either through the Lodging Partnership with AT&T or the Company's OSP services.
In recent years, major long distance companies, including AT&T, have
aggressively advertised to encourage customers to "dial around" hotel telephone
systems by using special codes such as 10-ATT or 1-800 phone numbers. The
growing prevalence of dial around has had a significant negative effect on the
amount of call traffic handled by the Company, including call traffic processed
through the Lodging Partnership. Management estimates that call volumes through
the Lodging Partnership declined from approximately 8 calls per room per month
during the first half of 1996 to approximately 5 calls per room per month during
1997. The declining call volumes adversely affected the Company's revenues and
net income during 1997. Effective January 16, 1998, the Company entered into the
New AT&T Agreement with AT&T. The New AT&T Agreement increases per call
revenues, in part to address the effects of the Company's declining call volumes
due to "dial around." However, under the New AT&T Agreement, a significant
portion of the Company's revenues continue to be dependent upon call volumes.
The number of calls handled by the Company may continue to decline in future
quarters and declining call volumes may have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

     NO ASSURANCES THAT BUSINESSES CAN BE COMBINED SUCCESSFULLY. The integration
of the operations of the Company and the Acquired Companies will require the
dedication of management resources, which will detract from attention to the
day-to-day business of the combined company. The combination of the Company and
the Acquired Companies will also require the coordination of geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. The process of combining
the Company and the Acquired Companies may cause an interruption of, or a loss
of momentum in, the activities of the companies' businesses, which could have an
adverse effect on the revenues and operating results of the Company, at least in
the near term. The Company's ability to manage its growth effectively will
require it to continue to improve its operational and financial systems and
controls, and to attract, retain, motivate and manage employees effectively.

     DEPENDENCE ON CONTINUING RELATIONSHIP WITH AT&T. The Company derived 54% of
its revenues from AT&T for the year ended December 31, 1997. The New AT&T
Agreement initially expires on January 16, 2000, but is automatically renewed
for an additional two-year term unless either party thereto terminates the New
AT&T Agreement by providing written notice to the other party within 30 days of
the expiration date. AT&T has also reserved a number of grounds to terminate the
New AT&T Agreement prior to its expiration. With the commercial introduction of
the MCC Telemanager in September 1997, the completion of the PIC Acquisition in
October 1997 



                                       30
<PAGE>   31

and the completion of the Incomex Acquisition in February 1998, the Company
expects that the percentage of its revenues derived from the Lodging Partnership
will decline substantially in 1998. However, no assurance can be given that the
Company will not remain significantly dependent on revenues from the Lodging
Partnership in 1998 and future periods.

     AT&T competes with the Company by providing long-distance services directly
to hotels and motels, although AT&T does not presently offer value-added
technology and services comparable to those offered by the Company. AT&T's
competitive position may cause potential conflicts of interest and may affect
AT&T's business strategy with respect to the Lodging Partnership, including a
decision with respect to renewal of the New AT&T Agreement. The Company believes
the value that MCC adds to the Lodging Partnership program (through the
Company's contracts with hotels and motels) should assure a long-term
relationship with AT&T, and that a similar relationship could be developed with
other long distance carriers such as Sprint Corporation ("Sprint") or MCI
Communications Corporation ("MCI"). No assurance can be given, however, that the
Company could successfully negotiate and enter into an agreement with MCI,
Sprint or any other long-distance carrier if the New AT&T Agreement is
terminated or not renewed, or that any such agreement would be on terms
favorable to the Company. Accordingly, MCC's business and financial prospects
could be adversely affected if its relationship with AT&T were disrupted. See
"Description of Business - AT&T Agreement."

     COMPETITION. Competition in the telecommunications industry is intense. The
Company competes with numerous companies, including AT&T, MCI, Sprint, U.S. Long
Distance and National Operator Services, to provide telecommunications services
to North American payphone operators and hotel properties. Should any of these
entitles choose to compete directly with the Company in providing bundled
telephone services to the hospitality industry, such entity would be capable of
devoting substantially greater financial, lobbying, technical and marketing
resources to such a venture than the Company is capable of providing. In
addition, start up companies may choose to enter into the Company's markets with
similar products. Any of these companies could form a strategic alliance with a
significant partner, such as the Company's relationship with AT&T, and establish
itself as a formidable competitor. See "Description of Business - Competition."

     IMPLEMENTATION OF NEW TECHNOLOGY. The Company's future growth will be
dependent in part on its ability to identify and develop new services. There can
be no assurance that the Company will be successful in identifying and
developing new services, that the new services developed by the Company will
achieve market acceptance or that the technology necessary for such new services
will be free from defects. Because of the importance of telecommunications
services to the hospitality industry, the Company's customers and potential
customers may be particularly sensitive to product defects. Despite testing by
the Company and by current and potential customers, there can be no assurance
that errors will not be found in new products after installation, resulting in
loss of revenues or delay in market acceptance, diversion of development
resources, damage to the Company's reputation, or increased service and warranty
costs, 


                                       31
<PAGE>   32

any of which may have a material adverse effect upon the Company's business,
operating results and financial condition.

     In addition, in view of the Company's limited capital resources, the
Company has decided to focus its development efforts on a limited number of
products, including the MCC Telemanager, while delaying or suspending other
product development efforts. There can be no assurance that the Company will
have adequate capital in the future to develop and implement new technology to
remain competitive in its markets.

     RELIANCE ON KEY PERSONNEL. MCC is dependent upon the efforts of its
officers and other key personnel. The loss of certain of these key employees,
including Guy O. Murdock, the Company's Chairman of the Board, Thomas E.
Chaplin, the Company's Chief Executive Officer, and Colin P. Halford, the
Company's President, could have a material adverse effect on the Company.
Although the Company has entered into employment agreements with Guy Murdock,
Thomas Chaplin and Colin Halford, there can be no assurance that the Company
will be able to retain them or its other key employees in the future. The
Company's success will depend on its ability to retain key employees, employ
additional capable executives and implement an effective management structure.
The Company has obtained $1,000,000 in key man life insurance for Mr. Murdock.
See "Management."

     RELIANCE ON PURCHASE AND LEASING ARRANGEMENTS. At the site of each new
hotel customer, the Company generally installs equipment from a number of
vendors and then sells the equipment to Berthel at cost plus a margin for profit
and enters into a leaseback transaction with Berthel. The Company has obtained
substantially all of its telecommunications equipment through such purchase and
leasing arrangements. Although the Company believes that such equipment supply
and lease financing arrangements are available from multiple sources, if the
Company were unable to obtain similar arrangements from other parties the
Company's services and planned expansion may be delayed or decreased. Any such
decrease or delay in services could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 7.    FINANCIAL STATEMENTS

     The consolidated financial statements of the Company and notes thereto are
filed under this item beginning on page F-1 of this report.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
           FINANCIAL DISCLOSURE

Not applicable.

                                       32
<PAGE>   33


                                    PART III

ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
              COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Information regarding the executive officers and directors of the
Company is incorporated herein by reference to the discussions under "Election
of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders which
will be filed on or before April 30, 1998.

ITEM 10.      EXECUTIVE COMPENSATION

         Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed on or before April 30, 1998.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated herein by reference to the discussion under "Security
Ownership" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed on or before April 30, 1998.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated herein by reference to the discussions under "Executive
Compensation--Employment Agreements" and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed on or before April 30, 1998.

                                       33

<
<PAGE>   34
                                      -----------------------------------------
                                      MURDOCK COMMUNICATIONS CORPORATION

                                      Consolidated Financial Statements for the
                                      Years Ended December 31, 1997 and 1996 and
                                      Independent Auditors' Report



<PAGE>   35




MURDOCK COMMUNICATIONS CORPORATION

TABLE OF CONTENTS
--------------------------------------------------------------------------------


                                                                          Page

INDEPENDENT AUDITORS' REPORT                                              F-1

CONSOLIDATED FINANCIAL STATEMENTS:

  Consolidated Balance Sheets                                             F-2

  Consolidated Statements of Operations                                   F-3

  Consolidated Statements of Redeemable Securities                        F-4

  Consolidated Statements of Shareholders' Equity (Deficiency)            F-5

  Consolidated Statements of Cash Flows                                   F-7

  Notes to Consolidated Financial Statements                              F-10



<PAGE>   36


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Murdock Communications Corporation
Cedar Rapids, Iowa

We have audited the accompanying consolidated balance sheets of Murdock
Communications Corporation and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations, redeemable
securities, shareholders' equity (deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Murdock Communications Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements for the year ended December
31, 1997 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses from operations, deficit working capital and
stockholders' deficiency raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



Deloitte & Touche
Cedar Rapids, Iowa
March 25, 1998



                                     F-1
<PAGE>   37


MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS (Notes 6 and  7)                                                                  1997              1996

<S>                                                                               <C>               <C>         
CURRENT ASSETS:
  Cash                                                                            $    547,737      $  1,241,897
  Accounts receivable, less allowance for doubtful
    accounts: 1997 - $376,589, 1996 - $30,000                                          846,414           726,282
  AT&T commission receivable (Note 2)                                                     --             500,000
  Inventory                                                                               --              51,091
  Prepaid expenses and other current assets                                            109,186           179,639
                                                                                  ------------      ------------
           Total current assets                                                      1,503,337         2,698,909
                                                                                  ------------      ------------



PROPERTY AND EQUIPMENT:
  Land and building                                                                    463,693           432,472
  Telecommunications equipment                                                       8,530,536         7,490,209
  Furniture and equipment                                                              537,550           270,011
                                                                                  ------------      ------------
                                                                                     9,531,779         8,192,692
  Accumulated depreciation                                                          (7,400,982)       (6,234,203)
                                                                                  ------------      ------------
                                                                                     2,130,797         1,958,489
  Telecommunications equipment under capital lease,
    net of accumulated amortization:  1997 - $3,209,405,
    1996 - $3,324,850                                                                  370,706         1,845,437
                                                                                  ------------      ------------
           Property and equipment, net                                               2,501,503         3,803,926
                                                                                  ------------      ------------

OTHER ASSETS:
  Goodwill, net of accumulated amortization of $70,061                               4,133,648              --
  Cost of purchased site contracts, net of accumulated amortization:
    1997 - $1,797,213,  1996 - $1,185,682                                              484,355           626,723
  Other intangible assets, net of accumulated amortization:
    1997 - $22,911, 1996 - $258,333                                                    397,556           241,667
  Other noncurrent assets                                                              365,654           107,861
                                                                                  ------------      ------------

           Total other assets                                                        5,381,213           976,251
                                                                                  ------------      ------------

TOTAL                                                                             $  9,386,053      $  7,479,086
                                                                                  ============      ============



LIABILITIES, REDEEMABLE SECURITY AND                                                   1997              1996
  SHAREHOLDERS' EQUITY (DEFICIENCY)

  CURRENT LIABILITIES:
  Notes payable (Note 6)                                                          $  1,715,000      $       --
  Outstanding checks in excess of bank balances                                        231,452              --
  Accounts payable                                                                   1,684,090           530,482
  Accrued expenses                                                                   1,453,334           537,962
  Current portion of capital lease obligations
    principally with a related party (Note 15)                                         181,322           895,526
  Current portion of long-term debt with related parties (Note 7)                      394,751           133,541
  Current portion of long-term debt, others (Note 7)                                   814,400            15,217
                                                                                  ------------      ------------
           Total current liabilities                                                 6,474,349         2,112,728

  LONG-TERM LIABILITIES:
  Capital lease obligations principally with a related party,
    less current portion (Note 15)                                                   3,375,011         2,608,952
  Long-term debt with related parties, less current portion (Note 7)                 2,181,415         1,206,117
  Long-term debt, others, less current portion (Note 7)                              1,404,907           278,358
  Accumulated loss of joint venture in excess of initial investment (Note 5)           380,913              --
  Deferred income (Note 8)                                                              51,447            73,875
                                                                                  ------------      ------------
           Total liabilities                                                        13,868,042         6,280,030
                                                                                  ------------      ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 5, 15 and 20)

REDEEMABLE SECURITY:
  10% Series A Redeemable Preferred Stock, no par or stated value (Note 9):
    Authorized-45,000 shares
    Issued and outstanding - 200 shares                                                   --              24,480
                                                                                  ------------      ------------
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
  8%Series A Convertible Preferred Stock, $100 stated value (Notes 9 and 20):
    Authorized - 50,000 shares
    Issued and outstanding - 16,250 shares                                           1,544,146              --
  Common stock, no par or stated value (Notes 10, 12 and 20):
    Authorized - 20,000,000 shares
    Issued and outstanding:  1997 - 4,458,439 shares; 1996 - 4,152,494 shares       11,343,308        10,820,898
  Common stock warrants (Notes 7, 11, 15, 19 and 20):
    Issued and outstanding:  1997 -1,909,729; 1996 - 933,089                           315,400           113,336
  Additional paid-in capital                                                           134,000           124,000
  Accumulated deficit                                                              (17,818,843)       (9,883,658)
                                                                                  ------------      ------------
           Total  shareholders' equity (deficiency)                                 (4,481,989)        1,174,576
                                                                                  ------------      ------------

TOTAL                                                                             $  9,386,053      $  7,479,086
                                                                                  ============      ============
</TABLE>




See notes to consolidated financial statements.

                                      -F2-



<PAGE>   38



MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                         1997             1996
<S>                                                                                  <C>              <C>        
REVENUES:
  Call processing revenues (Notes 2 and 16)                                          $ 7,629,116      $ 6,360,284
  AT&T commissions (Note 2)                                                              200,000        1,000,000
  Sales and rental of equipment                                                          442,157          483,937
  Recognition of gains deferred from equipment sales
    with a related party (Notes 8 and 15)                                                 22,428          236,266
  Other service income                                                                   123,419           84,115
                                                                                     -----------      ----------- 
           Total revenues                                                              8,417,120        8,164,602
                                                                                     -----------      ----------- 
COST OF SALES:
  Call processing  (Note 16)                                                           5,958,335        4,813,177
  Equipment                                                                              314,322          426,215
                                                                                     -----------      ----------- 
           Total cost of sales                                                         6,272,657        5,239,392
                                                                                     -----------      ----------- 

GROSS OPERATING PROFIT                                                                 2,144,463        2,925,210

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 16)                                 4,702,754        2,756,586

DEPRECIATION AND AMORTIZATION EXPENSE                                                  2,142,773        2,284,258

LOSS FROM JOINT VENTURE (Note 5)                                                         993,329             --

LOSS FROM IMPAIRMENT OF PROPERTY, EQUIPMENT
  AND INTANGIBLE ASSETS (Note 1)                                                       1,353,010             --
                                                                                     -----------      ----------- 

OPERATING LOSS                                                                        (7,047,403)      (2,115,634)

INTEREST EXPENSE (Notes 15 and 16)                                                       847,203        1,448,207
                                                                                     -----------      ----------- 

LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM                                       (7,894,606)      (3,563,841)

INCOME TAXES (Note 14)                                                                     5,402            8,112
                                                                                     -----------      ----------- 

LOSS BEFORE EXTRAORDINARY ITEM                                                        (7,900,008)      (3,571,953)

EXTRAORDINARY ITEM - GAIN ON RELATED PARTY
   RESTRUCTURING (Note 13)                                                                  --          1,084,314
                                                                                     -----------      ----------- 

NET LOSS                                                                             $(7,900,008)     $(2,487,639)
                                                                                     ===========      =========== 

NET LOSS (1996 Pro Forma Unaudited - Note 1)                                         $(7,900,008)     $(2,457,016)


DIVIDENDS AND ACCRETION ON 8% SERIES A
  CONVERTIBLE PREFERRED STOCK                                                            (35,007)            --
                                                                                     -----------      ----------- 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                                         $(7,935,015)     $(2,457,016)
                                                                                     ===========      =========== 

BASIC AND DILUTED NET LOSS PER COMMON SHARE (1996 Pro Forma Unaudited - Note 1):
   Loss before extraordinary item                                                    $     (1.89)     $     (1.41)
   Extraordinary item                                                                       --               0.43
                                                                                     -----------      ----------- 
   Net loss                                                                          $     (1.89)     $     (0.98)
                                                                                     ===========      =========== 

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING (1996 Pro Forma Unaudited - Note 1)                                      4,208,439        2,508,329
                                                                                     ===========      =========== 

</TABLE>

See notes to consolidated financial statements.




                                      -F3-


<PAGE>   39


MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF REDEEMABLE SECURITIES
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        COMMON
                                                   10% SERIES A         STOCK
                                                    REDEEMABLE           PUT           REDEEMABLE
                                                  PREFERRED STOCK      WARRANTS        SECURITIES
<S>                                                 <C>              <C>              <C>
BALANCES AT JANUARY 1, 1996                         $ 2,000,940      $   161,766      $ 2,162,706

  Accretion of put price on 10%
    Series A Redeemable Preferred Stock                 131,029             --            131,029

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                          192,865             --            192,865

  Exercise of 227,143 common stock put warrants
    held by a related party (Note 11)                      --           (161,766)        (161,766)

  Conversion of 22,450 shares of 10% Series A
    Redeemable Preferred Stock into 821,221
    shares of common stock (Note 9)                  (2,300,354)            --         (2,300,354)
                                                    -----------      -----------      -----------

BALANCES AT DECEMBER 31, 1996                            24,480             --             24,480

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                              170             --                170

  Repurchase of 200 shares of 10% Series A
    Redeemable Preferred Stock                          (24,650)            --            (24,650)
                                                    -----------      -----------      -----------

BALANCES AT DECEMBER 31, 1997                       $      --        $      --        $      --
                                                    ===========      ===========      ===========

</TABLE>


See notes to consolidated financial statements.

                                      -F4-

<PAGE>   40


MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                    COMMON STOCK
                                                                    COMMON STOCK                       WARRANTS              
                                                             --------------------------        --------------------------
                                                               NUMBER                           NUMBER                     
                                                                 OF                               OF                         
                                                               SHARES         ISSUED           WARRANTS          ISSUED          

<S>                                                           <C>           <C>                 <C>          <C>        
BALANCES AT JANUARY 1, 1996                                   1,168,986     $   193,588         349,843      $   559,008

  Issuance of common stock, net of offering
    costs of $1,481,629 (Note 10)                             1,600,000       6,518,371         800,000            8,000

  Consideration attributable to equity conversion
    terms of first tranche of bridge financing
    notes payable (Note 10)                                        --              --              --               --   

  Conversion of first tranche of bridge financing notes
     payable into common stock and warrants (Note 10)           160,000         479,600          80,000              400

  Conversion of shareholder notes payable into
     common stock (Note 10)                                     175,144         613,000            --               --   

  Conversion of 10% Series A Redeemable Preferred Stock
     and associated common
    stock warrants into
    common stock (Notes 9 and 10)                               821,221       2,854,426        (346,754)        (554,072)

  Exercise of common stock put warrants held by a
     related party (Note 11)                                    227,143         161,913            --               --   

  Issuance of warrant to consultant (Note 19)                      --              --            50,000          100,000

  Accretion of put price on 10% Series A
    Redeemable Preferred Stock                                     --              --              --               --   

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                                     --              --              --               --   

  Gain on related party restructuring (Note 11)                    --              --              --               --   

  Net loss for 1996                                                --              --              --               --   
                                                              ---------     -----------         -------      -----------
BALANCES AT DECEMBER 31, 1996                                 4,152,494      10,820,898         933,089          113,336
                                                              ---------     -----------         -------      -----------


<CAPTION>

                                                                    
                                                                                                                     SHARE-
                                                                                 ADDITIONAL                         HOLDERS'
                                                                                  PAID-IN       ACCUMULATED         EQUITY
                                                                                  CAPITAL         DEFICIT        (DEFICIENCY)

<S>                                                                             <C>             <C>              <C>         
BALANCES AT JANUARY 1, 1996                                                     $  124,000      $(7,273,307)     $(6,396,711)


  Issuance of common stock, net of offering
    costs of $1,481,629 (Note 10)                                                     --               --          6,526,371

  Consideration attributable to equity conversion
    terms of first tranche of bridge financing
    notes payable (Note 10)                                                         80,000             --             80,000

  Conversion of first tranche of bridge financing notes
     payable into common stock and warrants (Note 10)                              (80,000)            --            400,000

  Conversion of shareholder notes payable into
     common stock (Note 10)                                                           --               --            613,000

  Conversion of 10% Series A Redeemable Preferred Stock
     and associated common
    stock warrants into
    common stock (Notes 9 and 10)                                                     --               --          2,300,354

  Exercise of common stock put warrants held by a
     related party (Note 11)                                                          --               --            161,913

  Issuance of warrant to consultant (Note 19)                                         --               --            100,000

  Accretion of put price on 10% Series A
    Redeemable Preferred Stock                                                        --           (131,029)        (131,029)

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                                                        --           (192,865)        (192,865)

  Gain on related party restructuring (Note 11)                                       --            201,182          201,182

  Net loss for 1996                                                                   --         (2,487,639)      (2,487,639)
                                                                                ----------      -----------      ----------- 
BALANCES AT DECEMBER 31, 1996                                                      124,000       (9,883,658)       1,174,576
                                                                                ----------      -----------      ----------- 
</TABLE>


                                                                     (Continued)
                                      -F5-





<PAGE>   41




MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                  8% SERIES A CONVERTIBLE                                     COMMON STOCK         
                                                      PREFERRED STOCK              COMMON STOCK                   WARRANTS         
                                                --------------------------- --------------------------- ---------------------------
                                                   NUMBER                    NUMBER                        NUMBER                  
                                                     OF                        OF                            OF                    
                                                   SHARES         ISSUED     SHARES          ISSUED       WARRANTS       ISSUED    

<S>                                               <C>         <C>           <C>          <C>               <C>        <C>  
BALANCES AT DECEMBER 31, 1996                          --     $       --    4,152,494    $ 10,820,898      933,089    $    113,336 

  Issuance of options to directors                     --             --         --              --           --              --   

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                         --             --         --              --           --              --   

  Exercise of common stock warrants                    --             --        5,945          10,536       (3,089)         (4,936)

  Conversion of notes payable, accrued interest
    and long-term debt with a
    related party into common stock
    (Note 7)                                           --             --      465,265       1,334,274         --              --   

  Issuance of  8% Series A Convertible
    Preferred  Stock, net of offering costs
    of $87,636                                       16,250      1,537,364       --              --           --              --   

  Issuance of common stock in
    connection with the acquisition of
    PIC and PIC-R (Note 3)                             --             --      300,000         511,874         --              --   

  Issuance of warrants to Berthel in
    connection with lease and
    note modifications                                 --             --         --              --        979,729         207,000 

  Recission of conversion of notes payable,
    accrued interest and long-term debt
    with a related party into common stock
    (Note 7)                                           --             --     (465,265)     (1,334,274)        --              --   

  Accretion to conversion price of 8%
    Series A Convertible Preferred Stock               --            6,782       --              --           --              --   

  Accrued dividends on 8% Series A
    Convertible Preferred Stock                        --             --         --              --           --              --   

  Net loss for 1997                                    --             --         --              --           --              --   
                                                     ------   ------------  ---------    ------------    ---------    ------------ 
BALANCES AT DECEMBER 31, 1997                        16,250   $  1,544,146  4,458,439    $ 11,343,308    1,909,729    $    315,400 
                                                     ======   ============  =========    ============    =========    ============ 


<CAPTION>

                                                  
                                                                                     SHARE-
                                                   ADDITIONAL                       HOLDERS'
                                                    PAID-IN         ACCUMULATED      EQUITY
                                                    CAPITAL          DEFICIT      (DEFICIENCY)

<S>                                               <C>            <C>             <C>         
BALANCES AT DECEMBER 31, 1996                     $    124,000   $ (9,883,658)   $  1,174,576

  Issuance of options to directors                      10,000           --            10,000

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                            --             (170)           (170)

  Exercise of common stock warrants                       --             --             5,600

  Conversion of notes payable, accrued interest
    and long-term debt with a
    related party into common stock
    (Note 7)                                              --             --         1,334,274

  Issuance of  8% Series A Convertible
    Preferred  Stock, net of offering costs
    of $87,636                                            --             --         1,537,364

  Issuance of common stock in
    connection with the acquisition of
    PIC and PIC-R (Note 3)                                --             --           511,874

  Issuance of warrants to Berthel in
    connection with lease and
    note modifications                                    --             --           207,000

  Recission of conversion of notes payable,
    accrued interest and long-term debt
    with a related party into common stock
    (Note 7)                                              --             --        (1,334,274)

  Accretion to conversion price of 8%
    Series A Convertible Preferred Stock                  --           (6,782)           --

  Accrued dividends on 8% Series A
    Convertible Preferred Stock                           --          (28,225)        (28,225)

  Net loss for 1997                                       --       (7,900,008)     (7,900,008)
                                                  ------------   ------------    ------------ 
BALANCES AT DECEMBER 31, 1997                     $    134,000   $(17,818,843)   $ (4,481,989)
                                                  ============   ============    ============ 
</TABLE>

                                      -F6-
<PAGE>   42


MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                 1997            1996
<S>                                                                                         <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                                  $(7,900,008)     $(2,487,639)
  Extraordinary gain on related party restructuring                                                --         (1,084,314)
  Adjustments to reconcile net loss to net cash flows from operating activities:
    Loss from impairment of property, equipment and intangible assets                         1,353,010             --
    Depreciation and amortization, including amortization of technology license               2,226,106        2,384,258
    Noncash interest expense                                                                    359,141          188,717
    Noncash compensation expense                                                                 10,000             --
    Recognition of deferred gains from equipment sales with a related party                     (22,428)        (236,266)
    Loss from joint venture                                                                     993,329             --
    Changes in operating assets and liabilities, excluding the effects of acquisitions:
      Receivables                                                                               783,621           70,870
      Other current assets                                                                      130,684            4,846
      Other noncurrent assets                                                                  (187,372)            --
      Outstanding checks in excess of bank balances                                             134,192             --
      Accounts payable                                                                          873,691         (144,458)
      Accrued expenses                                                                           64,367          (68,249)
      Deferred income                                                                              --             64,775
                                                                                            -----------      -----------
           Net cash flows from operating activities                                          (1,181,667)      (1,307,460)
                                                                                            -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                          (641,229)      (1,213,470)
  Cash paid for acquisitions                                                                   (640,156)            --
  Purchase of equipment for lease receivable                                                       --           (108,614)
  Payments on lease receivable                                                                     --              4,884
  Payments for site contracts                                                                   (48,697)        (419,403)
  Capitalized software development costs                                                       (138,013)            --
  Cash advanced to joint venture                                                               (262,869)            --
  Payments for deposits                                                                            --            (10,562)
  Cash acquired with acquisitions                                                                49,713             --
                                                                                            -----------      -----------
           Net cash flows from investing activities                                          (1,681,251)      (1,747,165)
                                                                                            -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on capital lease obligations, primarily to a related party                          (217,344)      (2,425,514)
  Proceeds from capital lease obligations with a related party                                     --            389,941
  Borrowings on notes payable, including $100,000 in 1996 with a related party                1,470,000        1,890,000
  Borrowings of long-term debt with related parties                                              54,021          122,698
  Payments on notes payable                                                                    (595,000)      (1,965,000)
  Payments on long-term debt with related parties                                               (46,016)        (285,000)
  Payments on long-term debt, others                                                            (15,217)         (13,981)
  Dividends paid on 10% Series A Redeemable Preferred Stock                                        (170)        (102,000)
  Repurchase of 10% Series A Redeemable Preferred Stock and common stock warrants               (24,480)            --
  Proceeds from issuance of common stock and warrants                                             5,600        8,008,000
  Proceeds from issuance of 8% Series A Convertible Preferred Stock                           1,625,000             --
  Payments for offering costs                                                                   (87,636)      (1,481,629)
                                                                                            -----------      -----------
           Net cash flows from financing activities                                           2,168,758        4,137,515
                                                                                            -----------      -----------

NET INCREASE (DECREASE) IN CASH                                                                (694,160)       1,082,890

CASH AT BEGINNING OF YEAR                                                                     1,241,897          159,007
                                                                                            -----------      -----------
CASH AT END OF YEAR                                                                         $   547,737      $ 1,241,897
                                                                                            ===========      ===========

SUPPLEMENTAL DISCLOSURE:
  Cash paid during the year for interest, principally to a related party                    $   389,438      $ 1,355,184
  Cash paid during the year for income taxes                                                      5,402            8,355

</TABLE>

See notes to consolidated financial statements.


                                      -F7-



<PAGE>   43


MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
-------------------------------------------------------------------------------


SUPPLEMENTAL DISCLOSURES OF 1997 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:

The Company contributed telecommunications equipment with a carrying value of
$349,574 as its initial investment in a joint venture (see Note 5).

The Company recorded the following increases as a result of its acquisitions of
PIC and PIC-R:


<TABLE>
<S>                                                              <C>      
     Accounts receivable                                         $   403,753      
     Other current assets                                             53,894
     Telecommunications equipment                                  1,269,046
     Furniture and equipment                                         193,787
     Accumulated depreciation                                       (244,761)
     Goodwill                                                      3,563,553
     Purchased equipment location contracts                          420,466
     Accumulated amortization                                       (193,125)
     Other noncurrent assets                                          70,421
     Notes payable                                                  (840,000)
     Outstanding checks in excess of bank balances                   (97,260)
     Accounts payable                                               (279,917)
     Accrued expenses                                               (437,780)
     Long-term debt with related parties                          (1,400,000)
     Long-term debt, others                                       (2,019,916)
     Common stock                                                   (511,874)
                                                                 -----------
     Cash acquired with acquisitions                             $    49,713
                                                                 ===========

</TABLE>
                                                          



The Company recorded deferred loan and lease restructuring costs of $207,000 in
connection with the issuance of warrants to purchase 979,729 shares of common
stock in the Company to Berthel.

In connection with the modification of capital lease obligations with Berthel,
the Company recorded additional deferred lease restructuring costs and capital
lease obligations of $210,854.

The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $6,782
representing the current year's accretion to its conversion price.

The Company recorded an accrued expense and a charge to accumulated deficit of
$28,225 for the cumulative dividends earned by the holders of the 8% Series A
Convertible Preferred Stock.

The Company recorded an increase in accrued expense and telecommunications
equipment under capital lease for $235,000 representing sales taxes on lease
payments.





See notes to consolidated financial statements.


                                      -F8-
<PAGE>   44


MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONCLUDED)
-------------------------------------------------------------------------------


SUPPLEMENTAL DISCLOSURES OF 1996 NONCASH INVESTING AND FINANCING ACTIVITIES:

During 1996, in conjunction with an initial public offering of the Company's
common stock, the Company converted $400,000 of bridge financing notes payable
into 160,000 shares of common stock and 80,000 warrants; $613,000 of shareholder
notes payable were converted into 175,144 shares of common stock; and 22,450
shares of 10% Series A Redeemable Preferred Stock with a carrying amount of
$2,300,354 were converted into 821,221 shares of common stock.

During 1996, the Company repaid the amounts due on the note payable to
Intellicall and recognized the $1,799,500 deferred gain as discussed in Notes 11
and 13. Related decreases are as follows:

<TABLE>
<S>                                                                  <C>        
     Cost of purchased equipment location contracts                  $   514,004
     Accumulated deficit                                                 201,182
     Extraordinary item - gain on related party restructuring          1,084,314
                                                                     -----------
     Deferred gain                                                   $ 1,799,500
                                                                     ===========
</TABLE>


The Company accreted the 10% Series A Redeemable Preferred Stock by $131,029
during 1996.

The Company accrued dividends on the 10% Series A Redeemable Preferred Stock of
$192,865 during 1996.

During 1996, 227,143 shares of common stock put warrants with a carrying amount
of $161,766 were exercised for $147 and converted into common stock.

During 1996, accrued interest of $23,044 was added to the principal balance of
long-term debt with related parties.

During 1996, $750,000 of notes payable were renegotiated as long-term debt with
related parties.

During 1996, a common stock warrant valued at $100,000 was granted for a prepaid
consulting agreement.



See notes to consolidated financial statements.



                                     -F9-
<PAGE>   45



MURDOCK COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------


1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

      Description of Business - Murdock Communications Corporation
      (individually, or collectively with its wholly-owned subsidiaries
      discussed below, referred to herein as the "Company") is engaged in the
      business of providing long-distance telecommunications services to patrons
      of hotels with which the Company has contracts to provide such services.
      Services include, but are not limited to, credit card billing services,
      live operator services, automated collection and messaging delivery
      services, voice mail services and telecommunications consulting. At
      December 31, 1997, the Company maintains equipment location contracts with
      approximately 676 hotels (480 hotels at December 31, 1996) throughout the
      United States.

      Effective October 31, 1997, the Company purchased Priority International
      Communications, Inc. ("PIC") (see Note 3). PIC is primarily engaged in the
      business of providing long-distance telecommunications services to patrons
      of hotels and public and private payphone owners with which PIC has
      contracts to provide such services. Services include, but are not limited
      to, credit card billing services, live operator services, automated
      collection and messaging delivery services, voice mail services and
      telecommunications consulting. At December 31, 1997, PIC maintains site
      contracts with approximately 257 hotels and services approximately 3,700
      payphones throughout the United States.

      Also, on October 31, 1997, the Company purchased PIC Resources Corp.
      ("PIC-R") (see Note 3). PIC-R, operating through its wholly-owned
      subsidiary ATN Communications, Incorporated ("ATN"), is primarily engaged
      in the business of providing carrier services for long-distance
      telecommunications companies throughout the United States. PIC-R handles
      incoming operator assisted calls with their operators on location.

      Basis of Presentation - The accompanying consolidated financial statements
      have been prepared on a going concern basis, which contemplates the
      realization of assets and the satisfaction of liabilities in the normal
      course of business. The Company has an accumulated deficit of $17,818,843,
      a shareholders' deficiency of $4,481,989, and current liabilities exceed
      current assets by almost $5,000,000 at December 31, 1997. These factors,
      among others, indicate that the Company may be unable to continue as a
      going concern for a reasonable period of time. Management's plans to
      sustain operations are discussed below.

      The financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or the amounts
      and classification of liabilities that might be necessary should the
      Company be unable to continue as a going concern. The Company's
      continuation as a going concern is dependent upon its ability to generate
      sufficient cash flow to meet its obligations on a timely basis, to obtain
      additional financing and refinancing as may be required, and ultimately to
      attain successful operations. Management's plans to accomplish these
      objectives include, but are not limited to, the following:

      -     Successful implementation and market acceptance of the Telemanager
            system, a potential new source of revenues to the Company, that is
            being marketed to new and existing customers. Telemanager provides
            the Company's customers with information regarding the hotel's
            telecommunication system in graphs and reports that are easy to read
            and understand by persons lacking specialized expertise in
            telecommunications.

                                      -F10-

<PAGE>   46



      -     Successful completion of up to $1.5 million in debt financing for
            the implementation of the Telemanager system at customer sites.

      -     Integration of the PIC, PIC-R and Incomex, Inc. (see Note 20)
            acquisitions. Management believes these acquisitions will provide
            additional positive cash flows and additional markets for the
            Company's Telemanager system.

      -     Successful completion of up to $2.0 million in debt financing for
            telecommunications equipment to enable revenue growth for PIC, PIC-R
            and Incomex, Inc.

      -     Refinancing of the $1.7 million of notes payable at December 31,
            1997.

      -     During the first quarter of 1998, the Company raised $858,000 of
            cash from debt financing (see Note 20). The Company will need to
            generate sufficient cash flow from operations during 1998 to finance
            other expected cash needs of the Company.

      Principles of Consolidation - The consolidated financial statements
      include the accounts of the Company, and effective October 31, 1997, the
      accounts of PIC and PIC-R, its wholly-owned subsidiaries. Significant
      intercompany accounts and transactions have been eliminated in
      consolidation.

      Use of Estimates - 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
      significantly from those estimates. Material estimates that are
      particularly susceptible to significant change in the near-term relate to
      the determination of the collectibility of receivables, useful lives of
      property and equipment and impairment of long-lived assets.

      Certain Risk Concentrations - The Company derived 54% and 63% of its
      revenues from AT&T in 1997 and 1996, respectively. At December 31, 1997
      and 1996, 12% and 68%, respectively, of the Company's receivables were due
      from AT&T. Also, substantially all of the Company's leasing arrangements
      are with Berthel Fisher & Company and its subsidiaries, and their
      affiliated leasing partnerships ("Berthel"). Berthel owned 9.2% and 9.5%
      of the Company's outstanding common stock at December 31, 1997 and 1996,
      respectively.

      Revenue Recognition - After a hotel location agreement is signed, the
      Company installs equipment at the hotel site, if necessary, to provide the
      services called for under the hotel location agreement. The Company
      generally purchases the equipment from the manufacturer, Intellicall, Inc.
      ("Intellicall"), and incurs certain expenses in installing the equipment
      at the hotel. The Company then generally sells the equipment to Berthel at
      cost (including installation costs) plus a margin for profit and enters
      into a leaseback transaction with Berthel. Any profit on the sale under
      these transactions is deferred and amortized to income over the
      amortization period of the related leased equipment (generally five years)
      using the straight-line method.

      A portion of the Company's revenues are derived from processing credit
      card long-distance telephone calls. The gross charges for these calls are
      recognized as revenues by the Company as the calls are placed. At the same
      time, amounts are recorded as cost of services for long distance charges
      from the carrier of the calls, as well as charges for processing the
      calls, bad debts and commissions to be paid based on the Company's prior
      experience for these items.


                                     -F11-

<PAGE>   47


      Revenues derived from the AT&T commission agreement related to calls are
      recognized as revenues as the calls are placed. Additional bonuses,
      primarily for reaching the number of contracted rooms or calls specified
      in the agreement, are recognized when the specified criteria has been met.

      Inventory - Inventory is carried at the lower of cost or market with cost
      determined using the first-in, first-out ("FIFO") method and consists of
      telecommunication hardware and software awaiting installation at hotel
      sites.

      Property and Equipment - Property and equipment are stated at cost. For
      financial reporting purposes, depreciation and amortization are computed
      on these assets using the straight-line method over their estimated useful
      lives ranging from three to 28 years. For income tax purposes, accelerated
      methods are used. Amortization of telecommunications equipment under
      capital lease is included with depreciation expense.

      The Company accounts for its telecommunications equipment leases as
      capital leases under the provisions of Statement of Financial Accounting
      Standards ("SFAS") No. 13. Accordingly, the cost of the leased assets and
      the related obligations under the lease agreements are recorded at the
      inception of the lease. The leases are generally for four to seven years.

      The Company periodically reviews long-lived assets and intangible assets
      for impairment whenever events or changes in circumstances indicate that
      the carrying amount of these assets may not be recoverable. During 1997,
      the Company recorded an impairment write-down with respect to
      telecommunications equipment owned and under capital lease, purchased site
      contracts and a technology license of $1,353,010 based on the estimated
      discounted future cash flows expected to be generated by such assets. The
      write-down primarily related to call processing equipment at hotels and a
      technology license for such equipment which became functionally obsolete
      upon the acquisition of PIC-R since calls can be processed directly by
      PIC-R without utilizing such equipment.

      Goodwill - Goodwill is amortized on the straight-line method over 10
      years.

      Cost of Purchased Site Contracts - The cost of obtaining site contracts is
      amortized over the term of the related contracts, generally one to three
      years, using the straight-line method.

      Other Intangible Assets - Other intangible assets consist of software
      development costs, a technology license and deferred lease and loan
      restructuring costs.

      Software development costs of $138,013 at December 31, 1997 (none at
      December 31, 1996) for products and significant product enhancements
      incurred subsequent to establishment of their technological feasibility
      and prior to their general release to customers are capitalized and stated
      net of accumulated amortization of $22,911 at December 31, 1997. The
      ultimate recovery of the costs is dependent on the Company's ability to
      achieve a level of market acceptance which will generate revenues and
      profits in amounts sufficient to permit such recovery. The Company
      evaluates the recoverability of capitalized software development costs by
      project on a periodic basis. Capitalized software development costs are
      amortized using the straight-line method over three years.

      The technology license was stated at cost of $500,000 and net of
      accumulated amortization of $258,333 at December 31, 1996 and was being
      amortized over the technology's estimated useful life of five years using
      the straight-line method. Such license was written-off during 1997 as
      discussed above.

      Deferred lease and loan restructuring costs incurred in connection with
      lease and loan modification agreements of $282,454 at December 31, 1997
      (none at December 31, 1996) have been deferred and are being amortized
      over the restructured lease and loan agreements of five years using the
      effective interest method.

                                     -F12-

<PAGE>   48


      Investment in Joint Venture - The Company's 50% investment in joint
      venture is accounted for under the equity method. Losses in excess of the
      Company's investment are recorded when the Company has a legal obligation
      or is otherwise committed to provide additional financial support. An
      other than temporary decline in the value of the investment is recognized
      through a write-down or write-off of the investment.

      Income Taxes - The Company files a consolidated federal and certain
      consolidated state income tax returns with its subsidiaries. Deferred
      income taxes are provided for the tax consequences in future years of
      temporary differences between the tax basis of assets and liabilities and
      their financial reporting amounts, based on enacted tax laws and tax rates
      applicable to the periods in which the differences are expected to affect
      taxable income. Valuation allowances are established when necessary to
      reduce deferred tax assets to the amounts expected to be realized. Income
      tax expense is the tax payable for the year and the change during the
      period in deferred tax assets and liabilities.

      Accretion on Preferred Stock - Up to the date of the put or conversion,
      the Company accretes the carrying value of the 10% Series A Redeemable
      Preferred Stock and the 8% Series A Convertible Preferred Stock (net of
      offering costs incurred) to the put or conversion price by the effective
      interest method.

      Cumulative Dividends on Preferred Stock - Cumulative dividends on the 10%
      Series A Redeemable Preferred Stock and the 8% Series A Convertible
      Preferred Stock are deducted from accumulated deficit as the dividends are
      earned by the holders and the carrying value is increased or an accrued
      liability is recorded depending on the payment method under the preferred
      stock instrument.

      Impact of New Accounting Pronouncements - In June 1997, the Financial
      Accounting Standards Board ("FASB") issued Statement of Financial
      Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
      SFAS No. 130 establishes standards for reporting and display of
      comprehensive income and its components in the financial statements. SFAS
      No. 130 is effective for fiscal years beginning after December 15, 1997.
      Reclassification of financial statements for earlier periods provided for
      comparative purposes is required. The Company is in the process of
      determining its preferred format. The adoption of SFAS No. 130 will have
      no impact on the Company's consolidated results of operations, financial
      position or cash flows.

      Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
      Segments of an Enterprise and Related Information". SFAS No. 131
      establishes standards for the way that public business enterprises report
      information about operating segments in annual financial statements and
      requires that those enterprises report selected information about
      operating segments in interim financial reports issued to shareholders. It
      also establishes standards for related disclosures about products and
      services, geographic areas, and major customers. SFAS No. 131 is effective
      for financial statements for fiscal years beginning after December 15,
      1997. Financial statement disclosures for prior periods are required to be
      restated. The Company is in the process of evaluating the disclosure
      requirements. The adoption of SFAS No. 131 will have no impact on the
      Company's consolidated results of operations, financial position or cash
      flows.

      Stock-Based Compensation - The Company measures stock-based compensation
      cost with employees as the excess of the fair value of the Company's
      common stock at date of grant over the amount the employee must pay for
      the stock. The Company measures stock-based compensation with other than
      employees as the fair value of the goods or services received or the fair
      value of the equity instrument issued, whichever is more reliably
      measurable.


                                     -F13-


<PAGE>   49


      NET LOSS PER COMMON SHARE - During 1997 the Company adopted SFAS No. 128,
      "Earnings Per Share". Basic net loss per common share is based on the
      weighted average number of shares of common stock outstanding during the
      year. Diluted net loss per common share is the same as basic net loss per
      share due to the antidilutive effect on net loss per share of any assumed
      conversion of convertible securities or exercise of options. The adoption
      of this statement had no impact on the Company's reported loss per share
      amounts.

      PRO FORMA PER SHARE INFORMATION (UNAUDITED) - Due to the conversion of the
      10% Series A Redeemable Preferred Stock and related common stock warrants
      and of certain shareholder notes upon the closing of the Company's initial
      public offering of its common stock during 1996, as discussed in Note 10,
      historical per share information is not considered relevant and pro forma
      per share information for 1996 has been presented in accordance with
      Securities and Exchange Commission requirements. The Company's pro forma
      net loss per common share is based upon the weighted average number of
      common shares outstanding during 1996 and the shares issued upon
      conversion of the 10% Series A Redeemable Preferred Stock and related
      common stock warrants and of certain shareholder notes. Equivalent shares
      in the form of stock options, unit options and other warrants are excluded
      from the calculation since they are antidilutive.

      The pro forma per share information presented for the year ended December
      31, 1996 is based upon the following:


<TABLE>
<S>                                                                                         <C>           
         Historical net loss                                                                $(2,487,639)  
         Interest on certain shareholder notes                                                   30,623
                                                                                            -----------   
         Pro forma net loss                                                                 $(2,457,016)
                                                                                            ===========            
         Weighted average common shares outstanding 1,511,964 
         Common shares issued upon conversion of:
           Preferred stock and related common stock warrants                                    821,221
           Certain shareholder notes                                                            175,144
                                                                                            -----------   
         Pro forma weighted average common shares outstanding                                 2,508,329
                                                                                            ===========   
</TABLE>


      PRO FORMA SUPPLEMENTAL PER SHARE INFORMATION (UNAUDITED) - Proceeds from
      the issuance of 914,924 shares of common stock, net of offering costs,
      were used to retire debt of $3,727,382 during 1996. Pro forma supplemental
      loss per common share for the year ended December 31, 1996 was ($0.58).
      Such pro forma supplemental per share amount assumes the debt was retired
      as of the beginning of the year or from date of issuance if later,
      resulting in interest savings of $462,000 and the weighted average common
      shares outstanding used in the pro forma loss per share computation
      discussed above plus the 914,924 incremental shares.

      RECLASSIFICATIONS - Certain amounts in the 1996 financial statements have
      been reclassified to conform with the current year's presentation.

2.    AT&T COMMISSION AGREEMENT

      During 1995, the Company entered into an agreement with AT&T with an
      effective date of December 16, 1995 (the "Old Agreement"). Under the Old
      Agreement, the Company received commissions based on the number of calls
      made, management fees based on 10% of the commissions earned, compliance
      incentive bonuses determined quarterly and paid monthly based on the
      number of calls processed each month and various additional bonuses,
      including a $1 million bonus to be paid in four quarterly installments for
      contracting 100,000 rooms under the Old Agreement by July 1, 1996. Prior
      to July 1, 1996, the Company had reached the 100,000 room threshold and
      recognized the $1 million bonus. During 1996, an amended agreement was
      executed which accelerated the payment dates of the final two quarterly
      installments to February 28, 1997 and May 1, 1997.

                                      -F14-


<PAGE>   50



      The Old Agreement, as amended, included provisions for the refund of
      $1,000,000 in bonuses paid to the Company by AT&T should the Company
      terminate the agreement or fail to comply with the agreement. AT&T had
      reserved a number of grounds to terminate the Old Agreement, as amended,
      prior to its expiration, primarily related to certain compliance and
      quality standards. AT&T was responsible for determining if the Company was
      in compliance with certain standards set forth in the Old Agreement, as
      amended, including achieving a 94% compliance rate with respect to AT&T
      dialing standards. The Company achieved a compliance rate above 94% and,
      therefore, has not forfeited any compliance bonuses received during 1997
      and 1996. Management is not aware of any noncompliance nor has the Company
      been notified of any noncompliance with the Old Agreement, as amended.

      During 1997, a new agreement was executed with an effective date of
      January 16, 1998 (the "New Agreement"). By executing the New Agreement,
      the Company received a signing bonus of $200,000. Under the New Agreement,
      the Company will receive monthly commissions based on the number of calls
      made, bonuses of up to $400,000 based on the number of calls processed
      during the year and monthly compliance incentive bonuses based on the
      number of calls processed each month. The New Agreement includes
      provisions for the refund of the bonus payments should the Company
      terminate the New Agreement or fail to comply with the New Agreement. AT&T
      is responsible for determining if the Company is in compliance with
      certain standards, as set forth in the New Agreement. AT&T has reserved a
      number of grounds to terminate the New Agreement prior to its expiration,
      with or without cause.

3.    ACQUISITION OF PIC AND PIC-R

      Effective October 31, 1997, the Company purchased all of the outstanding
      capital stock of PIC in exchange for a cash payment at closing of $500,000
      and the issuance to certain shareholders of PIC of a promissory note in
      the principal amount of $840,000 due March 1, 1998, which was subsequently
      extended to June 30, 1998 (the "Short-Term Note"), and promissory notes
      with an aggregate principal amount of $1,910,000 due in installments
      through April 30, 1999 (the "Long-Term Notes" and, collectively with the
      Short-Term Note, the "PIC Notes"). Concurrently, the Company acquired all
      of the outstanding capital stock of PIC-R in exchange for a cash payment
      at closing of $30,000 and the issuance by the Company of an aggregate of
      300,000 shares of common stock of the Company valued at $511,874. In
      connection with the PIC acquisition, the Company also loaned $400,000 to
      PIC-R for capital expenditures. The acquisitions were recorded under the
      purchase method for financial reporting purposes. Goodwill of $4,203,709
      associated with the acquisitions is being amortized over ten years.

      The PIC-R agreement provides that the Company will issue additional shares
      of common stock to the extent that the combined earnings before interest,
      taxes, depreciation and amortization ("EBITDA") of PIC and PIC-R for
      either of the first two full twelve month periods after closing exceeds
      $1,000,000. Shares of common stock with a quarterly average market value
      of $1.25 will be issued for each dollar of EBITDA over $1,000,000 during
      either of the twelve-month periods. The Company granted piggyback
      registration rights to the PIC-R shareholders with respect to any
      secondary offerings of common stock made within three years after the
      closing of the PIC acquisition.

      The Company's obligations under the PIC notes are subject to a collateral
      interest in the shares of PIC stock and PIC-R stock acquired by the
      Company pursuant to the PIC acquisition. In the event that the Company
      defaults with respect to the repayment of the Short-Term Note, the holders
      of the PIC notes will have the right to rescind the PIC acquisition by
      surrendering the shares of common stock issued in the PIC acquisition and
      the PIC notes to the Company in exchange for the return of all of the
      shares of PIC and PIC-R stock. In addition, if the PIC acquisition is
      rescinded, the shareholders of PIC and PIC-R would retain the $530,000
      cash payments made at closing and the $400,000 advanced to PIC-R.

                                     -F15-

<PAGE>   51


      Pro forma results of operations for the Company reflecting the PIC and
      PIC-R acquisitions for the years ended December 31, 1997 and 1996 as if
      the acquisitions had occurred on January 1, 1996 are as follows:

<TABLE>
<CAPTION>

                                                                   1997                1996

<S>                                                            <C>                 <C>         
Total revenues                                                 $ 15,745,311        $ 13,467,406
Cost of sales                                                    11,640,653           9,292,101
                                                               ------------        ------------ 
Gross operating profit                                            4,104,658           4,175,305

Selling, general and administrative expense                       6,624,572           4,239,512
Depreciation and amortization expense                             2,738,878           3,185,473
Loss from impairment of property, equipment
  and intangible assets                                           1,353,010                --
Loss from joint venture                                             993,329                --
                                                               ------------        ------------ 

Operating loss                                                   (7,605,131)         (3,249,680)

Interest expense                                                  1,148,119           1,865,058
                                                               ------------        ------------ 

Loss before income taxes and extraordinary item                  (8,753,250)         (5,114,738)
Income taxes                                                          5,620               8,112
                                                               ------------        ------------ 

Loss before extraordinary item                                   (8,758,870)          5,112,850
Extraordinary item - gain on related party restructuring               --             1,084,314
                                                               ------------        ------------ 

Net loss                                                       $ (8,758,870)       $ (4,038,536)
                                                               ============        ============ 

Pro forma net loss applicable to common shareholders           $ (8,793,877)       $ (4,007,913)
                                                               ============        ============ 

Pro forma net loss per common share:
  Loss before extraordinary item                               $      (1.97)       $      (1.82)
  Extraordinary item                                               --                       .39
                                                               ------------        ------------ 
  Net loss                                                     $      (1.97)       $      (1.43)
                                                               ============        ============ 

Pro forma weighted average common stock outstanding               4,458,439           2,808,329
                                                               ============        ============ 


</TABLE>

4. PURCHASE OF ASSETS OF POWERTEL OF DELAWARE, INC.

      On August 26, 1996, the Company purchased approximately 130,000
      telephones, related rights and interests, and various assets, such as
      computers and office furniture, from PowerTel of Delaware, Inc.
      ("PowerTel") for a cash price of $250,000. The Company assumed no
      liabilities of PowerTel as a result of this purchase.


                                     -F16-

<PAGE>   52


5.    PURCHASE OF ASSETS OF INTERACTIVE COMMUNICATIONS, INC. AND FORMATION AND 
      OPERATION OF GUIDE STAR JOINT VENTURE

      On December 13, 1996, the Company purchased all rights and interests in
      interactive voice response hardware ("IVR Hardware") from Interactive
      Communications, Inc. ("ICI") for a cash price of $361,600. The Company
      assumed no liabilities of ICI as a result of this purchase, except that
      the Company reimbursed ICI for all telephone and leasing costs incurred by
      ICI prior to the date the IVR Hardware was assumed by the Company, which
      totaled $64,545. Also, pursuant to this agreement, the Company entered
      into an Audiotext Services Agreement with ICI covering thirty-eight IVR
      Hardware platforms. This agreement is effective from January 1, 1997 until
      January 1, 2000, with an option to renew for successive periods of twelve
      months. Under the terms of the agreement, ICI will provide information
      updating services for each IVR Hardware platform in exchange for a $1,000
      per platform monthly licensing fee to be paid by the Company. In addition
      , the Company will pay a monthly fee to ICI in the amount of 5% of the
      gross monthly revenues generated by the business activities supported by
      the IVR Hardware platforms after the Company has received gross revenues
      of $6,000,000.

      On January 31, 1997, the Company entered into an agreement with an
      unrelated third party to form a joint venture, Guide Star, L.L.C. The
      Company contributed the IVR platforms and other assets with a carrying
      value of $349,574 in exchange for a 50% ownership interest and a
      preferential distribution of $496,934. The other party contributed
      $209,970 in cash in exchange for a 50% ownership interest. The joint
      venture provides consumer telecommunications services related to the IVR
      platforms.

      During the fourth quarter of 1997, management of the Company decided to
      cease the operations of the Guide Star joint venture and dispose of its
      assets. All assets of the joint venture have been written down to their
      estimated net realizable values at December 31, 1997. The Company's net
      investment in the joint venture of $(380,913) at December 31, 1997
      represents net liabilities of the venture for which the Company is
      responsible.

      Condensed financial information for the Company's investment in the joint
      venture as of and for the year ended December 31, 1997 is as follows:

<TABLE>
<CAPTION>

                                         TOTAL           TOTAL           TOTAL             NET
                                         ASSETS       LIABILITIES      REVENUES            LOSS

<S>                                     <C>            <C>             <C>             <C>          
      Guide Star                        $ 18,286       $ 399,199       $ 256,705       $ (1,237,728)
</TABLE>



      On November 30, 1997, the Company and ICI entered into a Settlement
      Agreement whereby the Company has agreed to pay the full amount currently
      due and outstanding at that date to ICI under the Audiotext Services
      Agreement of $295,000 and additional costs, fees and accrued interest of
      $22,196, with interest on these unpaid amounts accruing interest at 18%.
      The Company was also effectively released from its continuing obligation
      under the Audiotext Services Agreement since ICI is no longer required to
      provide, and is not providing, updating services for each IVR Hardware
      platform. However, if the Settlement Agreement obligation is not paid, the
      Company may remain liable under the Audiotext Services Agreement. No loss,
      if any, with respect to such contingency has been recorded in the
      consolidated financial statements.

                                     -F17-

<PAGE>   53


6.    NOTES PAYABLE

      Notes payable at December 31, 1997, consisted of the following:

<TABLE>
<S>                                                                                                        <C>        
      Past due $250,000 variable line-of-credit with a financial institution, with                                              
        interest on borrowings payable monthly at 2% above the financial institution's
        prime rate (combined rate of 10.5% at December 31, 1997), collateralized by
        substantially all assets of the Company not otherwise encumbered and
        personally
        guaranteed by the Company's Chairman of the Board.                                                 $   250,000
      
      Past due note payable to financial institution bearing interest at 12%,
        collateralized by substantially all assets of the Company not otherwise
        encumbered and personally guaranteed by the Company's Chairman
        of the Board.                                                                                          225,000
      
      Note payable to financial institution bearing interest at 2% over the bank's
        prime rate (combined rate of 10.5% at December 31, 1997), due March 28, 1998,
        collateralized by AT&T accounts and commission receivables, inventory and
        certain telecommunications equipment with a carrying
        value of approximately $180,000.                                                                       400,000
      
      Note payable to the former owners of PIC bearing interest at 8%, due June 30,
        1998, collateralized by a pledge of the common stock of PIC and PIC-R.                                 840,000
                                                                                                           -----------
      Total                                                                                                $ 1,715,000
                                                                                                           ===========
</TABLE>
     
     

      Also see Note 18 with respect to the estimated fair value of notes
payable.



                                     -F18-


<PAGE>   54


7.    LONG-TERM DEBT

      Long-term debt, others as of December 31, 1997 and 1996 consisted of the
      following:

<TABLE>
<CAPTION>      
                                                                                              1997           1996         
<S>                                                                                        <C>            <C>             
      Mortgage note payable to partnership due in monthly installments of $3,299,                                            
        including interest at 8.5%, until September 15, 2000, when the balance is due 
        The note is collateralized by a first mortgage on the Company's office 
        facilities and land                                                                $  278,358     $  293,575
      
      Notes payable to the former owners of PIC, non-interest bearing, due in
        quarterly installments of $190,999, beginning on January 31, 1998 through
        January 31, 1999 and a balloon payment due at maturity of $955,005 on April
        30, 1999, (net of discount of $242,840 at December 31, 1997 for an effective
        interest rate of 14.5%), collateralized by a pledge of the common stock of 
        PIC and PIC-R                                                                       1,667,160           --
      
      Note payable to financial institution bearing interest at 11.25%, due April 9,
        1999, collateralized by substantially all assets of PIC not otherwise
        encumbered and personally guaranteed by certain former PIC shareholders                66,165           --
      
      Note payable to financial institution bearing interest at 10.25%, due August 1,
        1998, collateralized by substantially all assets of PIC not otherwise
        encumbered and personally guaranteed by certain former PIC shareholders                38,983           --
      
      Notes payable to financial institution bearing interest at 11.25%, maturing May
        3, 1999 to December 2, 1999, collateralized by certain equipment and note and
        lease assignments and personally guaranteed by certain former PIC shareholders         23,199           --
      
      Note payable to vendor bearing interest at 8.5%, due March 30, 1999,
        collateralized by a security interest in all billable call records processed by 
        the vendor on behalf of PIC                                                            35,219           --
      
      $120,000 variable line of credit with a financial institution, bearing interest
        at 10.0%, due February 9, 1999, collateralized by substantially all assets of
        PIC and personally guaranteed by certain former PIC shareholders                      110,223           --
                                                                                           ----------     ----------
      Total                                                                                 2,219,307        293,575
      Less current portion                                                                    814,400         15,217
                                                                                           ----------     ----------
      Long-term debt, others                                                               $1,404,907     $  278,358
                                                                                           ==========     ==========
</TABLE>




                                     -F19-


<PAGE>   55


        Long-term debt with related parties at December 31, 1997 and 1996
        consisted of the following:
<TABLE>
<CAPTION>
   
                                                                                                          1997           1996      
<S>                                                                                                   <C>            <C>           
      Uncollateralized notes payable to Intellicall due January 31, 2005, (net of                                                  
        discount of $377,734 and $410,342 at December 31, 1997 and 1996,                                                           
        respectively). Interest payable quarterly at 4%, beginning March 31, 1995                                                  
        until maturity, when the balance is due (effective interest rate of 11.5%)                                                 
        The note was purchased by Berthel from Intellicall during 1996                               $  622,266     $  589,658    
                                                                                                                                   
                                                                                                                                   
      Note payable to Berthel, due in five monthly installments of $9,494 including                                                
        interest at 14% (15.5% at December 31, 1996) beginning on March 30, 1998, then                                             
        fifty-five installments of $20,130 including interest at 14% until February                                                
        28, 2003, collateralized by property and equipment with a net carrying value                                               
        of $7,426 at December 31, 1997 ($85,000 at December 31, 1996), all subsequent                                              
        additions affixed to the equipment, all revenues derived from the equipment,                                               
        and assignment of all of the Company's rights in the equipment                                  792,786        750,000     
                                                                                                                                   
      Note payable to Berthel due in monthly installments of $23,528 beginning                                                     
        December 1, 1997 until November 1, 2002 when the balance is due including                                                  
        interest at 14.5%, collateralized by all telecommunications equipment owned by PIC-R            988,555           --       
                                                                                                                                   
      Uncollateralized, noninterest bearing demand notes payable to                                                                
        related parties                                                                                 172,559           --       
                                                                                                     ----------     ----------     
                                                                                                                                   
      Total                                                                                           2,576,166      1,339,658     
      Less current portion                                                                              394,751        133,541     
                                                                                                     ----------     ----------     
      Long-term debt with related parties                                                            $2,181,415     $1,206,117     
                                                                                                     ==========     ==========     
                                                                                                                                   
</TABLE>






      Maturities of long-term debt for each of the five years subsequent to
      December 31, 1997 are as follows:
<TABLE>
<CAPTION>
                                                                                  RELATED
                                                                  OTHER           PARTIES            TOTAL

<S>                                                           <C>              <C>               <C>
        1998                                                  $   814,400      $   394,751       $ 1,209,151
        1999                                                    1,161,137          339,825         1,500,962
        2000                                                      243,770          346,846           590,616
        2001                                                            -          399,773           399,773
        2002                                                            -          437,254           437,254
        Thereafter                                                      -          657,717           657,717
                                                              -----------      -----------       -----------
        Total                                                 $ 2,219,307      $ 2,576,166       $ 4,795,473
                                                              -----------      -----------       -----------
</TABLE>



      In June 1997, Berthel converted note obligations with a face value of $1.7
      million and a carrying value of approximately $1.3 million into 465,625
      shares of the Company's common stock. Additionally, the Company had agreed
      to issue up to 187,067 "adjustment shares" to Berthel should the lowest
      average closing trading price of the shares for any 30-day period during
      the 90 days after the shares become registered fall below $4.00 per share.
      Berthel had the option to rescind the transaction if the Company did not
      register the shares during 1997. Such shares were not registered during
      1997.


                                     -F20-


<PAGE>   56



      Effective December 31, 1997, the Company and Berthel agreed to rescind the
      conversion and reissued each of the note obligations. Interest on each of
      the note obligations from the conversion date to the rescission date was
      added to the principal balance outstanding or was payable on December 31,
      1997. Also, the interest rate on one of the notes was reduced from 15.5%
      to 14.0% and the repayment terms were extended. In connection with the
      agreement, the Company agreed to issue warrants to Berthel for 229,729
      shares of common stock of the Company, at an exercise price of $1.12 per
      share. The Company has assigned a fair value of $50,000 to the warrants,
      that has been capitalized as deferred loan costs. The warrants will
      expire, if not exercised, on December 31, 2002.

      Also see Note 18 with respect to the estimated fair value of long-term
      debt.

8.    DEFERRED INCOME

      As described in Note 1, the Company enters into sale and leaseback
      arrangements with Berthel for much of the Company's telecommunications
      equipment used in call processing. During the year ended December 31,
      1996, the Company had equipment sales of $389,941 with related cost of
      sales of $327,331 under such arrangements with Berthel. The Company
      deferred gains under these arrangements of $62,610 during the year ended
      December 31, 1996. Deferred income recognized for the years ended December
      31, 1997 and 1996 was $22,428 and $236,266, respectively.

9.    PREFERRED STOCK ISSUES

      The 10% Series A Redeemable Preferred Stock (the "Redeemable Preferred")
      included a detachable common stock warrant, paid a 10% cumulative,
      preferred dividend and included certain liquidation preferences and
      redemption terms.

      Effective October 21, 1996, the holders of 22,450 shares of the Company's
      Redeemable Preferred and associated common stock warrants, with a net
      carrying value of $2,300,354 (including $419,815 of dividends in arrears
      at October 21, 1996), agreed to convert their Redeemable Preferred and
      warrants into 821,221 shares of the Company's common stock, in conjunction
      with the Company's initial public offering, as discussed in Note 10.
      During 1997, the remaining Redeemable Preferred shares outstanding were
      repurchased.

      On July 2, 1997, the Company amended its Articles of Incorporation to
      eliminate the Redeemable Preferred and authorized 1,000,000 shares of a
      new class of "blank check" preferred stock.

      On August 1, 1997, the Company authorized the issuance of up to 50,000
      shares of Series A Convertible Preferred Stock (the "Convertible
      Preferred"). The Convertible Preferred has a liquidation preference,
      subject to adjustment, of $100 per share and accrues cumulative dividends
      at an annual rate of 8% of the liquidation preference. Dividends are
      payable quarterly at the Company's option in cash or in common stock.
      Payments to holders of shares of Convertible Preferred with respect to
      liquidation or dividends must be made prior to any payments to holders of
      shares of common stock. The Convertible Preferred has no voting rights
      except as required by applicable law. The Convertible Preferred may also
      be converted into common stock, at the holder's option, commencing one
      year after issuance at the conversion rate of $2.50 per share of Common
      Stock and is automatically converted into Common Stock three years after
      issuance at the conversion rate of $2.50 per share of Common Stock. On
      December 22, 1997, the Company amended the conversion rate to $1.125 per
      share. As of December 31, 1997, the Company had received gross proceeds of
      $1,625,000 from the issuance and sale of 16,250 shares of Convertible
      Preferred pursuant to a private placement offering.



                                     -F21-


<PAGE>   57



10.   COMMON STOCK

      On July 29, 1996, the shareholders approved a 15.4456 for one common stock
      split to shareholders of record on July 19, 1996. Retroactive restatement
      has been made in the financial statements to all share and per share data.

      Effective October 21, 1996, the Company completed an initial public
      offering of the Company's common stock and common stock purchase warrants.
      The offering consisted of 800,000 units comprised of two shares of common
      stock and one warrant to purchase common stock (the "Units"). The Company
      sold 800,000 Units at $10.01, which resulted in gross proceeds of
      $8,008,000. The Company paid underwriting commissions of $800,800,
      underwriting fees of $240,240 and accounting, legal and other expenses of
      $440,589. The total expenses of $1,481,629 incurred in connection with the
      initial public offering have been netted against the proceeds.

      In conjunction with the initial public offering, the Company converted
      $598,918 of shareholders' notes payable plus accrued interest of $14,082
      into 175,144 shares of common stock.

      During 1996 the Company also entered into a bridge financing arrangement
      with the underwriters for the Company's initial public offering for
      $650,000 of 12% subordinated notes, due April 1997, issued in tranches of
      $400,000 and $250,000. In October 1996, the first tranche of $400,000 was
      automatically converted into 80,000 Units at a conversion ratio equal to
      50% of the initial public offering price. The second tranche of $250,000
      was issued with detachable warrants to purchase 41,667 Units exercisable
      at $6 per Unit. The second tranche was repaid on October 25, 1996. The
      detachable warrants expire on August 5, 1998.

      The Company recorded $80,000 of additional interest expense in relation to
      the first tranche of subordinated notes payable. The Company derived this
      additional interest expense based on the 10% greater discount to the
      initial public offering price reflected in the 80,000 Units issued on
      conversion of the first tranche of notes as compared to the discount
      reflected in the exercise price of the detachable warrants issued with the
      second tranche of notes.

      In conjunction with the initial public offering, the Company sold to the
      underwriters, warrants to purchase 80,000 Units (the "Underwriter
      Warrants") exercisable at $12.51 per Unit, subject to adjustment for
      dilutive issuances of stock. The Underwriter Warrants are exercisable on
      October 21, 1997 or at any time thereafter for a period of four years from
      October 21, 1997. The Company has also agreed to allow the underwriters
      the right to nominate one member to the Company's Board of Directors.

11.   COMMON STOCK WARRANTS

      Concurrent with the Intellicall restructuring described in Note 13, the
      Company renegotiated the exercise price of 227,143 detachable common stock
      warrants originally issued to Intellicall. The exercise price on these
      shares was reduced from $1.81 to effectively zero. From February 15, 1996
      through April 15, 1999, the price that Intellicall could have put the
      common stock warrants and/or the resulting warrant shares to the Company
      was also reduced from $1.81 to $.71. As a result of the put, the Company
      reclassified the warrants as a redeemable security and reduced the
      carrying value from $362,948 to $161,766. The $201,182 gain was deferred
      pending payment of the Intellicall restructuring obligation, as discussed
      in Note 13, and was recorded directly to accumulated deficit on June 29,
      1996 when the obligation was repaid. On December 31, 1996, Berthel
      purchased the common stock put warrants from Intellicall and purchased
      227,143 shares of common stock from the Company for $147.


                                    -F22-
<PAGE>   58


      The Company has the following common stock warrants outstanding (all of
      which are currently exercisable) at December 31, 1997:

<TABLE>
<CAPTION>
        
                                                                       APPLICABLE                                         
                                                                         COMMON         EXERCISE        EXPIRATION
                                                                         SHARES           PRICE            DATE
        
<S>                                                                    <C>                <C>            <C>
        Issued with initial public offering                               880,000         $ 6.50          1999
                                                                                           
        Issued with lease modification (Note 15)                          750,000           1.44          2001
                                                                                           
        Issued with stock rescission (Note 7)                             229,729           1.12          2002
                                                                                           
        Issued with consulting agreement (Note 19)                         50,000           2.50          1999
                                                                        ---------
        Total outstanding                                               1,909,729
                                                                        =========
</TABLE>



      Also see Note 10 with respect to Unit warrants outstanding.

      The 880,000 common stock warrants were issued in conjunction with the
      initial public offering. Each warrant is exercisable to purchase one share
      of common stock at a price of $6.50 per share, subject to adjustment for
      dilutive issuances of stock. The warrants are exercisable at any time
      after issuance and expire on October 21, 1999. The warrants are redeemable
      at the Company's option commencing 270 days after October 21, 1996 upon 30
      days notice to holders at $.01 per warrant if the closing bid price of the
      common stock averages in excess of 110% of the exercise price of the
      warrants for a period of 20 consecutive trading days ending within 15 days
      of the notice of redemption.

12.   STOCK OPTION PLANS

      The Company has adopted the 1993 Stock Option Plan (the "1993 Plan").
      Under the 1993 Plan, options may be granted to employees to purchase up to
      an aggregate of 272,529 shares of the Company's common stock. The 1993
      Plan is administered by the Compensation Committee of the Board of
      Directors which determines to whom options will be granted. The 1993 Plan
      provides for the grant of incentive stock options (as defined in Section
      422 of the Internal Revenue Code) to employees of the Company. The
      exercise price of stock options granted under the 1993 Plan is established
      by the Compensation Committee, but the exercise price may not be less than
      the fair market value of the common stock on the date of grant of each
      option. Each option shall be for a term not to exceed ten years after the
      date of grant, and a participant's right to exercise an option vests at
      the rate of twenty percent on the date of grant and each anniversary date
      until the option is fully vested.

                                     -F23-


<PAGE>   59


      A summary of stock option activity under the 1993 Plan during the years
      ended December 31, 1997 and 1996, is summarized as follows:

<TABLE>
<CAPTION>
 
                                                           WEIGHTED
                                                           AVERAGE
                                                           EXERCISE        OPTION PRICE
                                                             PRICE          PER SHARE               SHARES
<S>                                                          <C>             <C>                   <C>    
Balance at January 1, 1996                                                   $      1.81           102,621
  Granted                                                                           1.81            45,518
  Cancelled                                                                         1.81           (10,395)
                                                                             -----------           -------
Balance at December 31, 1996                                                        1.81           137,744
  Granted                                                                           2.88            96,208
  Granted                                                                           4.00             6,000
  Granted                                                                           3.25            18,000
  Cancelled                                                                         1.81           (25,523)
  Cancelled                                                                         4.00            (4,000)
  Cancelled                                                                         3.25            (3,000)
  Cancelled                                                                         2.88            (1,500)
                                                                             -----------           -------
Balance at December 31, 1997                                 $ 2.51          $1.81-$4.00           223,929
                                                                             ===========           =======
</TABLE>




      At December 31, 1997, options for 172,779 shares were exercisable (82,646
      at December 31, 1996), an additional 48,600 shares were available for
      future grants and the weighted average remaining life of the options
      outstanding was six years. During 1996, contingent stock options of
      45,518, exercisable at $1.81 per share, were granted as stock options upon
      resolution of the contingency. The Company has reserved 272,529 shares of
      common stock in connection with the 1993 Plan at December 31, 1997.

      During 1996 the shareholders also approved the allocation of an additional
      272,529 shares of common stock to an incentive performance plan to be
      developed by the Company (the "Incentive Performance Plan"). During 1997,
      the Company completed the development of the Incentive Performance Plan,
      renamed it the Murdock Communications Corporation 1997 Stock Option Plan
      (the "1997 Stock Option Plan") and amended the number of shares allocated
      to 288,029. The 1997 Stock Option Plan is also administered by the
      Compensation Committee of the Board of Directors which determines to whom
      the options will be granted. The 1997 Stock Option Plan provides for the
      grant of incentive stock options (as defined in Section 422 of the
      Internal Revenue Code) or nonqualified stock options to executives or
      other key employees of the Company. The exercise price of the stock
      options granted under the 1997 Stock Option Plan is established by the
      Compensation Committee, but the exercise price may not be less than the
      fair market value of the common stock on the date of the grant of each
      option for incentive stock options. Each option shall be for a term not to
      exceed ten years after the date of grant for non-employee directors and
      five years for certain shareholders. Options cannot be exercised until the
      vesting period, if any, specified by the Compensation Committee has
      expired.




                                     -F24-


<PAGE>   60

      A summary of stock option activity under the 1997 Stock Option Plan for
      the year ended December 31, 1997, is as follows:


<TABLE>
<CAPTION>

                                                     Weighted
                                                     Average
                                                     Exercise       Option Price
                                                      Price           Per Share            Shares
     <S>                                              <C>             <C>                  <C>          
      Balance at January 1, 1997                                      $     --                --
        Granted                                                              3.25          225,629
        Granted                                                              4.16           10,000
        Granted                                                              3.13           15,000
                                                                      -----------          -------
      Balance at December 31, 1997                    $ 3.28          $3.13-$4.16          250,629
                                                                      ===========          =======
</TABLE>



      Compensation expense of $10,000 was recorded in connection with the grant
      of these options for the year ended December 31, 1997. At December 31,
      1997, options for 25,000 shares were exercisable, an additional 37,400
      shares were available for future grants and the weighted average remaining
      life of the options outstanding was 6 years. The Company has reserved
      288,029 shares of common stock in connection with the 1997 Stock Option
      Plan at December 31, 1997.

      See Note 15 for common stock options issued in connection with the
      employment of the Company's Chief Executive Officer and Note 19 for
      options issued to a consultant.

      The Company accounts for stock option grants and awards to employees using
      the intrinsic value method. If compensation cost for stock option grants
      and awards had been determined based on fair value at the grant dates for
      1997 and 1996 options consistent with the method prescribed by Statement
      of Financial Accounting Standards No. 123, "Accounting for Stock Based
      Compensation" (SFAS No. 123), the Company's net loss and net loss per
      share would have been the pro forma amounts indicated below:



<TABLE>
<CAPTION>

                                                                            1997                1996
                                                     
     <S>                                             <C>               <C>                  <C>          
      Net loss attributable to common shareholders   As reported       $ (7,935,015)      $ (2,457,016)
                                                     Pro forma           (8,073,015)        (2,519,184)
                                                     
      Net loss per common share                      As reported       $      (1.89)      $       (.98)
                                                     Pro forma                (1.92)             (1.00)
                                                     
</TABLE>                                             


      The weighted average fair values at date of grant for options granted
      during 1997 and 1996 were estimated to be $138,000 and $62,168,
      respectively. The Company's calculations were made using the Black-Scholes
      option pricing model with the following weighted average assumptions: five
      years expected life to vesting; stock volatility of 51% in 1997 and 1996;
      risk-free interest rate of 6% in 1997 and 1996; and no dividends during
      the expected term. During the initial phase-in period, as required by SFAS
      No. 123, the pro forma amounts were determined based on stock option
      grants and awards in 1997 and 1996 only. The pro forma amounts for
      compensation cost may not be indicative of the effects on net loss and net
      loss per share for future years.


                                     -F25-


<PAGE>   61
13.   EXTRAORDINARY ITEM

      During 1994, the Company restructured a $1,600,000 uncollateralized note
      and a $500,000 uncollateralized note with a total carrying value of
      $2,034,499, all held by Intellicall. The notes, including capital lease
      obligations of $418,787, were exchanged for a note payable with a face
      amount of $1,425,000 and an estimated fair value of $1,368,972. The
      estimated fair value was determined based on the discounted future cash
      flows using the Company's incremental borrowing rate. The resulting gain
      of $1,084,314 was deferred pending payment of all amounts due under the
      $1,425,000 uncollateralized note payable, as provided in the underlying
      restructuring agreement. On June 29, 1996, the Company paid all amounts
      due as provided in the underlying restructuring agreement and recorded the
      $1,084,314 extraordinary gain.

14.   INCOME TAXES

      The provision for income taxes consisted of the following for the years
      ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                               1997           1996

        <S>                                                  <C>            <C>  
        Current:
        Federal                                              $  --          $  --
        State                                                  5,402          8,112
                                                             -------        -------           
        Total                                                $ 5,402        $ 8,112
                                                             =======        =======
</TABLE>





      The provision for income taxes for the years ended December 31, 1997 and
      1996 is less than the amounts computed by applying the statutory federal
      income tax rate of 34% to the loss before income taxes and extraordinary
      item due to the following items:

<TABLE>
<CAPTION>
                                                                            1997                1996

<S>                                                                     <C>                <C>          
      Computed expected amount                                          $ (2,684,200)       $(1,211,700)
      Meals and entertainment                                                  8,000              8,000
      Officer's life insurance                                                 8,600              4,100
      State income taxes, net of federal tax benefit                           3,500              5,400
      Net operating losses for which no tax benefit was provided           2,669,502          1,202,312
                                                                        ------------        -----------
      Income tax provision                                              $      5,402        $     8,112
                                                                        ============        ===========
</TABLE>



      At December 31, 1997 the Company has net operating loss carryforwards for
      federal income tax purposes of approximately $11 million to use to offset
      future taxable income. These net operating losses will expire, if unused,
      from December 31, 2008 through 2012.

      Certain restrictions under the Tax Reform Act of 1986, caused by a change
      in ownership resulting from sales of common stock, limit the annual
      utilization of net operating loss carryforwards. The initial public
      offering of the Company's common stock described in Note 10 resulted in
      such a change in ownership. The Company estimates that the post-change
      taxable income that may be offset with the pre-change net operating loss
      carryforward will be limited annually to approximately $600,000. The
      annual limitation may be increased for any built-in gains recognized
      within five years of the date of the ownership change.


                                     -F26-

<PAGE>   62


      Significant components of the Company's deferred tax assets and
      liabilities as of December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>

                                                                           1997              1996
<S>                                                                    <C>              <C>        
       Deferred tax assets:                                                                                    
         Current:
           Allowance for doubtful accounts receivable                  $    49,000      $    11,000
                                                                       -----------      -----------
       
         Noncurrent:
           Intangible asset amortization and valuation allowance           227,000          320,000
           Differences in net book value of property and equipment         999,000          720,000
           Capital lease adjustment                                      1,134,000          620,000
           Deferred income                                                  19,000           28,000
           Carryforward of net operating loss                            4,072,000        1,870,000
                                                                       -----------      -----------
                                                                         6,451,000        3,558,000
                                                                       -----------      -----------
       Total deferred tax assets                                         6,500,000        3,569,000
       Valuation allowance for deferred tax assets                      (6,500,000)      (3,569,000)
                                                                       -----------      -----------
       Net deferred tax assets                                         $      --        $      --
                                                                       ===========      ===========

</TABLE>

      A valuation allowance for the entire balance of deferred tax assets has
      been recorded because of uncertainty over their future realization.

15.   COMMITMENTS AND CONTINGENCIES

      The Company is obligated under long-term capital leases for
      telecommunication equipment. Substantially all of the leases are with
      Berthel and have been capitalized and are personally guaranteed by the
      Company's Chairman of the Board. The Company is responsible for all
      property taxes, maintenance and insurance. The Company also leases certain
      of its facilities under operating leases. At December 31, 1997, future
      minimum rental payments on lease obligations are as follows:

<TABLE>
<CAPTION>

                                                                Capital Leases                        
                                                 ----------------------------------------     Operating
                                                   Berthel          Other         Total         Leases
<S>                                              <C>            <C>            <C>            <C>       
       Years ending December 31:
          1998                                   $  652,928     $   16,032     $  668,960     $  208,945
          1999                                    1,064,826          6,680      1,071,506        196,228
          2000                                    1,064,826           --        1,064,826        168,317
          2001                                    1,064,826           --        1,064,826        182,928
          2002                                    1,064,826           --        1,064,826         68,180
          Thereafter                                177,471           --          177,471           --
                                                 ----------     ----------     ----------     ----------
          Minimum rental payments                 5,089,703         22,712      5,112,415     $  824,598
          Less amounts representing interest      1,554,012          2,070      1,556,082     ----------
                                                 ----------     ----------     ----------     
                                                  3,535,691         20,642      3,556,333
          Less amounts due within one year          167,149         14,173        181,322
                                                 ----------     ----------     ----------     
          Capital lease obligations due
            after one year                       $3,368,542     $    6,469     $3,375,011
                                                 ==========     ==========     ==========
              
</TABLE>
              
              
      Rent expense under operating leases for the years ended December 31, 1997
      and 1996 was $32,921 and $12,120, respectively.

                                     -F27-

<PAGE>   63


      On May 31, 1996, the Company modified its existing lease agreements with
      Berthel by deferring the March, April and May 1996 lease payments until
      the end of the lease term as an additional balloon payment for leases with
      a carrying value of $3,550,750 at December 31, 1995. Monthly lease
      payments for the remaining leases, with a carrying value of $1,916,358 at
      December 31, 1995, were also reduced with the amount of the reduction
      included as a balloon payment at the end of the lease term.

      On September 30, 1997, the Company modified its existing lease agreements
      with Berthel by deferring the July and August 1997 lease payments and
      increasing the remaining future minimum rental payments for the payments
      deferred.

      During 1997, with an effective date of February 28, 1998, the Company
      further modified its existing lease agreements with Berthel by deferring
      the October 1997 through February 1998 lease payments until the end of the
      lease term as additional payments. Total monthly lease payments are
      $41,850 from March 1998 through July 1998 and $88,736 per month until
      February 2003. In connection with these modifications, the Company agreed
      to issue warrants to Berthel for 750,000 shares of common stock of the
      Company, at an exercise price of $1.44 per share. The Company has assigned
      a fair value of $157,000 to the warrants, that has been capitalized as
      deferred lease restructuring costs. The warrants will expire, if not
      exercised on February 28, 2001.

      In conjunction with the PowerTel purchase discussed in Note 4, the Company
      leases warehouse space on a month-to-month basis, with payments of $3,200.
      The Company also subleases a portion of this warehouse space to an
      unrelated third party on a month-to-month basis for $1,000.

      The Company received a notice and demand dated September 20, 1996 (the
      "Demand") from the trustee for the Value-Added Communications Litigation
      Trust, as successor-in-interest to the bankruptcy estate of Value-Added
      Communications, Inc. (collectively, "VAC"), relating to revenues received
      by the Company for providing telecommunications services to the hotels
      managed by Larken, Inc., a related party (see Note 16). The Demand alleges
      that all revenues received by the Company for providing telecommunications
      services to the Larken, Inc. managed hotels constitute avoidable transfers
      under the federal Bankruptcy Code and demands payment to VAC of all such
      amounts. The amount of revenues subject to the Demand was not specified.
      Management believes that the Company's agreements to provide
      telecommunications services to Larken, Inc. were made by the Company in
      good faith, for value and without knowledge as to the alleged avoidable
      nature of such agreements.

      On January 14, 1998, the Company received notice of a Settlement Agreement
      and Release between VAC, Larken, Inc. and the Company, among others. Under
      the Agreement and Release, VAC released Larken, Inc. and the Company from
      any and all past, present and future claims.

      The Company's wholly-owned subsidiary, PIC, is involved in an adversary
      proceeding filed in connection with two jointly administered Chapter 11
      proceedings in the United States Bankruptcy Court for the Southern
      District of Florida. On May 13, 1997, a joint motion of the Chapter 11
      Trustees was filed for an order to show cause why certain individuals and
      entities, including PIC, should not be held in civil contempt of court;
      for relief under Rule 70 of the Federal Rules of Civil Procedure and Rule
      7070 of the Federal Rules of Bankruptcy Procedure; and for the entry of an
      order of criminal referral for criminal conduct of certain individuals and
      entities, including Priority International Communications, Inc. Factually,
      it is alleged that the Bankruptcy Court entered an injunction on April 1,
      1996 which included a prohibition against any dissipation of the assets of
      Tel-Span Communications, Inc. ("Tel-Span"); that on May 1, 1996, PIC
      entered into a new Operator Services Agreement with Tel-Span purporting to
      release PIC from its contractual obligation to use Tel-Span as its
      exclusive operator service provider; that on October 4, 1996, while the
      parties to the proceeding awaited the Court's ruling on ownership of
      certain assets of Tel-Span, PIC participated in a secret meeting in New
      Orleans at which an agreement was reached to begin migration of business
      which violated the Bankruptcy Court's injunction; and, finally, that


                                     -F28-

<PAGE>   64



      PIC violated the Court's injunction since it aided and abetted a party
      bound by such order. In response, PIC has defended by asserting that it
      had no notice of any injunction entered into by the Bankruptcy Court as
      required by Rule 65(d) of the Federal Rules of Civil Procedure if such an
      order is to be enforced against a non-party such as PIC; that the
      injunction entered by the Bankruptcy Court did not clearly prohibit the
      conduct of PIC in migrating its own business; and in any event as a
      non-party, PIC's conduct was motivated by legitimate business concerns and
      did not constitute an aiding and abetting of a party's violation of the
      injunction. In relation to this matter, a claim has also been made against
      ATN Communications, Inc. ("ATN") and certain employees of ATN. Evidentiary
      hearings were held and written summations and closing briefs were filed by
      all parties with the Bankruptcy Court on or before September 19, 1997. The
      Bankruptcy Court has not rendered a judgment in relation to the above
      matter. The proceeding does not specify a dollar amount of damages.
      Although the Company believes that this lawsuit is without merit and
      intends to defend vigorously against it, in the event of an adverse
      determination, there can be no assurance that this litigation will not
      have a material adverse effect on the Company. No loss, if any, has been
      recorded in the consolidated financial statements with respect to this
      matter.


      On August 16, 1996, the Company entered into three-year employment
      agreements with the Chairman of the Board, President, and the Vice
      President of Operations. Pursuant to these agreements, the Chairman of the
      Board, President and the Vice President of Operations will receive base
      salaries of $150,000, $130,000 and $65,000, respectively. In addition,
      each of these individuals will be eligible to participate in the Stock
      Option Plans discussed in Note 12. Each agreement contains a provision
      restricting competition with the Company for a period of two years
      following their termination of employment. If employment with the Company
      is terminated by the Company for any reason, including for cause, the
      employee is entitled to receive continuation of his base salary for two
      years.

      On April 4, 1997, the Company entered into a three-year employment
      agreement with the Chief Executive Officer. Pursuant to this agreement, he
      will receive an annual base salary of $150,000 and will be eligible to
      participate in an incentive bonus program to be developed by the
      Compensation Committee. This agreement contains a provision restricting
      competition with the Company for a period of time equal to his employment
      term if his employment is terminated on or after October 4, 1997 but prior
      to April 4, 1998 and a period of two years following termination of
      employment if his employment is terminated on or after April 4, 1998. If
      his employment is terminated by the Company for any reason other than for
      cause, as defined in the employment agreement, he is eligible to receive
      continuation of his base salary for the period of his covenant restricting
      competition with the Company. In connection with this employment
      agreement, he also received options to purchase an aggregate of 400,000
      shares of common stock at an exercise price of $2.625 per share. Options
      exercisable for 75,000 shares were immediately exercisable on grant,
      options exercisable for 50,000 shares vest on each of April 4, 1998 and
      1999, and options for a total of 225,000 shares vest in three increments
      of 75,000 each upon the achievement by the Company of specified income and
      profit targets. The options granted to the Chief Executive Officer were
      not granted under either the 1993 Plan or the 1997 Stock Option Plan.

16.   RELATED PARTY TRANSACTIONS

      The Company conducts a significant amount of business with Berthel,
      Intellicall and other affiliated entities. Berthel provided lease and
      other financing services, including underwriting, to the Company. In
      addition to the previously discussed transactions with Intellicall, the
      Company has paid royalty and validation fees to Intellicall for processing
      of phone calls under an agreement with Intellicall. The Company also has
      an agreement with an entity owned by the Company's Chairman of the Board
      for the use of aircraft. The Company has also paid consulting expenses to
      a member of the Company's Board of Directors and had loans from certain
      shareholders.


                                     -F29-

<PAGE>   65

      On July 1, 1994, the Company entered into an agreement with a minority
      shareholder to provide telecommunication services to hotels owned and
      managed by Larken, Inc., a company 50% owned by a minority shareholder.
      The agreement provided for 75% of the net income derived from the hotels,
      as defined under the agreement (after direct costs and compensation to the
      Company for administrative expenses), to be paid to the shareholder.
      Revenues of $603,644 and $962,089 were generated for the years ended
      December 31, 1997 and 1996, respectively. Further, the Company had call
      processing receivables from the hotels included under the agreement of
      $79,500 and $141,641 at December 31, 1997 and 1996, respectively.
      Effective July 1996, the agreement was amended to provide for a set
      payment of $25,000 per month in commissions to be paid to the minority
      shareholder, until January 1, 1997, when the commission payment will be
      increased to $30,000 per month for a period of 24 months. Also in
      conjunction with this agreement, effective from July 1, 1996 and through
      June 30, 2000, the Company will pay an additional $6,000 per month to
      Berthel for commissions payable to the minority shareholder pursuant to a
      settlement of a dispute between Berthel and the minority shareholder.

      A summary of transactions with related parties for the years ended
      December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
      
      
                                                                                     1997              1996
      
<S>                                                                                <C>               <C>     
      Rental of aircraft                                                           $ 33,116          $ 60,881
      Consulting expense                                                             35,181            69,914
      Interest expense on shareholder notes payable                                  20,778            30,623
      Commissions/75% profit share to minority shareholder                          360,000           274,410
      Interest expense on notes payable to Berthel                                   38,622           179,250
      Lease payments to Berthel                                                     491,175         2,445,429
      Equipment sales to Berthel                                                          -           389,941
      Royalty fees to Intellicall                                                         -             1,942
      Validation fees to Intellicall                                                      -            22,933
      Interest expense to Intellicall                                                     -           127,943
      Commissions to Berthel                                                         72,000            18,000
      Underwriting fees to Berthel                                                   43,250           132,531
</TABLE>




17.   PROFIT SHARING PLAN

      The Company has a profit sharing plan under Section 401(k) of the Internal
      Revenue Code. Employees are eligible to participate in the plan after
      completing three months of service. There were no contributions required
      and no discretionary contributions made to the plan for the years ended
      December 31, 1997 and 1996.

18.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value amounts disclosed below are based on estimates prepared by
      the Company utilizing valuation methods appropriate in the circumstances.
      Generally accepted accounting principles do not require disclosure for
      lease contracts. The carrying amount for financial instruments included
      among cash, receivables, notes payable, and other short-term payables
      approximates their fair value because of the short maturity of those
      instruments. The estimated fair value of other significant financial
      instruments are based principally on discounted future cash flows at rates
      commensurate with the credit and interest rate risk involved.


                                    -F30-
<PAGE>   66


      The estimated fair values of the Company's other significant financial
      instruments at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                 1997                              1996
                                    -----------------------------     -----------------------------
                                      Carrying            Fair          Carrying           Fair
                                       Amount             Value          Amount            Value

<S>                                 <C>               <C>             <C>               <C>        
      Long-term debt                $ 4,795,473       $ 4,795,473     $ 1,633,233       $ 1,541,192
</TABLE>



19.   CONSULTING AGREEMENTS

      On December 20, 1996 the Company entered into a consulting agreement (the
      "Agreement") with a consultant to provide advisory services to the Company
      for a fee of $3,000 per month. The term of the Agreement is January 1997
      through June 1998, renewable in additional three-month increments unless
      terminated in writing by either the Company or the consultant. In
      addition, pursuant to the Agreement, the consultant received a warrant to
      purchase up to 50,000 shares of the Company's common stock at an exercise
      price of $2.50 per share. The Company assigned a fair value of $100,000 to
      the warrant. The warrant expires, if not exercised, on December 20, 1999.

      On July 2, 1997 the Company entered into a Letter of Agreement (the
      "Agreement") with a consultant to provide investor relations services to
      the Company for a fee of $2,500 per month. The term of the Agreement is
      July 1997 through July 1998, renewable in additional one-year increments
      unless terminated in writing by either the Company or the consultant. In
      addition, pursuant to the Agreement, the consultant received options to
      purchase up to 50,000 shares of the Company's common stock at an option
      price of $2.875 per share and vesting over two years. The options expire,
      if not exercised, on July 2, 2002. The Company recognized no expense in
      connection with the options for the year ended December 31, 1997 due to
      the high exercise price of the options.

20.   SUBSEQUENT EVENTS

      On January 27, 1998, McFarland, Grossman & Company, Inc. filed suit
      seeking $162,500, together with reasonable and necessary attorneys' fees
      based upon a breach of contract by the Company's wholly-owned subsidiary,
      PIC, for its failure to pay an investment banking fee. PIC has filed a
      written answer, generally denying all of the allegations set forth in the
      suit. This case is set for a non-jury trial for the week of October 12,
      1998. Written discovery has been served on PIC, but the answers thereto
      are not yet due and have not yet been filed. It is anticipated that
      substantial additional discovery will be initiated and completed by both
      parties prior to October 12, 1998. Legal counsel and the Company have not
      formed an opinion as to the probability of an outcome or the amount or
      range of potential loss which may be present as a result of the claims
      asserted against PIC. No provision for any loss that may result upon the
      resolution of this matter has been made in the consolidated financial
      statements.

      On February 13, 1998, the Company entered into an agreement to purchase
      all of the outstanding shares of common stock of Incomex, Inc.
      ("Incomex"), a provider of international operator services from Mexico to
      the United States for approximately 80 hotel and resort hotel properties
      located in Mexico in exchange for 400,000 shares of common stock of the
      Company, valued at $422,500. The agreement also provides for the Company
      to pay the selling shareholders an aggregate amount equal to 60% of the
      income before income taxes of Incomex, as defined, during the period from
      February 1, 1998 through July 31, 1998. The Company has also agreed to
      issue common stock of the Company equal to an aggregate quarterly average
      market value of $1.50 for each dollar of income before taxes of Incomex,
      as defined, earned in excess of $400,000 during the two 12 month periods
      beginning August, 1998. The Incomex acquisition will be recorded under the
      purchase method for financial reporting purposes. Goodwill, exclusive of
      any amounts attributable to the contingent consideration, is estimated at
      $850,000 and will be amortized over 



                                     -F31-


<PAGE>   67
      ten years. Concurrent with the purchase, the Company entered into 
      employment agreements with Incomex's Chief Executive Officer and Vice 
      President for three years.        


      Pro forma results of operations (unaudited) for the Company reflecting the
      Incomex, PIC and PIC-R acquisitions for the years ended December 31, 1997
      and 1996 as if the acquisitions had occurred on January 1, 1996 are as
      follows:

<TABLE>
<CAPTION>
                                                                                      1997               1996

<S>                                                                             <C>                <C>         
Total revenues                                                                  $ 20,595,648       $ 15,966,612
Cost of sales                                                                     15,297,749         10,640,920
                                                                                ------------       ------------
Gross operating profit                                                             5,297,899          5,325,692

Selling, general and administrative expense                                        7,984,501          5,431,878
Depreciation and amortization expense                                              2,833,193          3,274,077
Loss from impairment of property, equipment
  and intangible assets                                                            1,353,010               --
Loss from joint venture                                                              993,329               --
                                                                                ------------       ------------

Operating loss                                                                    (7,866,134)        (3,380,263)

Interest expense                                                                   1,240,659          1,865,058
                                                                                ------------       ------------

Loss before income taxes and extraordinary item                                   (9,106,793)        (5,245,321)
Income taxes                                                                           5,620              8,112
                                                                                ------------       ------------

Loss before extraordinary item                                                    (9,112,413)        (5,253,433)
Extraordinary item - gain on related party restructuring                                --            1,084,314
                                                                                ------------       ------------

Net loss                                                                        $ (9,112,413)      $ (4,169,119)
                                                                                ============       ============ 

Pro forma net loss attributable to common shareholders                          $ (9,147,420)      $ (4,138,496)
                                                                                ============       ============ 

Pro forma net loss per common share:
  Loss before extraordinary item                                                $      (1.88)      $      (1.63)
  Extraordinary item                                                                    --                  .34
                                                                                ------------       ------------ 
  Net loss                                                                      $      (1.88)      $      (1.29)
                                                                                ============       ============ 

Pro forma weighted average common stock outstanding                                4,858,439          3,208,329
                                                                                ============       ============ 
</TABLE>


      On February 26, 1998, the Company agreed to issue 2,170 shares of
      Convertible Preferred to Berthel in exchange for the prepayment of
      $180,000 of commissions and the payment of $37,000 of commissions
      currently owed.


                                     -F32-


<PAGE>   68


      Effective February 27, 1998, the Company entered into a binding letter of
      intent with Berthel to provide an additional $700,000 of lease financing
      payable over 41 months at a 14% interest rate and the issuance of a
      warrant to purchase 350,000 shares of common stock of Company at an
      exercise price equal to the average of the daily closing bid price per
      share of the Company's common stock for the sixty trading days prior to
      the date of closing that will expire in 3 years and $1.3 million of
      subordinated debt financing at 14% with a three year term with 1,300,000
      warrants with terms similar to the lease financing. As of March 25, 1998,
      Berthel had funded $358,000 of the lease financing. Berthel has agreed to
      provide this financing on a best efforts basis and the commitment expires
      on April 30, 1998, unless mutually extended by the Company and Berthel.

      As of March 25, 1998, the Company has received $500,000 in notes payable
      proceeds, $400,000 of which has been provided by related parties.. The
      borrowings bear interest at 14% and accrued interest and principal are due
      on March 5, 1999. In connection with the financing, warrants to purchase
      500,000 shares of common stock of the Company were issued at an exercise
      price of $1.75 per share. The warrants expire on March 31, 2001.


                                    * * * * *


                                     -F33-
<PAGE>   69
ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K

              a.    Exhibits:


   EXHIBIT NUMBER                         DOCUMENT DESCRIPTION


           2.1         Stock Purchase Agreement, dated as of August 22, 1997,
                       among MCC Acquisition Corp., Priority International
                       Communications, Inc. and certain shareholders of Priority
                       International Communications, Inc.  (1)

           2.2         First Amendment to Stock Purchase Agreement, dated as of
                       October 31, 1997, among MCC Acquisition Corp., Priority
                       International Communications, Inc. and certain
                       shareholders of Priority International Communications,
                       Inc. (1)

           2.3         Second Amendment to Stock Purchase Agreement, dated as of
                       February 27, 1998, among MCC Acquisition Corp., Priority
                       International Communications, Inc. and certain
                       shareholders of Priority International Communications,
                       Inc.

           2.4         Stock Purchase Agreement, dated as of August 22, 1997,
                       among MCC Acquisition Corp., PIC Resources Corp., the
                       shareholders of PIC Resources Corp. and ATN
                       Communications Inc. (1)

           2.5         First Amendment to Stock Purchase Agreement dated as of
                       October 31, 1997, among MCC Acquisition Corp., PIC
                       Resources Corp., the shareholders of PIC Resources Corp.
                       and ATN Communications Inc. (1)

           2.6         Second Amendment to Stock Purchase Agreement, dated as of
                       February 27, 1998, among MCC Acquisition Corp., PIC
                       Resources Corp., the shareholders of PIC Resources Corp.
                       and ATN Communications, Inc.

           2.7         Short-Term Note dated October 31, 1997 issued by MCC
                       Acquisition Corp. to Bonner B. Hardegree, trustee for the
                       benefit of Wayne Wright and Bonner B. Hardegree (1)

           2.8         Amended and Restated Short-Term Note dated February 27,
                       1998 issued by MCC Acquisition Corp. to Bonner B.
                       Hardegree, trustee for the benefit of Wayne Wright, and
                       Bonner B. Hardegree.

                                       34
<PAGE>   70

          2.9         Form of Long-Term Note (1)

          2.10        Stock Purchase Agreement, dated as of February 13, 1998,
                      among MCC Acquisition Corp., Incomex, Inc. and the
                      Shareholders of Incomex, Inc. (2)

          3.1         Restated Articles of Incorporation of the Company (3)
         
          3.2         First Amendment to Restated Articles of Incorporation of
                      the Company (4)


          3.3         Second Amendment to Restated Articles of Incorporation of
                      the Company (4)
        
          3.4         Amended and Restated By-Laws of the Company (5)

          4.1         Form of Warrant Agreement between the Company and Firstar
                      Trust Company (3)

          4.2         Form of Redeemable Warrant (3)

         10.1         AT&T Management Company Commission Agreement, dated as of
                      December 16, 1995, by and between the Company and AT&T
                      Communications, Inc. ("AT&T") (3) (6)

         10.2         Amendment No. 1 to AT&T Management Company Commission
                      Agreement, dated as of January 16, 1996, by and between
                      the Company and AT&T (1)


         10.3         Amendment No. 2 to AT&T Management Company Commission
                      Agreement, dated as of January 16, 1996, by and between
                      the Company and AT&T (3) (6)

         10.4         Amendment No. 3 to AT&T Management Company Commission
                      Agreement, executed on December 13, 1996, by and between
                      AT&T and the Company (7)

         10.5         AT&T Management Company Commission Agreement, effective
                      as of January 16, 1998, by and between the Company and
                      AT&T.

         10.6         Credit Agreement dated as of May 31, 1994, by and between
                      the Company and Berthel Fisher & Company Leasing, Inc. (3)

         10.7         Indemnification Agreement, dated as of March 3, 1995, by
                      and between the Company and Larken, Inc. (3)

                                       35
<PAGE>   71

         10.8          Restructuring Agreement, dated as of December 31, 1994,
                       by and between the Company and Intellicall, Inc. (3)

         10.9          $1,000,000 Preferred Stock Subordinated Note from the
                       Company to Intellicall, Inc. (3)

         10.10         Bi-Party Intelli-Max Billing Agreement, dated as of May
                       8, 1992, between the Company and Intellicall, Inc. (3)

         10.11         License Agreement, dated May 31, 1994, between the
                       Company and Intellicall, Inc. (3)

         10.12         Account Purchase Agreement dated June 25, 1992, between
                       the Company and OAN Services, Inc. (3)

         10.13         Operator Billing and Related Services Agreement, dated
                       May 11, 1992, between the Company and OAN Services, Inc.
                       (3)

         10.14         Murdock Communications Corporation 1993 Stock Option
                       Plan (3)

         10.11         Murdock Communications Corporation 1997 Stock Option Plan
         
         10.15         Unit Purchase Warrant to purchase 41,667 Units, dated
                       August 5, 1996, from the Company to 
                       George N. McDonald (3)

         10.16         Promissory Note in the principal amount of $250,000 dated
                       August 1, 1996, from the Company to George N. McDonald 
                       (3)

         10.17         Letter Agreement, dated August 5, 1996, by and between
                       the Company and George N. McDonald (3)

         10.18         Credit Agreement, dated as of May 31, 1994, by and
                       between the Company and Telecommunications Income Fund X,
                       L.P. (3)

         10.19         Credit Agreement, dated as of May 31, 1994, by and
                       between the Company and Telecommunications Income
                       Fund IX, L.P. (3)

         10.20         Lease Agreement for Lease #076-18000-012, dated as of
                       February 27, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

                                       36
<PAGE>   72

         10.21         Lease Agreement for Lease #074-18000-016, dated as of
                       June 14, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

         10.22         Lease Agreement for Lease #076-18000-017, dated as of
                       July 3, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.23         Modification Agreement for 21 Leases, dated as of May 30,
                       1996, by and between the Company and Berthel Fisher &
                       Company Leasing, Inc. as agent for Telecommunications
                       Income Fund IX, L.P. (3)

         10.24         Modification Agreement for Lease #063-17000-001, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. (3)

         10.25         Modification Agreement for Lease #076-17000-443, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.26         Modification Agreement for Lease #076-17000-943, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.27         Modification Agreement for Lease #076-18000-012, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.28         Modification Agreement for Lease #076-46698-000, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.29         Equipment Lease #076-17000-443, dated as of May 31, 1994,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

                                       37
<PAGE>   73

         10.30         Equipment Lease #076-46698-000, dated as of January 18,
                       1995, by and between the Company and Berthel Fisher &
                       Company Leasing, Inc. as agent for Telecommunications
                       Income Fund X, L.P. (3)

         10.31         Equipment Lease/Purchase Agreement #063-18000-000, dated
                       as of May 30, 1996, by and between the Company and
                       Berthel Fisher & Company Leasing, Inc. (3)

         10.32         Assignment of Lease of Security Agreement, dated as of
                       May 31, 1994, from Berthel Fisher & Company Leasing, Inc.
                       to Telecommunications Income Fund X, L.P. (3)

         10.33         Demand Note for $50,000, dated as of December 26, 1995,
                       between the Company and Berthel Fisher & Company Leasing,
                       Inc. (3)

         10.34         Demand Note for $200,000, dated as of January 25, 1996,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

         10.35         Demand Note for $200,000, dated as of January 31, 1996,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

         10.36         Demand Note for $100,000, dated as of February 27, 1996,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

         10.37         Equipment Lease, dated as of August 16, 1995, by and
                       between the Company and Harvey Leasing. (3)

         10.38         Lease Agreement for Lease #074-18000-004, dated as of
                       November 30, 1995, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

         10.39         Lease Agreement for Lease #074-18000-005, dated as of
                       November 30, 1995, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

         10.40         Lease Agreement for Lease #074-18000-006, dated as of
                       November 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

                                       38
<PAGE>   74

         10.41         Employment Agreement, dated as of August 16, 1996, by and
                       between the Company and Guy O. Murdock. (3)

         10.42         Employment Agreement, dated as of August 16, 1996, by and
                       between the Company and Colin P. Halford. (3)

         10.43         Employment Agreement, dated as of April 5, 1997, by and
                       between the Company and Thomas E. Chaplin (8)

         10.44         Employment Agreement, dated as of August 16, 1996, by and
                       between the Company and Bill R. Wharton. (3)

         10.45         Asset Purchase Agreement, dated December 13, 1996,
                       between the Company and Interactive Communications Inc.
                       (7)

         21            Subsidiaries

         24            Power of Attorney (included as part of the signature page
                       hereof)

         27            Financial Data Schedule

--------------------
(1)      Filed as an exhibit to the Company's Current Report on Form 8-K (File
         No. 000-21463) filed with the Securities and Exchange Commission on
         November 7, 1997 and incorporated herein by reference.

(2)      Filed as an exhibit to the Company's Current Report on Form 8-K (File
         No. 000-21463) filed with the Securities and Exchange Commission on
         February 13, 1998 and incorporated herein by reference.

(3)      Filed as an exhibit to the Company's Registration Statement on Form
         SB-2 (File No. 333-05422C) and incorporated herein by reference.

(4)      Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
         for the quarter ended September 30, 1997 (File No. 000-21463) and
         incorporated herein by reference.

(5)      Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
         for the quarter ended March 31, 1997 (File No. 000-21463) and
         incorporated herein by reference.

                                       39
<PAGE>   75

(6)      Portions of these exhibits were granted confidential treatment by the
         Securities and Exchange Commission by order dated October 21, 1996.

(7)      Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
         the year ended December 31, 1996 (File No. 000-21463) and incorporated 
         herein by reference.

(8)      Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
         for the quarter ended June 30, 1997 (File No. 000-21463) and
         incorporated herein by reference.

(b)      Reports on Form 8-K.

         The Company did not file any reports on Form 8-K for the three months
ended December 31, 1997.


                                       40
<PAGE>   76

                                   SIGNATURES


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

                                             MURDOCK COMMUNICATIONS 
                                             CORPORATION

                                             By  /s/ Thomas E. Chaplin
                                                ---------------------------
                                                      Thomas E. Chaplin
                                                    Chief Executive Officer

                                             Date:  April 10, 1998

                  Each person whose signature appears below hereby appoints Guy
O. Murdock and Thomas E. Chaplin, and each of them individually, his true and
lawful attorney-in-fact, with power to act with or without the other and with
full power of substitution and resubstitution, in any and all capacities, to
sign any or all amendments to the Form 10-KSB and file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully cause to be done by virtue hereof.

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

/s/ Guy O. Murdock           Chairman of the Board of Directors   April 10, 1998
------------------------     (Principal Executive Officer)      
Guy O. Murdock               

/s/ Colin P. Halford         President and Director               April 10, 1998
------------------------     
Colin P. Halford             

/s/ Thomas E. Chaplin        Chief Executive Officer and Director April 10, 1998
------------------------     (Principal Financial Officer and
Thomas E. Chaplin            Principal Accounting Officer)      



                                       41
<PAGE>   77
/s/ John C. Poss             Director                           April 10, 1998
-----------------------                                                 
John C. Poss                                                                  

/s/ Steven R. Ehlert         Director                           April 10, 1998
-----------------------                                                       
Steven R. Ehlert                                                              

/s/ Larry A. Erickson        Director                           April 10, 1998
-----------------------                                                       
Larry A. Erickson                                                             

/s/ Wayne Wright             Director                           April 10, 1998
-----------------------      
Wayne Wright                 



                                       42

<PAGE>   78


                                EXHIBIT INDEX



<TABLE>
<CAPTION>                                       
                                                                                           SEQUENTIAL
                                                                                              PAGE
   EXHIBIT NUMBER                         DOCUMENT DESCRIPTION                               NUMBER
   --------------                         --------------------                          ----------------
<S>                    <C>                                                            <C>
            2.1        Stock Purchase Agreement, dated as of August 22, 1997,
                       among MCC Acquisition Corp., Priority International
                       Communications, Inc. and certain shareholders of Priority
                       International Communications, Inc.  (1)

            2.2        First Amendment to Stock Purchase Agreement, dated as of
                       October 31, 1997, among MCC Acquisition Corp., Priority
                       International Communications, Inc. and certain
                       shareholders of Priority International Communications,
                       Inc. (1)

            2.3        Second Amendment to Stock Purchase Agreement, dated as of
                       February 27, 1998, among MCC Acquisition Corp., Priority
                       International Communications, Inc. and certain
                       shareholders of Priority International Communications,
                       Inc.

            2.4        Stock Purchase Agreement, dated as of August 22, 1997,
                       among MCC Acquisition Corp., PIC Resources Corp., the
                       shareholders of PIC Resources Corp. and ATN
                       Communications Inc. (1)

            2.5        First Amendment to Stock Purchase Agreement dated as of
                       October 31, 1997, among MCC Acquisition Corp., PIC
                       Resources Corp., the shareholders of PIC Resources Corp.
                       and ATN Communications Inc. (1)

            2.6        Second Amendment to Stock Purchase Agreement, dated as of
                       February 27, 1998, among MCC Acquisition Corp., PIC
                       Resources Corp., the Shareholders of PIC Resources Corp.
                       and ATN Communications, Inc.

            2.7        Short-Term Note dated October 31, 1997 issued by MCC
                       Acquisition Corp. to Bonner B. Hardegree, trustee for the
                       benefit of Wayne Wright and Bonner B. Hardegree (1)

</TABLE>

<PAGE>   79

<TABLE>
            <S>        <C> 
            2.8        Amended and Restated Short-Term Note dated February 27,
                       1998 issued by MCC Acquisition Corp. to Bonner B.
                       Hardegree, trustee for the benefit of Wayne Wright, and
                       Bonner B. Hardegree.

            2.9        Form of Long-Term Note (1)

            2.10       Stock Purchase Agreement, dated as of February 13, 1998,
                       among MCC Acquisition Corp., Incomex, Inc. and the
                       Shareholders of Incomex, Inc. (2)

            3.1        Restated Articles of Incorporation of the Company (3)

            3.2        First Amendment to Restated Articles of Incorporation of
                       the Company (4)

            3.3        Second Amendment to Restated Articles of Incorporation of
                       the Company (4)

            3.4        Amended and Restated By-Laws of the Company (5)

            4.1        Form of Warrant Agreement between the Company and Firstar
                       Trust Company (3)

            4.2        Form of Redeemable Warrant (3)

           10.1        AT&T Management Company Commission Agreement, dated as of
                       December 16, 1995, by and between the Company and AT&T
                       Communications, Inc. ("AT&T") (3) (6)

           10.2        Amendment No. 1 to AT&T Management Company Commission
                       Agreement, dated as of January 16, 1996, by and between
                       the Company and AT&T (1)


           10.3        Amendment No. 2 to AT&T Management Company Commission
                       Agreement, dated as of January 16, 1996, by and between
                       the Company and AT&T (3) (6)

           10.4        Amendment No. 3 to AT&T Management Company Commission
                       Agreement, executed on December 13, 1996, by and between
                       AT&T and the Company (7)

           10.5        AT&T Management Company Commission Agreement, effective
                       as of January 16, 1998, by and between the Company and
                       AT&T.

</TABLE>

                                       ii
<PAGE>   80

<TABLE>
         <S>           <C>
         10.6          Credit Agreement dated as of May 31, 1994, by and between
                       the Company and Berthel Fisher & Company Leasing, Inc. (3)

         10.7          Indemnification Agreement, dated as of March 3, 1995, by
                       and between the Company and Larken, Inc. (3)

         10.8          Restructuring Agreement, dated as of December 31, 1994,
                       by and between the Company and Intellicall, Inc. (3)

         10.9          $1,000,000 Preferred Stock Subordinated Note from the
                       Company to Intellicall, Inc. (3)

         10.10         Bi-Party Intelli-Max Billing Agreement, dated as of May
                       8, 1992, between the Company and Intellicall, Inc. (3)

         10.11         License Agreement, dated May 31, 1994, between the
                       Company and Intellicall, Inc. (3)

         10.12         Account Purchase Agreement dated June 25, 1992, between
                       the Company and OAN Services, Inc. (3)

         10.13         Operator Billing and Related Services Agreement, dated
                       May 11, 1992, between the Company and OAN Services, Inc.
                       (3)
 
         10.14         Murdock Communications Corporation 1993 Stock Option
                       Plan (3)

         10.15         Murdock Communications Corporation 1997 Stock Option Plan
                       Unit Purchase Warrant to purchase 41,667 Units, dated
                       August 5, 1996, from the Company to George N. McDonald (3)

         10.16         Promissory Note in the principal amount of $250,000 dated
                       August 1, 1996, from the Company to George N. McDonald (3)

         10.17         Letter Agreement, dated August 5, 1996, by and between
                       the Company and George N. McDonald (3)

         10.18         Credit Agreement, dated as of May 31, 1994, by and
                       between the Company and Telecommunications Income Fund X,
                       L.P. (3)


</TABLE>
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<PAGE>   81

<TABLE>
         <S>           <C>
         10.19         Credit Agreement, dated as of May 31, 1994, by and
                       between the Company and Telecommunications Income
                       Fund IX, L.P. (3)

         10.20         Lease Agreement for Lease #076-18000-012, dated as of
                       February 27, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.21         Lease Agreement for Lease #074-18000-016, dated as of
                       June 14, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

         10.22         Lease Agreement for Lease #076-18000-017, dated as of
                       July 3, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.23         Modification Agreement for 21 Leases, dated as of May 30,
                       1996, by and between the Company and Berthel Fisher &
                       Company Leasing, Inc. as agent for Telecommunications
                       Income Fund IX, L.P. (3)

         10.24         Modification Agreement for Lease #063-17000-001, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. (3)

         10.25         Modification Agreement for Lease #076-17000-443, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.26         Modification Agreement for Lease #076-17000-943, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

         10.27         Modification Agreement for Lease #076-18000-012, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

</TABLE>
  
                                       iv
<PAGE>   82

<TABLE>
        <S>            <C>
        10.28          Modification Agreement for Lease #076-46698-000, dated as
                       of May 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund X, L.P. (3)

        10.29          Equipment Lease #076-17000-443, dated as of May 31, 1994,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

        10.30          Equipment Lease #076-46698-000, dated as of January 18,
                       1995, by and between the Company and Berthel Fisher &
                       Company Leasing, Inc. as agent for Telecommunications
                       Income Fund X, L.P. (3)

        10.31          Equipment Lease/Purchase Agreement #063-18000-000, dated
                       as of May 30, 1996, by and between the Company and
                       Berthel Fisher & Company Leasing, Inc. (3)

        10.32          Assignment of Lease of Security Agreement, dated as of
                       May 31, 1994, from Berthel Fisher & Company Leasing, Inc.
                       to Telecommunications Income Fund X, L.P. (3)

        10.33          Demand Note for $50,000, dated as of December 26, 1995,
                       between the Company and Berthel Fisher & Company Leasing,
                       Inc. (3)

        10.34          Demand Note for $200,000, dated as of January 25, 1996,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

        10.35          Demand Note for $200,000, dated as of January 31, 1996,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

        10.36          Demand Note for $100,000, dated as of February 27, 1996,
                       by and between the Company and Berthel Fisher & Company
                       Leasing, Inc. (3)

        10.37          Equipment Lease, dated as of August 16, 1995, by and
                       between the Company and Harvey Leasing. (3)

        10.38          Lease Agreement for Lease #074-18000-004, dated as of
                       November 30, 1995, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

</TABLE>

                                       v
<PAGE>   83

<TABLE>
            <S>        <C>
            10.39      Lease Agreement for Lease #074-18000-005, dated as of
                       November 30, 1995, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

            10.40      Lease Agreement for Lease #074-18000-006, dated as of
                       November 30, 1996, by and between the Company and Berthel
                       Fisher & Company Leasing, Inc. as agent for
                       Telecommunications Income Fund IX, L.P. (3)

            10.41      Employment Agreement, dated as of August 16, 1996, by and
                       between the Company and Guy O. Murdock. (3)

            10.42      Employment Agreement, dated as of August 16, 1996, by and
                       between the Company and Colin P. Halford. (3)

            10.43      Employment Agreement, dated as of April 5, 1997, by and
                       between the Company and Thomas E. Chaplin (8)

            10.44      Employment Agreement, dated as of August 16, 1996, by and
                       between the Company and Bill R. Wharton. (3)

            10.45      Asset Purchase Agreement, dated December 13, 1996,
                       between the Company and Interactive Communications Inc.
                       (7)

            21         Subsidiaries

            24         Power of Attorney (included as part of the signature page
                       hereof)

            27         Financial Data Schedule

</TABLE>

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

(1)      Filed as an exhibit to the Company's Current Report on Form 8-K (File
         No. 000-21463) filed with the Securities and Exchange Commission on
         November 7, 1997 and incorporated herein by reference.

(2)      Filed as an exhibit to the Company's Current Report on Form 8-K (File
         No. 000-21463) filed with the Securities and Exchange Commission on
         February 13, 1998 and incorporated herein by reference.


                                       vi
<PAGE>   84

(3)      Filed as an exhibit to the Company's Registration Statement on Form
         SB-2 (File No. 333-05422C) and incorporated herein by reference.

(4)      Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
         for the quarter ended September 30, 1997 (File No. 000-21463) and
         incorporated herein by reference.

(5)      Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
         for the quarter ended March 31, 1997 (File No. 000-21463) and
         incorporated herein by reference.

(6)      Portions of these exhibits were granted confidential treatment by the
         Securities and Exchange Commission by order dated October 21, 1996.

(7)      Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
         the year ended December 31, 1996 (File No. 000-21463) and incorporated
         herein by reference.

(8)      Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
         for the quarter ended June 30, 1997 (File No. 000-21463) and
         incorporated herein by reference.



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