<PAGE>   1

                       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, 1998.

[ ] 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
        ------------------------------------------------------------------- 
        (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)


<PAGE>   2



         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 past 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.
$33,988,099.

         The aggregate market value of the common stock held by nonaffiliates of
the issuer as of March 15, 1999 was $17,941,805. Shares of common stock held by
any executive officer or director of the issuer and any person who beneficially
owns 10% or more of the outstanding common stock have been excluded from this
computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.

         On March 15, 1999, there were outstanding 10,329,867 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 1999 Annual Meeting of the
Shareholders of the issuer are incorporated by reference into Part III of this
report.

                                       2

<PAGE>   3


                                     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. ("PIC Resources"), and PIC
Resources' wholly owned subsidiary ATN Communications, Inc. ("ATN"), and (ii)
the acquisition (the "Incomex Acquisition") by MCC on February 13, 1998 of
Incomex, Inc. ("Incomex"). Effective January 1, 1999, PIC Resources was merged
into PIC, and all references in this report to "PIC" include PIC Resources and
ATN.

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         MCC is a provider of operator services and call processing to North
American payphones, hotels and institutions, database profit management services
and telecommunications billing and collection services for the hospitality
industry, outsourced operator services for the telecommunications industry, and
telecommunications systems and services to the lodging industry. Through a
series of acquisitions and new product developments, the Company has transformed
itself during 1998 from a reseller of AT&T network services to U.S. hotels to a
provider of a wide range of complementary telecommunications services in North
America. The Company operates through three principal business units:

         -        Murdock Technology Services ("MTS") is a division of the
                  Company which provides database profit management services and
                  other telecommunications management and consulting services;

         -        PIC and ATN (collectively, "PIC/ATN") are wholly owned
                  subsidiaries of the Company which provide operator services,
                  call processing and related valued added services; and

         -        Incomex is a wholly owned subsidiary of the Company which
                  provides billing and collection services for calls to the
                  United States from resort hotels in Mexico.

         MCC was incorporated as an Iowa corporation in 1989.

                                       3

<PAGE>   4


THE COMPANY'S PRINCIPAL BUSINESS UNITS

         MURDOCK TECHNOLOGY SERVICES. MTS was formed as a division of the
Company in 1998 to provide database profit management services and other value
added services to the hospitality telecommunications management market.

         MTS's principal product, the MCC Telemanager(TM), is a proprietary
software and hardware product created to help manage telecommunication
installations and services in the hospitality market. The Telemanager was
introduced to the market in September 1997 and there were 174 units installed as
of December 31, 1998 as compared to 80 units as of December 31, 1997. The
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 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. MTS generates this
information by remotely accessing information from the customer's 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 customer.
The Telemanager generates revenues through a one-time fee for the initial
installation and audit and a monthly service fee.

         The Company has initially focused its marketing of the Telemanager to
the North American hospitality industry with special emphasis toward hotels
which participated in the AT&T Lodging Partnership program, hotels and resorts
in Mexico under contract with Incomex and hotels using the Company's operator
services. 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."

         MTS is the successor to the Company's historical operating unit which
marketed AT&T operator services to the hospitality market through the AT&T
Lodging Partnership. The Company and AT&T terminated the Lodging Partnership
arrangement in the fourth quarter of 1998. See "Recent Developments -
Termination of AT&T Lodging Partnership" below. MTS also continues to offer
one-plus long distance services and automated call processing services ("OSP
Services") on a limited basis and telecommunications equipment to its customers
in the hospitality industry.

         PIC/ATN OPERATOR SERVICES. PIC/ATN offers telecommunications services
to payphone operators, consumer service providers, hotels and other

                                       4

<PAGE>   5


institutions in the United States and Mexico. PIC and ATN operate in concert to
provide marketing, service delivery and customer support for owners and
aggregators of telecommunications services. PIC/ATN provides both live operator
services and automated call processing services. The operator center, located in
Mobile, Alabama, features 50 live operator stations and automated call platforms
currently generating approximately 220,000 completed calls and 2 million minutes
monthly. PIC/ATN also offers credit card billing services, automated collection
and messaging delivery services, voice mail services and telecommunications
consulting. At December 31, 1998, PIC/ATN provided telecommunications services
to and maintained site contracts with approximately 207 customers throughout the
United States, compared to 257 customers at December 31, 1997. Each customer may
represent from one to 2,000 telephone numbers that are processed by PIC/ATN. The
total size of PIC's database increased substantially in 1998 to approximately
17,000 telephone numbers at December 31, 1998.

         INCOMEX TELECOMMUNICATIONS SERVICES. Incomex contracts with Mexican
resort hotels to provide billing and collection services for calls to the United
States. As of December 31, 1998, Incomex provided telecommunications services to
more than 95 hotel and motel resort properties representing approximately 15,000
rooms, compared to approximately 80 hotel and motel resort properties
representing approximately 10,600 rooms at February 13, 1998. Incomex's target
market includes 1,300 Mexican resort hotels representing approximately 325,000
rooms. Incomex offers value added customer services, training and technology to
enhance the profitability of the telephone departments of Mexican resort hotels.

RECENT DEVELOPMENTS

         TERMINATION OF AT&T LODGING PARTNERSHIP. In light of the declining call
volumes and narrow profit margins experienced by the Company under the Lodging
Partnership with AT&T, the Company and AT&T agreed to terminate the Lodging
Partnership arrangement effective October 15, 1998. AT&T agreed to purchase all
of the customer contracts under the Lodging Partnership and to directly manage
the existing customers under the contracts. As a result, the Company recorded a
one-time gain in the fourth quarter of $453,396. Revenues to the Company from
the AT&T agreement ended in the fourth quarter of 1998.

         PIC EARN-OUT SETTLEMENT. The Company's agreement for the PIC
Acquisition contained an earn-out provision (the "PIC Earn-Out") which required
that the Company issue additional shares of Common Stock to the former
shareholders of PIC to the extent that the combined earnings before interest,
taxes, depreciation and amortization ("EBITDA") of PIC 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
would be issued for each dollar of EBITDA over $1,000,000 during either of the
twelve-month periods. In December 1998, the Company and the former shareholders
of PIC agreed to settle the PIC Earn-Out based on historical and projected
financial information with respect to PIC. Pursuant to the settlement, the
Company issued an aggregate of 2,300,000 shares of Common Stock to the former
shareholders of

                                       5


<PAGE>   6


PIC in December 1998. The Company agreed to file a registration statement
covering these shares following the filing of this Form 10-KSB.

         The Company also agreed with two of the former PIC shareholders who had
received promissory notes (the "PIC Notes") pursuant to the PIC Acquisition that
the PIC Notes would bear interest at an annual rate of 14% from the date of the
settlement agreement. At December 31, 1998, an aggregate of $317,203 was
outstanding under these notes. In January 1999, the notes were paid in full. The
Company also entered into a deferred payment arrangement with Wayne Wright, one
of the former PIC shareholders who is also a member of the Company's Board of
Directors, pursuant to which Mr. Wright will receive $300,000 payable in 24
equal monthly installments commencing in January 1999.

         INCOMEX EARN-OUT SETTLEMENT. The Company's agreement for the Incomex
Acquisition contained an earn-out provision (the "Incomex Earn-Out") which
required that the Company make a cash payment to the Incomex shareholders equal
to 60% of Incomex's net income before income taxes ("IBT") during the period
from February 1, 1998 through July 31, 1998, and issue 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 would be issued for each dollar of IBT over $400,000 during either
of the twelve month periods. In December 1998, the Company and the shareholders
of Incomex agreed to settle the Incomex Earn-Out based on historical and
projected financial information with respect to Incomex. Pursuant to the
settlement, the Company agreed to issue an aggregate of 1,500,000 shares of
Common Stock to the shareholders of Incomex and cash consideration in the amount
of $861,432. Each Incomex shareholder could elect to receive the cash
consideration in the form of either an immediate cash payment or the issuance of
a note and warrants. The notes (the "Incomex Notes") bear interest at an annual
rate of 14% and all interest and principal on the Incomex Notes are due on
November 15, 1999. Warrants (the "Incomex Warrants") to purchase 200 shares of
Common Stock at an exercise price of $3.25 per share were issued for each $1,000
of principal under the Incomex Notes. In December 1998, the Company committed to
make cash payments of $84,515 (excluding a prior advance of $32,000) and issued
Incomex Notes in the aggregate principal amount of $744,917 and Incomex Warrants
to purchase an aggregate of 155,384 shares of Common Stock. The Company also
agreed with three of the former Incomex shareholders to issue $340,000 in notes
payable due no later than April 1, 1999.

COMPETITION

         Competition in the telecommunications industry is intense. PIC/ATN
competes with numerous other providers of alternative operator services and call


                                       6

<PAGE>   7


processing services. PIC/ATN's customers, which include telephone owners and
aggregators, are extremely attentive to the competitive environment and the
competitive efforts of alternative operator service providers to acquire new
customers. Incomex competes with several competitors who also focus on the hotel
and payphone markets in Mexico. MTS competes with up to nine telecommunications
consulting companies which target the lodging industry. The Company's operator
and call processing services also compete with a variety of long distance
interexchange carriers, including Sprint, MCI and AT&T. Each of the major long
distance interexchange carriers provide callers with the ability to "dial
around" payphones, hotel and other telephone systems by using special codes such
as 10-ATT, 10-10 or 1-800 phone numbers. The Company believes that competition
in its markets is based principally on price, quality, reliability and customer
service. Each of the Company's business units may face competition from
companies with greater financial, technical, marketing and other resources than
the Company. There can be no assurance that the Company will be able to compete
successfully in its markets.

SIGNIFICANT CUSTOMERS

         Prior to 1998, the Company derived a substantial part of its revenues
from the AT&T Lodging Partnership. The Company and AT&T terminated the Lodging
Partnership arrangement in the fourth quarter of 1998. See "Recent Developments
- Termination of AT&T Lodging Partnership" above. During 1998, the Company
derived approximately 12% and 24% of its revenues from two customers for 
PIC/ATN's call processing services.

SALES AND MARKETING

         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. The Company
offers its customers a single point of contact telecommunications management
program.

         MTS'S SALES FORCE. MTS has an internal sales staff which consisted of
two full-time sales managers and one full-time sales agent as of December 31,
1998. This sales force generally concentrates on the largest management and
franchise companies in the lodging industry. MTS also uses strategic
relationships

                                       7

<PAGE>   8


with other lodging technology suppliers to market its management and consulting
services.

         PIC/ATN. PIC/ATN has an internal sales staff which consisted of three
persons as of December 31, 1998. PIC/ATN's sales force concentrates its sales
efforts on direct marketing and referral based marketing. PIC/ATN also
participates in trade organizations to maintain its presence in the industry.

         INCOMEX. Incomex has an internal sales staff which consisted of three
persons as of December 31, 1998. Incomex's internal sales force is supplemented
by six external sales agents.

INTELLECTUAL PROPERTY

         The Company does not currently have any material patent or trademark
registrations. The Company principally relies on trade secrets and proprietary
know-how in the operation of its business.

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.

         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, 1998, the FCC had not commented on or
challenged the Company's tariffs.


                                      8

<PAGE>   9



         STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utilities commissions subject alternative operator and
call processing 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 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 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.

         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, 1998, MCC had 124 full-time employees and 39
part-time employees, including 90 full-time employees and 39 part-time employees
at PIC/ATN, five full-time and no part-time employees at Incomex and 26
full-time and no part-time employees at MTS. The Company believes its
relationships with its employees are good. None of the Company's employees is
subject to a collective bargaining agreement.

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 Company also has a Harris Model 2020 switching center in Mobile,
Alabama, where it has purchased an office building with 33,000 square feet,

                                       9

<PAGE>   10


subject to a first mortgage held by Sunmed Management, Inc., of which 12,500
square feet is currently occupied.

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

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

Huntington Beach, California              850           $1,223    MUAA, Inc.      August 1, 2000
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS

         Incomex and EILCO Leasing Services, Inc. ("Eilco"), a creditor of
Incomex, have commenced an arbitration proceeding to resolve a dispute regarding
a loan agreement between Incomex and Eilco. Eilco claims that Incomex is in
violation of certain covenants of the loan agreement, including provisions
relating to certain obligations of Incomex to make payments to Eilco based on
Incomex's income from telecommunications services provided to a group of hotels
in Mexico. This matter is scheduled for an arbitration hearing on April 21,
1999. Eilco is seeking the amount due on the loan and additional damages which
may be in excess of $1,000,000 plus legal fees. The Company's position is that
it owes only the amount due on the loan. The Company intends to defend the
claims against it and Incomex vigorously, but no assurance can be given as to
the outcome of this matter.

         On July 20, 1998, Operator Communications, Inc. ("Oncor") filed a
lawsuit in the District Court of Dallas County, Texas against the Company,
Incomex, and an unrelated third party. Oncor alleges that the defendants
improperly terminated a long distance service agreement with Oncor and claims
damages based on amounts which Oncor alleges to have advanced to the Company,
lost profits for the period in which the Company is alleged to have breached the
contract, attorneys' fees and for interference with contractual relations in an
unspecified amount. The Company has asserted a counterclaim for accounting,
breach of contract, misrepresentation and payment of attorneys' fees. This case
is at a preliminary stage and it is not possible to assess fully the merits of
the Oncor's claims. The Company intends to defend the claims against it and
Incomex vigorously, but no assurance can be given as to the outcome of this
matter.

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, 1998.



                                       10
<PAGE>   11




                                     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 1997
First                              $4.75                $3.13                $1.50                $0.75
Second                              4.69                 2.88                 1.13                 0.56
Third                               3.50                 2.44                 0.94                 0.31
Fourth                              3.81                 0.69                 0.88                 0.25

FISCAL 1998
First                              $2.63                $0.69                $0.31                $0.06
Second                              3.31                 2.25                 0.25                 0.13
Third                               4.50                 2.75                 0.44                 0.19
Fourth                              4.25                 2.13                 0.25                 0.13
</TABLE>

         At December 31, 1998, there were approximately 155 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 December 1998, the Company issued 2,300,000 shares of Common Stock
to the former shareholders of PIC pursuant to the PIC Earn-Out. The shares were
issued in a private placement exempt from the registration requirements of


                                       11
<PAGE>   12


the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) of the Securities Act.

         In December 1998, the Company issued 1,500,000 shares of Common Stock 
to the former shareholders of Incomex pursuant to the Incomex Earn-Out.
The Company also issued Incomex Notes in the aggregate principal amount of
$744,918 and Incomex Warrants to purchase an aggregate of 155,384 shares of
Common Stock to certain of the former shareholders of Incomex pursuant to the
Incomex Earn-Out. The Incomex Notes bear interest at an annual rate of 14% and
all interest and principal on the Incomex Notes are due on November 15, 1999.
The Incomex Warrants may be exercised at any time between December 1998 and
December 2003 to purchase shares of Common Stock at an exercise price of $3.25
per share. The shares of Common Stock, the Incomex Notes and the Incomex
Warrants were issued in a private placement exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act.

         During the fourth quarter of 1998, the Company completed an offering of
notes and warrants to certain of its directors and executive officers and to a
limited number of outside investors. The notes bear interest at an annual rate
of 14% and all principal and all interest on the notes are due on November 30,
1999. The Company paid the purchasers of the notes an origination fee of 1% and
issued warrants to purchase 10,000 shares of Common Stock for each $50,000 in
principal amount of the notes. The warrants are exercisable at an exercise price
of $3.25 per share (although one outside investor received warrants to purchase
80,000 shares of Common Stock at an exercise price of $2.50 per share) and may
be exercised at any time on or before November 30, 2003. The Company issued
$3,420,000 aggregate principal amount of the notes and warrants to purchase
684,000 shares of Common Stock, and the Company received net proceeds of
$3,380,800. The notes and the warrants were issued in a private placement exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act.

         During the fourth quarter of 1998, the Company entered into an
agreement with a consultant to provide advisory services to the Company.
Pursuant to this agreement, the Company issued two warrants to the consultant to
purchase up to 10,000 shares of Common Stock each at exercise prices of $3.60
per share and $3.00 per share, respectively. The warrants may be exercised at
any time between November 30, 1999 and November 30, 2003. The warrants were
issued in a private placement exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act.

         Effective December 31, 1998, certain subsidiaries and affiliated
leasing partnerships of Berthel Fisher & Company ("Berthel") exercised warrants
to purchase an aggregate of 1,100,000 shares of Common Stock at an exercise
price



                                       12
<PAGE>   13


of $1.30 per share, resulting in total proceeds to the Company of $1,430,000.
The shares of Common Stock were issued to Berthel in a private placement exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act.

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

OVERVIEW

         MCC is a provider of operator services and call processing to North
American payphones, hotels and institutions, database profit management services
and telecommunications billing and collection services for the hospitality
industry, outsourced operator services for the telecommunications industry, and
telecommunications systems and services to the lodging industry.

         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. Due to declining call volumes, caused in
part by the use of proprietary calling cards and other dial-around activities
(such as 1-800-CALL ATT), 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. Under the Lodging Partnership, AT&T processed the calls,
carried call traffic and billed the end user. In return, AT&T paid MCC
commissions on the calls dialed.

         In light of the declining call volumes and narrow profit margins
experienced by the Company under the Lodging Partnership with AT&T, the Company
and AT&T agreed to terminate the Lodging Partnership arrangement effective
October 15, 1998. AT&T agreed to purchase all of the customer contracts under
the Lodging Partnership and to directly manage the existing customers under the
contracts. As a result, the Company recorded a one-time gain in the fourth
quarter of $453,396. Revenues to the Company from the AT&T agreement ended in
the fourth quarter of 1998. The decision to end the AT&T relationship followed
the Company's growth in 1998 as a provider of telecommunications services as a
result of the commercial introduction of the 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 currently conducts its
business through three principal business units: (i) MTS, which provides
telecommunications management and consulting services, (ii) PIC/ATN, which
provides operator services and related valued added services, and (iii) Incomex,
which provides billing and collection services for calls to the United States
from resort hotels in Mexico.


                                       13
<PAGE>   14


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,
                                                       ------------------------
                                                     1998                 1997
                                                     ----                 ----
<S>                                                <C>                      <C> 
Revenues...................................        100%                      100%
Cost of sales..............................         67                        75
Selling, general, and administrative.......         22                        56
Depreciation and amortization..............          5                        25
Loss from impairment of property,
  equipment and intangible assets..........          -                        16
                                                  ----                     -----
Total operating expenses...................         27                       172
Operating income (loss)....................          6                       (72)
Interest expense...........................          7                        10
Loss from joint venture....................          -                        12
Income taxes...............................          -                         -
                                                  ----                     -----
Net loss...................................         (1)%                     (94)%
                                                  ====                    =====
</TABLE>



        The information for the year ended December 31, 1997 in the preceding
table includes statement of operations data for PIC after the consummation of
the PIC Acquisition on October 31, 1997. The information for the year ended
December 31, 1998 in the preceding table includes statement of operations data
for Incomex after the consummation of the Incomex Acquisition on February 13,
1998.

        REVENUES. Consolidated revenues increased $25.6 million, or 305%, to
$34.0 million for the twelve months ended December 31, 1998 from $8.4 million
for the twelve months ended December 31, 1997. Revenues during the twelve months
ended December 31, 1998 consisted of $5.2 million attributable to MTS, $20.8
million attributable to PIC/ATN compared with $1.9 million in the previous year
following its acquisition on October 31, 1997, and $8.0 million attributable to
the Incomex following its acquisition in February 1998. Call processing revenues
generated from MTS through its Lodging Partnership program decreased $2.5
million, or 54%, to $2.1 million for the twelve months ended December 31, 1998
from $4.6 million for the twelve months ended December 31, 1997. This decrease
was the result of declining room counts contracted under the Lodging Partnership
program, decreased call counts per room from the previous year and the
termination of the AT&T agreement effective October 1998. Revenues from other
service income generated by MTS increased $790,000, or 642%, to $913,000 for the
twelve months ended December 31, 1998 from $123,000 for the twelve months ended
December 31, 1997. Telemanager revenues were $635,000 for the twelve months
ended December 31, 1998, compared to none for the twelve months ended December
31, 1997.


                                       14
<PAGE>   15

        In October 1998, the Company and AT&T agreed to end the Lodging
Partnership. Under this agreement, AT&T will directly manage all customers in
the Lodging Partnership. The Company reported a one-time gain of $453,396 during
the fourth quarter of 1998 relating to the termination of its agreement with
AT&T. Revenues of $2.0 million and marginal net profits have been recognized by
the Company from the AT&T agreement for the twelve months ended December 31,
1998. These revenues and net profits will not be present in future periods.

        COST OF SALES. Consolidated cost of sales increased $16.5 million, or
262%, to $22.8 million for the twelve months ended December 31, 1998 from $6.3
million for the twelve months ended December 31, 1997. Cost of sales during the
twelve months ended December 31, 1998 consisted of $3.4 million attributable to
MTS, $14.7 million attributable to PIC/ATN and $4.7 million attributable to
Incomex following its acquisition in February 1998. Costs associated with call
processing revenues for MTS decreased $1.9 million, or 40%, to $2.9 million for
the twelve months ended December 31, 1998 from $4.8 million for the twelve
months ended December 31, 1997.

        A nonstandard charge of $390,000 was taken in the fourth quarter of 1998
as a result of a dispute in collection procedures and policies with a billing
and collection processor for Incomex. The Company has changed vendors and does
not expect a reaccurance of this issue, except for approximately $100,000 in the
first two months of 1999.

        GROSS PROFIT. Consolidated gross operating profit increased $9.1 
million, or 423%, to $11.2 million for the twelve months ended December 31, 1998
from $2.1 million for the twelve months ended December 31, 1997. Gross operating
profit during the twelve months ended December 31, 1998, consisted of $1.9
million attributable to MTS compared to $1.6 million in 1997, $6.1 million
attributable to PIC/ATN compared to $500,000 in 1997, and $3.2 million
attributable to Incomex following its acquisition in February 1998.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Consolidated selling,
general and administrative expense increased $2.8 million, or 59%, to $7.5
million for the twelve months ended December 31, 1998 from $4.7 million for the
twelve months ended December 31, 19997. Selling, general and administrative
expense during the twelve months ended December 31, 1998 consisted of $3.5
million attributable to MTS and Corporate compared to $4.3 million in 1997, $2.7
million attributable to PIC/ATN compared to $403,000 in 1997, and $1.3 million
attributable to Incomex following its acquisition in February 1998. MTS and
Corporate selling, general and administrative expense decreased $500,000, or
13%, to $3.5 million for the twelve months ended


                                       15
<PAGE>   16


December 31, 1998 from $4.0 million for the twelve months ended December 31,
1997. The decrease was primarily due to a reduction in commissions and costs 
associated with the termination of the AT&T agreement in October 1998.

         DEPRECIATION AND AMORTIZATION EXPENSE. Consolidated depreciation and
amortization expense decreased $0.3 million, or 14%, to $1.8 million for the
twelve months ended December 31, 1998 from $2.1 million for the twelve months
ended December 31, 1997. Depreciation and amortization expenses during the
twelve months ended December 31, 1998 consisted of $1.4 million attributable to
MTS and Corporate, $436,000 attributable to PIC/ATN and $12,000 attributable to
Incomex. The completion of the PIC Acquisition in October 1997 resulted in
additional goodwill and acquisition cost amortization of $406,000 for the twelve
months ended December 31, 1998. The completion of the Incomex Acquisition in
February 1998 resulted in goodwill and acquisition cost amortization of $162,000
for the twelve months ended December 31,1998. Such increases were offset by a
decrease in depreciation of property and equipment due to the impairment loss
recorded in 1997 of $1.4 million. As a result of the PIC Earn-Out settlement and
the Incomex Earn-Out settlement recorded in the fourth quarter of 1998 (see
Notes 3 and 4 to Notes to Consolidated Financial Statements) the Company
recorded additional goodwill of $4.4 million which will be amortized over the
remaining life of the original goodwill. This will result in higher amortization
expense in future periods.

         GAIN ON AT&T AGREEMENT BUYOUT. The Company's agreement with AT&T was
amended during 1998 to terminate as of October 15, 1998. Under the amendment,
AT&T will directly manage the existing customers under the contracts and AT&T
assumed liability for all commissions owed to the existing customers for the
period March 1, 1998 to October 15, 1998. As a result, the Company recorded a
one-time gain in the fourth quarter of 1998 of $453,396 representing the
commissions assumed by AT&T less the write-off of owned equipment at the
existing customers properties.

         INTEREST EXPENSE. Consolidated interest expense, including amortization
of debt discount, increased $1.6 million, or 186%, to $2.4 million for the
twelve months ended December 31, 1998 from $847,000 for the twelve months ended
December 31, 1997. The primary reason for the increased interest expense was due
to additional debt incurred related to the PIC Acquisition and the acquisition
of fixed assets. Interest expense during the twelve months ended December 31,
1998 consisted of $1.5 million attributable to MTS and Corporate, $524,000
attributable to PIC/ATN and $356,000 attributable to Incomex following its
acquisition in February 1998. Interest expense incurred by MTS and Corporate
increased $790,000 or 102%, to $1.5 million for the twelve months ended December
31, 1998 from $775,000 for the twelve months ended December 31, 1997.



                                       16
<PAGE>   17


LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1998, the Company's current liabilities of $12.6
million exceeded current assets of $3.8 million resulting in a working capital
deficit of $8.8 million. During 1998, the Company used $0.7 million in cash for
operating activities and $2.8 million in investing activities. The Company
received proceeds from new debt financing of $7.6 million and repaid borrowings
on notes payable and made payments on capital lease obligations of $2.9 million.
These activities resulted in an increase in available cash of $1.2 million for
the twelve months ended December 31, 1998.

         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, 1998 was $6.2
million. The Company currently makes monthly lease and debt payments of
approximately $163,000, in the aggregate, pursuant to these financing
arrangements. As of December 31, 1998, the Company was current on all lease
payments to Berthel. However, subsequent to year-end, the Company has not made
the February and March 1999 payments. Berthel only has the right to demand that
the Company cure this violation, but has not made such a demand as of March 22,
1999.

         As of December 31, 1998, the Company had total current debt of $9.3
million.

         During the first quarter of 1999, the Company raised $1.5 million from
debt financing. 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, capital expenditures, debt obligations and
investments in acquisitions in 1999. The Company currently estimates that it
will need at least $8.5 million in debt or equity financings in 1999 in addition
to the $1.5 million debt financing discussed above, and in addition to cash
flows from operations, to fund its cash requirements, including its initial
investments in ACTEL Integrated Communications, Inc. and AcNet de C.V. In
addition, the Company may be required to obtain additional financing in the
event of new acquisition opportunities. The Company has engaged in discussions
with a number of potential investors regarding proposed debt or equity
financings. However, 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.

YEAR 2000 PREPARATIONS

         The Year 2000 issue relates to computer hardware and software and other
systems designed to use two digits rather than four digits to define the
applicable year. As a result, the Year 2000 would be translated as two zeroes.
Because the Year 1900 could also be translated as two zeroes, systems which use
two digits could read the date incorrectly for a number of date-sensitive
applications, resulting in potential calculation errors or the shutdown of major
systems. The Company has undertaken various initiatives intended to ensure that
its computer hardware and software and other systems will function properly with
respect to


                                       17
<PAGE>   18



dates in the Year 2000 and thereafter. The systems subject to potential Year
2000 issues include not only information technology ("IT") systems, such as
accounting and data processing, communications systems and the Company's
telecommunications switches, but also non-IT systems, such as alarm systems, fax
machines or other miscellaneous systems.

         THE COMPANY'S STATE OF READINESS. The Company's main internal systems,
including IT systems such as financial systems, the Telemanager and the
Company's telecommunications switches, and non-IT systems have been tested and
are either currently believed to be Year 2000 compliant or are expected to be
Year 2000 compliant by the end of the second quarter of 1999, with the exception
of the internal accounting software system of a subsidiary which is expected to
be integrated with the Company's system in the third quarter of 1999. The
Company anticipates completing surveys to its key customers and vendors during
the second quarter of 1999.

         COSTS TO ADDRESS THE COMPANY'S YEAR 2000 COMPLIANCE. The majority of
the Company's internal Year 2000 issues have been or will be corrected through
systems upgrades, including an upgrade of the Company's telecommunications
switches, some of which are being made for other business purposes. The Company
has estimates that the costs of all such upgrades will not exceed $200,000, of
which approximately $100,000 had been incurred through December 31, 1998.

         RISKS TO THE COMPANY RELATING TO THE YEAR 2000 ISSUE. The Company
believes that its reasonably likely worse case scenario would involve
malfunctions of the Company's telecommunications switches or the internal
systems of the Company's customers and key vendors. Any such malfunctions which
result in serious disruption of the Company's ability to process calls could
have a material adverse effect on the Company's results of operations and
financial condition. The Company plans to monitor the Year 2000 compliance of
its significant customers and vendors. However, a number of risks relating to
the Year 2000 issue may be out of the Company's control, including the
compliance status of the Company's customers and vendors and the Company's
reliance on outside links for essential services such as power. There can be no
assurance that a failure of systems of third parties on which the Company's
systems and operations will rely to be Year 2000 compliant will not have a
material adverse effect on the Company's business, financial condition or
operating results.

         THE COMPANY'S YEAR 2000 CONTINGENCY PLANS. By the end of the second
quarter of 1999, the Company expects to be substantially Year 2000 compliant. To
the extent that any of the Company systems are not Year 2000 compliant by the
end of the second quarter of 1999, the Company believes that it will have time
to implement alternative systems. The Company's ability to respond to
non-compliance by its customers and vendors will be limited.


                                       18
<PAGE>   19



FORWARD-LOOKING STATEMENTS

         This report contains statements, including statements of management's
belief or expectation, which may be forward-looking within the meaning of
applicable securities laws. Such statements are subject to known and unknown
risks and uncertainties that could cause actual future results and developments
to differ materially from those currently projected. Such risks and
uncertainties include, among others, the following:

         -        the Company's access to adequate debt or equity capital to
                  meet the Company's operating and financial needs;

         -        the Company's ability to integrate and assimilate the
                  businesses of PIC/ATN and Incomex;

         -        the Company's ability to respond to competition in its
                  markets;

         -        the Company's ability to expand into new markets and to
                  effectively manage its growth;

         -        customer acceptance and effectiveness of the Telemanager and
                  the Company's ability to develop new technology and to adapt
                  to technological change in the telecommunications industry;

         -        the risk that the Company's assessment of the Year 2000 issue,
                  including its identification, assessment, remediation and
                  testing efforts, the dates on which the Company believes it
                  will complete such efforts and the costs associated with such
                  efforts, may be incorrect because it is based upon
                  management's estimates, which were derived from numerous
                  assumptions regarding future events, available resources,
                  third-party remediation plans, the accuracy of testing of the
                  affected systems and other factors;

         -        changes in, or failure to comply with, governmental
                  regulation, including telecommunications regulations;

         -        the Company's reliance on its key personnel and the
                  availability of qualified personnel;

         -        general economic conditions in the Company's markets;



                                       19
<PAGE>   20



         -        the risk that the Company's analyses of these risks could be
                  incorrect and/or the strategies developed to address them
                  could be unsuccessful; and

         -        various other factors discussed in this Annual Report on Form
                  10-KSB.

         The Company will not update the forward-looking information to reflect
actual results or changes in the factors affecting the forward-looking
information.

         The forward-looking information referred to above includes any matters
preceded by the words "anticipates," "believes," "intends," "plans," "expects"
and similar expressions as they relate to the Company and include, but are not
limited to:

         -        expectations regarding the Company's financial condition and
                  liquidity, as well as future cash flows;

         -        expectations regarding sales growth, sales mix, gross margins
                  and related matters with respect to operating results;

         -        expectations regarding the expansion of the Company's
                  business;

         -        the estimated costs to bring the Company's IT and non-IT
                  systems into compliance with respect to the Year 2000 issue
                  and the consequences to the Company of non-compliance by the
                  Company or third parties; and

         -        expectations regarding capital expenditures and investments in
                  new acquisition opportunities.

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.

                                       20

<PAGE>   21


                                    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 1999 Annual Meeting of Shareholders which
will be filed on or before April 30, 1999.

ITEM 10.      EXECUTIVE COMPENSATION

         Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders which will be filed on or before April 30, 1999.

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 1999 Annual Meeting of
Shareholders which will be filed on or before April 30, 1999.

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 1999 Annual Meeting of
Shareholders which will be filed on or before April 30, 1999.

                                       21

<PAGE>   22


ITEM 13.      EXHIBITS, LIST AND REPORTS ON FORM 8-K

         a.       Exhibits:


    EXHIBIT NUMBER                         DOCUMENT DESCRIPTION
    --------------                         --------------------

          3.1           Restated Articles of Incorporation of the Company. (1)

          3.2           First Amendment to Restated Articles of Incorporation of
                        the Company. (2)

          3.3           Second Amendment to Restated Articles of Incorporation
                        of the Company. (2)

          3.4           Amended and Restated By-Laws of the Company. (3)

          4.1           Form of Warrant Agreement between the Company and
                        Firstar Trust Company. (1)

          4.2           Form of Redeemable Warrant. (1)

         10.1           AT&T Management Company Commission Agreement, dated a
                        of December 16, 1995, by and between the Company and
                        AT&T Communications, Inc. ("AT&T"). (1) (4)

         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. (1) (4)

         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. (5)

         10.5           AT&T Management Company Commission Agreement, effective
                        as of January 16, 1998, by and between the Company and
                        AT&T. (4) (6)

         10.6           Amendment to AT&T Management Company Commission
                        Agreement, effective as of October 15, 1998, by and
                        between the Company and AT&T.




                                       22
<PAGE>   23



         10.7           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.  (7)

         10.8           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. (7)

        10.9            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. (6)

         10.10          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. (7)

         10.11          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. (7)

         10.12          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. (6)

         10.13          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. (6)

         10.14          Form of Long-Term Note (7)

         10.15          Agreement, dated as of May 21, 1998, among the Company,
                        MCC Acquisition Corp., Priority International
                        Communications, Inc., PIC Resources Corp., Wayne Wright,
                        Bonner Hardegree and ATN Communications, Inc. (8)


                                       23
<PAGE>   24



         10.16          Earn-Out Settlement Agreement, dated as of December 7,
                        1998, among the Company, MCC Acquisition Corp., Priority
                        International Communications, Inc., PIC Resources Corp.,
                        Wayne Wright, Bonner Hardegree and ATN Communications,
                        Inc.

         10.17          Stock Purchase Agreement, dated as of February 13, 1998,
                        among MCC Acquisition Corp., Incomex, Inc. and the
                        Shareholders of Incomex, Inc. (9)

         10.18          Earn-Out Settlement Agreement, dated as of December 1,
                        1998, among the Company, MCC Acquisition Corp., Incomex,
                        Inc. and the Shareholders of Incomex, Inc.

         10.19          Murdock Communications Corporation 1993 Stock Option
                        Plan. (1) (10)

         10.20          Murdock Communications Corporation 1997 Stock Option
                        Plan, as amended. (10)

         10.21          Amended and Restated Employment Agreement, dated as of
                        October 1, 1998, by and between the Company and Guy O.
                        Murdock. (10)

         10.22          Employment Agreement, dated as of January 1, 1999, by
                        and between the Company and Colin P. Halford. (10)

         10.23          Amended and Restated Employment Agreement, dated as of
                        October 1, 1998, by and between the Company and Thomas
                        E. Chaplin. (10)

         10.24          Employment Agreement, dated as of January 1, 1999, by
                        and between the Company and Bill R. Wharton. (10)

         10.25          Employment Agreement, dated as of November 1, 1998, by
                        and among the Company, Priority International
                        Communications, Inc., PIC Resources Corp. and Bonner B.
                        Hardegree. (10)

         10.26          Employment Agreement, dated as of November 16, 1998, by
                        and between the Company and Paul C. Tunink. (10)

         10.27          Credit Agreement, dated as of May 31, 1994, by and
                        between the Company and Telecommunications Income Fund
                        X, L.P. (1)


                                       24
<PAGE>   25



         10.28          Credit Agreement, dated as of May 31, 1994, by and
                        between the Company and Telecommunications Income
                        Fund IX, L.P. (1)

         10.29          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. (1)

         10.30          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. (1)

         10.31          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. (1)

         10.32          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. (1)

         10.33          Modification Agreement for Lease #063-17000-001, dated
                        as of May 30, 1996, by and between the Company and
                        Berthel Fisher & Company Leasing, Inc. (1)

         10.34          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. (1)

         10.35          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. (1)

         10.36          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. (1)



                                       25
<PAGE>   26


         10.37          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. (1)

         10.38          Equipment Lease #076-17000-443, dated as of May 31,
                        1994, by and between the Company and Berthel Fisher &
                        Company Leasing, Inc. (1)

         10.39          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. (1)

         10.40          Equipment Lease/Purchase Agreement #063-18000-000, dated
                        as of May 30, 1996, by and between the Company and
                        Berthel Fisher & Company Leasing, Inc. (1)

         10.41          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. (1)

         10.42          Demand Note for $50,000, dated as of December 26, 1995,
                        between the Company and Berthel Fisher & Company
                        Leasing, Inc. (1)

         10.43          Demand Note for $200,000, dated as of January 25, 1996,
                        by and between the Company and Berthel Fisher & Company
                        Leasing, Inc. (1)

         10.44          Demand Note for $200,000, dated as of January 31, 1996,
                        by and between the Company and Berthel Fisher & Company
                        Leasing, Inc. (1)

         10.45          Demand Note for $100,000, dated as of February 27, 1996,
                        by and between the Company and Berthel Fisher & Company
                        Leasing, Inc. (1)

         10.46          Equipment Lease, dated as of August 16, 1995, by and
                        between the Company and Harvey Leasing. (1)

         10.47          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. (1)



                                       26
<PAGE>   27



         10.48          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. (1)

         10.49          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. (1)

         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 Registration Statement on Form SB-2
    (File No. 333-05422C) and incorporated herein by reference.

(2) 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.

(3) 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.

(4) Portions of these exhibits were granted confidential treatment by the
    Securities and Exchange Commission.

(5) 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.

(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
    year ended December 31, 1997 (File No. 000-21463) and incorporated herein by
    reference.

(7) 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.


                                       27
<PAGE>   28



(8)   Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
      the quarter ended June 30, 1998 (File No. 000-21463) and incorporated
      herein by reference.

(9)   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.

(10)  Management contract or compensatory plan or arrangement.

(b)   Reports on Form 8-K.

      The Company did not file any reports on Form 8-K for the three months 
ended December 31, 1998.




                                       28
<PAGE>   29


                                   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:  March 30, 1999

                  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

<TABLE>
<CAPTION>


<S>                                       <C>                                      <C> 
/s/ Guy O. Murdock                        Chairman of the Board of Directors       March 30, 1999
------------------------------------      (Principal Executive Officer)
Guy O. Murdock                            

/s/ Colin P. Halford                      President and Director                   March 30, 1999
------------------------------------
Colin P. Halford

/s/ Thomas E. Chaplin                     Chief Executive Officer and Director     March 30, 1999
------------------------------------      (Principal Financial Officer and
Thomas E. Chaplin                         Principal Accounting Officer)

</TABLE>




                                       29
<PAGE>   30

<TABLE>
<CAPTION>

<S>                                       <C>                                      <C> 
/s/ John C. Poss                          Director                                 March 30, 1999
------------------------------------
John C. Poss

/s/ Steven R. Ehlert                      Director                                 March 30, 1999
------------------------------------
Steven R. Ehlert

/s/ Larry A. Erickson                     Director                                 March 30, 1999
------------------------------------
Larry A. Erickson

/s/ Wayne Wright                          Director                                 March 30, 1999
------------------------------------
Wayne Wright

                        
</TABLE>




                                       30
<PAGE>   31
--------------------------------------------------------------------------------
    MURDOCK COMMUNICATIONS
    CORPORATION

    CONSOLIDATED FINANCIAL STATEMENTS FOR THE
    YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
    INDEPENDENT AUDITORS' REPORT





                                     F-1

<PAGE>   32




MURDOCK COMMUNICATIONS CORPORATION

TABLE OF CONTENTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                  PAGE
                                                                                  ----

<S>                                                                                 <C>
INDEPENDENT AUDITORS' REPORT                                                        1

CONSOLIDATED FINANCIAL STATEMENTS:

  Consolidated Balance Sheets                                                       2

  Consolidated Statements of Operations                                             3

  Consolidated Statements of Redeemable Securities                                  4

  Consolidated Statements of Shareholders' Equity (Deficiency)                      5

  Consolidated Statements of Cash Flows                                             7

  Notes to Consolidated Financial Statements                                       10
</TABLE>




                                      F-2
<PAGE>   33








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,
1998 and 1997, 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, 1998 and 1997, 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 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 and deficit working capital 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.


/s/ DELOITTE & TOUCHE LLP

Cedar Rapids, Iowa
March 22, 1999



                                     F-3
<PAGE>   34

MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


ASSETS (Notes 6 and 7)                                                           1998          1997         

<S>                                                                         <C>              <C>    
CURRENT ASSETS:
  Cash                                                                      $ 1,722,033      $ 547,737   
  Accounts receivable, less allowance for doubtful                                                         
    accounts: 1998 - $654,793, 1997 - $376,589                                1,690,302        846,414     
  AT&T commission receivable (Note 2)                                            62,513           --       
  Prepaid expenses and other current assets                                     280,568        109,186     
                                                                           ------------    -----------     
            Total current assets                                              3,755,416      1,503,337     
                                                                           ------------    -----------     
PROPERTY AND EQUIPMENT:                                                                                    
  Land and building                                                           1,171,659        463,693     
  Telecommunications equipment                                                9,013,509      8,530,536     
  Furniture and equipment                                                       748,512        537,550     
                                                                           ------------    -----------     
                                                                             10,933,680      9,531,779
  Accumulated depreciation                                                   (8,097,752)    (7,400,982)    
                                                                           ------------    -----------     
                                                                              2,835,928      2,130,797     
                                                                                                           
  Telecommunications equipment under capital lease,                                                        
    net of accumulated amortization:  1998 - $3,326,300                                                    
    1997 - $3,209,405                                                           181,630        370,706     
                                                                           ------------    ----------- 
            Property and equipment, net                                       3,017,558      2,501,503     
                                                                           ------------    -----------  
                                                                                                           
OTHER ASSETS:                                                                                              
  Goodwill, net of accumulated amortization:                                                      
    1998 - $697,324; 1997 - $70,061                                          11,643,882      4,133,648     
 Cost of purchased site contracts, net of accumulated                                                     
  amortization:                                                                                              
    1998 - $669,597,  1997 - $740,330                                           173,576        484,355     
 Other intangible assets, net of accumulated amortization:                                                
    1998 - $348,208, 1997 - $22,911                                             659,155        397,556     
  Investments, at cost (Note 17)                                              1,500,296           --       
  Prepaid commissions                                                         1,704,444           --       
  Other noncurrent assets                                                       223,963        365,654     
                                                                           ------------    -----------     
           Total other assets                                                15,905,316      5,381,213     
                                                                           ------------    -----------     
TOTAL                                                                      $ 22,678,290    $ 9,386,053     
                                                                           ============    ===========
                                                                             
<CAPTION>

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)                              1998          1997    
                                                                                                    
<S>                                                                      <C>               <C> 
CURRENT LIABILITIES:
  Notes payable (Note 6)                                                 $  7,401,371     $ 1,715,000
  Outstanding checks in excess of bank balances                                  --           231,452
  Accounts payable                                                          1,204,690       1,684,090
  Accrued expenses                                                          2,059,362       1,453,334
  Current portion of capital lease obligations
    principally with a related party (Note 12)                                868,754         181,322
  Current portion of long-term debt with related parties (Note 7)             828,331         949,497
  Current portion of long-term debt, others (Note 7)                          199,287         259,654
                                                                         ------------    ------------
           Total current liabilities                                       12,561,795       6,474,349


  LONG-TERM LIABILITIES:
  Capital lease obligations principally with a related party,
    less current portion (Note 12)                                          3,133,077       3,375,011
  Long-term debt with related parties, less current portion (Note 7)        2,105,325       3,293,829
  Long-term debt, others, less current portion (Note 7)                       725,381         292,493
  Accumulated loss of joint venture in excess of initial
   investment (Note 5)                                                         60,393         380,913
  Deferred income                                                              15,189          51,447
                                                                         ------------    ------------
           Total liabilities                                               18,601,160      13,868,042
                                                                         ------------    ------------

COMMITMENTS AND CONTINGENCIES (Note 12)


SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
  8% Series A Convertible Preferred Stock, $100 stated value (Note 8):
    Authorized - 50,000 shares
    Issued and outstanding: 1998 - 18,920 ($1,892,000 liquidation 
    value); 1997 - 16,250 shares                                            1,837,109       1,544,146
  Common stock, no par or stated value (Note 10):
    Authorized - 20,000,000 shares
    Issued and outstanding:  1998 - 10,329,867 shares;
      1997 - 4,458,439 shares                                              19,834,810      11,343,308
  Common stock warrants (Note 9):
    Issued and outstanding:  1998 - 4,420,763; 1997 - 2,149,279               438,905         315,400
  Additional paid-in capital                                                  134,000         134,000
  Accumulated deficit                                                     (18,167,694)    (17,818,843)
                                                                         ------------    ------------
           Total shareholders' equity (deficiency)                          4,077,130      (4,481,989)
                                                                         ------------    ------------
TOTAL                                                                    $ 22,678,290    $  9,386,053
                                                                         ============    ============
</TABLE>

See notes to consolidated financial statements.

                                      F-4




<PAGE>   35
MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>



                                                                           1998            1997
REVENUES:
<S>                                                                  <C>              <C>        
  Call processing                                                    $ 32,386,570     $ 7,629,116
  Other revenue                                                         1,601,529         788,004
                                                                     ------------     -----------
           Total revenues                                              33,988,099       8,417,120
                                                                     ------------     -----------
COST OF SALES:
  Call processing                                                      21,859,097       5,958,335
  Other cost of sales                                                     516,220         314,322
  Nonstandard international bad debt expense                              390,276            --
                                                                     ------------     -----------
           Total cost of sales                                         22,765,593       6,272,657
                                                                     ------------     -----------

GROSS PROFIT                                                           11,222,506       2,144,463
                                                                     ------------     -----------

OPERATING EXPENSES:
  Selling, general and administrative expense                           7,468,246       4,702,754
  Depreciation and amortization expense                                 1,848,748       2,142,773
  Loss from impairment of property, equipment and intangible assets          --         1,353,010
                                                                     ------------     -----------
           Total operating expenses                                     9,316,994       8,198,537
                                                                     ------------     -----------

INCOME (LOSS) FROM OPERATIONS                                           1,905,512      (6,054,074)
                                                                     ------------     -----------
NONOPERATING  INCOME (EXPENSE):
  Gain on AT&T contract buyout (Note 2)                                   453,396            --
  Interest expense                                                     (2,426,140)       (847,203)
  Other income                                                              8,906            --
                                                                     ------------     -----------
           Total nonoperating income (expense)                         (1,963,838)       (847,203)
                                                                     ------------     -----------

LOSS BEFORE INCOME TAX EXPENSE AND JOINT VENTURE LOSS                     (58,326)     (6,901,277)

Loss from joint venture (Note 5)                                           41,546         993,329
Income tax expense (Note 11)                                               74,466           5,402
                                                                     ------------     -----------

NET LOSS                                                                 (174,338)     (7,900,008)

Dividends and accretion on 8% Series A Convertible Preferred Stock       (174,513)        (35,007)
                                                                     ------------     -----------

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                             (348,851)     (7,935,015)
                                                                     ============     ===========

BASIC AND DILUTED NET LOSS PER COMMON SHARE                          $       (.06)    $     (1.89)
                                                                     ============     ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                              5,422,783       4,208,439
                                                                     ============     ===========
</TABLE>

See notes to consolidated financial statements.


                                      F-5

<PAGE>   36




MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF REDEEMABLE SECURITIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                    10% SERIES A
                                                                     REDEEMABLE
                                                                  PREFERRED STOCK

<S>                                                                  <C>      
BALANCE AT JANUARY 1, 1997                                           $  24,480

  Accrued dividends on 10% Series A
    Redeemable Preferred Stock                                             170

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

BALANCE AT DECEMBER 31, 1997 AND 1998                               $      -
                                                                    ===========
</TABLE>


See notes to consolidated financial statements.

                                      F-6




<PAGE>   37
MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997

--------------------------------------------------------------------------------
<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 JANUARY 1, 1997                   --         $    --            4,152,494    $ 10,820,898       1,173,089  $    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                        --                --               --              --           979,279       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       2,149,279  $    315,400
                                        ============  ============       ============    ============    ============  ============
</TABLE>


<TABLE>
<CAPTION>
  
                                                                                 SHARE-                                            
                                           ADDITIONAL                           HOLDERS'                                           
                                             PAID-IN        ACCUMULATED          EQUITY                                            
                                             CAPITAL          DEFICIT         (DEFICIENCY)                                         
<S>                                        <C>             <C>             <C>         
BALANCES AT JANUARY 1, 1997                $    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>

                                                                     (Continued)
                                      F-7

<PAGE>   38

MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (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, 1997                       16,250   $  1,544,146     4,458,439   $ 11,343,308     2,149,279    $   315,400
                                                                                                                                    
  Issuance of 8% Series A Convertible                                                                                               
    Preferred Stock, net of issuance                                                                                                
    costs of $5,228                                  2,670        261,772          --             --            --             --  
  Issuance of common stock and warrants                                                                                             
    in connection with the acquisition                                                                                              
    of Incomex (Note 4)                               --             --       1,900,000      2,494,375       155,384         29,797
  Exercise of warrants by a related                                                                                                 
    party                                             --             --       1,100,000      1,752,396    (1,100,000)      (322,396)
  Issuance of warrants in connection with                                                                                           
    debt financing with a related party                                                                                             
    (Note 12)                                         --             --            --             --         350,000        165,396 
  Issuance of warrants in connection                                                                                               
    with debt financing of which 739,000                                                                                           
    are with related parties (Note 6)                 --             --            --             --       2,700,000        221,288 
  Issuance of warrants in lieu of director                                                                                          
    and consulting fees                               --             --            --             --          45,000          5,200 
  Issuance of warrants in lieu of agent                                                                                             
    fees to a related party (Note 6)                  --             --            --             --         121,100         24,220 
  Issuance of common stock in                                                                                                       
    connection with the acquisition of PIC
    (Note 3)                                          --             --       2,871,428      4,244,731          --             --   
 Accretion to conversion price of 6%                                                                                              
    Series A Convertible Preferred Stock              --           31,191          --             --            --             --   
 Accrued dividends on 8% Series A                                                                                               
    Convertible Preferred Stock                       --             --            --             --            --             --   
  Net loss for 1998                                                                                                                 
                                                      --             --            --             --            --             --   
                                              ------------   ------------  ------------   ------------  ------------   ------------ 
                                                                                                                                    
BALANCES AT DECEMBER 31, 1998                       18,920   $  1,837,109    10,329,867   $ 19,834,810     4,420,763   $    438,905 
                                              ============   ============  ============   ============  ============   ============ 


<CAPTION>
 
                                                                                          SHARE-            
                                                         ADDITIONAL                       HOLDERS'           
                                                         PAID-IN         ACCUMULATED       EQUITY            
                                                          CAPITAL           DEFICIT     (DEFICIENCY)         
<S>                                                    <C>             <C>             <C>           
BALANCES AT DECEMBER 31, 1997                          $    134,000    $(17,818,843)   $ (4,481,989) 
                                                                                                     
  Issuance of 8% Series A Convertible                                                                
    Preferred Stock, net of issuance                                                                 
    costs of $5,228                                            --              --           261,772  
  Issuance of common stock and warrants                                                              
    in connection with the acquisition                                                               
    of Incomex (Note 4)                                        --              --         2,524,172  
  Exercise of warrants by a related                                                                  
    party                                                      --              --         1,430,000  
  Issuance of warrants in connection with                                                            
    debt financing with a related party                                                              
    (Note 12)                                                  --              --           165,396
  Issuance of warrants in connection                                                                 
    with debt financing of which 739,000                                                                 
    are with related parties (Note 6)                          --              --           221,288  
  Issuance of warrants in lieu of director                                                           
    and consulting fees                                        --              --             5,200  
  Issuance of warrants in lieu of agent                                                              
    fees to a related party (Note 6)                           --              --            24,220 
  Issuance of common stock in                                                                        
    connection with the acquisition of PIC (Note 3)            --              --         4,244,731
  Accretion to conversion price of 6%                                                                  
    Series A Convertible Preferred Stock                       --           (31,191)           --    
  Accrued dividends on 8% Series A                                                                   
    Convertible Preferred Stock                                --          (143,322)       (143,322) 
  Net loss for 1998                                            --          (174,338)       (174,338) 
                                                       ------------    ------------    ------------  
BALANCES AT DECEMBER 31, 1998                          $    134,000    $(18,167,694)   $  4,077,130  
                                                       ============    ============    ============  
</TABLE>
                                                              
See notes to consolidated financial statements.




                                      F-8


<PAGE>   39
MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                              1998          1997
<S>                                                                                       <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                                $  (174,338)   $(7,900,008)
  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             1,848,748      2,226,106
    Noncash interest expense                                                                  271,623        359,141
    Noncash compensation expense                                                                --            10,000
    Noncash commission expense                                                                 71,000         -- 
    Recognition of deferred gains from equipment sales with a related party                     --           (22,428)
    Loss from joint venture                                                                    41,546        993,329
    Changes in operating assets and liabilities, excluding the effects of acquisitions:
      Receivables                                                                            (727,670)       783,621
      Other current assets                                                                    (60,285)       130,684
      Prepaid commissions                                                                    (730,269)         --
      Other noncurrent assets                                                                 260,654       (187,372)
      Outstanding checks in excess of bank balances                                          (247,255)       134,192
      Accounts payable                                                                       (717,933)       873,691
      Accrued expenses                                                                       (539,525)        64,367
      Deferred income                                                                         (36,258)          --  
                                                                                          -----------    ----------- 
           Net cash flows from operating activities                                          (739,962)    (1,181,667)
                                                                                          -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                
  Purchases of property and equipment                                                        (766,176)      (641,229)
  Cash paid for acquisitions                                                                 (130,155)      (640,156)
  Payments for site contracts                                                                  (2,875)       (48,697)
  Capitalized software development costs                                                        --          (138,013)
  Cash paid for investments                                                                (1,500,296)          --  
  Cash advanced to joint venture                                                             (362,065)      (262,869)
  Cash acquired with acquisitions                                                              16,574         49,713
                                                                                          -----------    -----------
           Net cash flows from investing activities                                        (2,744,993)    (1,681,251)
                                                                                          -----------    ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                
  Payments on capital lease obligations, primarily to a related party                        (264,822)      (217,344)
  Proceeds from capital lease obligations with a related party                                710,320           --   
  Borrowings on notes payable                                                               5,406,000      1,470,000
  Borrowings of long-term debt with related parties                                             --            54,021
  Payments on notes payable                                                                (1,656,241)      (595,000)
  Payments on long-term debt with related parties                                            (719,005)       (46,016)
  Payments on long-term debt, others                                                         (152,479)       (15,217)
  Dividends paid on 10% Series A Redeemable Preferred Stock                                      --             (170)
  Repurchase of 10% Series A Redeemable Preferred Stock and common stock warrants                --          (24,480)
  Proceeds from issuance of common stock and warrants                                       1,430,000          5,600
  Proceeds from issuance of 8% Series A Convertible Preferred Stock                            50,000      1,625,000
  Payments for offering costs                                                                (144,522)       (87,636)
                                                                                          -----------    -----------
           Net cash flows from financing activities                                         4,659,251      2,168,758
                                                                                          -----------    -----------
NET INCREASE (DECREASE) IN CASH                                                             1,174,296       (694,160)
                                                                                                     
CASH AT BEGINNING OF YEAR                                                                     547,737      1,241,897
                                                                                          -----------    -----------
                                                                                          $ 1,722,033    $   547,737
CASH AT END OF YEAR                                                                       ===========    ===========
                                                                                                     
SUPPLEMENTAL DISCLOSURE:                                                                                 
  Cash paid during the year for interest, principally to a related party                  $2,183,214     $   389,438
  Cash paid during the year for income taxes                                                  24,466           5,402
                                                                                               
</TABLE>

See notes to consolidated financial statements.


                                      F-9



<PAGE>   40

MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
--------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF 1998 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:

The Company recorded the following increases as a result of its acquisition of 
Incomex:

<TABLE>
<S>                                    <C>                                       

Accounts receivable                    $178,731
Other current assets                    111,097                        
Telecommunications equipment              3,242
Furniture and equipment                  52,787
Accumulated depreciation                (13,851)
Goodwill                                920,947
Commission advances                     974,175
Other assets                              9,964
Notes payable                          (821,697)
Outstanding checks over bank balances   (15,803)
Accounts payable                       (133,533)
Accrued expenses                       (826,985)
Common stock                           (422,500)
                                       --------
Cash acquired with acquisition         $ 16,574
                                       ========

</TABLE>

The Company recorded deferred loan costs of $445,901 in connection with the 
issuance of warrants to purchase 3,171,000 shares of common stock in the 
Company in connection with debt financing and 155,384 shares of common stock in 
the Company in connection with the Incomex earnout.

The Company recorded a note payable of $25,000 in exchange for accrued 
consulting fees.

The Company recorded a note payable of $5,000 in exchange for accrued director 
fees.

The Company recorded an increase to the carrying value of the 8% Series A 
Convertible Preferred Stock and a charge to accumulated deficit of $31,191 
representing the current year's accretion to its conversion price.

The Company recorded an increase in accrued expense and a charge to accumulated 
deficit of $143,322 for the cumulative dividends earned by the holders of the 
8% Series A Convertible Preferred Stock.

The Company recorded prepaid commissions of $180,000 and accrued expenses of 
$37,000 in connection with the issuance of 2,170 shares of 8% Series A 
Convertible Preferred Stock.

The Company recorded long-term debt others and land and building of $525,000 in 
connection with the purchase of ATN's building.

The Company recorded goodwill of $3,916,889, accounts payable of $135,000,
accrued expenses of $153,059, common stock of $4,244,731, decreased long-term
debt by $627,389 and issued 571,428 shares of common stock in connection with
the PIC earnout as discussed in Note 3.

The Company recorded goodwill of $4,103,776, accrued expenses of $59,187,
incurred notes of $1,084,915 and common stock of $2,469,609 in connection with
the Incomex purchase as discussed in Note 4.

See notes to consolidated financial statements.


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 979,279 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.


                                      F-10

<PAGE>   41







MURDOCK COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------------------------------------------------
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 operator services and call processing to North
      American payphones, hotels and institutions, database profit management
      services and telecommunications billing and collection services for the
      hospitality industry and outsourced operator services for the
      telecommunications industry.

      Through a series of acquisitions and new product development, the Company
      has transformed itself over the last year from a long distance reseller of
      AT&T network services to U.S. hotels to being a communications provider in
      North America, primarily servicing the hospitality and pay telephone
      businesses.

      The Company operates its business under three business units. Murdock
      Technology Services ("MTS"), formerly the operating unit of Murdock
      Communications Corporation, was the unit responsible for marketing of AT&T
      operator services. In light of the declining volume and narrow margin of
      the AT&T business, and the Company's refocused business strategy, the
      Company reached an agreement with AT&T to terminate their marketing
      agreement effective October 15, 1998. After the effective date of the
      termination, AT&T directly managed the existing customers under the
      contract and revenues from the AT&T agreement ended effective in the
      fourth quarter of 1998. As a result of the termination, the Company
      recorded a one-time gain in the fourth quarter of $453,396.

      The MTS division was created in 1998 to meet the needs of the hospitality
      telecommunications management market by providing database profit
      management services and other value added telecommunication services. The
      division's main product, the Telemanager, is a proprietary software and
      hardware product, created to help manage telecommunication installations
      and services in the hospitality market. At December 31, 1998, MTS has
      installed the Telemanager in approximately 174 locations compared with 80
      locations at December 31, 1997.

      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, 1998, PIC maintains site
      contracts with and provides services for approximately 207 customers
      throughout the United States (257 customers at December 31, 1997).

      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.
      Together, PIC, PIC-R and ATN comprise the second business unit, known as
      "PIC/ATN".

                                      F-12

<PAGE>   42


      On February 13, 1998, the Company purchased Incomex, Inc. ("Incomex"), the
      Company's third business unit (see Note 4). Incomex is primarily engaged
      in the business of providing international operator services to the
      hospitality industry from Mexico to the United States. At December 31,
      1998, Incomex maintains contracts with approximately 95 hotel and resort
      hotel properties located in Mexico compared with approximately 80 at
      February 13, 1998.

      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 $18.2
      million, and current liabilities exceed current assets by $8.8 million at
      December 31, 1998. 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 profitable operations. Management's plans to accomplish these
      objectives include, but are not limited to, the following:

      -    Continuing integration of the PIC/ATN and Incomex acquisitions (see
           Notes 3 and 4). Management believes these acquisitions will continue
           to provide additional positive cash flows as the companies are more
           fully integrated and generate additional sources of call processing
           traffic.

      -    Obtaining a line of credit which would enable the Company to
           restructure its debt position and finance future growth.

      -    Successful implementation and market acceptance of the Telemanager
           system, a new source of revenues to the Company in 1998, 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.

      -    During the first quarter of 1999, the Company raised $1,500,000 of
           cash from debt financing (see Note 18). 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,
           capital expenditures, debt obligations and investments in
           acquisitions in 1999. The Company currently estimates that it will
           need at least $10 million, including the $1,500,000 above, in debt or
           equity financings in 1999, or in addition to cash flows from
           operations, to fund its cash requirements and initial investments in
           AcNet and ACTEL (see note 17).

      PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
      include the accounts of the Company, the accounts of PIC and PIC-R
      effective October 31, 1997, and effective February 13, 1998, the accounts
      of Incomex, 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 and impairment of
      long-lived assets.

                                      F-13

<PAGE>   43


      CERTAIN RISK CONCENTRATIONS - The Company derived 12% and 24% of its 
      revenues in 1998 from two customers of PIC/ATN and 54% of its revenues
      from AT&T in 1997. At December 31, 1998 and 1997, 3% and 12%,
      respectively, of the Company's receivables were due from AT&T. The
      Company's agreement with AT&T ended in the fourth quarter of 1998. 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 14.8% and 9.2% of the Company's
      outstanding common stock at December 31, 1998 and 1997, respectively.

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

      A growing portion of the Company's revenues are now derived from
      processing 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.

      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 five 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.

                                      F-14

<PAGE>   44


      Software development costs of $138,013 at December 31, 1998 and 1997 were
      incurred for products and significant product enhancements subsequent to
      establishment of their technological feasibility and prior to their
      general release to customers. These costs were capitalized and stated net
      of accumulated amortization of $68,915 and $22,911 at December 31, 1998
      and December 31, 1997, respectively. 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, net of amortization,
      in connection with lease and loan modification agreements of $869,350 and
      $282,454 at December 31, 1998 and 1997, respectively, have been deferred
      and are being amortized over the restructured lease and loan agreement 
      term of five years using the effective interest method. Accumulated 
      amortization related to deferred lease and loan restructuring costs are 
      $279,293 and none at December 31, 1998 and 1997, respectively.

      INVESTMENTS - The Company owns a note receivable convertible into
      preferred stock and convertible preferred stock. Such investments are
      accounted for at cost and are not readily marketable. Should these
      investments experience a decline in value that is other than temporary,
      the Company will recognize a loss to reflect such decline.

      INCOMEX FUNCTIONAL CURRENCY - All contracts Incomex has entered into with
      their customers are denominated in United States dollars.

      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. Some states
      do not allow the filing of a consolidated state tax return, and therefore,
      certain subsidiaries file a separate state income tax return. 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 conversion, the Company
      accretes the carrying value of the 8% Series A Convertible Preferred Stock
      (net of offering costs incurred) to the conversion price by the effective
      interest method.

      CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Cumulative dividends on the 8%
      Series A Convertible Preferred Stock are deducted from accumulated deficit
      as the dividends are earned by the holders and an accrued liability is
      recorded.

                                      F-15

<PAGE>   45


      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.

      NET LOSS PER COMMON 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 and 
      warrants.

      RECLASSIFICATIONS - Certain amounts in the 1997 financial statements have
      been reclassified to conform with the current year's presentation.

      IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
      Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities". SFAS No. 133 establishes standards
      for derivative instruments and hedging activities. It requires that an
      entity recognize all derivatives as either assets or liabilities in the
      statement of financial position and measure those instruments at fair
      value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
      beginning after June 15, 1999. The Company has not yet determined if the
      adoption of SFAS No. 133 will have an impact on the Company's consolidated
      results of operations, financial position or cash flow.

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.

      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. Management
      is not aware of any noncompliance nor has the Company been notified of any
      noncompliance with the Old Agreement, as amended.

                                      F-16

<PAGE>   46



      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 received 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 included
      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
      was responsible for determining if the Company was in compliance with
      certain standards, as set forth in the New Agreement. AT&T reserved a
      number of grounds to terminate the New Agreement prior to its expiration,
      with or without cause.

      During 1998, the Company and AT&T agreed to terminate the agreement with
      an effective date of October 15, 1998. The Company based this decision on
      the declining volume and narrow margins of the AT&T business, and on the
      Company's refocused business strategy. AT&T agreed to pay certain hotel
      commissions otherwise payable by the Company and, as a result, the Company
      recorded a one-time gain in the fourth quarter of $453,396. 

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 provided that the Company would 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 were to 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 were 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
      defaulted with respect to the repayment of the Short-Term Note, the
      holders of the PIC notes had 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 had
      been 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.

      Effective May 21, 1998, the Company and the former shareholders of PIC and
      PIC-R entered into an agreement to amend the terms of the original Stock
      Purchase Agreements with respect to the Company's acquisition of PIC and
      PIC-R. Pursuant to the original Stock Purchase Agreements, the former PIC
      and PIC-R shareholders received certain special default rights to rescind
      the acquisitions of PIC and PIC-R. The May 21, 1998 amendment terminated
      the special default rights. Pursuant to the amendment, the Company also
      issued 571,428 shares of common stock as a prepayment of $1,000,000 of the
      Long-Term Notes in reverse order of their maturities of the amounts owed.


                                      F-17

<PAGE>   47



      Effective December 7, 1998, the Company and the former shareholders of PIC
      and PIC-R entered into an Earn-Out Settlement Agreement. This Agreement
      terminated the May 21, 1998 Agreement. Pursuant to the Earn-Out Settlement
      Agreement, in full and final settlement of the earn-out rights for the
      former shareholders of PIC and PIC-R, the Company issued 2,300,000 shares
      of common stock; issued a $300,000 note payable in 24 monthly installments
      commencing January 7, 1999; assumed $135,000 of costs associated with the
      defense and settlement of a suit related to brokerage fees in connection
      with the PIC acquisition; and agreed to pay in full the total outstanding
      balances on the long-term notes issued to the principal shareholders. The
      principal balances on the long term notes as of December 31, 1998 was
      $338,138 of which $317,203 was subsequently paid in January 1999. Goodwill
      of $3,916,889 associated with the amended terms of the agreement is being
      amortized over the remaining life of the original goodwill which is eight
      years and eleven months. Concurrent with the Earn-Out Settlement
      Agreement, the Company entered into a consulting agreement with PIC's
      President for two years and an employment agreement with PIC's Executive
      Vice President for three years.

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

<TABLE>
<CAPTION>
    
<S>                                                               <C>         
Total revenues                                                    $ 15,745,211
Cost of sales                                                       11,640,553
                                                                  ------------
Gross operating profit                                               4,104,658


Selling, general and administrative expense                          6,624,572
Depreciation and amortization expense                                3,128,578
Loss from impairment of property, equipment and intangible assets    1,353,010
                                                                  ------------

Loss from operations                                                (7,001,502)

Interest expense                                                    (1,057,519) 
                                                                  ------------
Loss before income tax expense and joint venture loss               (8,059,021)

Loss from joint venture                                                993,329
Income tax expense                                                       5,620
                                                                  ------------

Net loss                                                          $ (9,057,970)
                                                                  ============
Pro forma net loss attributable to common shareholders            $ (9,092,977)
                                                                  ============

Pro forma net loss per common share                               $      (1.24)
                                                                  ============

Pro forma weighted average common shares outstanding                 7,329,867
                                                                  ============
</TABLE>




4.    ACQUISITION OF INCOMEX

      On February 13, 1998, the Company entered into an agreement to purchase
      all of the outstanding shares of common stock of Incomex, in exchange for
      400,000 shares of common stock of the Company, valued at $422,500. The
      agreement also provided 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 had 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 has been recorded under the purchase method. Goodwill
      of $901,219 associated with the acquisition is being amortized over ten
      years.

                                      F-18

<PAGE>   48



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

      Effective December 7, 1998, the Company and the former shareholders of
      Incomex entered into an Earn-Out Settlement Agreement. This Agreement
      amended certain provisions of the Purchase Agreement to provide full and
      final settlement of the earn-out rights for the former shareholders of
      Incomex. Under the terms of the Earn-Out Settlement Agreement, the Company
      issued 1,500,000 shares of common stock; issued $744,915 in notes payable
      maturing in one year at an annual rate of 14% and includes a 1%
      origination fee; issued 155,384 warrants associated with the notes payable
      entitling the holder to purchase the Company's common stock at an exercise
      price of $3.25 which expire, if unexercised, on December 31, 2003; issued
      $340,000 in notes payable due no later than April 1, 1999 and recorded
      cash obligations of $117,479. Goodwill of $3,319,389 associated with the
      amended terms of the agreement is being amortized over the remaining life
      of the original goodwill which is nine years and two months.

      Pro forma results of operations (unaudited) for the Company reflecting the
      Incomex, PIC and PIC-R acquisitions for the years ended December 31, 1998
      and 1997, as if the acquisitions had occurred on January 1, 1997, are as
      follows:
<TABLE>
<CAPTION>

                                                              1998            1997

<S>                                                      <C>             <C>         
Total revenues                                           $ 34,468,424    $ 20,595,648
Cost of sales                                              23,059,280      15,297,649
                                                         ------------    ------------
Gross operating profit                                     11,409,144       5,297,999

Selling, general and administrative expense                 7,595,785       7,984,501
Depreciation and amortization expense                       2,453,579       3,560,293
Loss from impairment of property, equipment
  and intangible assets                                          --         1,353,010
                                                         ------------    ------------

Income (loss) from operations                               1,359,780      (7,599,805)


Gain on AT&T buyout                                           453,396            --   

Interest expense                                           (2,766,133)     (1,413,959)
                                                            ---------       ---------

Loss before income tax expense and joint venture loss        (952,957)     (9,013,764)

Loss from joint venture                                        41,546         993,329
Income tax expense                                             74,466           5,620
                                                         ------------    ------------

Net loss                                                 $ (1,068,969)   $(10,012,713)
                                                         ============    ============

Pro forma net loss attributable to common shareholders   $ (1,243,480)   $(10,047,720)
                                                         ============    ============

Pro forma net loss per common share                      $       (.13)   $      (1.09)
                                                         ============    ============

Pro forma weighted average common shares outstanding        9,232,881       9,229,867
                                                         ============    ============
                                                                                
</TABLE>


                                      F-19


<PAGE>   49


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 was 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 was to 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 was to 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 had 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 provided consumer telecommunications services related to the IVR
      platforms.

      During the fourth quarter of 1997, management of the Company decided to
      cease substantially all 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. The Company's net
      investment in the joint venture of $(60,393) and $(380,913) at December
      31, 1998 and 1997, respectively represents net liabilities of the venture
      for which the Company is responsible.

      Condensed financial information for the joint venture as of and
      for the years ended December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                            TOTAL       TOTAL        TOTAL             NET
                            ASSETS   LIABILITIES    REVENUES          LOSS
<S>                        <C>        <C>           <C>           <C>        
1998                       $10,486    $ 70,879      $  3,142      $   (41,546)
1997                        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 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%. All
      amounts under the Settlement Agreement were paid during 1998 and the
      Company was released from its continuing obligation under the Audiotext
      Services Agreement.

      In July 1998, the joint venture entered into a written agreement with
      MatrixMedia, the other 50% owner of the joint venture, providing for the
      sale of the joint venture's remaining assets and certain
      telecommunications equipment owned by the Company to MatrixMedia. Subject
      to MatrixMedia obtaining financing, the Company anticipates the completion
      of this transaction during the second quarter of 1999.

                                      F-20

<PAGE>   50


6.    NOTES PAYABLE

      Notes payable as of December 31, 1998 and 1997, consisted of the
following:

<TABLE>
<CAPTION>
                                                                                             1998           1997
       <S>                                                                                  <C>             <C>                   
       Past due notes payable to individuals, $400,000 of which has been provided by
        related parties, bearing interest at 14%, due March 5, 1999. Warrants to
        purchase 500,000 shares of the Company's common stock were issued at an
        exercise price of $1.75 per share, which expire if unexercised, on March 31,
        2001. A warrant to purchase 10,000 shares of the Company's common stock was
        issued to Berthel at an exercise price of $1.44 per share which expires if 
        unexercised, on March 31, 2001.                                                     $  500,000      $--
       
       Notes payable to individuals, $225,000 of which has been provided by related
        parties, bearing interest at 14%, due March 31, 1999. Warrants to purchase
        1,486,000 shares of the Company's common stock were issued, 225,000 of which
        were issued to related parties, at an exercise price of $1.75 per share which
        expire, if unexercised, on March 31, 2001. Warrants to purchase 121,100 shares
        of the Company's common stock were issued to Berthel in connection with the
        offering with terms substantially similar to the warrants issued in the 
        offering.                                                                            1,486,000       --   
       
       Notes payable to individuals, $2,520,000 of which has been provided by related
        parties, bearing interest at 14%, due November 30, 1999. Warrants to purchase
        684,000 shares of the Company's common stock were issued, 504,000 of which
        were issued to related parties. The Warrants were issued at an exercise price
        of $3.25 for 604,000 warrants and $2.50 for 80,000 warrants which expire, 
        if unexercised, on November 30, 2003.                                                3,420,000       --
       
       Notes payable to the former owners of Incomex bearing interest at 14% due 
        November 15, 1999.                                                                     744,915       --   
       
       Noninterest-bearing notes payable to the former owners of Incomex due 
        April 1, 1999.                                                                         340,000       --   
       
       Note payable to consultant bearing interest at 14%, due March 31, 1999. Warrants
        to purchase 25,000 shares of the Company's common stock were issued at an
        exercise price of $1.75 per share which expire, if unexercised, on  March 31, 2001.     25,000       --
</TABLE>


                                      F-21

<PAGE>   51

<TABLE>
<CAPTION>
                                                                                      1998       1997

<S>                                                                               <C>           <C>
Note payable to director bearing interest at 14%, due March 31, 1999. A warrant
  to purchase 5,000 shares of the Company's common stock was issued at an
  exercise price of $1.75 per share which expires, if unexercised, on March 31, 
  2000.                                                                            $    5,000   $     --

Notes payable to leasing company bearing interest ranging from 24.9% to 33.4%
  due in periods ranging from December 1999 to April 2002. The notes are in
  arbitration, see Note 12.                                                           480,456         --

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

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 9.75% and 10.5% at December 31, 1998 and 1997,
  respectively), due March 28, 1999, collateralized by AT&T accounts and
  commission receivables, inventory and certain telecommunications equipment
  with a carrying value of approximately $130,000 and $180,000 at December
  31, 1998 and 1997, respectively.                                                    400,000      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                                                                              $7,401,371   $1,715,000
                                                                                   ==========   ==========
</TABLE>


Also see Note 15 with respect to the estimated fair value of notes payable. Due
to the issuance of the warrants, all notes payable issued with warrants have an
effective interest rate of 18%.


                                      F-22

<PAGE>   52
7.  LONG-TERM DEBT

    Long-term debt, others as of December 31, 1998 and 1997 consisted of the
    following:

<TABLE>
<CAPTION>
                                                                                            1998      1997
       <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 corporate
         office facilities and land.                                                      $261,796   $278,358

       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.     8,830     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

       Mortgage note payable to partnership due in monthly installments of $6,500,
         including interest at 9%, due September 2008, collateralized by ATN's office
         facilities and land.                                                              514,634       --


       Uncollateralized note payable to financial institution due in monthly
         installments of $12,353, including interest at the financial institution's
         prime rate (8.75% at December 31, 1998), until January 2000, when the
         balance is due.                                                                   139,408       --
                                                                                          --------   --------

       Total                                                                               924,668    552,147
       Less current portion                                                                199,287    259,654
                                                                                          --------   --------
       Long-term debt, others                                                             $725,381   $292,493
                                                                                          ========   ========
</TABLE>


                                      F-23
<PAGE>   53

Long-term debt with related parties at December 31, 1998 and 1997 consisted of
the following:

<TABLE>
<CAPTION>
                                                                                      1998          1997
<S>                                                                                <C>           <C>             
Uncollateralized notes payable to Berthel due January 31, 2005, (net of discount
  of $341,010 and $377,734 at December 31, 1998 and 1997, respectively).
  Interest payable quarterly at 4%, beginning March 31, 1995 until maturity.
  when the balance is due (effective interest rate of 11.5%).                       $  658,990   $  622,266


Uncollateralized note payable to Berthel, due in five monthly installments of
  $9,494 including interest at 14% beginning on March 30, 1998, then fifty-five
  installments of $20,130 including interest at 14% until February 28, 2003.           759,309      792,786

Non-interest bearing, uncollateralized note payable to the owner of PIC, (net of
  discount of $46,738 at December 31, 1998) due in monthly installments of
  $12,500, beginning January 1998 through January 2008 (effective interest
  rate of 19.6%).                                                                      253,262         --

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.                                                                            839,936      988,555

Non-interest bearing notes payable to the former owners of PIC, (net of discount
  of $242,840, at December 31, 1997, for an effective interest rate of 14.5%),
  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, collateralized by a pledge of the common stock of PIC and
  PIC-R. During 1998, 571,428 shares of common stock were issued in exchange for
  $1 million of the principal balance as discussed in Note 3, with the remaining
  balance bearing interest at 12% and due December 31, 1998.  The note was
  repaid in January 1999.                                                              338,138    1,667,160

Uncollateralized, noninterest bearing demand notes payable to related parties.          84,021      172,559
                                                                                    ----------   ----------

Total                                                                                2,933,656    4,243,326
Less current portion                                                                   828,331      949,497
                                                                                    ----------   ----------
Long-term debt with related parties                                                 $2,105,325   $3,293,829
                                                                                    ==========   ==========
</TABLE>





                                      F-24



<PAGE>   54
      Maturities of long-term debt for each of the five years subsequent to 
      December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                  RELATED
                      OTHER       PARTIES       TOTAL
      <S>          <C>          <C>          <C>
      1999         $  199,287   $  828,331   $1,027,618
      2000            501,230      523,899    1,025,129
      2001             21,353      422,734      444,087
      2002             23,240      460,136      483,376
      2003             25,293       39,566       64,859
      Thereafter      154,265      658,990      813,255
                   ----------   ----------   ----------
      Total        $  924,668   $2,933,656   $3,858,324
                   ==========   ==========   ==========
</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.

      Effective December 31, 1997, the Company and Berthel agreed to rescind the
      conversion and the Company 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
      229,279 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. Due to the issuance
      of the warrants, the effective interest rate on the notes is 15.5%.

      Also see Note 15 with respect to the estimated fair value of long-term
      debt.

8.    PREFERRED STOCK

      On July 2, 1997, the Company amended its Articles of Incorporation to
      authorize 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 the Convertible Preferred with respect to
      liquidation or dividends must be made prior to any payments to the holders
      of shares of the Company's 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 $1.125 per
      share of Common Stock and is automatically converted into Common Stock
      three years after issuance at the same conversion rate of $2.50 per share
      of Common Stock. 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
      underwritten by Berthel and received an additional $50,000 in gross
      proceeds in the first quarter of 1998 from the issuance of 500 shares of
      Convertible Preferred.

                                      F-25

<PAGE>   55


      On February 26, 1998, the Company agreed to issue 2,170 shares of
      Convertible Preferred to an affiliate of Berthel in exchange for the
      prepayment of $180,000 of commissions and the payment of $37,000 of
      commissions currently owed. This transaction was completed and the shares
      issued on June 19, 1998.

9.    COMMON STOCK WARRANTS

      The Company has the following common stock warrants outstanding (all of
      which are currently exercisable) at December 31, 1998:


                                          APPLICABLE
                                            COMMON    EXERCISE  EXPIRATION
                                            SHARES      PRICE      DATE

[S]                                         [C]       [C]          [C] 
Issued with initial public offering         880,000   $   3.14     1999
Issued with initial public offering         160,000       3.07     2001
Issued with initial public offering          80,000       9.75     2001
Incomex Earn-Out Settlement (Note 4)        155,384       3.25     2003
Issued with note payable (Note 6)         1,486,000       1.75     2001
Issued with note payable (Note 6)           500,000       1.75     2001
Issued with note payable (Note 6)           604,000       3.25     2003
Issued with note payable (Note 6)            80,000       2.50     2003
Issued with stock rescission (Note 7)       229,279       1.12     2002
Issued with note payable (Note 6)             5,000       1.75     2001
Issued with note payable (Note 6)            25,000       1.75     2001
Issued with offering agreement (Note 6)      10,000       1.44     2001
Issued with short-term notes payable         15,000       1.44     2001
Issued with offering agreement (Note 6)     121,100       1.75     2001
Issued with consulting agreement             50,000       2.88     1999
Issued with consulting agreement             10,000       3.60     2003
Issued with consulting agreement             10,000       3.00     2003
                                          ---------
           Total outstanding              4,420,763
                                          =========

      The weighted average exercise price of the warrants was $2.48 and $3.48
      and the weighted average remaining life of the warrants was 2.5 and 3
      years at December 31, 1998 and 1997, respectively.

      The 880,000 common stock warrants were issued in conjunction with the
      initial public offering of the Company's common stock during 1996. 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. As
      a result of the anti-dilutive provision, the exercise price at December
      31, 1998 was adjusted in accordance with the agreement to $3.14. 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.

                                    F-26

<PAGE>   56


      In connection with the offering during 1998 of promissory notes in a
      private placement underwritten by Berthel, the Company issued to Berthel
      warrants to purchase up to 121,100 shares of the Company's common stock at
      an exercise price of $1.75 per share and warrants to purchase up to 10,000
      shares at an exercise price of $1.44 per share. The warrants expire, if
      not exercised, on March 31, 2001.

      In conjunction with the initial public offering, the Company sold to the
      underwriters, warrants to purchase 160,000 shares at $3.07 and 80,000
      shares at $9.75, as adjusted, (the "Underwriters Warrants"), subject to
      adjustment for dilutive issuances of stock. The Underwriters Warrants are
      exercisable on October 21, 1997 or at any time thereafter for a period of
      four years from October 21, 1997.

      During 1996, the Company entered into a consulting agreement (the
      "Agreement") with a consultant to provide advisory services to the
      Company. 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 $2.88 per share. The Company assigned a fair value of
      $100,000 to the warrant. The warrant expires, if not exercised, on
      December 20, 1999.

10.   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.

                                      F-27

<PAGE>   57


      A summary of stock option activity under the 1993 Plan during the years
      ended December 31, 1998 and 1997, is summarized as follows:

                                          WEIGHTED
                                          AVERAGE
                                          EXERCISE    OPTION PRICE
                                           PRICE       PER SHARE       SHARES

        Balance at January 1, 1997         $ 1.81     $      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
          Granted                                            2.00      30,927
          Cancelled                                          3.25      (1,000)
          Cancelled                                          2.00     (13,255)
                                           ------     -----------     ------- 
        Balance at December 31, 1998       $ 2.04     $1.81-$4.00     240,601
                                           ======     ===========     =======


      At December 31, 1998, options for 163,026 shares were exercisable (172,779
      at December 31, 1997), an additional 31,928 shares were available for
      future grants and the weighted average remaining life of the options
      outstanding was five years. The Company has reserved 272,529 shares of
      common stock in connection with the 1993 Plan at December 31, 1998 and
      1997.

      During 1997, the Company completed the development of the Murdock
      Communications Corporation 1997 Stock Option Plan (the "1997 Stock Option
      Plan"). During 1998, the Company amended the number of shares allocated to
      1,727,471. 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.

                                      F-28

<PAGE>   58


      A summary of stock option activity under the 1997 Stock Option Plan for
      the years ended December 31, 1998 and 1997, is as follows:


                                        WEIGHTED
                                        AVERAGE
                                        EXERCISE     OPTION PRICE
                                         PRICE         PER SHARE       SHARES

                
        Balance at January 1, 1997      $    -     $       -             -
          Granted                                         3.25        225,629
          Granted                                         4.16         10,000
          Granted                                         3.13         20,000
                                        ------     -----------      ---------
        Balance at December 31, 1997    $ 3.28     $3.13-$4.16        255,629
          Granted                                    2.25-3.50        400,000
          Granted                                         3.13         17,000
          Granted                                         2.81        165,000
          Granted                                         2.75        535,000
          Granted                                         2.00          4,073
          Granted                                         2.25        225,629
          Cancelled                                       3.25       (225,629)
          Cancelled                                       2.00         (1,745)
                                        ------     -----------      ---------
        Balance at December 31, 1998    $ 2.65     $2.00-$4.16      1,374,957
                                        ======     ===========      =========


      Compensation expense of none and $10,000 was recorded in connection with
      the grant of these options for the years ended December 31, 1998 and 1997,
      respectively. At December 31, 1998, options for 893,561 shares were
      exercisable (25,000 at December 31, 1997), an additional 352,514 shares
      were available for future grants and the weighted average remaining life
      of the options outstanding was 6 years. The Company has reserved 1,727,471
      shares of common stock in connection with the 1997 Stock Option Plan at
      December 31, 1998.

      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
      1998 and 1997 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:


        
                                                       1998            1997
        
         Net loss attributable to 
           common shareholders       As reported   $  (348,851)   $(7,935,015)
                                     Pro forma      (2,348,214)    (8,073,015)
         
         Net loss per common share   As reported   $      (.06)   $     (1.89)
                                     Pro forma            (.43)         (1.92)
        

                                      F-29

<PAGE>   59


      The weighted average fair values at date of grant for options granted
      during 1998 and 1997 were estimated to be $1,999,400 and $138,000,
      respectively. The Company's calculations were made using the Black-Scholes
      option pricing model with the following weighted average assumptions: ten
      years expected life; stock volatility of 153% in 1998 and 51% in 1997;
      risk-free interest rate of 6% in 1998 and 1997; 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 1998 and 1997 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.

11.   INCOME TAXES

      The provision for income taxes consisted of the following for the years
      ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                           1998          1997
      <S>                                              <C>            <C>
      Current:
        Federal                                        $     --       $      --
        State                                               74,466          5,402
                                                       -----------    -----------
                 Total                                 $    74,466    $     5,402
                                                       ===========    ===========
</TABLE>



      The provision for income taxes for the years ended December 31, 1998 and
      1997 is less than the amounts computed by applying the statutory federal
      income tax rate of 34% to the loss before income taxes due to the
      following items:
<TABLE>
<CAPTION>
                                                           1998          1997
      <S>                                              <C>            <C>
      Computed expected amount                         $   (34,000)   $(2,684,200)
      Amortization of goodwill                             295,100           --
      Meals and entertainment                               11,200          8,000
      Officer's life insurance                               5,700          8,600
      State income taxes, net of federal tax benefit        74,466          3,500
      Change in valuation allowance                       (278,000)     2,669,502
                                                       -----------    -----------
        Income tax provision                           $    74,466    $     5,402
                                                       ===========    ===========
</TABLE>



      At December 31, 1998 the Company has net operating loss carryforwards for
      federal income tax purposes of approximately $13 million ($11 million at
      December 31, 1997) to use to offset future taxable income. These net
      operating losses will expire, if unused, from December 31, 2008 through
      2013.

      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 during 1996 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 of approximately $4.5 million 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.

                                      F-30

<PAGE>   60

Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                1998              1997
<S>                                                          <C>             <C>   
Deferred tax assets:
  Current:
    Allowance for doubtful accounts receivable                $   150,000    $    49,000
                                                              -----------    -----------

  Noncurrent:
    Intangible asset amortization and valuation allowance         213,000        227,000
    Differences in net book value of property and equipment       700,000        999,000
    Capital lease adjustment                                      242,000      1,134,000
    Deferred income                                                  --           19,000
    Carryforward of net operating loss                          4,917,000      4,072,000
                                                              -----------    -----------
                                                                6,072,000      6,451,000
                                                              -----------    -----------
Total deferred tax assets                                       6,222,000      6,500,000
Valuation allowance for deferred tax assets                    (6,222,000)    (6,500,000)
                                                              -----------    -----------
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.

12.   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, 1998, 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:
         1999                                   $1,351,929   $   11,646   $1,363,575   $   91,325
         2000                                    1,351,929        2,608    1,354,537       42,294
         2001                                    1,232,304          997    1,233,301       10,951
         2002                                    1,064,828           --    1,064,828        9,780
         2003                                      177,472           --      177,472        7,742
                                                ----------   ----------   ----------   ----------
         Minimum rental payments                 5,178,462       15,251    5,193,713   $  162,092
                                                                                       ==========
         Less amounts representing interest      1,190,555        1,327    1,191,882
                                                ----------   ----------   ----------
                                                 3,987,907       13,924    4,001,831
     
         Less amounts due within one year          858,102       10,652      868,754
                                                ----------   ----------   ----------
         Capital lease obligations due
          after one year                        $3,129,805   $    3,272   $3,133,077
                                                ==========   ==========   ==========
</TABLE>

      As of December 31, 1998, the Company was current on all lease payments to
      Berthel. However, subsequent to year end, the Company has not made the
      February 1999 and March 1999 payments. Berthel only has the right to
      demand that the Company cure this violation, but has not made such a
      demand as of March 22, 1999.


                                      F-31
<PAGE>   61


      Rent expense under operating leases for the years ended December 31, 1998
      and 1997 was $30,196 and $32,921, respectively.

      As of February 27, 1998, the Company entered into an agreement with
      Berthel to provide $700,000 of lease financing. The financing bears
      interest at 14%. In connection with the lease financing, warrants to
      purchase 350,000 shares of the Company's common stock were issued at an
      exercise price of $1.44 per share. As of June 30, 1998, Berthel funded the
      entire $700,000 of lease financing. These warrants were exercised on
      December 31, 1998.

      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 assigned a
      fair value of $157,000 to the warrants, that has been capitalized as
      deferred lease restructuring costs. These warrants were exercised on
      December 31, 1998.

      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 and Strategica Capital Corporation ("Strategica") 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 PIC. The proceeding does not specify a dollar amount of damages.
      The contempt motion was denied by the Bankruptcy Court on November 4,
      1998. Strategica filed a motion for rehearing on November 16, 1998, which
      was denied by the Bankruptcy Court on December 2, 1998. Strategica filed a
      notice of appeal of the adverse ruling on December 11, 1998. PIC filed a
      motion for attorneys' fees and costs on November 24, 1998, and a hearing
      was conducted by the Bankruptcy Court on January 28, 1999 with respect to
      PIC's motion. Strategica's appeal and PIC's motion for attorneys' fees and
      costs are both currently pending. No assurance can be given as to the
      ultimate outcome of this matter. No loss, if any, has been recorded in the
      consolidated financial statements with respect to this matter.

      Incomex and EILCO Leasing Services, Inc. ("Eilco"), a creditor of Incomex,
      have commenced an arbitration proceeding to resolve a dispute regarding a
      loan agreement between Incomex and Eilco. Eilco claims that Incomex is in
      violation of certain covenants of the loan agreement, including provisions
      relating to certain obligations of Incomex to make payments to Eilco based
      on Incomex's income from telecommunications services provided to a group
      of hotels in Mexico. This matter is scheduled for an arbitration hearing
      on April 21, 1999. Eilco is seeking the amount due on the loan and
      additional damages which may be in excess of $1,000,000 plus attorney
      fees. The Company's position is that it owes only the amount due on the
      loan and is not in violation of the covenants. Accordingly, the Company
      has not recorded any loss in the consolidated financial statements with
      respect to this matter in excess of the amount due on the loan. No
      assurance can be given as to the ultimate outcome of this matter.

                                     F-32

<PAGE>   62


      On July 20, 1998, Operator Communications, Inc. ("Oncor") filed a lawsuit
      in the District Court of Dallas County, Texas against the Company,
      Incomex, and an unrelated third party. Oncor alleges that the defendants
      improperly terminated a long distance service agreement with Oncor and
      claims damages based on amounts which Oncor alleges to have advanced to
      the Company, lost profits for the period in which the Company is alleged
      to have breached the contract, attorneys' fees and for interference with
      contractual relations in an unspecified amount of not less than $100,000.
      The Company has asserted a counterclaim for accounting, breach of
      contract, misrepresentation and payment of attorneys' fees. This case is
      at a preliminary stage and it is not possible to assess fully the merits
      of Oncor's claims. The Company intends to defend the claims against it and
      Incomex vigorously but no assurance can be given to the outcome of this
      matter. The Company has accrued $108,000 as a reserve in connection with
      this matter at December 31, 1998 in accordance with SFAS No. 5 "Accounting
      for Contingencies." There can be no assurance that the loss, if any, will
      not exceed the reserve established by the Company

      W.B. McKee Securities, Inc. ("McKee") filed suit against the Company in
      U.S. District Court for the District of Arizona alleging breach of an
      investment banking agreement relating to finders' fees for the PIC/ATN
      acquisition. The Company and McKee entered into a settlement agreement in
      the first quarter of 1999 with respect to this matter. Pursuant to the
      settlement, the Company has agreed to pay $100,000 to McKee in
      installments over a three-month period in return for a general release of
      all claims by McKee. The effectiveness of the settlement agreement and
      McKee's release is contingent on the timely payment by the Company of the
      settlement amount. The settlement amount of $100,000 has been accrued by
      the Company as of December 31, 1998.

      On October 1, 1998, the Company entered into an Amended and Restated
      Employment Agreement with Thomas C. Chaplin, Chief Executive Officer and
      Guy O. Murdock, Chairman of the Board. Each of the Amended and Restated
      Employment Agreements has a term through December 31, 2001. Pursuant to
      the Amended and Restated Employment Agreements, Messrs. Chaplin and
      Murdock will receive base salaries of not less than $250,000 and $150,000,
      respectively. In addition, each of them will be eligible to participate in
      the Company's bonus plan and other executive compensation plans. Each
      Amended and Restated Employment Agreement contains a provision restricting
      competition with the Company for a period of two years following
      termination of employment. Mr. Chaplin's Amended and Restated Employment
      Agreement provides that if his employment is terminated by the Company for
      any reason other than for cause, Mr. Chaplin will be entitled to receive
      severance at an annual rate of $150,000 for two years, provided, however,
      that if his employment is terminated by the Company or by Mr. Chaplin for
      any reason within 180 days after a sale of the Company, Mr. Chaplin will
      be entitled to continuation of his then effective base salary for three
      years. Mr. Murdock's Amended and Restated Employment Agreement provides
      that if his employment is terminated by the Company for any reason,
      including for cause, Mr. Murdock will be entitled to receive severance at
      an annual rate of $150,000 for two years, provided, however, that if his
      employment is terminated by the Company or by Mr. Murdock for any reason
      within 180 days after a sale of the Company, Mr. Murdock will be entitled
      to continuation of his then effective base salary for three years.

      On January 1, 1999, the Company entered into an Amended and Restated
      Employment Agreement with Colin P. Halford, President. The Amended and
      Restated Employment Agreement has a term through December 21, 2001 and
      provides that Mr. Halford will receive a base salary of not less than
      $150,000. In addition, Mr. Halford will be eligible to participate in the
      Company's bonus plan and other executive compensation plans. The Amended
      and Restated Employment Agreement contains a provision restricting
      competition with the Company for a period of two years following
      termination of employment. Mr. Halford's Amended and Restated Employment
      Agreement provides that if his employment is terminated by the Company for
      any reason, including for cause, Mr. Halford will be entitled to receive
      severance at an annual rate of $150,000 for two years, provided, however,
      that if his employment is terminated by the Company or by Mr. Halford for
      any reason within 180 days after a

                                     F-33


<PAGE>   63

      sale of the Company, Mr. Halford will be entitled to continuation of his
      then effective base salary for three years.

      On November 1, 1998, the Company and its wholly owned subsidiaries PIC and
      PIC-R entered into an Employment Agreement with Bonner B. Hardegree,
      Executive Vice President of PIC. The Employment Agreement has a three-year
      term, with automatic one-year renewals unless either party gives notice of
      termination at least one year in advance of the end of the term. Pursuant
      to the Employment Agreement, Mr. Hardegree will receive a base salary of
      not less than $144,000. In addition, Mr. Hardegree will be entitled to
      participate in the Company's bonus plans and other compensation plans and
      fringe benefits for executive officers. The Employment Agreement contains
      a provision restricting competition with the Company for a period of six
      months following termination of employment unless termination is by the
      Company without cause or by Mr. Hardegree for good reason. Mr. Hardegree's
      Employment Agreement provides that if his employment is terminated by the
      Company without cause or by Mr. Hardegree for good reason, Mr. Hardegree
      will be entitled to continuation of his then effective base salary for a
      period equal to the greater of (i) one year, or (ii) the remaining term of
      the Employment Agreement.

13.   RELATED PARTY TRANSACTIONS

      The Company conducts a significant amount of business with Berthel and
      other affiliated entities. Berthel provided lease and other financing
      services, including underwriting, to the Company. The Company also had 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 with related
      parties.

      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.
      Revenues of $463,976 and $603,644 were generated for the years ended
      December 31, 1998 and 1997, respectively. Further, the Company had call
      processing receivables from the hotels included under the agreement of
      $135,983 and $79,500 at December 31, 1998 and 1997, respectively. The
      agreement provides 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 was 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, 1997, the Company paid 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, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                        1998          1997
      <S>                                               <C>        <C>
      Consulting expense                                $ 73,630   $ 35,181
      Interest expense on related party notes payable    289,922     20,778
      Commissions to minority shareholder                360,000    360,000
      Interest expense on notes payable to Berthel       133,681     38,622
      Lease payments to Berthel                          840,415    491,175
      Commissions and related fees to Berthel            141,518    115,250
      Rental of aircraft                                    --       33,116
</TABLE>
                                      F-34


<PAGE>   64



14.   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, 1998 and 1997.

15.   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.

      The estimated fair values of the Company's other significant financial
      instruments at December 31, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>

                                 1998                       1997
                       ------------------------   -----------------------
                         CARRYING      FAIR        CARRYING        FAIR
                          AMOUNT      VALUE         AMOUNT        VALUE

      <S>               <C>          <C>          <C>          <C>
      Note receivable   $  806,229   $  806,229   $     --     $     --
      Long-term debt     3,858,324    3,367,119    4,795,473    4,795,473
</TABLE>



16.   BUSINESS SEGMENT INFORMATION

      In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
      and Related Information", was issued effective for fiscal years ending
      after December 15, 1998. The Company's reportable segments are structured
      into a decentralized organizational structure resulting in three
      stand-alone business units. While all three business units are engaged in
      the business of providing telecommunications services to hospitality and
      payphone businesses, they are managed separately largely due to a series
      of acquisitions the Company completed in 1997 and 1998, as discussed in
      Notes 3 and 4.

      The Company's three reportable segments are PIC/ATN, Incomex and MTS. The
      Company provides long-distance telecommunications services to hotels and
      payphone owners in the United States through the PIC/ATN business unit.
      The services include, but are not limited to, live operator services,
      credit card billing services, automated collection and messaging delivery
      services, voice mail services, telecommunications consulting and providing
      carrier services for long-distance telecommunications companies. The
      incoming operator assisted calls are processed with the PIC/ATN operators
      on location. The Incomex business unit provides international operator
      services to hotels and payphone owners in Mexico on international calls
      from Mexico to the United States. The MTS business unit was created in
      1998 to meet the needs of the hospitality telecommunications management
      market by providing database profit management services and other value
      added services. The MTS business unit was formerly the operating unit of
      the Company responsible for marketing of AT&T operator services until the
      contract was terminated during the fourth quarter of 1998.

      The accounting policies of the reportable segments are the same as those
      described in Note 1. The Company evaluates the performance of its
      operating units based on income (loss) from operations.


                                      F-35


<PAGE>   65


      Summarized financial information concerning the Company's reportable
      segments is shown in the following table (amounts expressed in thousands).
      The "Other" column includes the effect of eliminating inter-business unit
      transactions.

                                                    MTS AND
                                PIC/ATN    INCOMEX CORPORATE   OTHER    TOTAL
        1998:
        Revenues                $24,094   $ 7,921   $ 5,262   $(3,289)  $33,988
        Income (loss) from 
          operations              2,544     1,958    (2,596)              1,906
        Total assets              5,591     2,463    16,818    (2,194)   22,678
        Depreciation and 
          amortization expense      436        12       771       629     1,848
        Capital expenditures        800       134       357               1,291
        
        1997:
        Revenues                  1,369               7,048               8,417
        Income (loss) from 
          operations                 17              (7,064)             (7,047)
        Total assets              2,642               7,728      (984)    9,386
        Depreciation and 
          amortization expense       73               2,070               2,143
        Capital expenditures        284                 357                 641

         
      Financial information relating to the Company's operations by geographic
      area was for the years ended December 31, 1998 and 1997 as follows
      (amounts expressed in thousands):


                                                               1998       1997
        
        Revenues:
          United States                                       $26,009   $ 8,417
          Mexico                                                7,921      --
          Canada                                                   58      --
                                                              -------   -------
                   Total                                      $33,988   $ 8,417
                                                              -------   -------
        
        Long-lived assets (excluding investments):
          United States                                       $15,719   $ 7,883
          Mexico                                                1,704      --
                                                              -------   -------
                   Total                                      $17,423   $ 7,883
                                                              =======   =======

17.   INVESTMENTS

      During 1998, the Company reached an agreement to invest in ACTEL
      Integrated Communications, Inc. ("ACTEL") of Mobile, Alabama. As of
      December 31, 1998, the Company had invested $694,067, and from January 1,
      1999 through March 22, 1999, had invested an additional $586,000. On March
      10, 1999, the Company and ACTEL entered into an Investment Agreement
      whereby, the Company receives one share of Series A Convertible Preferred
      Stock for every dollar invested. Each Series A Convertible Preferred Stock
      earns a 10% dividend and may be converted to 1.46 shares of common stock
      at any time on or before March 10, 2002 at the option of the Company.

                                      F-36

<PAGE>   66


      ACTEL, based in Mobile, Alabama, will provide local exchange
      communications services as a facility-based carrier. ACTEL has received
      public service approval to become a competitive local exchange carrier in
      both Louisiana and Alabama and will begin to offer voice and data
      communications services to medium and small businesses in April 1999.
      Initially, resale service will commence in Mobile, Alabama and in New
      Orleans, Louisiana, through an interconnect agreement with Bell South. An
      advanced Lucent AnyMedia(TM) MultiService Module is being installed in
      Mobile. It will enable proprietary retail services to be provided to the
      Mobile, Alabama market later this spring. At that time ACTEL will own its
      local service lines, sell monthly services and become a facility-based
      carrier providing proprietary voice and data services to the targeted
      market of medium and small businesses.

      During 1998, the Company reached an initial lending/investment agreement
      with AcNET de C.V. ("AcNet") of Mexico. As of December 31, 1998, the
      Company had invested $806,229, and from January 1, 1999 through March 22,
      1999, had invested an additional $403,000. The initial agreement in August
      1998 provided for an option to purchase 49% of AcNet for $2 million. The
      option was renewed beyond the original October 1998 expiration and revised
      in March 1999 to the following: the Company may lend up to $2 million to
      AcNet on a 10% note and convert the note to preferred stock that earns 20%
      of the earnings of AcNet, as defined in the agreement. The preferred
      stock may be redeemed by AcNet for 120% of its face value plus any
      accumulated dividends. Additionally, the Company possesses an option to
      acquire 49% of the common stock of AcNet in exchange for 450,000 shares of
      the Company's common stock and the guarantee by the Company of certain
      debt of AcNet by March 30, 1999. As of March 22, 1999, no amounts had been
      guaranteed by the Company. The option extends through July 31, 1999.

      AcNet provides internet services and network services to businesses,
      governments and consumers in Mexico by authority of concessions provided
      by the Mexican government. As of March 1999, AcNet provided internet
      services to over 13,000 customers and network services to several of the
      major corporations in Mexico generating annualized revenues of
      approximately $1.5 million.

18.   SUBSEQUENT EVENT

      During the first quarter of 1999, the Company received proceeds of 
      $1,500,000 from the issuance of promissory notes to related parties. The 
      notes bear interest at 14% and the accrued interest and principal are due 
      on November 30, 1999. Warrants to purchase 300,000 shares of the 
      Company's common stock were issued in relation to the promissory notes at 
      an exercise price of $3.25 per share.





                                      F-37