<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A

                               (AMENDMENT NO. 2)


(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
      OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
                        TO

        FOR THE TRANSITION PERIOD FROM                TO

                         COMMISSION FILE NUMBER 0-20444

                                PLD TELEKOM INC.
                    (FORMERLY PETERSBURG LONG DISTANCE INC.)
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                 <C>
                     DELAWARE                                           13-3950002
          (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER IDENTIFICATION NO.)
          INCORPORATION OR ORGANIZATION)

            505 PARK AVENUE, 21ST FLOOR                                    10022
                   NEW YORK, NY                                         (ZIP CODE)
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (212) 527-3800

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

<TABLE>
<CAPTION>
          TITLE OF EACH CLASS           NAME OF EACH EXCHANGE ON WHICH REGISTERED
          -------------------           -----------------------------------------
<S>                                     <C>
                 NONE                                     NONE
</TABLE>

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

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                       14% SENIOR DISCOUNT NOTES DUE 2004
                   9% CONVERTIBLE SUBORDINATED NOTES DUE 2006
                                (TITLE OF CLASS)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

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

     As of March 29, 1999, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $69,858,027.00. Such aggregate market
value was computed by reference to the closing sale price of the Common Stock as
reported on the National Market segment of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all executive officers, directors and beneficial owners
of more than ten percent of the Common Stock of the Company.

     As of March 29, 1999, there were 37,846,789 shares of the registrant's
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     None.

     Unless the context indicates otherwise, the terms "PLD" and "Company" refer
to PLD Telekom Inc.

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<PAGE>   2

                                PLD TELEKOM INC.

       FORM 10-K/A ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 1998

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   68
Item 3.   Legal Proceedings...........................................   68
Item 4.   Submission of Matters to a Vote of Security Holders.........   68

PART II
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................   68
Item 6.   Selected Financial Data.....................................   72
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   73
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk...   90
Item 8.   Financial Statements and Supplementary Data.................   90
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosures...................................   91

PART III
Item 10.  Directors and Executive Officers of the Registrant..........   91
Item 11.  Executive Compensation......................................   93
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................  102
Item 13.  Certain Relationships and Related Transactions..............  103

PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................  106
</TABLE>



     PLD TELEKOM INC. HEREBY AMENDS ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998, FILED WITH THE COMMISSION ON MARCH 31, 1999, AS AMENDED
BY THE ANNUAL REPORT ON FORM 10-K/A (AMENDMENT NO. 1) FILED WITH THE COMMISSION
ON APRIL 28, 1999.

<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     PLD Telekom Inc. ("PLD" or the "Company"), through its operating
subsidiaries, is a major provider of local, long distance and international
telecommunications services in the Russian Federation, Kazakhstan and Belarus.
The Company's five principal operating businesses are: (i) PeterStar Company
Limited ("PeterStar"), which provides integrated local, long distance and
international telecommunications services in St. Petersburg through a fully
digital fiber optic network; (ii) Technocom Limited ("Technocom"), which,
through Teleport-TP, provides dedicated international telecommunications
services to Russian and foreign businesses in Moscow and operates a
satellite-based pan-Russian long distance network; (iii) Baltic Communications
Limited ("BCL"), which provides dedicated international telecommunications
services in St. Petersburg; (iv) ALTEL (known until May 1998 as BECET
International), which provides national cellular service in Kazakhstan and (v)
Belarus-Netherlands Belcel Joint Venture ("BELCEL"), which provides the only
national cellular service in Belarus. In addition, the Company is developing a
portfolio of international long distance products and services, under the name
"PLDncompass", targeted at carriers and corporate customers in the United
States, the United Kingdom and Europe which require telecommunications services
to and from the countries of the former Soviet Union.

     In August 1998, News America Incorporated, through an affiliate ("News"),
acquired a 38% stake in the Company in a series of transactions with the Company
and Cable and Wireless plc ("Cable & Wireless"). Prior to the completion of
these transactions, Cable & Wireless had been, since 1994, the Company's
principal shareholder. As part of these transactions, the Company acquired an
additional 11% interest in PeterStar and its 50% interest in BELCEL. See
"-- Recent Developments -- Transactions with Cable & Wireless and News."

     The Company's objective is to be a leading participant in the targeted
development of telecommunications infrastructure, products and services in the
emerging markets of the Russian Federation and other countries of the former
Soviet Union. The Company expects to achieve this goal through: (i) expanding
and further integrating its existing business and network infrastructure into
the public telecommunications networks; (ii) providing high quality national and
international long distance services in the Russian Federation; (iii) providing
additional value-added services such as wireless communications, fax, data and
Internet services as a means of developing new traffic streams; (iv) further
developing relationships with local and national strategic partners in the
Russian Federation and other countries of the former Soviet Union; and (v)
developing its "PLDncompass" international long distance business.

     The Company has several potential sources of cash flows, including fees
from management services, dividends, repayment of intercompany advances, lease
payments, payments under equipment sales contracts and payments from customers
of its "PLDncompass" business. The Company currently generates fees from
management services provided to certain of its operating subsidiaries. One of
its operating subsidiaries, ALTEL, paid two dividends in 1997 and three in
respect of 1998. Although its ability to generate dividend income from its other
operating businesses in the near future may be limited due to the cash flow
requirements of those businesses, the Company ultimately expects to receive
dividends from them in the future. The Company received payments in respect of
intercompany advances during the course of 1997 and 1998, and expects this to
continue in 1999. In relation to leases and equipment sales contracts entered
into with its operating subsidiaries, the Company started to receive payments in
1998. The Company received its first payment from "PLDncompass" customers at the
end of 1998 and expects to see revenues from this business grow in 1999.

     The Company's receivables (described above) are all denominated in U.S.
Dollars, as are its Senior Notes, its Convertible Notes and its Revolving Credit
Notes (all as hereinafter defined), which represent almost all of its
outstanding indebtedness. Certain of its operating subsidiaries have incurred
bank indebtedness, and are expected to continue to do so from time to time. All
such indebtedness has been, and is expected to continue to be denominated in
U.S. Dollars.
<PAGE>   4

     In general, PeterStar, ALTEL and, to a lesser extent, Teleport-TP post
their tariffs in U.S. Dollars, and receive payment in local currency at the U.S.
dollar exchange rate prevailing on the date of payment. These operating
businesses face an exchange risk to the extent that they experience any
difficulty in converting the local currency payment received into U.S. Dollars.
In addition, they face a risk that the local currency weakens against the U.S.
Dollar during the period between the customer instructing its bank to pay the
operating business and the day the payment is actually received by the operating
business. Historically, this time period has been short and the exchange risks
arising from this particular issue have therefore been minimal. However, the
Company's operating businesses experienced significant foreign exchange losses
in the third and, to a lesser extent, fourth quarters of 1998, due principally
to delays in clearing payments within the Russian banking system. In addition,
virtually all of Teleport-TP's tariffs for its domestic long distance service
are denominated in Russian Roubles, so that the Company is fully exposed to
exchange losses with respect to the revenues from this business. The revenues
from this business currently represent over 20% of Teleport-TP's total revenues,
and, as this business grows, so too will the amount and percentage of
Teleport-TP's revenues exposed to foreign exchange losses. See "Risk
Factors -- Country Risks -- Restrictions on Currency Conversion; Historical
Volatility in Currency Prices."

     The fostering of existing, and the creation of new, partnerships with local
and regional partners is crucial to the long-term success of the Company in this
environment. In its operating businesses, the Company's partners include:
Petersburg Telephone Network ("PTN"), the local telephone system operator in St.
Petersburg, and St. Petersburg Intercity & International Telephone ("SPMMTS"),
the gateway for national and international long distance calls to and from St.
Petersburg, which together hold an indirect 14% interest in PeterStar;
Kazakhtelekom, the state-owned national telecommunications operator in
Kazakhstan which is the holder of a 50% interest in ALTEL; and AO Rostelecom,
the primary long distance and international carrier in the Russian Federation,
which is a 44% shareholder in Teleport-TP. The Company will seek to continue
developing ventures with local partners who can provide: (i) assistance in
obtaining telecommunications operating licenses; (ii) access to network
facilities; and (iii) political support.

RECENT DEVELOPMENTS

  RUSSIAN ECONOMIC AND POLITICAL TURMOIL

     During 1998 there was considerable turmoil and uncertainty in the Russian
financial markets, prompted in large part by a drop in commodity prices and
economic problems in Russia, together with the crisis in the Asian financial
markets which began in late 1997. These developments were accompanied by a
substantial decline in the Russian stock market. These developments led the
Russian government to raise interest rates significantly and to seek special
assistance from the International Monetary Fund. In August 1998, the Russian
government announced a substantial widening of the trading band in which the
Russian Rouble would be permitted to float, together with a moratorium on
certain foreign debt payments. Thereafter the Rouble dropped substantially in
value and traded outside of the high end of the band, and the Russian government
did not intervene to stop this trading, thereby effectively acquiescing to a
major devaluation of the Rouble. In the latter part of 1998 and the first months
of 1999, the Rouble has further declined in value and this process is expected
to continue.

     Also in August 1998 the Russian government announced a 90-day moratorium on
debt repayments. This moratorium caused considerable difficulties for Russian
banks and businesses with hard currency obligations, as well as significantly
impairing the ability of such banks and businesses, as well as the Russian
government itself, to access the Western capital markets. The difficulties
experienced by the Russian banks in turn caused difficulties for their
customers, as bank transfers and deposits were frozen in many cases. The Russian
government itself has effectively defaulted on substantial amounts of its debt,
and is engaged in negotiations with Western banks and institutions (which reach
back several months) to restructure this indebtedness. Continuation of these
conditions for any significant period of time could have serious long-term
effects on the Russian economy. At the present time, it is impossible to predict
whether or when any resolution of these problems is likely.

                                        2
<PAGE>   5

     Also in August 1998, the Russian government experienced a significant
upheaval, with the dismissal of the reformist government led by Sergei Kiriyenko
and its replacement by one led by the current Prime Minister Yevgeny Primakov.
The current government has yet to propose a plan to address Russia's economic
and financial difficulties, one result of which has been to cause the
International Monetary Fund to delay further assistance to the Russian
government. At the same time, the fact that President Boris Yeltsin appears to
be playing a less active role in the day-to-day governing of the country, and
the possibility that he may decide (as he is constitutionally permitted) to once
more reshuffle his government, have created increased uncertainty about the
future political situation in Russia, which in turn has created additional
concern about the ability of the government to deal with the many problems
currently afflicting the Russian economic system. See "Risk Factors -- Country
Risks -- Russian Economic and Political Turmoil."

  TRANSACTIONS WITH CABLE & WIRELESS AND NEWS

     On August 14, 1998, following approval by the Company's shareholders, the
Company concluded a series of transactions with News and Cable & Wireless which
resulted, among other things, in the acquisition by the Company of: (i) an
additional 11% interest in its subsidiary PeterStar from News (immediately
following News' acquisition of such interest from Cable & Wireless); and (ii) a
50% interest in BELCEL and certain intercompany indebtedness from Cable &
Wireless. In connection with these acquisitions, the Company issued an aggregate
of 4.3 million shares of its Common Stock to News and Cable & Wireless. In
addition, Cable & Wireless sold to News its complete stake in the Company
(including the Common Stock issued by the Company to Cable & Wireless in
exchange for the interest in BELCEL and a warrant to purchase 250,000 shares of
Common Stock). As a result of these transactions, News now holds a 38% interest
in the Company and has become the Company's largest shareholder.

     The Company acquired its additional 11% interest in PeterStar by acquiring
100% of the shares of PLD Holdings Limited, a Bermuda company ("PLD Holdings"),
the owner of that 11% interest. The Company acquired its 50% interest in BELCEL
by acquiring all of the shares of CommStruct International Byelorussia BV, a
corporation organized under the laws of the Netherlands ("CIBBV"), which owns
such 50% interest.

  NEWS REVOLVING CREDIT AGREEMENT

     On November 30, 1998 (but effective September 30, 1998), the Company
entered into a revolving credit agreement with News (the "News Revolving Credit
Agreement") under which News agreed to advance up to $8.1 million to the
Company. On March 22, 1999, News increased the amount it would advance to $9.1
million and on April 22, 1999, News further increased the amount it would
advance to $9.55 million. Each advance under the News Revolving Credit Agreement
bears interest at an annual rate of 20% and is repayable on June 30, 1999.
Advances are evidenced by notes which, together with interest thereon, are
convertible at News' option into shares of Common Stock of the Company at
conversion rates determined as of the date of issue of the applicable note. In
addition, in the event that News guarantees obligations of the Company, a note
is issued reflecting the Company's reimbursement obligation should such
guarantee be called. Amounts so guaranteed are treated as advances under the
News Revolving Credit Agreement, meaning that they count with respect to the
$9.55 million ceiling on total advances. In addition, in the event a guarantee
is called, the Company will owe interest on its reimbursement obligation at the
annual rate of 20% calculated from the date payment by News is made under its
guarantee. Notes issued in respect of reimbursement obligations, together with
interest thereon, are also convertible into shares of Common Stock at conversion
rates determined as of their date of issue. News can cease making advances at
any time and for any reason. Currently, however, the full amount available under
the News Revolving Credit Agreement has been advanced or applied in respect of
News' guarantees. Of the total $9.55 million of notes issued, notes aggregating
$3.1 million have been issued in respect of guarantees of the Revolving Credit
Notes described below. See "Recent Sales of Unregistered Securities."

  TRAVELERS FINANCING

     In November 1997, in connection with its acquisition of additional
interests in Technocom, the Company issued $12.32 million in 12% Series A
secured revolving credit notes (the "Series A Notes") and $3.1 million
                                        3
<PAGE>   6

in 12% Series B revolving credit notes (the "Series B Notes" and, together with
the Series A Notes, the "Revolving Credit Notes"), to The Travelers Insurance
Company and The Travelers Indemnity Company (collectively, the "Travelers
Parties") pursuant to a Revolving Credit Note and Warrant Agreement dated
November 26, 1997 between the Company and the Travelers Parties (the "Revolving
Credit Agreement"). Both the Series A Notes and the Series B Notes are secured
by the Company's inventory and accounts receivable. In addition, the Series A
Notes are secured by 28 of the Technocom shares acquired. In addition to issuing
the Series A and Series B Notes, the Company also issued to the Travelers
Parties a total of 423,000 warrants to purchase Common Stock at $8.625 at any
time up to December 31, 2008 (the "Travelers Warrants").

     Pursuant to the terms of the Series A Notes and the Series B Notes, the
Company had the option of making certain "targeted reductions in commitment"
with respect to such Notes commencing in July 1998, or of issuing additional
warrants to purchase shares of the Company's Common Stock (the "Additional
Warrants") at an exercise price of $8.625 each, expiring on December 31, 2008.
The Company elected not to make any such "targeted reductions in commitment"
and, as a result, issued a total of 182,000 Additional Warrants to the Travelers
Parties.

     The Company made required amortization payments of $1,000,000 on each of
July 31, 1998 and August 31, 1998, which were applied in reduction of the Series
B Notes. The $1,100,000 balance due under the Series B Notes was payable in full
on September 30, 1998 but, as a result of News issuing a guarantee in respect of
the amount due, the maturity date was deferred by the Travelers Parties to
December 31, 1998. Required amortization payments of $1,000,000 due on each of
October 31, 1998 and November 30, 1998 were also deferred by the Travelers
Parties to December 31, 1998, also as a result of News issuing guarantees in
respect of the amounts due.


     On December 31, 1998 the Series A Notes and the amounts deferred under the
Series B Notes would have matured and the balance due become payable in full.
Taking into account the amounts deferred, the total that would have been due
under the Series A and Series B Notes as of that date was $13,420,000, of which
$3,100,000 was guaranteed by News as described above. Prior to December 31,
1998, the Travelers Parties issued a deferral of the payment of the amounts due
to January 15, 1999. The Travelers Parties have given the Company a further
series of payment deferrals since December 31, 1998 with respect to the amounts
due under the Series A and Series B Notes, the last of which was given on
February 28, 1999 and defers payment of the Notes to April 30, 1999. The Company
has continued to make monthly interest payments due on the Notes on a current
basis.



     Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes were not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes would have
been reset at $0.01 per share. In addition, in the event of such non-payment, on
December 31, 1998 and on the last day of each succeeding month until the
Revolving Credit Notes have been repaid in full, the holders of the Series A
Notes would have been entitled to receive 70,000 additional warrants to purchase
shares of the Company's Common Stock and the holders of the Series B Notes would
have been entitled to receive 32,000 additional warrants to purchase shares of
the Company's Common Stock, in each case at a price of $0.01 per share. All such
warrants, referred to as "Default Warrants", would have had an expiration date
ten years after their respective dates of issue.



     The Travelers Parties have expressly reserved their rights to claim all of
the Default Warrants to which they would be entitled under the formula described
above, and also to claim that the exercise price of the Travelers Warrants and
the Additional Warrants has been reset at $0.01 per share. Management of the
Company believes that the Travelers Parties have no basis for such claims and,
if asserted, they will not be successful.


     Management of the Company is actively engaged in pursuing ways in which to
settle the Company's obligations to the Travelers Parties. While management
believes that, as long as progress towards settlement of such obligations is
being made, the Travelers Parties will be willing to agree to additional payment
deferrals, there can be no assurance that they will do so, or that they will not
demand payment in full of the Series A and Series B Notes. The Company's failure
to make payment in full could result in a cross-default under and
                                        4
<PAGE>   7

acceleration of the Senior Notes and the Convertible Notes. This in turn could
require the Company to resort to extraordinary measures, including making sales
of assets under distressed conditions or ultimately seeking the protection of
the bankruptcy courts. See "Risk Factors -- Risks Involving the
Company -- Repayment of Travelers Financing" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

  THE CONSENT SOLICITATION

     In March 1998, the Company commenced a consent solicitation (the "Consent
Solicitation") directed at the holders of its outstanding 14% Senior Discount
Notes due 2004 (the "Senior Notes") and 9% Convertible Subordinated Notes due
2006 (the "Convertible Notes" and, together with the Senior Notes, the "Notes")
requesting their consent to certain amendments to the Indentures governing such
Notes, intended to give the Company more flexibility in conducting its business
and also to clarify certain provisions of those Indentures.

     The amendments were approved by the requisite number of holders of the
Notes and, following this, The Bank of New York, as trustee under the
Indentures, the Company and certain other parties executed a supplemental
indenture, dated March 20, 1998 (the "Supplemental Indenture"), bringing the
amendments to the Indentures and certain related documents into effect. In
addition, the Company issued a total of 123,000 five-year warrants to purchase
1.8 shares of Common Stock at $6.90 per share to the holders of the Senior
Notes, and a total of 22,700 five-year warrants to purchase 2 shares of Common
Stock at a price of $6.90 per share to the holders of the Convertible Notes. If
all of these warrants are exercised, the Company will issue a total of 266,800
shares of Common Stock. These warrants are referred to herein collectively as
the "Consent Warrants."

     Unless the context clearly requires otherwise, references to the "Notes",
the "Senior Notes" and the "Convertible Notes" shall refer to such securities as
so amended pursuant to the Consent Solicitation, and references to the "Senior
Note Indenture", the "Convertible Note Indenture" and the "Indentures" shall
refer to such indentures, as so amended pursuant to the Consent Solicitation.

  REGISTRATION OF OUTSTANDING SECURITIES; COMPLETION OF EXCHANGE OFFER

     In June 1996, the Company issued the following securities to a limited
number of U.S. institutional investors (the "June 1996 Placement"): (i)
$123,000,000 aggregate principal amount at maturity of Senior Notes; (ii)
123,000 warrants (the "Placement Warrants") to purchase an aggregate of
4,182,000 shares of Common Stock (the "Placement Warrant Shares"); and (iii)
$26,500,000 aggregate principal amount of Convertible Notes. The Senior Notes
and the Placement Warrants were initially issued as units (the "Units") and the
Placement Warrants became separable from the Senior Notes on December 10, 1996.


     On July 30, 1998, the Securities and Exchange Commission declared effective
registration statements relating to (i) an exchange offer (the "Exchange Offer")
pursuant to which the outstanding Senior Notes (the "Outstanding Senior Notes")
would be exchanged for identical Senior Notes which had been registered under
the Securities Act of 1933 (the "Exchange Notes"); (ii) the resale by the
holders thereof of the Convertible Notes and the shares of Common Stock issuable
upon the conversion thereof; and (iii) the resale by the holders thereof of the
Placement Warrants and the Placement Warrant Shares. As a result of the
effectiveness of the registration statement relating to the Convertible Notes
and the Common Stock issuable upon conversion thereof, Special Interest (as
defined in the Indentures) ceased to be payable with respect to the Convertible
Notes on July 30, 1998.


     The Exchange Offer with respect to the Senior Notes commenced on August 28,
1998 and was completed at the close of business on October 9, 1998, with the
holders of 100% of the Outstanding Senior Notes tendering such Notes for
Exchange Notes. Upon completion of the Exchange Offer, the Exchange Notes were
issued in exchange for such Outstanding Senior Notes, in the form of a global
Exchange Note held through the facilities of the Depository Trust Company. As a
result of the completion of the Exchange Offer, Special Interest ceased to be
payable with respect to the Senior Notes on October 9, 1998.

                                        5
<PAGE>   8

  INCREASED INTEREST RATE ON INDEBTEDNESS


     Under the terms of the Senior Notes and the Revolving Credit Notes, the
interest rate payable increased if the Company had not raised $20.0 million in
additional equity by May 31, 1998. The Company did not complete such an equity
offering by such date and accordingly the interest rate on the Senior Notes
increased from 14% to 14.5% per annum, and the interest rate on the Revolving
Credit Notes increased from 12% to 15% per annum, in each case effective June 1,
1998. Such rates revert to their former levels once the equity offering has been
completed. Interest due on the Senior Notes (at 14.5% per annum) accreted until
December 1, 1998, and thereafter is payable in cash, semi-annually, on each June
1 and December 1 thereafter.


CORPORATE STRUCTURE

     The following chart shows the corporate structure of the Company and its
material interests (but also including intermediate holding companies and
special purpose financing subsidiaries such as NWE Capital (Cyprus) Ltd. ("NWE
Cyprus"), PLD Holdings, PLD Capital Asset (U.S.) Inc. ("PLDCA") and PLD Asset
Leasing Limited ("PLD Leasing")), together with the percentage of equity
ownership of the Company and Technocom in each operating subsidiary and other
significant investments.

                                        6
<PAGE>   9

                          [CORPORATE STRUCTURE CHART]
---------------
(1) The Company holds its interests in a number of its subsidiaries through NWE
    Cyprus to take advantage of the double taxation treaty between Cyprus and
    the Russian Federation.

(2) Of its total 71% interest in PeterStar, the Company holds 60% through NWE
    Cyprus and 11% through PLD Holdings, a former subsidiary of Cable & Wireless
    which the Company acquired from News in August 1998. The other shareholder
    of PeterStar is Telecominvest (29%), which is in turn owned 51% by an
    affiliate of Commerzbank AG, a major German bank, 25% by PTN and 24% by
    SPMMTS, and which was formed by PTN and SPMMTS to act as a holding company
    for their respective interests in a number of telecommunications ventures in
    Northwest Russia.

(3) In November 1997, the Company acquired an additional 29.65% of the ordinary
    shares in Technocom, bringing its total interest to the current 80.40% As a
    result, the remaining interests in Technocom are beneficially owned by: (i)
    Plicom Limited (14.57%), an Irish company beneficially owned by the family
    interests of Mr. Mark Klabin ("Plicom"); and (ii) Elite International
    Limited (5.03%), an Irish company beneficially owned by a trust advised by
    Dr. Boris Antoniuk ("Elite"). The Company understands that Dr. Antoniuk has
    the power to exercise the voting rights of the shares in Technocom owned by
    Elite. The remainder of the interests held by Plicom and Elite are subject
    to put and call

                                        7
<PAGE>   10

    arrangements with the Company. See "-- Risk Factors -- Risks Involving the
    Company -- Technocom Minority Shareholders' Put Options."

    Technocom also holds an effective 100% interest in Space Communication
    Services (SCS) Limited, a company organized under the laws of Guernsey,
    Channel Islands ("SCS"), which acts as Teleport-TP's marketing arm for the
    selling and administration of TV broadcasting services, and a 50% interest
    in Rosh Telecom Limited, a telecommunications equipment distributor, which
    it is currently negotiating to sell to Plicom.

(4) The Company holds its 50% interest in ALTEL through its wholly owned
    subsidiary, Wireless Technology Corporations Limited ("WTC"), a corporation
    organized under the laws of the British Virgin Islands, which in turn is
    wholly owned by NWE Cyprus. The other 50% interest in ALTEL is currently
    held by Kazakhtelekom, a Kazakh joint stock company, formerly wholly owned
    by the government of Kazakhstan, which operates the public telephone network
    in that country. In May 1997, the Kazakh government announced the sale of a
    40% stake in Kazakhtelekom to Daewoo. However, in March 1998, it was
    reported that Daewoo had sold a portion of its stake (reported to be
    approximately 10%) to an unnamed third party. It was later confirmed that
    Daewoo had sold its entire stake in Kazakhtelekom to Kazcommertzbank, a
    commercial bank based in Kazakhstan. It is understood that the Kazakh
    government is seeking to sell a 15% stake in Kazakhtelekom to private
    investors.

(5) In 1996, Technocom's interest in Teleport-TP was increased to its current
    49.33% (56% voting interest) through: (i) its acquisition of a 55.51%
    interest in JV Technopark Limited ("Technopark"), which owns a 7.5% interest
    in Teleport-TP; and (ii) the acquisition by Roscomm Limited, a Guernsey
    company ("Roscomm"), which is 66.67% beneficially owned by Technocom and
    which already owned a 5% interest in Teleport-TP, of an additional 5%
    interest previously held in trust for the VVC, the All-Russian Exhibition
    Center, a business park in Moscow. Technocom holds 38.5% of its beneficial
    interest directly, 6.67% through its 66.67% beneficial interest in Roscomm
    (which owns a 10% interest in Teleport-TP), and 4.16% through its 55.51%
    interest in Technopark (which owns a 7.5% interest in Teleport-TP). The
    remaining 44% voting interest in Teleport-TP is held by Rostelecom.

    Teleport-TP holds a 25% interest in Gorizont-RT, a cellular
    telecommunications operator in the Republic of Sakha. The remaining
    interests in Gorizont-RT are held by Sakhatelekom (51%) and local business
    partners (24%).

(6) Technocom holds a 49% interest in MTR-Sviaz, a wireline telecommunications
    operator in Moscow. The remaining 51% interest is held by Mosenergo, the
    Moscow city power utility.

(7) The Company holds its 50% interest in BELCEL through its wholly owned
    subsidiary CIBBV, a corporation organized under the laws of the Netherlands.
    The remaining interests in BELCEL are currently held by the Minsk City
    Telephone Network (45%) and the Minsk Regional Telephone Company (5%).
                            ------------------------

     The Company's executive offices are located at 505 Park Avenue, 21st Floor,
New York, New York, 10022 (telephone number (212) 527-3800).


     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PLDI" and the Toronto Stock Exchange under the symbol "PLD". It is
also traded on the Berlin, Frankfurt and Munich Stock Exchanges. Prior to March
6, 1997, the Company's trading symbol on the Nasdaq National Market was "PLDIF."


     As of December 31, 1998, the Company had 15 employees, all of whom were
full-time.

TELECOMMUNICATIONS IN THE FORMER SOVIET UNION

     In the Soviet era, telecommunications in the Russian Federation and other
republics of the former Soviet Union were government owned and designed
principally to serve the defense and security needs of the state. The telephone
network itself was highly centralized, reflecting the centralized nature of the
Soviet economy. Telephonic links were directed towards the center of the network
while neglecting inter-regional links. As a

                                        8
<PAGE>   11

result, the ability to direct calls between regions without going through the
center remains limited, which in turn has been a major constraint on economic
growth in regional markets. Being committed to a "hub and spoke" network, the
former Soviet Union never developed a trunk "backbone" capable of providing
network expansion on a nationwide basis.

     Consistent with a political philosophy which limited access to the world
outside the former Soviet Union, all international calls originating in the
former Soviet Union until 1992 were routed through a single international
exchange in Moscow which had a capacity of only 3,200 circuits. Due to the
inadequacies of the public network, as well as to ensure secrecy, many
individual ministries and security organizations, including the Communist Party
itself, established their own private nationwide networks. These private
networks absorbed a substantial amount of the relatively limited resources
available for investment in telecommunications. At the same time, these networks
currently present an opportunity for the development of a national network apart
from the existing public network.

     With the break-up of the Soviet Union and the liberalization of the
economies of its former republics, the demand for telecommunications services
increased significantly. However, the governments of the countries of the former
Soviet Union did not have the significant capital necessary for the development
of the telecommunications infrastructure. As a result, they have actively
encouraged market liberalization, privatization and foreign investment in the
telecommunications sector. This has resulted in significant development in the
areas of fixed wire overlay systems, private networks and cellular and data
services. They have also made their own efforts to develop a basic
telecommunications infrastructure, but lack of capital, exacerbated by recent
difficult economic conditions, has made progress towards this goal slow.

  TELECOMMUNICATIONS IN THE RUSSIAN FEDERATION

     The Russian telecommunications sector has experienced substantial
difficulty in meeting the rapidly growing demand for telecommunications services
in the Russian Federation. At the local level, there has been a significant
growth in joint ventures providing discrete telecommunications services, such as
international access and cellular service. While the bulk of this activity has
been in Moscow and St. Petersburg, it has occurred in other regions as well.
This trend has been encouraged by the Russian government which has issued over
10,000 licenses through the Ministry of Communications of the Russian Federation
(the "Former MOC") (which as of March 17, 1997 has been replaced by the Russian
Federal Committee on Telecommunications and Informatics (the "RFCTI")) to these
new service providers. Most joint ventures involve a Russian and a foreign
partner. Many of these joint ventures have remained moribund; however, where
they have commenced operations, there has been an immediate improvement in
telecommunications services in the targeted areas. Since much of the marketing
activity has been aimed at the business community, the benefits of these
improvements have not been (and for the foreseeable future are not likely to be)
widely felt by residential customers, particularly those outside major
metropolitan areas.

     When the Former MOC was reorganized in 1991, the Russian government decided
to convert each regional telephone center into a separate, privatized company
with the government maintaining the controlling interest in the company. There
are 89 of these regional telephone companies. The government's interests in most
of these companies are now held through Sviazinvest.

     The national and international long distance market in the Russian
Federation is dominated by Rostelecom, a formerly state-owned enterprise which
has been privatized, but in which the Russian government continues to hold a 38%
equity and 51% voting interest through Sviazinvest. Until 1991, Rostelecom was
the monopoly provider of national and international long distance service. Since
then, the Former MOC has issued licenses to approximately twenty other providers
of international services. Rostelecom itself has entered into a number of joint
ventures to develop its network and services, including through its
participation in Teleport-TP.

     Sviazinvest, which was originally 100% owned by the Russian State Property
Committee (now the Ministry of State Property), is a holding company for the
Russian government's interests in the local and regional telephone companies
across the Russian Federation. In general, Sviazinvest has a portfolio that
comprises holdings of 35% of the equity interest and 51% of the voting
interests, with a number of notable
                                        9
<PAGE>   12

exceptions, in these telephone companies. Sviazinvest is represented on the
board of directors of each of these companies, but does not participate in the
day-to-day management of the operations.

     In 1997, it was reported that, notwithstanding previously announced plans
to have Sviazinvest compete with Rostelecom, the Russian government had
consolidated its telecommunications holdings in Sviazinvest and Rostelecom by
transferring its shareholding in Rostelecom (38% of the common stock, and 51% of
the voting stock) to Sviazinvest. The balance of the shares in Rostelecom remain
in the hands of private investors. In April 1997, the government announced that
it was seeking to sell 49% of Sviazinvest in two auctions, one as to a 25% stake
open to Russian and foreign investors and the other as to a 24% stake open only
to Russian investors. In July 1997, the government announced that the 25% stake
had been sold to a consortium which included Oneximbank and Renaissance Capital,
for a purchase price of $1.875 billion. Following this auction, the Russian
government announced its intention to increase the size of the other stake being
sold to 25% minus two shares. The schedule for the sale of the second stake has
been delayed following the August 1998 financial crisis, and the structure of
any such sale (including whether foreign participation will be permitted) has
not been announced. While it is not yet clear how the proceeds of this sale will
be employed, it is understood that the government wishes to have a substantial
part, if not all, of the proceeds allocated to its current budget deficit. Prior
to the August 1998 crisis, Sviazinvest had announced plans to raise $400 million
through a Eurobond offering in 1998, but that offering was also delayed as a
result of the Russian financial crisis. In light of all of the foregoing, it is
unclear what impact the consolidation of the government's telecommunications
holdings and the auction of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.

     The provision of telecommunications services is currently regulated by the
Law on Telecommunications which came into effect on February 22, 1995 (the
"Telecommunications Law"). While the Former MOC had significant regulatory
powers prior to the passage of the Telecommunications Law, principally through
the issuance of new licenses, telecommunications had traditionally been viewed
as the province of the military and security services. The Telecommunications
Law placed control of the Russian telecommunications network (except for the
networks of the government, military and security forces) in the hands of a
civilian regulatory authority. Under the Telecommunications Law, the Former MOC
was, and now the RFCTI is, charged with the responsibility of coordinating the
development of telecommunications in the Russian Federation and regulating the
provision of services. Specifically, the Former MOC was and now the RFCTI is,
given authority to issue telecommunications licenses, allocate frequencies and
certify equipment for use in Russia. The Telecommunications Law also establishes
a number of important principles in the telecommunications area, including the
guarantee of equal access for all providers of telecommunications services and
safeguards for private business activity in the telecommunications sector. The
Telecommunications Law extends these principles to foreign companies and
individuals, thereby recognizing the need to encourage foreign participation in
the development of the Russian telecommunications sector.

     The Federal Committee for Regulating Natural Monopolies in
Telecommunications (now under the government of the Russian Federation) has been
empowered to regulate international and, since mid-1997, domestic long distance
tariffs, together with interconnect fees for public operators in the Russian
Federation. In addition, this Committee has the authority to establish the
framework for local fees and tariffs which, in the future, will be regulated by
newly-established Regional Committees for Regulating Natural Monopolies. At the
current time, regional governments set and regulate local tariffs, and it is
currently uncertain as to how, and when, local tariff regulation will be
transferred to the Regional Committees. While the Company's businesses are not
public operators and will therefore not be directly affected by any tariff
regulation imposed by the Federal or Regional Committees, their own pricing
policies are inevitably influenced by the tariffs charged by public operators.

     While the RFCTI appears to have succeeded to all of the powers and
authorities of the Former MOC (with the exception of tariff regulation), it is
not yet clear whether it will in fact continue to operate in the same manner,
and wield the same influence as the Former MOC. In particular, it is not clear
whether the RFCTI will be able to control the actions of local governmental and
other regulatory authorities who may endeavor to impose their own informal
licensing and other regulatory requirements or conditions on operators. In
addition, in the area of tariff regulation, it is not yet clear how the various
Committees will interact with the
                                       10
<PAGE>   13

regional governments, and the regional governments may continue to seek to
regulate tariffs in their regions. See "Risk Factors -- Risks Involving the
Company -- Regulatory Uncertainties."

     Moscow.  Local public fixed-line telephone service in Moscow is provided by
MGTS, a recently privatized company which operates the telephone network in
Moscow. MGTS currently serves approximately 4,900,000 subscribers, of which 79%
are residential. Approximately 10% of the switches on the MGTS network are
digital and digital service generally is available to only 10% of its
subscribers. Since local calls are free, the bulk of MGTS' revenue comes from
line rental. However, MGTS has announced plans to introduce call metering as
part of a major redevelopment of its network, although the timing of the
introduction of such metering remains unclear.

     MGTS has also announced a number of initiatives designed to develop the
Moscow public network, including projects to be carried out jointly with AT&T,
Rostelecom and Siemens.

     In addition to MGTS, there are a number of digital overlay networks in
Moscow which involve a Western investor (e.g., GPT, Belgacom, Lucent
Technologies (formerly, AT&T Network Systems ("Lucent")) and Global TeleSystems
("GTS")) and a local Russian partner (usually MGTS, the Central Telegraph Office
or Rostelecom). Finally, there are a number of private network facilities owned
by the local and regional utilities that provide services to a limited market
segment.

     MGTS routes long distance traffic through a gateway exchange called MMTS.
This traffic is directed to the Rostelecom long distance network for delivery to
the regional telephone operators. International traffic is also passed to
Rostelecom via MMTS. The international network of Rostelecom is supported by a
combination of Russian and Western satellite capacity, including that provided
by Teleport-TP, and international fiber optic cable capacity. However, there
continues to be considerable congestion at the MMTS and Rostelecom switching
centers due to their inability to keep up with demand. Certain calls to other
countries of the former Soviet Union can still be routed through the Rostelecom
network although this network primarily consists of analog switching and is
characterized by significant call failure rates. For callers on private
networks, international access is generally provided by direct satellite
facilities, such as Teleport-TP. The telecommunications market in Moscow also
supports four cellular operators (two analog and two digital) and nine paging
networks.

     A majority of the voting stock of MGTS is held by Sistema, a holding
company with ties to the Moscow city government which has significant interests
in the Moscow telecommunications, tourist and other industries.

     St. Petersburg.  The telephone network serving St. Petersburg is operated
by PTN, the local telephone company which was privatized in May 1993. PTN has
1,800,000 lines in operation, amounting to a nominal penetration rate of 36%.
PTN's intra-city traffic is carried through a network of thirty-four transit
exchanges distributed throughout St. Petersburg and all connected to each other
in a "cobweb" fashion. The existing PTN network is outdated and overloaded,
producing congestion, interference, "crossed lines" and poor transmission
quality. Only 23% of PTN's exchanges are digital/electronic, and some of its
equipment is over 40 years old. PTN has recently installed a modern fiber optic
loop which, once fully operational, will significantly enhance its ability to
deliver traffic throughout its service area. PTN has also entered into a number
of other, primarily wireless, telecommunications joint ventures.

     PTN routes long distance traffic through a gateway exchange operated by
SPMMTS. This traffic is then passed to the Rostelecom long distance network for
delivery throughout the rest of the Russian Federation and the other countries
of the former Soviet Union. The Company acquired a 10.4% equity interest in
SPMMTS in 1994, which it sold in June 1997.

     SPMMTS is the gateway for international calls to and from St. Petersburg.
SPMMTS has a number of options for the forwarding of international calls. Such
calls can be directed to an international gateway owned by St. Petersburg
International ("SPI"), a joint venture between British Telecommunications plc
("BT") and SPMMTS which has satellite connections to the UK. In addition, SPMMTS
has access, via Rostelecom, to the undersea cable between Russia and Denmark for
international traffic. Finally, SPMMTS has the option to route international
traffic through the international gateway in Moscow. In addition to SPMMTS,
there are
                                       11
<PAGE>   14

several independent dedicated networks which provide international
telecommunications access in St. Petersburg, including BCL. Under the terms of
its license, PeterStar is required to route its long distance and international
traffic via the public network gateway.

     The telecommunications market in St. Petersburg also supports three
cellular operators (two analog and one digital) and a number of paging networks.

     In 1994, PTN and SPMMTS formed Telecominvest, originally as a joint venture
to act as a holding company for their respective interests in a number of
telecommunications ventures in Northwest Russia. Subsequently, in 1996, a
Commerzbank affiliate acquired a 51% interest in Telecominvest. Currently
Telecominvest owns 29% of PeterStar, 31% of North West GSM ("NW GSM"), the
digital 900 MHZ operator for St. Petersburg, 49% of Neva Cable and 5% of Neda
Paging. It is understood that PTN intends to transfer all or part of its
interests in Delta Telecom and Neda Paging to Telecominvest, subject to final
agreement with their joint venture partners. Although as a result of this
activity Telecominvest will hold interests in regional cellular operators which
are customers of PeterStar, as well as other ventures which may be possible
customers for PeterStar, it is unclear what the exact nature of Telecominvest's
plans are with respect to these holdings or how such plans will affect
PeterStar.

  TELECOMMUNICATIONS IN KAZAKHSTAN

     At the time of Kazakhstan's independence in 1991, the Kazakh telephone
system consisted of the same outdated network equipment as the other telephone
systems in the former Soviet republics. Currently, only 11% of Kazakhstan's
population of approximately 17,000,000 has telephone lines. The existing
national telephone network consists of approximately 1,900,000 lines, of which
330,000 are in Almaty. Due to the poor condition of much of the
telecommunications infrastructure in Kazakhstan, basic telephone service is
characterized by poor transmission quality. However, some modernization has
taken place during the last few years and quality is improving. While the
installed exchange switching capacity has not increased significantly, the
introduction of digital exchanges will make for easier future expansion.

     The national network is served by trunk switches in what were the 19
original regional centers throughout the country. New transit switches supplied
by Alcatel, Lucent and others have been installed in 15 of the 19 regional
centers, and three more will be installed by the summer of 1999. Some digital
local exchanges have been installed in 16 of the regional centers, although many
electromechanical exchanges are expected to remain in use throughout the country
for some time.

     While the majority of inter-regional transmission capacity is still analog,
a limited amount of digital transmission has been added over some routes. Low
capacity digital microwave has been introduced on several routes, and a high
capacity microwave has been installed between Astana and Petropavlovsk. The
existing fiber optic cable between Astana and Karaganda will be extended to
Almaty by the summer of 1999, and there is a fiber optic spur from Petropavlovsk
to Omsk connecting to the Vladivostok-Moscow-Europe cable.

     Until 1992, the sole means of international access to and from Kazakhstan
was through a central switch located in Moscow. Kazakhstan acquired its own
international gateway in August 1992 when a new AT&T 5ESS switch was installed
in Almaty. It now has approximately 800 direct international circuits via
satellite with 22 countries, including the United States, Japan, Australia,
Germany, France, Israel and Turkey and via analog cables to Moscow. Kazakhstan
is also participating in the fiber optic link between China and the countries of
Central Asia and Europe, and this system is already being used to provide
inter-regional capacity between Almaty, Taraz and Chimkent.

     The Kazakh Law on Enterprises dated February 13, 1991 authorizes the
Cabinet of Ministers to issue licenses for certain types of activities in
Kazakhstan, including the provision of telecommunications services. The Cabinet
of Ministers delegated the authority to license telecommunication providers,
allocate frequencies and certify telecommunications equipment to the Kazakh
Ministry of Transport and Communications (the "KMOC"). Pursuant to this
delegation of authority, the KMOC adopted temporary procedures for the
consideration of applications for and the issuance of such licenses. In April
1995, President Nazarbayev issued a decree setting forth the licensing
procedures in greater detail. The decree also confirmed the authority of the

                                       12
<PAGE>   15

Cabinet of Ministers to grant licenses and the right of non-Kazakh companies and
individuals to equal treatment in the granting of licenses. However, apart from
these licensing procedures, there is virtually no other regulation in the
telecommunications sector, and no comprehensive regulatory framework.
Administration of the telecommunications sector is essentially left to the
discretion of the KMOC.

     Actual operation of the public telephone network is carried out by
Kazakhtelekom, which was created for this purpose in June 1994, as well as
regional operators. A variety of functions previously carried out by other
governmental entities, including representation of the Kazakh government in
international telecommunications matters and the planning and development of the
network in Kazakhstan, have been transferred to Kazakhtelekom. Kazakhtelekom has
been granted a revised license giving it specific authority to act as the
exclusive operator of the Kazakh national network and to represent the Kazakh
government in international telecommunications matters, along with a broad
series of powers to enable it to fulfil this function. Kazakhtelekom carries out
its functions under the oversight and direction of the KMOC. In May 1997, the
Kazakh government announced that it had sold a 40% stake in Kazakhtelekom to
Daewoo. However, in March 1998, it was reported that Daewoo had sold a portion
of its stake (reported to be approximately 10%) to an unnamed third party. It
was later confirmed that Daewoo had sold its entire stake in Kazakhtelekom to
Kazcommertzbank, a commercial bank based in Kazakhstan. It is understood that
the Kazakh government is seeking to sell a 15% stake in Kazakhtelekom to private
investors.

  TELECOMMUNICATIONS IN BELARUS

     Belarus, a former member of the Soviet Union, became an independent state
in 1991. Like Kazakhstan, Belarus' telephone system at the time of its
independence consisted of outdated network equipment. As of 1991, only 14% of
Belarus' population had telephone lines and, although improvements have been
made to the telephone system since then, as of 1995 that penetration rate had
risen only to 18%.

     All aspects of the telecommunications sector in Belarus are regulated by
the Ministry of Posts, Telecommunications and Informatics. In October 1994, the
Supreme Soviet of Belarus adopted its Communications Law, effective January
1995. Also in 1995, Beltelekom, the current monopoly national telephone operator
in Belarus, was formed through the combination of the Minsk local telephone
network, the long distance operator and other telecommunications entities
throughout the country.

                                       13
<PAGE>   16

PETERSTAR COMPANY LIMITED

  OVERVIEW

     PeterStar, in which the Company owns a 71% interest, operates a fully
digital, city-wide fiber optic telecommunications network in St. Petersburg that
is interconnected with the network of PTN, the local telephone company, as well
as the Russian national and international long distance systems. PeterStar
provides integrated, high quality, digital telecommunications services with
modern transmission equipment, including local, national and international long
distance and value-added services, to businesses in St. Petersburg. The
PeterStar network provides an alternative to the PTN network, which to date has
been characterized by significant capacity constraints. PeterStar is able to
provide integrated telecommunications services to business customers, including
users of high bandwidth voice, data and video communications services.
PeterStar's network is designed to support a wide range of telecommunications
products and services with a high degree of reliability. Additionally, PeterStar
provides the three cellular operators in St. Petersburg with access to digital
switching and transmission capacity which significantly improves their ability
to consistently receive and deliver their customers' traffic. As of December 31,
1998, PeterStar had a total of 168,166 active lines, of which 108,278 were
provided to cellular operators.

     PeterStar, which started limited service in 1993, generated net income for
the year ended December 31, 1998 of $17.8 million on operating revenues of $72.4
million, as compared to net income of $16.5 million on operating revenues of
$54.5 million for the year ended December 31, 1997. Subscriber lines installed
increased from 114,774 at the end of 1997 to 168,166 at December 31, 1998,
reflecting increased penetration of the business community, residential and
cellular operators. PeterStar accounted for 49.8% of the Company's operating
revenues for the year ended December 31, 1998, as compared to 47.6% for the year
ended December 31, 1997.

     PeterStar, a Russian closed joint stock company, was incorporated in 1992.

  STRATEGY

     PeterStar's strategy is to continue to meet the growing demands of business
customers and other network operators in St. Petersburg. PeterStar has recently
added incremental transmission capacity and upgraded its transmission network
from STM-4 to STM-16, as well as introducing new service features such as ISDN
capability, which allows simultaneous transmission of voice, data, video and
still images. In addition, as part of its strategic relationship with PTN,
PeterStar intends to continue to provide targeted support to PTN in its efforts
to upgrade and modernize its network. While the August 1998 financial crisis and
its aftermath have caused some slowdown in business activity, the business
environment in St. Petersburg remains stable, and the prospects for continued
growth of small to mid-sized Russian and foreign businesses remain reasonably
positive. PeterStar has placed increased emphasis on this market segment in
order to capitalize on what it considers to be a significant market opportunity.

     PeterStar is involved in several projects designed to expand its direct
dial services in St. Petersburg and Northwest Russia. PeterStar has undertaken
with PTN a major infrastructure project involving the replacement of analog
exchanges with digital exchanges for certain parts of the network on
Vassilievski Island, a city district in St. Petersburg. This project requires
the conversion of approximately 30,000 business and residential lines that have
previously been operated by PTN, after which such lines become a part of the
PeterStar network. In addition, PeterStar plans to further enhance its transit
network capabilities in order to provide continued support to the cellular and
other network providers in terminating traffic in St. Petersburg and to the
national and international gateway.

  PRODUCTS AND SERVICES

     PeterStar currently provides: (i) voice and data services to business and
residential customers; (ii) switched transit services for cellular and other
network operators; and (iii) value-added voice and data services. PeterStar
markets its products and services through its own direct sales force and agents
which target mainly corporate accounts.

                                       14
<PAGE>   17

     PeterStar also provides a number of value-added voice and data services to
complement the basic fixed network services it currently provides. PeterStar
believes that the ability to provide such services on the PeterStar digital
network is a key competitive advantage in the St. Petersburg marketplace.
Current services include the following:

     Data Services.  PeterStar provides high speed data links across the city of
St. Petersburg. These connections provide links between the computer networks of
banks and large companies, allowing for data interchange between a variety of
back office systems. The target customer for such services is the financial
sector, with the Russian Stock Market, Sberbank, Promstroibank, and Bank St.
Petersburg all currently using PeterStar's services. Other applications for
these high speed links, such as Reuters, utilize PeterStar to deliver
value-added services to their own customers.

     Frame Relay.  PeterStar operates a frame relay data network service as an
enhanced feature of its current service offering. Customers include Citibank,
the Russian Central Bank and the Russian Stock Market.

     ATM.  PeterStar has installed an ATM service, including eight switches, for
selected customers to complement its existing service offering. Customers
include Coca-Cola and financial institutions such as Promstroibank and Bank St.
Petersburg, and it is anticipated that an expansion of this service will take
place once market demand has been confirmed.

     Operator services.  PeterStar has provided operator assistance service
since the third quarter of 1995 pursuant to a 1995 agreement with SPMMTS. The
agreement with SPMMTS provides PeterStar with primary access to the "07" (long
distance) operators connecting customers on a non-automatic dial destination
throughout the Russian Federation and the other countries of the former Soviet
Union. Other operator services offered include conference calling and
person-to-person calling. PeterStar also plans to provide access to wider
databases including those provided by C.P.Y. Yellow Pages Limited, the Company's
wholly owned subsidiary which publishes a business-to-business directory for St.
Petersburg ("Yellow Pages").

     Calling Card Services.  In November 1995, PeterStar launched a direct dial
calling card service, enabling customers to dial directly through to the
PeterStar network when using a tone dial telephone. The service, which provides
both debit and credit card service, is also available via the PeterStar operator
service for pulse and rotary dial telephones. PeterStar has expanded this
service offering through co-operation with Comstar, a network operator in
Moscow, providing PeterStar customers access in Moscow. PeterStar is currently
considering a further expansion of its calling card platform in conjunction with
the development of the Teleport-TP national network facilities.

     Equipment Sales.  PeterStar offers customers a wide range of
telecommunications equipment as a means of enhancing its service. It offers
PBXs, key systems, handsets, and the full range of customer terminals including
Partner, Partner Plus, Eurogenesis and Definity. PeterStar also offers a
maintenance service for the equipment.

     ISDN.  PeterStar has installed an ISDN platform to service the demand in
the local marketplace. PeterStar also offers international ISDN services,
following agreement on the standard for C-7 signaling and the upgrading of the
international gateway.

     Internet.  Since August 1996, PeterStar has provided its subscribers access
to the Internet via WEBplus, a local Internet service provider. PeterStar
provides dial-up and dedicated network access to customers wishing to use the
WEBplus service.

  CUSTOMERS AND MARKETING

     PeterStar's customer base currently consists of three general categories:
(i) business customers; (ii) cellular and other network operators; and (iii)
residential customers. PeterStar's primary focus is the provision of voice and
data services to business customers, focusing on those which generate large
amounts of outgoing long distance and international traffic.

                                       15
<PAGE>   18

     PeterStar continues to experience a shift in its customer base, from
foreign companies (which tend to use the higher priced international services)
to predominantly Russian businesses and, to a lesser extent, residential
customers (for whom local calling is the principal usage).

     The following table illustrates, as of December 31, 1998, 1997, 1996 and
1995, the number of lines on the PeterStar network, set forth by customer
segment:

<TABLE>
<CAPTION>
                                  NO. OF              NO. OF              NO. OF              NO. OF
                                  LINES               LINES               LINES               LINES
                                  AS OF     % OF      AS OF     % OF      AS OF     % OF      AS OF     % OF
                                 DEC. 31,   1998     DEC. 31,   1997     DEC. 31,   1996     DEC. 31,   1995
TYPE OF CUSTOMER                   1998     TOTAL      1997     TOTAL      1996     TOTAL      1995     TOTAL
----------------                 --------   -----    --------   -----    --------   -----    --------   -----
<S>                              <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
Direct dial -- business........   42,388      25%     24,344      21%     12,482      24%      4,840      23%
Direct dial -- consumer........   17,500      11%      4,482       4%      2,310       4%      2,029       9%
Cellular.......................  108,278      64%     85,948      75%     37,213      72%     14,659      68%
                                 -------     ---     -------     ---      ------     ---      ------     ---
          Total................  168,166     100%    114,774     100%     52,005     100%     21,528     100%
                                 =======     ===     =======     ===      ======     ===      ======     ===
</TABLE>

  COMMERCIAL VOICE AND DATA SERVICES

     PeterStar's digital overlay network provides its customers with improved
connectivity, as well as a package of exchange services such as call waiting,
call forwarding and three-way conferencing. PeterStar offers its customers a
choice between new digital installations or the upgrading of existing PTN analog
connections to digital capability. New lines are provided via either traditional
copper connections or fiber optic cables.

     For domestic long distance connections, PeterStar offers dedicated digital
circuits to Moscow. Moscow is the destination of approximately 40% of the long
distance traffic from St. Petersburg, all other national traffic being directed
to the national switching center of Rostelecom in Moscow for delivery throughout
the Russian Federation.

     SPMMTS is the gateway for international calls to and from St. Petersburg
and SPMMTS has a number of options for the forwarding of international calls.
Such calls can be directed to an international gateway owned by SPI, a joint
venture between BT and SPMMTS which has satellite connections to the UK. In
addition, SPMMTS has access, via Rostelecom, to the undersea cable between
Russia and Denmark for international traffic. Finally, SPMMTS has the option to
route international traffic through the international gateway in Moscow. In
addition to SPMMTS, there are several independent dedicated networks which
provide international telecommunications access in St. Petersburg, including
BCL.

     Call revenues and total minutes in the commercial voice and data services
segment (i.e, non-cellular) amounted to $30.9 million, $22.5 million, $12.8
million and $6.2 million, and 220,022,000, 126,220,000, 71,128,000 and
19,995,000, in 1998, 1997, 1996 and 1995, respectively.

     Business Customers.  PeterStar's primary focus has been the provision of
telecommunications products and services to business customers, focusing on
those which generate large amounts of outgoing long distance and international
traffic. PeterStar targets both foreign and, increasingly, Russian businesses
which have requirements for high quality local, long distance and international
telecommunications services. As of December 31, 1998, Russian businesses, such
as Baltika Brewery and LenEnergo, represented approximately 70% of PeterStar's
42,388 business subscriber lines and foreign businesses, such as ABB, Rothmans
Inc., Pepsi, Alcatel, Nokia, McDonalds, Volvo, PricewaterhouseCoopers and Philip
Morris, represented the balance. Total call revenues from PeterStar's directly
connected business customers were $30.5 million in 1998.

     Residential Customers.  As of December 31, 1998, PeterStar had connected
17,500 residential customers to its network. Revenues from direct dial
residential customers (principally connection charges and line rentals) totaled
$0.7 million in 1998 (of which $0.4 million was call revenue). At present,
PeterStar does not directly receive any local call revenues from its residential
customers, but does bill and collect revenues for national and international
calls at the SPMMTS tariff. In 1999, PeterStar will complete a project with PTN
to

                                       16
<PAGE>   19

upgrade telecommunications services on Vassilievski Island, a project which is
increasing the number of residential customers on the PeterStar network.

  EXPANSION OF VOICE AND DATA SERVICES

     PeterStar has undertaken with PTN an infrastructure project centering on
the replacement of analog step-by-step and cross-bar exchanges with digital
telecommunications equipment for Vassilievski Island, a city district in St.
Petersburg. The project requires the conversion of a total of approximately
30,000 business and residential lines that were previously operated by PTN,
after which such lines become part of the PeterStar network and the users become
PeterStar customers. As of December 31, 1998, approximately 13,000 lines had
been converted, with the balance expected to completed in the first half of
1999. While the business customers are charged either PeterStar or PTN tariffs
(based on their traffic patterns), the residential customers pay PeterStar the
equivalent PTN rate for the line rental. PeterStar collects the revenues on
national and international calling from these customers, although the level of
such calling for residential customers, who are the bulk of the new customers,
is not substantial. The total cost of the project is estimated at approximately
$25 million, of which $13 million is for network infrastructure and the balance
for civil works and local network upgrades. This amount also includes
approximately $3 million for an upgrade to the core PeterStar overlay network.
As of December 31, 1998, a total of $23.7 million had been spent, representing
approximately 95% of the project's total cost.

     PeterStar also expects to increase its operating presence in Northwest
Russia through the targeted development of digital infrastructure to connect
business customers and to develop operational relationships with the regional
telephone companies. PeterStar is exploring the possibilities for closer
cooperation with both Teleport-TP and BCL in connection with the expansion of
its core business in St. Petersburg and the implementation of its strategy in
Northwest Russia.

     The implementation of this expansion in direct dial services involves a
variety of risks, including those set forth in "-- Risk Factors -- Risks
Involving PeterStar Company Limited and Baltic Communications Limited."

  CELLULAR SERVICES

     The three cellular operators in St. Petersburg currently utilize the
PeterStar network to deliver high quality services to their customers and
provide reliable access to the local, long distance and international networks.
PeterStar's digital infrastructure enhances the ability of the cellular
operators to consistently receive and deliver their customer's traffic, a
benefit that is not achievable by using the outdated PTN transmission network.
In addition, the lack of capacity on the PTN network provides a significant
constraint on the ability of the cellular operators to expand their capacity to
meet market demand. Access to the PeterStar network provides these cellular
operators with the additional capacity necessary to accommodate their planned
growth.

     The number of cellular customers in St. Petersburg has increased from
approximately 6,400 at December 31, 1994 to over 110,000 at December 31, 1998,
as St. Petersburg has become one of the fastest growing cellular markets in
Russia. The cellular operators in St. Petersburg experienced a drop-off in the
number of subscribers following the August 1998 crisis, although there are signs
that the subscriber numbers are beginning to recover. Subscribers are primarily
business customers who use cellular service as a mobile telecommunications tool
rather than as an alternative to the wireline network.

     The three cellular operators in St. Petersburg are:

     Delta Telecom.  Delta, the NMT 450 operator which is a joint venture
between PTN and an affiliate of MediaOne (formerly U.S. West Media Group, Inc.),
was connected to the PeterStar network in September 1995. As of December 31,
1998, the majority of Delta's subscribers (of which 20,789 were active) were
connected to the PeterStar network.

     North West GSM.  NW GSM, the digital 900 MHZ operator for the city which is
a joint venture between Sonera, Telia, Telenor, Lensvyaz and Telecominvest, has
been connected to the PeterStar system

                                       17
<PAGE>   20

since September 1994. As of December 31, 1998, all of NW GSM's subscribers (of
which 73,673 were active) were connected to the PeterStar network.

     Fora Communications.  Fora, a joint venture between Millicom International
Cellular ("Millicom") and the City of St. Petersburg, is an AMPS 800 cellular
system that has been connected to the PeterStar network since July 1994. As of
December 31, 1998, all of Fora's subscribers (of which 13,816 were active) were
connected to the PeterStar network.

     The following table sets forth, for each cellular operator, the number of
active lines connected to PeterStar at December 31, 1995, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
                                        DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
OPERATOR                                    1998           1997           1996           1995
--------                                ------------   ------------   ------------   ------------
<S>                                     <C>            <C>            <C>            <C>
Fora Communications...................     13,816         16,671          8,603         3,410
NorthWest GSM.........................     73,673         52,681         22,210         7,049
Delta Telecom.........................     20,789         16,596          6,400         4,200
</TABLE>

     Call revenues and total minutes in the cellular segment amounted to $12.2
million, $9.0 million, $5.2 million and $2.2 million, and 178,370,000,
119,096,000, 57,729,000 and 17,830,000 minutes, in 1998, 1997, 1996 and 1995,
respectively.

  NETWORK AND FACILITIES

     PeterStar's network and facilities give it the ability to provide advanced
digital services to the telecommunications market in St. Petersburg, services
that the Company believes PTN, with its primarily analog network, will be unable
to provide in the near term due to internal funding constraints. The PeterStar
network consists of digital exchanges which are connected by fiber optic cables,
advanced transmission systems and remote switching units and concentrators. The
fiber optic network forms twelve rings, permitting traffic to be re-routed in
the event that a cable is cut or damaged. The network is fully interconnected
with the PTN network, with direct and indirect connections via approximately 680
kilometers of fiber optic cable to all thirty-four PTN transit exchanges
distributed throughout St. Petersburg. These direct connections to all of the
primary PTN exchanges enable callers to by-pass congestion on the PTN network.
The fiber optic cables also provide direct links to the national and
international switch, providing PeterStar customers with high quality long
distance and international access. PeterStar expects that it will continue to
incrementally add switching, transmission capacity and local loop infrastructure
to its core network in order to address its target market in St. Petersburg and
regional points of presence.

     In addition to core network development, PeterStar, as part of its goal to
be the full service telecommunications provider to the business community in St.
Petersburg, has undertaken a number of specialized customer connections to its
network, tailoring the solution to the specific customers' needs. This involved
investment in, among other things, new cable, trunked radio, and customer
premises equipment. Customer contracts concluded in 1998 include those with the
Customs Authority, the Russian Mint, Lenexpo and Siemens.

     PeterStar has signed a contract with Tadiran, an Israeli wireless equipment
manufacturer, to supply 1,500 lines of wireless local loop infrastructure.
PeterStar has deployed such equipment where: (i) local loop infrastructure is
non-existent or of poor quality; and (ii) the cost of installing cable would be
prohibitive. As of December 31, 1998, PeterStar had in operation 809 wireless
local loop lines and plans on expanding the wireless local loop service offering
during 1999 based on customer demand.

     The PeterStar network currently consists of three AT&T 5ESS exchanges and
several remote concentrators. PeterStar's Vassilievski Island exchange now
serves as its main transit exchange, and is linked to the other PeterStar
exchange located in Ligovskaia, in the central business district of St.
Petersburg, as well as with PTN and SPMMTS. The Ligovskaia switch is being
upgraded in order to provide redundancy to the main Vassilievski Island transit
exchange. The Vassilievski Island exchange has the capacity to serve a large
number of customers, both in the immediate vicinity of Vassilievski Island and
at remote locations via the

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<PAGE>   21

fiber optic network. This capacity enables PeterStar to carry substantial
volumes of traffic to and from the PTN network to other network operators, such
as cellular, Internet and paging operators, and to provide high quality links
for long distance and international calls. PeterStar has added incremental
transmission capacity and upgraded its transmission network from STM-4 to
STM-16, as well as working on the provision of new service features. In
addition, as part of its strategic relationship with PTN, PeterStar intends to
continue to provide targeted support to PTN in its effort to upgrade and
modernize its network. See "-- Expansion of Voice and Data Services" and
"-- Risk Factors -- Risks Involving PeterStar Company Limited and Baltic
Communications Limited -- Dependence on PTN Facilities."

  BILLING, TARIFFS AND INTERCONNECTION CHARGES

     Billing

     Except for the residential and business customers on Vassilievski Island
(which are billed in Roubles at the PTN rate), PeterStar denominates its tariffs
in U.S. Dollars, with its customers paying the monthly invoice in Roubles at the
U.S. Dollar/Rouble exchange rate on the date when the customer instructs its
bank to make payment. By denominating its tariffs in U.S. Dollars (and
exchanging Roubles at the then current U.S. Dollar/Rouble exchange rate),
PeterStar reduces the exchange rate risk otherwise associated with transacting
business in a foreign currency. However, during the third and, to a lesser
extent, fourth quarters of 1998, significant delays occurred in the processing
of payments within the Russian banking system and led to exchange losses in
those periods. See "-- Risk Factors -- Country Risks -- Restrictions on Currency
Conversion; Historical Volatility in Currency Prices."

     Tariffs

     There are no specific regulations regarding tariffs charged by PeterStar
(except for customers on Vassilievski Island which are charged the PTN tariff).
PeterStar sets its tariffs taking into account those charged by PeterStar's
interconnect parties, namely PTN, SPMMTS and SPI, as well as competitive
pressures in the marketplace. PeterStar charges its customers for the
installation of equipment and initiation of service, line rental, local, long
distance and international calls and special services.

     In the period during which PeterStar has operated, there has been
significant price convergence between PeterStar and public network national and
international call tariffs. As PeterStar has widened its customer base, it has
reduced its national and international call tariffs. At the same time, public
network tariffs have increased for long distance access. Until PTN introduces
local call metering to its customers, PeterStar will not receive any local
calling revenues from its residential customers, and the timing of the
introduction of such metering remains unclear.

     PeterStar's published tariff for local calls differs according to whether
the call is made during peak times (8 AM to 8 PM) or at other times. For
domestic and international long distance calls, tariffs are based on the call's
destination and the time of the call. PeterStar offers discounts, based on call
volumes, for customers who make a large number of calls per month.

     PeterStar charges a flat per line installation charge for telephone lines
and for 2Mb/s digital circuits, regardless of the number of lines or circuits
installed. In addition, customers are charged a monthly rental charge for the
telephone lines and digital circuits.

     Business Customers.  PeterStar business customers are charged the full
PeterStar published tariffs for installation and initiation charges, line rental
and local, long distance and international calls. Certain discounts are given
for installations based on the number of lines installed at a single customer
location and for call volumes.

     Cellular Operators.  The cellular companies pay PeterStar for the
installation and lease of 2 Mb/s links, a connection charge for each number
connected and a monthly rental fee for each number, plus volume related call
charges.

                                       19
<PAGE>   22

     Residential Customers.  PeterStar currently receives line rental and
connection charges from residential customers at the PTN rate. PeterStar will
not receive local call charges from residential customers until PTN imposes such
charges and then will only receive charges at the PTN rate. Long distance and
international calls are billed directly by PeterStar. For residential customers
connected as part of the Vassilievski Island project, PeterStar collects all
revenues for long distance and international calling, with charges at the PTN
tariff level.

     Interconnection Charges

     PeterStar has been able to negotiate favorable tariffs for interconnection
fees and carrier charges with both PTN and SPMMTS. PeterStar's current
interconnect agreements with PTN and SPMMTS are open-ended agreements, while the
interconnection fees and carrier charges payable under the interconnect
agreements are subject to renegotiation between the parties from time to time.
Commencing in 1998, PeterStar has been required to pay a local line rental
charge to PTN, although roughly half of the fee otherwise payable during 1998
was offset against amounts owed to PeterStar by PTN in respect of the
Vassilievski Island project. The aggregate amount paid to PTN in 1998 for line
rental charges was $1.3 million. The amount of the 1999 line rental charged has
not yet been determined, but PeterStar expects once again to be able to offset
amounts owing from PTN against such charges during 1999. See "-- Risk Factors --
Risks Involving PeterStar Company Limited and Baltic Communications
Limited -- Dependence on Interconnect Parties."

  TELECOMMUNICATIONS LICENSES

     In June 1996, PeterStar was granted a license, which superseded a license
granted in November 1994, for an eight year term expiring November 2004 to
provide local, national and international telecommunications services within St.
Petersburg and the surrounding region. One of the conditions of this license is
that access to long distance and international communications be through the
public network. Other licenses that have been issued to PeterStar include a
dedicated network license (expiring September 2001), a data communications
license (expiring May 2001), a telematics license (expiring May 2001) and a
videoconferencing license (expiring June 2001). Based on its experience in
renewing existing, and obtaining new, licenses and its general knowledge of the
licensing environment in Russia, management of PeterStar believes that, so long
as they are being actively utilized, all such licenses will be renewed at the
end of their respective terms.

     The main PeterStar license, governing the provision of public
telecommunications services, sets the number of lines which PeterStar may have
in St. Petersburg and the surrounding region at 106,000, and requires that
capacity equal to 74,200 lines be introduced by June 1999. Based on its
experience in renewing existing, and obtaining new, licenses and its general
knowledge of the licensing environment in Russia, management of PeterStar
believes that the maximum and minimum number of lines are not strict
requirements but are instead designed to provide general guidance as to the
number of lines intended to be included on the system. As of December 31, 1998,
PeterStar had 168,166 lines, of which 108,278 were provided to cellular
operators. PeterStar does not believe that its license would be terminated or
re-negotiated, that it would be forced to reduce the number of its subscribers,
or that other penalties would be imposed, by reason of its exceeding its 106,000
line ceiling, but there can be no assurance that the RFCTI would not take a
different position which in turn could result in the revocation of the license
or its renegotiation on terms unfavorable to PeterStar or the imposition of
penalties. It is not possible to calculate the amount of any penalties which
might be imposed, which are in the discretion of the RFCTI.

     The dedicated network license permits PeterStar to provide long distance
and international telephone transmission services to dedicated network operators
(such as BCL) in St. Petersburg and the surrounding region for a term expiring
in September 2001. The dedicated network license sets the number of lines which
PeterStar may have at 30,000 and requires that capacity equal to 21,000 lines be
introduced by September 1999. Once again, based on its experience in renewing
existing, and obtaining new, licenses and its general knowledge of the licensing
environment in Russia, management of PeterStar believes that the maximum and
minimum number of lines are not strict requirements but are instead designed to
provide general guidance as to the number of lines intended to be included on
the system. However, there can be no assurance that the RFCTI would not take a
different position which in turn could result in the revocation of the licenses
or their
                                       20
<PAGE>   23

renegotiation on terms unfavorable to PeterStar or the imposition of penalties.
It is not possible to calculate the amount of any penalties which might be
imposed, which are in the discretion of the RFCTI. See "-- Risk Factors -- Risks
Involving PeterStar Company Limited and Baltic Communications
Limited -- Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses."

  EQUIPMENT AND OTHER OPERATING AGREEMENTS

     Equipment.  Lucent is PeterStar's primary network equipment supplier. In
recent years, equipment supply agreements have been entered into with Lucent for
the purchase of telecommunications equipment, including transmission systems,
switching equipment and related software, for the PeterStar network, including
for the Vassilievski Island project. In some cases, Lucent has provided vendor
financing, using Dutch export credit guarantees. In all other cases, the
equipment has been purchased by the Company and resold on an installment payment
basis to PeterStar.

     Cellular and Other Operators.  Pursuant to interconnect agreements with
Delta, NW GSM and Fora, PeterStar provides interconnect service from the
cellular networks to the local network and a gateway for long distance and
international networks. Traffic interconnections are linked and made through
PeterStar's switch system. The interconnect agreements provide for the following
payments to be made by each cellular operator to PeterStar based on 2 Mb/s trunk
connections: monthly lease fees for each trunk; per-subscriber number fees and
per-minute tariffs. The Delta agreement is for a one year term, renewable for
additional one year periods by mutual agreement. The NW GSM agreement is for a
minimum period of two years, after which either party may terminate upon not
less than three months prior written notice. The agreement with Fora is for two
years and may be extended by mutual agreement for successive five year periods.

  EMPLOYEES

     As of December 31, 1998, PeterStar had 412 employees, all of whom were
full-time. Of these employees, 411 were Russian nationals and one was an
expatriate manager. None of its employees is subject to a collective bargaining
agreement. PeterStar believes that its relations with its employees are good.

BALTIC COMMUNICATIONS LIMITED

  BUSINESS

     BCL, in which the Company acquired a 100% equity interest in April 1996,
provides international direct dial, international payphone and leased line
services for Russian and foreign businesses in St. Petersburg and the Leningrad
Oblast. BCL also offers a number of advanced broadband services, as well as
"carrier's carrier" services to other telecommunications operators. BCL has its
own switching and international transmission facilities in St. Petersburg, which
act as a gateway for corporate customers in both Moscow and St. Petersburg. The
BCL network consists of an international and local switch and capacity on the
international fiber optic cable via Finland to Sweden and the United Kingdom.
BCL's primary international carrier relationships are with Telia of Sweden,
Cable & Wireless Communications of the United Kingdom and Lattelekom of Latvia.
BCL rents local access from PeterStar and PTN to connect its customers in St.
Petersburg.

     BCL had a total of approximately 1,200 lines connected as of December 31,
1998 and generated approximately 10,408,000 million minutes of traffic for the
year ended December 31, 1998. BCL is currently investigating means to increase
the capacity on its network and to provide additional capacity for "carrier's
carrier" services.

     The Company endeavors to cross-sell the distinct service offerings provided
by PeterStar and BCL to their respective customer bases. For example,
PeterStar's marketing representatives are now also able to market BCL's
international private line services to PeterStar's and other corporate
customers. In addition, control of both PeterStar and BCL provides the Company
with the opportunity to: (i) potentially realize economies of scale at the
operational level (i.e. a single sales and customer services channel and
coordinated technical resources); and (ii) introduce new services to targeted
markets in a more efficient manner. In addition, PeterStar and BCL are exploring
the possibilities of closer cooperation in connection with the

                                       21
<PAGE>   24

expansion of their respective core businesses in St. Petersburg and the
implementation of their strategies in Northwest Russia.

     BCL generated net income for the year ended December 31, 1998 of $0.4
million on operating revenues of $9.9 million, as compared to net income of $0.8
million on operating revenues of $7.6 million for the year ended December 31,
1997. BCL accounted for 6.8% of the Company's operating revenues for the year
ended December 31, 1998, compared to 6.6% for the year ended December 31, 1997.

     BCL, a Russian closed joint stock company, was incorporated in 1991.

  TELECOMMUNICATIONS LICENSE

     BCL's primary license permits it to provide long distance and international
telephone, facsimile and data transmission services within St. Petersburg and
the surrounding region for a term expiring on December 31, 2003. Management
believes that, so long as it is being actively utilized, BCL's license will be
renewed at the end of its current term. BCL is not required to route its long
distance traffic through the facilities of SPMMTS, and has its own international
facilities providing cable access. However, BCL's license does not permit it to
interconnect with PTN's public network. BCL is therefore working with PeterStar
to explore providing integrated long distance and international solutions for
customers. The license sets the upper limit of subscribers to the BCL network at
100,000 and requires that 70,000 of these be in place by January 2001. BCL had a
total of approximately 1,200 lines as of December 31, 1998. Based on its
experience in renewing existing, and obtaining new, licenses and its general
knowledge of the licensing environment in Russia, management of BCL believes
that the maximum and minimum line numbers are not strict requirements but are
instead designed to provide general guidance as to the number of lines intended
to be included on the system. However, there can be no assurance that the RFCTI
would not take a different position which in turn could result in the revocation
of the license or its renegotiation on terms unfavorable to BCL or the
imposition of penalties. It is not possible to calculate the amount of any
penalties which might be imposed, which are in the discretion of the RFCTI. See
"-- Risk Factors -- Risks Involving PeterStar Company Limited and Baltic
Communications Limited -- Reliance on Telecommunications Licenses; Risks of
Revocation or Renegotiation of Licenses."

  EMPLOYEES

     As of December 31, 1998, BCL had 94 employees, all of whom were full-time.
Of these employees, 93 were Russian nationals and one was an expatriate manager.
None of its employees is subject to a collective bargaining agreement, although
there is a union representative at BCL. BCL believes that its relations with its
employees are good.

TECHNOCOM LIMITED

  OVERVIEW

     Technocom, in which the Company owns an 80.4% interest, is the Company's
holding company for its interests in various telecommunications ventures in the
Russian Federation outside of St. Petersburg and the surrounding region.
Technocom's principal asset is its 49.33% equity interest (56% voting interest)
in Teleport-TP, a Moscow-based long distance and international operator
targeting the commercial sector and other telecommunications operators with its
satellite-based telecommunications services. Technocom also holds a 49% interest
in MTR-Sviaz, a venture formed by Technocom and Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. See "-- Ownership and Management of Operating
Subsidiaries -- Technocom Limited."

     In addition, Teleport-TP is a 25% shareholder in Gorizont-RT, a GSM
cellular operator in the Republic of Sakha, an autonomous region within the
Russian Federation. Under the joint venture arrangements, Teleport-TP was
required to procure two GSM switches for Gorizont-RT; these have been supplied
by Technocom through a lease arrangement. In addition, Teleport-TP is the
primary carrier for long distance

                                       22
<PAGE>   25

traffic for both the cellular network and the local telephone company,
Sakhatelekom, which is the majority shareholder in Gorizont-RT.

     Technocom recorded a net loss for the year ended December 31, 1998 of $16.1
million on operating revenues of $22.2 million, as compared with a net loss of
$4.5 million on operating revenues of $21.0 million for the year ended December
31, 1997. Technocom accounted for 15.3% of the Company's operating revenues for
the year ended December 31,1998 as compared to 18.4% for the year ended December
31, 1997.

     Teleport-TP recorded a net loss for the year ended December 31, 1998 of
$4.5 million on operating revenues of $18.2 million, as compared with a net loss
of $2.8 million on revenues of $16.9 million for the year ended December 31,
1997.

     Technocom, an Irish company, and Teleport-TP, a Russian closed joint stock
company, were both organized in 1992.

  STRATEGY

     Teleport-TP has developed from being a provider of international
telecommunications services from a single point of presence in Moscow to a
company able to provide high-quality domestic and international long distance
services in multiple locations across the Russian Federation and certain other
countries of the former Soviet Union. Teleport-TP utilizes Western satellite
capacity and technology and the Company believes that there is a largely
untapped market for satellite-based services between various regions of the
Russian Federation due to the current poor quality, or total absence, of
terrestrial digital long distance lines in many areas. Installation of the first
phase of the long distance network commenced in the second half of 1996, with 36
sites installed as of December 31, 1998. Technocom has contracted with the
telecommunications equipment supplier Scientific-Atlanta, Inc. to supply
equipment for a total of 45 sites which, based on current plans, will be
installed by mid-1999.

     Technocom expects to further develop its group's presence in Moscow through
the targeted development of infrastructure via Teleport-TP and MTR-Sviaz, and
through co-operation agreements with other network providers to deliver value
added voice and data services to the corporate market. Teleport-TP and MTR-Sviaz
are presently working together to address the corporate market, with MTR-Sviaz
providing or arranging to provide the local infrastructure in Moscow, and
connecting customers to Teleport-TP for national and international access.

  TELEPORT-TP

     Overview

     Since 1994, Teleport-TP has operated an international telecommunications
network providing dedicated voice, data and video services, as well as
bandwidth, to Russian and foreign businesses and private telecommunications
networks. During 1998, Teleport-TP continued the installation of a long distance
network (installation of which commenced in 1996) which is being targeted to
high volume customers requiring high quality, reliable long distance service
across the Russian Federation. Targeted customers include: (i) regional public
telephone companies (Electrosviaz); (ii) local public telephone companies; (iii)
private cellular, wireline, data and other network operators; and (iv) corporate
users.

     Dedicated International Network Services

     Products and Services

     Voice and Data Services.  Teleport-TP provides international voice and data
services, as well as bandwidth, to a number of private networks in the Russian
Federation and to Russian and foreign businesses, including Rostelecom, the
primary national and international long distance carrier in the Russian
Federation and a 44% shareholder in Teleport-TP, Sprint and MTR-Sviaz. As of
December 31, 1998, Teleport-TP provided access to over 1,000 international
digital circuits to 25 operators in 22 countries, making it one of the largest
international carriers in the Russian Federation. Teleport-TP has opened up
direct routes to Georgia, Kazakhstan and Kyrgyzstan in the C.I.S.
                                       23
<PAGE>   26

     Teleport-TP provides these international telecommunications services
through access to two Intelsat satellites and one Eutelsat satellite.
Teleport-TP's arrangements with Intelsat and Eutelsat provide it with flexible
and reliable satellite capacity, allowing Teleport-TP to provide consistent,
high quality dedicated international telecommunications services to Russian and
foreign businesses. The Company believes these arrangements represent a
competitive advantage over carriers using less reliable Russian-made satellite
systems.

     In order to reach those countries to which it has not yet opened direct
routes, Teleport-TP has entered into carrier relationships with Deutsche Telekom
("DT") in Germany, AT&T in the United States and Kokusai Denshin Denwa Co., Ltd.
("KDD") in Japan. Teleport-TP receives at least the same accounting rates and
equal division of revenues from DT, AT&T and KDD as has been negotiated between
the predecessor to the RFCTI and the German, United States and Japanese
governments.

     Television Transmission.  An additional source of revenue for Teleport-TP
has been the provision of international circuits for the transmission of
television signals to broadcasters which require international transmission
capacity on an as-needed, rather than a scheduled, basis. Customers for this
service include Capital Cities -- ABC, NHK and Fuji TV of Japan and TV India.

     Customers and Marketing

     Rostelecom.  Rostelecom, the primary national and international carrier in
the Russian Federation and the holder of a 44% ownership interest in
Teleport-TP, is Teleport-TP's principal customer for dedicated international
network services. As of December 31, 1998, Teleport-TP leased approximately 800
active circuits via Intelsat and Eutelsat to Rostelecom, pursuant, as to the
Intelsat circuits, to a contract which was originally signed in December 1992
and is now automatically renewed for one year terms unless otherwise terminated
by either party and, as to the Eutelsat circuits, to a ten-year contract which
commenced in September 1995. Revenue from Rostelecom in 1998 totaled $5.4
million. Rostelecom utilizes Teleport-TP on traffic routes where it does not yet
have a direct terrestrial connection and where the cost of a terrestrial
connection would be prohibitive. On such routes, Teleport-TP provides Rostelecom
with a means of accessing high quality digital international circuits that are
not available via other Russian satellite or terrestrial means. See "-- Risk
Factors -- Risks Involving Technocom Limited and Teleport-TP -- Dependence on
Rostelecom as Customer; Necessity to Further Develop Customer Base."

     Carrier Relationships.  Teleport-TP, through its direct carrier
relationships, the most important of which is with KDD of Japan, delivers
incoming international traffic to its private network.

     Private Networks.  Teleport-TP also has relationships with a number of
business centers and private network operators. Teleport-TP's most important
private network customer to date has been Sprint Sviaz, a Russian subsidiary of
Global One, which leases 30 international circuits. Other customers include MTR-
Sviaz, Technopark, the Intourist Computer Center and the Oil House Business
Center.

     Network and Facilities

     Teleport-TP Network.  Teleport-TP's dedicated international
telecommunications network consists of an earth station (with three antennae),
an international gateway switch and fiber optic cable. These network facilities
are owned by Technocom and leased to Teleport-TP. The earth station consists of
two Standard-A 18.3 meter antennas linked to two Intelsat satellites, one of
which (at 342) serves Western Europe and the United States and the other of
which (at 62) serves the Far East, and a 13 meter antenna linked to a Eutelsat
satellite (at 36) which provides additional connectivity to European countries.

     Fiber optic cable links Teleport-TP's switch with its principal customers,
including the national network of Rostelecom, the national television switching
center in Ostankino, and a number of business parks, overlay network operators
such as MTR-Sviaz and Comstar, and state-owned utilities located in Moscow and
the Moscow region.

     Teleport-TP is connected to the facilities of MTR-Sviaz to terminate
certain traffic to users on the MTR-Sviaz network. MTR-Sviaz uses leased
circuits from a number of network providers, access to the Teleport-TP fiber
optic facilities, and the Mosenergo internal communications network to terminate
its calls. Teleport-TP also uses the MTR-Sviaz facilities to house its Internet
gateway, from which links to Internet Service

                                       24
<PAGE>   27

Providers (ISPs) are provided via leased and dial-up lines on the public
network. Teleport-TP also acts as the long distance gateway for subscribers on
the MTR-Sviaz network.

     The fiber optic cable utilizes the underground duct facilities of MGTS, the
operator of the local telephone network in Moscow, under one year agreements
which are subject to automatic one year renewals unless either party provides
timely notice of cancellation. The current agreements expire on December 31,
1999. See "-- Risk Factors -- Risks Involving Technocom Limited and
Teleport-TP -- Dependence on MGTS Facilities."

     Intelsat Arrangements.  Teleport-TP currently routes international traffic
through two Intelsat satellites at 342 and 62. The annual cost of such circuits
is currently $1.2 million. In addition, Teleport-TP has leased transponder
capacity on a third Intelsat satellite (at 66) in connection with the
development of its long distance network program in Russia and the C.I.S. at an
annual cost of $4.1 million. The circuit capacity is leased on a "rolling"
15-year basis, under which each lease automatically renews each year for a
15-year term, unless the election is made not to roll over the commitment, in
which event the lease terminates on a date 15 years later. The transponder
leases are for fixed 15-year terms, terminating in 2012 and 2013, respectively.
See "-- Long Distance Network Services--Network and Facilities."

     The Intelsat system, with 22 operational satellites of 4 different
configurations, is of significantly greater size, and provides greater coverage,
than any of its competitors. Intelsat's global capacity makes it the leading
international telecommunications satellite operator. The Intelsat organization
is able to offer flexible and reliable satellite capacity, supported by a
variety of contingency plans. Additionally, because of the strength of the
Intelsat organization, manufacturers and operators have designed their ground
stations to be compatible with Intelsat's specifications, creating a system that
is global and transparent to users and their customers.

     Since January 1993, Teleport-TP has been one of only three direct Intelsat
customers in the Russian Federation. Teleport-TP's relationship with Intelsat
provides a number of advantages to Teleport-TP and its customers, including: (i)
high quality and reliable service resulting from the reliability of the
satellite system; (ii) a wide range of service options; (iii) a wide range of
consulting and training services; and (iv) operational planning and management
services reflecting Intelsat's experience with in excess of 60
telecommunications satellites over a period of 30 years.

     Eutelsat Arrangements.  Pursuant to a ten-year agreement with Eutelsat,
which commenced in September 1995, Teleport-TP has access to a total switched
capacity of 1,800 international circuits. Teleport-TP currently provides access
to seven countries in Europe via a Eutelsat satellite at 36.

     Teleport-TP is one of three private registered Eutelsat operators in the
Russian Federation and, in 1997, became an equity participant in Eutelsat as
well. Eutelsat is the intergovernmental organization responsible for providing
satellite communications space segment facilities for almost all European
nations. Although originally designed to provide principally television and
radio capacity, Eutelsat satellites now carry large quantities of
telecommunications traffic. Unlike Teleport-TP, most of the signatories to
Eutelsat are national telephone companies, often with a right to exclusive use
or monopoly control of operations of users within their home territory.

     Teleport-TP has already benefited from its relationships with Eutelsat by
obtaining relatively inexpensive access to the Eutelsat system. Pursuant to the
initial agreement between Teleport-TP and Eutelsat, 50% of the cost of the earth
station is being financed on favorable terms by Eutelsat and 300 satellite
circuits are being provided free to Teleport-TP for the first three years.

     The Eutelsat system is designed to have high transponder capacity, with
built-in redundancy, both within its satellites and by the provision of in-orbit
spare capacity. Additionally, the transponder, antenna and cross-connect
facilities make for very flexible space segment capacity. The Company believes
that Teleport-TP's position as a participant in Eutelsat and a provider of
Eutelsat services in the Russian Federation will provide it with a considerable
strategic advantage with respect to intra-European telecommunications.

                                       25
<PAGE>   28

     Long Distance Network Services

     Products and Services

     The Company believes that there is a largely untapped market for satellite
links between various regions of the Russian Federation due to the current poor
quality, or total absence, of terrestrial digital long distance lines in many
areas. In order to expand its customer base beyond Moscow and to meet growing
demand for reliable telecommunications links, Teleport-TP has developed
satellite links using both PAMA/SCPC (Pre-Assigned Multiple Access/Single
Channel Per Carrier) and DAMA (Demand Assigned Multiple Access) technologies
between cities and regions in the Russian Federation. These links are provided
by Teleport-TP, under the registered trade name "Satelink", directly between
cities and regions, without going through Teleport-TP's Moscow hub. In
particular, Teleport-TP is seeking to address the market for inter-regional
communications where call completion rates are understood to be low, primarily
due to the underdeveloped nature of the Rostelecom infrastructure. In addition,
Teleport-TP is seeking to address the market for intra-regional communications
where call completion is the responsibility of the regional network provider. In
such instances Teleport-TP becomes an integral part of regional network
developments. Currently, Teleport-TP has reached agreements with Uraltelecom and
the regional operators in Sakha and Chita for such regional networks. While, due
to various startup problems including logistical difficulties and administrative
difficulties with local and regional governmental authorities, there have been
significant delays in the installation of, and the clearance to operate the
equipment for this network, it is expected that a total of 45 sites will be
installed by mid-1999. See "-- Risk Factors -- Risks Involving Technocom Limited
and Teleport-TP -- Capital and Management Resources Required for Network
Expansion; Management of Growth."

     Internet Services.  Teleport-TP opened an Internet gateway during the first
quarter of 1997, using the registered trade name "Portal." The gateway is
configured to provide high speed data access to regional Internet service
providers as well as leased line and dial-up access in Moscow for corporate
clients.

     Television Services.  Teleport-TP has formulated a strategy to address the
growing demand for the resale of transponder capacity to domestic television
companies for: (i) the distribution of programming to regional sites for onward
terrestrial re-broadcasting; and (ii) direct distribution of digital TV
broadcasting.

     Private Line Services.  Teleport-TP also provides national and
international private leased circuit access to corporate entities, either as
part of an integrated private network package or on a case-by-case basis as
defined by the customer.

     Value-Added Services.  The Company anticipates that Teleport-TP will
develop a portfolio of corporate network services to address this specific
market sector as Teleport-TP's operations mature. Cooperation with PeterStar in
addressing this corporate market is also envisaged.

     Customers and Marketing

     These long distance services are being targeted to high volume customers
requiring high quality, reliable long distance service across the Russian
Federation. Targeted customers include: (i) regional and local public telephone
companies (Electrosviaz); (ii) private cellular, wireline, data and other
network operators; and (iii) corporate users. As of December 31, 1998, 42
contracts had been signed. Of these, 15 are with regional and local public
telephone companies, 16 are with cellular operators and alternative local access
providers and the balance are with corporate and individual users.

     Implementation of these contracts in a timely manner is subject to the
ability of Teleport-TP to comply with any new operating conditions that may be
set by the local and regional governmental authorities in the areas in which it
operates. See "-- Risk Factors -- Risks Involving Technocom Limited and
Teleport-TP -- Capital and Management Resources Required for Network Expansion;
Management of Growth."

     Teleport-TP acts as a "carrier's carrier" to public telephone companies and
cellular, wireline and other operators. Teleport-TP provides these operators
with long distance and, in many cases, international access via its dedicated
network so that these operators can provide high quality access to their own
subscribers.

                                       26
<PAGE>   29

     In developing a package of voice and data services for the corporate user,
Teleport-TP has enhanced its marketing and sales functions through recruitment
of experienced sales personnel and is addressing three distinct corporate market
segments: (i) the corporate market where the main focus of the customer is
located in Moscow and St. Petersburg (where co-operation can take place with
PeterStar and BCL), but where the customer also requires regional network
services; (ii) international ventures with requirements for both national and
international connectivity; and (iii) the corporate market in which the customer
has made the decision to expand to the regional cities or in which the
decision-making will take place in the regional centers.

     Network and Facilities

     The Teleport-TP network uses Scientific-Atlanta Skylinx.DDSTM Digital PAMA,
DAMA and IDR satellite telephony systems, technologies that are used by public
telephone companies either as a market entry mechanism or as an enhancement of
the existing terrestrial infrastructure. The network utilizes an 18.3-meter
Standard-A Intelsat satellite master antenna at the hub site in Moscow.
Agreements are in place with Intelsat for access to 77 MHZ of transponder
capacity on the Intelsat 704 satellite at 66. Teleport-TP believes that using
this digital capacity from Intelsat represents a competitive advantage over
telecommunications operators using less reliable Russian domestic satellite
systems. Customers on Teleport-TP's long distance network -- public and private
telecommunications companies -- have the choice of taking permanent leased
circuits or switched circuits, depending on their requirements. In addition,
corporate customers now have the ability to create their own private networks
throughout the Russian Federation using this combination of permanent and
switched circuits.

     As of December 31, 1998, 36 medium (7 meter) and small (4.5 meter) antenna
terminals had been installed in major cities throughout the Russian Federation;
including Ekaterinburg, Kazan, Orenburg, Astrakhan, Volgodonsk, Kaliningrad and
Stavropol, and in Kazakhstan and Georgia, providing digital voice and data
services. It is anticipated that a total of 45 antennas will be installed by
mid-1999.

     The system is designed to be flexible, allowing for timely installation of
antennas in regional sites without changing the existing network configuration.
Additional channel units can be quickly installed at existing sites should
demand increase. The network has full mesh topology allowing customers in remote
sites to connect with other remote sites without going through a central hub
station, thus avoiding a "double-hop" on the satellite. This offers considerable
improvement over traditional "star" configuration satellite-based systems.

     The Teleport-TP long distance network interconnects with Rostelecom for the
delivery of calls to locations where Teleport-TP does not have its own
facilities.

  MTR-SVIAZ

     MTR-Sviaz, which commenced operations in November 1996 and had
approximately 850 lines connected as of December 31, 1998, provides local,
national and international services to both corporate customers and the Internet
market. MTR-Sviaz uses leased circuits from a number of providers, access to the
Teleport-TP fiber cable facilities and the Mosenergo internal communications
network to terminate its calls. Teleport-TP uses the MTR-Sviaz facilities to
house its Internet gateway, from which links to ISPs are provided via leased and
dial-up lines on the public network.

     MTR-Sviaz is a venture between Mosenergo (51%) and Technocom (49%) to
modernize and commercialize a portion of Mosenergo's internal telecommunications
network. MTR-Sviaz commenced operations in the third quarter of 1996 with the
initial network program encompassing the installation of a 10,000 line Siemens
exchange as a central switching node on the existing Mosenergo
telecommunications network. The switch is connected to Teleport-TP via fiber
optic cable, giving customers on the Mosenergo network direct access to the
digital long distance facilities of Teleport-TP's network. In addition to the
Mosenergo organization itself, other entities connected to the Mosenergo network
include commercial enterprises located at business centers on Mosenergo
premises.

     Technocom's contribution to MTR-Sviaz included provision of the switch to
service 8,000 Moscow city lines and 2,000 lines on the internal Mosenergo
network and the acquisition of 4,000 Moscow city lines. The

                                       27
<PAGE>   30

switch and lines were purchased by Technocom and are leased to MTR-Sviaz.
Further capital investment may be required if subscriber demand is greater than
anticipated. Customers on the MTR-Sviaz network include Mosenergo (1,000 lines)
and nine Internet service providers.

     MTR-Sviaz, a Russian closed joint stock company, was incorporated in 1994.

  OTHER ACTIVITIES

     Cellular Services.  Teleport-TP holds a 25% interest in Gorizont-RT, a
joint venture which has a license to provide GSM cellular service in the
Republic of Sakha, a semi-autonomous region of the Russian Federation. The other
parties to the joint venture are Sviazservice (24%) and Sakhatelekom, the local
Electrosviaz (51%). The network is currently operational in the cities of
Yakutsk, Mirny and Neriungry. In addition to taking an equity interest in the
project, Teleport-TP is providing the long distance access for the venture
through the installation of Satelink antennae at the above three sites. In
addition, Teleport-TP has an agreement with Sakhatelekom for the provision of
long distance access. The GSM switching equipment for Mirny and Neriungry has
been purchased by Technocom from Italtel and is being leased to Gorizont-RT. As
of December 31, 1998, Gorizont-RT had approximately 500 active subscribers
generating approximately $85,000 in revenues per month. Based on the level of
customer demand to date, Teleport-TP does not anticipate being required to
provide further funding to Gorizont-RT.

     Teleport-TP paid an initial fee for its participation, and was required to
provide three antennae and two GSM switches capable of serving 1,500
subscribers. Teleport-TP receives 27% of the income derived from new
installations, line rentals and local calling, and 80% of the income derived
from long distance and international calling. Sakhatelekom has committed to
provide a minimum of 90,000 minutes of traffic per month, at a minimum tariff of
$1.50 per minute. Gorizont-RT's license has a term of eight years and requires
that 20% coverage of the territory of the Republic of Sakha (and an installed
network capacity of 3,000 numbers) be achieved by the end of 1997 and 50%
coverage of the territory of the Republic of Sakha (and an installed network
capacity of 20,000 numbers) be achieved by the end of 2004. Gorizont-RT did not
meet the initial coverage requirement by the end of 1997, but management does
not believe that this will have any material impact on its future licensing
position.

     Other Joint Ventures.  Technocom anticipates that it may, either directly
or through Teleport-TP, enter into joint ventures with local partners in
connection with the development of local network infrastructure either wireline
or wireless, to complement the development of its long distance network.

  BILLING AND TARIFFS

     Billing

     International Network Services.  Teleport-TP bills the operators of the
networks it serves, who in turn are responsible for billing the individual
subscribers to those networks. For its foreign carrier relationships,
Teleport-TP has agreed with KDD, DT and AT&T the inter-administration settlement
process for international traffic settlements.

     Long Distance Network Services.  Teleport-TP invoices the operators of
public telephone, and private cellular, wireline and other networks, which in
turn invoice their own subscribers. Teleport-TP invoices all corporate users
directly.

     Currency of Billing.  The tariffs for the Satelink long distance services
are generally posted and invoiced in Russian Roubles. Teleport-TP therefore
faces an exchange risk if the value of the Russian Rouble declines between the
time the bill is sent to the customer and the date that payment is received in
Russian Roubles, and a more significant exchange risk if, as in 1998, the Rouble
is devalued. Currently, revenues from Satelink represent 20% of Teleport-TP's
total revenues, and this percentage (and hence Teleport-TP's currency exposure)
is likely to grow as the Satelink program itself grows. Teleport-TP's other
tariffs are predominantly denominated in U.S. Dollars. Invoices are then paid
either in U.S. dollars or in Roubles at the U.S. Dollar/ Rouble exchange rate on
the date when the customer instructs its bank to make payment. While there is
still

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<PAGE>   31

some exchange risk where tariffs are denominated in U.S. Dollars, it is more
limited. See "-- Risk Factors -- Country Risks -- Restrictions on Currency
Conversion; Historical Volatility in Currency Prices."

     Tariffs

     International Network Services.  Teleport-TP is not subject to federal or
local regulation on tariffs. Teleport-TP sets its tariffs taking into account
those charged by its interconnect parties, as well as competitive pressures in
the marketplace. Teleport-TP maintains tariffs for international calls, private
line services for corporate clients and television transmissions. Teleport-TP
also has fixed line charges, for connection and rental fees, although these
currently do not contribute significantly to its revenues. However, as
Teleport-TP expands its activities and more private customers are connected to
its network, revenues from fixed line charges may become more significant.

     The tariffs that Teleport-TP offers to its dedicated network customers for
international calls depend on the call's destination and the volume of calls
placed by each customer regardless of the time or day. Teleport-TP offers a
range of discounts for customers that exceed a certain targeted level of call
minutes. Discount packages are being developed for individual customers on a
case-by-case basis as the business matures. Teleport-TP provides international
private leased circuits to corporate customers at a monthly tariff, with prices
determined by the amount of bandwidth and the destination required by the
customer.

     Domestic Long Distance Network Services.  Per minute tariffs for the
satellite-based domestic long distance network services depend on the call's
destination and the volume of traffic. The tariffs for DAMA and IDR circuits are
also generally on a per minute basis. Tariff packages are being developed for
individual customers on a case-by-case basis as the business matures and will
incorporate, where necessary, the sale or lease of the antenna as part of the
package. Tariffs for private leased circuits to corporate customers range are on
a per circuit basis and vary based on the amount of bandwidth required by the
customer. In recent months, Teleport-TP's tariffs in U.S. dollar terms for its
long distance services have come under significant downward pressure due to the
Rouble devaluation in August 1998 and the fact that Rostelecom has not been
permitted to raise its Rouble tariffs to compensate for such devaluation, but it
is not yet possible to predict the long-term trends for these tariffs.

  TELECOMMUNICATIONS LICENSES

     Teleport-TP

     Teleport-TP's business is dependent on four telecommunications licenses,
although it holds a total of 12 such licenses.

     Teleport-TP has been issued two licenses for long distance and
international leased circuits for dedicated network services and for television,
and a data license providing for interconnection to the public network. In
addition, Teleport-TP has been issued an overlay license to offer local, long
distance and international voice and data services which are interconnected to
the public telephone network in the 40 regions (plus Moscow and St. Petersburg)
in which Teleport-TP's long distance network will initially be operational.
Based on its experience in renewing existing, and obtaining new, licenses and
its general knowledge of the licensing environment in Russia, management of
Teleport-TP believes that, so long as they are being actively utilized, all of
the licenses will be renewed at the expiration of their respective terms.

     License N4207, issued in October 1996 (replacing earlier licenses N100 and
N1661 obtained by Teleport-TP) authorizes Teleport-TP to provide long distance
and international telecommunications services to private networks within
Moscow's city limits and, to a limited extent, elsewhere in the Russian
Federation. No interconnection of the Teleport-TP network with public switched
telephone networks is permitted under this license. License N4207 expires in
November 2004.

     A second license, license N4437, issued in October 1996 (replacing an
earlier license N386), authorizes Teleport-TP to provide international leased
lines and circuits for the transmission of television signals within Moscow's
city limits. International lines may only be leased to customers holding an
appropriate license granted by the RFCTI. The license also provides that
Teleport-TP may lease up to 1,000 international circuits

                                       29
<PAGE>   32

for the transmission of television and telecommunications services. Teleport-TP
believes that this number of lines and circuits is sufficient to cover its
requirements through the remainder of the current term of the license. License
N4437 expires October 28, 2004.

     The data license, license N3654, authorizes Teleport-TP to provide data
transmission services in Moscow, St. Petersburg and other cities of the Russian
Federation and permits interconnection with public networks. The data license
expires in January 2002.

     The overlay license, license N4199, permits Teleport-TP to offer local,
long distance and international voice and data services which are interconnected
to the public telephone network in the 40 regions (plus Moscow and St.
Petersburg) in which Teleport-TP's long distance network will initially be
operational. This permits Teleport-TP to deliver calls to all subscribers on the
public network in such regions. License N4199 expires in May 2001.

     License N4207 limits the number of subscribers under such license to 15,000
and requires that 10,500 be in place by October 1999. License N4437, unlike its
predecessor N386, makes no reference to minimum subscriber targets. (License
N386 limited the number of subscribers to 1,700 and required that 1,190 be in
place by October 28, 1997.) Teleport-TP did not meet these minimum subscriber
numbers. License N3654 provides that the installed subscriber capacity of
Teleport-TP's data network should permit the connection of at least 70,000
subscribers by December 2000 and at least 100,000 subscribers by the end of the
license, but it does not impose any limit on the number of subscribers. License
N4199 provides that the total installed capacity of the long distance network
should be at least 100,000 numbers with at least 70,000 numbers operational by
May 2000. Based on its experience in renewing existing, and obtaining new,
licenses and its general knowledge of the licensing environment in Russia,
management of Teleport-TP believes that these subscriber provisions are not
strict requirements, but are instead designed to provide general guidance as to
the number of subscribers intended to be included on the system. Based on that
experience, management of Teleport-TP further believes that, so long as a
license is being actively utilized, such license will not be terminated nor
other sanctions imposed if Teleport-TP failed to have the minimum number of
subscribers in place by any date specified or if it was to exceed the maximum
number of subscribers permitted by the license, but there can be no assurance
that the RFCTI would not take a different position, which in turn could result
in the revocation of the license or its renegotiation on unfavorable terms or
the imposition of penalties. It is not possible to calculate the amount of any
penalties which might be imposed, which are in the discretion of the RFCTI. See
"-- Risk Factors -- Risks Involving Technocom Limited and
Teleport-TP -- Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses."

     MTR-Sviaz

     MTR-Sviaz has been issued license N3644 which authorizes MTR-Sviaz to
provide local telephone service through interconnection with the public switched
telephone network within the city and region of Moscow. The license permits
connection only through the Mosenergo network. License N3644 is limited to a
maximum of 9,500 lines in the city of Moscow and a further 500 lines in the
Moscow oblast. License N3644 expires in December 2006. Under the terms of the
license, MTR-Sviaz is obligated to have at least 70% of the total number of
subscribers permitted under the terms of the license in place within six years.

     MTR-Sviaz has also been issued license N2463 which authorizes MTR-Sviaz to
provide local and long distance leased line services within the city and region
of Moscow. Local and long distance lines may only be leased to customers holding
an appropriate license issued by the RFCTI. License N2463 is limited to a
maximum of 3,500 lines and expires in October 2001. MTR-Sviaz is obligated by
the terms of the license to have at least 70% of the total number of subscribers
permitted under the license in place by October 1999.

  EQUIPMENT AND OTHER OPERATING AGREEMENTS

     Equipment Leases.  Equipment purchased by Technocom for the various
projects undertaken by Teleport-TP and MTR-Sviaz is leased to them pursuant to
lease agreements between Technocom and those ventures.

                                       30
<PAGE>   33

     Teleport-TP -- International Network Facilities -- Intelsat.  The original
two Intelsat antennas and the AT&T type 5ESS switch for Teleport-TP's operations
were supplied on a turnkey basis by AT&T under a supplier financing arrangement.
In July 1995, Technocom agreed to pay off the outstanding balance on the AT&T
debt of $8.0 million in Teleport-TP in return for ownership of the assets.
Technocom then leased the equipment to Teleport-TP over a ten year lease period.
In addition, the Company has purchased an Ericsson switch and other network
telecommunications equipment, which have been provided to Teleport-TP on lease
and installment sales bases.

     Teleport-TP -- International Network Facilities -- Eutelsat.  The Eutelsat
antenna was supplied on a turnkey basis pursuant to an agreement with Hughes.
Fifty percent of the purchase price was financed by a three-year supplier credit
agreement, supported by a guarantee drawn on the Bank of Austria. Technocom's
commitments under this agreement were satisfied in full during 1998. The
remaining fifty percent was financed by a five-year loan from Eutelsat, which
provides for no principal payments during the first 18 months and for the loan
to be guaranteed by the RFCTI. The funds were provided by Eutelsat on the
condition that Teleport-TP will use the TDMA earth station exclusively for the
Eutelsat space segment for a minimum continuous period of ten years from the
start of the earth station's operation. The equipment is being leased to
Teleport-TP by Technocom for a period of eight years. Teleport-TP has the right
to purchase the equipment from Technocom at the end of the lease period.

     Teleport-TP -- Long Distance Network Facilities.  All of the equipment for
the satellite-based network, consisting principally of a master 18-meter antenna
in Moscow, and 7-meter and 4.5-meter remote antennas, was supplied by
Scientific-Atlanta, pursuant to an agreement originally signed in 1995 and
amended several times to increase the amount of equipment being supplied.

     All of the telecommunications equipment purchased under the
Scientific-Atlanta agreement is being leased to Teleport-TP by Technocom
pursuant to telecommunications asset leases.

     The Company has also contracted with Siemens for converters and other
telecommunications equipment required for the long distance network, and leased
such equipment to Teleport-TP.

     ECI Telecom of Israel has supplied the Digital Channel Multiplication
Equipment (DCME) and modems for the Teleport-TP international and domestic long
distance service facilities, as well as a SDH-4 system for the 622 Mb/s fiber
optic ring in Moscow.

     MTR-Sviaz.  Technocom's contribution to MTR-Sviaz included provision of,
among other things, a switch to service 8,000 Moscow city lines and 2,000 lines
on the internal Mosenergo network. Technocom also purchased 4,000 Moscow city
lines, for which it will be paid by MTR-Sviaz as part of the equipment lease
described below. Mosenergo's contribution to MTR-Sviaz includes the provision of
Moscow city lines at a discounted price, the premises for the switch and the
construction of the fiber optic connections between the Mosenergo network and
the Moscow city network. Mosenergo is also responsible for network design,
securing the numbering plan for the 4,000 city lines and supplying the technical
data for connecting the Mosenergo network to the city network. The switch for
MTR-Sviaz was purchased from Siemens which financed 70% of the purchase price.
The Company has guaranteed this vendor financing. The switch is being leased by
Technocom to MTR-Sviaz under an eight-year lease agreement signed in 1995.
MTR-Sviaz will have the right to purchase the equipment from Technocom at the
end of the lease period.

     Gorizont-RT.  Supply arrangements were concluded with Italtel for the
provision of GSM cellular switches and related equipment for the Gorizont-RT
venture; this equipment has been installed in the cities of Mirny and Neriungry.

  EMPLOYEES

     As of December 31, 1998, Technocom and Teleport-TP had 74 and 106
employees, respectively, all of whom were full-time. All but two of these
employees were Russian nationals. None of Technocom's or Teleport-TP's employees
is subject to a collective bargaining agreement. Technocom believes that its
relations with its employees are good.

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ALTEL

  OVERVIEW

     ALTEL, in which the Company owns a 50% interest, currently operates the
only nationwide cellular network in Kazakhstan. ALTEL was formerly known as
BECET International, although marketing its services under the name "ALTEL". In
May 1998 ALTEL changed its corporate name to the name under which it was doing
business. Also in 1998, ALTEL introduced a prepaid cellular service (marketed
under the name "TUMAR") in Almaty which, as of December 31, 1998, had 6,964
active subscribers.

     The other 50% of ALTEL is held by Kazakhtelekom, the operator of the
national telephone network in Kazakhstan. In May 1997, the Kazakh government
announced the sale of a 40% stake in Kazakhtelekom, the state-owned
telecommunications company, to Daewoo. However, in March 1998, it was reported
that Daewoo had sold a portion of its stake (reported to be approximately 10% of
Kazakhtelekom) to an unnamed third party. It was later confirmed that Daewoo had
sold its entire stake in Kazakhtelekom to Kazcommertzbank, a commercial bank
based in Kazakhstan. It is understood that the Kazakh government is seeking to
sell a 15% stake in Kazakhtelekom to private investors. Kazakhtelekom recently
received a revised license specifically naming it as the exclusive national
network operator in Kazakhstan, and giving it a wide range of powers to carry
out this function. During 1998, the KMOC issued two GSM licenses for the
development of national GSM networks in Kazakhstan. The two license recipients
(one of which is a joint venture including Kazakhtelekom) commenced active
marketing of their services in February 1999.

     The Company's primary objectives for ALTEL are to increase revenues and
cash flows through increased penetration, usage and network coverage. Cellular
service provides a rapid and relatively inexpensive way to overcome the
deficiencies of the wireline telecommunications infrastructure in Kazakhstan.
ALTEL's cellular telecommunications network in Kazakhstan currently consists of
separate systems in Almaty, South Kazakhstan (Chimkent), Karaganda, Pavlodar,
Astana (formerly known as Akmola), Aktyubinsk, Kustanai, East Kazakhstan
(Ust-Kamenogorsk), Atyrau, Taraz, Petropavlovsk and Kyzl Orda. As of December
31, 1998, ALTEL's cellular telecommunications network covered a geographic area
of approximately 4,200,000 people, representing 24% of the total population, in
12 cities. ALTEL commenced cellular service in September 1994 and has since
experienced significant subscriber and revenue growth. As of December 31, 1998,
ALTEL had 21,395 active subscribers, of which 6,964 were customers of ALTEL's
prepaid service. This compares with 11,102 subscribers as of December 31, 1997.

     ALTEL, which began operations in September 1994, generated net income for
the year ended December 31, 1998 of $9.2 million on operating revenues of $39.5
million, as compared to net income of $7.2 million on operating revenues of
$30.0 million for the year ended December 31, 1997. The subscriber base grew
from 2,882 at the end of 1995 to 21,395 at December 31, 1998 (of which 6,964
were customers of ALTEL's prepaid service). ALTEL accounted for 27.2% of the
Company's operating revenues for the year ended December 31, 1998, as compared
to 26.2% for the year ended December 31, 1997.

     ALTEL, a Kazakh closed joint stock company, was incorporated in 1994.

  STRATEGY

     The Company believes the development of a market economy in Kazakhstan is
likely to increase demand for modern telecommunications services, including
wireless communications, as demonstrated by the subscriber growth experienced to
date by ALTEL. While the Kazakh telephone network is slowly being modernized,
the Company believes this is likely to be an expensive and lengthy process. The
Company believes that this environment provides ALTEL with the opportunity to
provide customers in Kazakhstan with a viable, high quality alternative to
wireline telephone service during the period it will take to modernize the basic
public network. Management of ALTEL currently believes that, by virtue of its
cost structure and its market penetration to date, together with its recently
introduced prepaid service, it is in a good position to compete with the new GSM
operations. However, ALTEL is currently assessing the impact of the GSM licenses
on its business, and there can be no assurance that ALTEL will in fact be able
to compete successfully with the new licensees.

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  NETWORK AND FACILITIES

     As of December 31, 1998, ALTEL's cellular telecommunications network in
Kazakhstan consisted of separate systems in Almaty, South Kazakhstan (Chimkent),
Karaganda, Pavlodar, Astana, Aktyubinsk, Kustanai, East Kazakhstan
(Ust-Kamenogorsk), Atyrau, Taraz, Petropavlovsk and Kyzl Orda. Further
installations remain dependent upon many factors including the successful
location of additional cell sites and the results of marketing and other
studies. As of December 31, 1998, investment in ALTEL's cellular network
infrastructure and support facilities totaled approximately $43.4 million. ALTEL
anticipates that its capital expenditure program in 1999 will total
approximately $8.6 million and will be used to develop new installations, expand
network capacity in the existing cities and to upgrade equipment. The Company
currently believes that this funding will be provided by internally generated
cashflows.

     All ALTEL systems are connected to the local telephone network and the
regional trunk switch in the cities where they are located. The system in Almaty
is also linked to an international trunk exchange and the Astana system will be
linked to a new international switch in that city when it becomes operational.
Long distance and international calls are completed using the national and
international network of Kazakhtelekom. International calls are switched through
a digital exchange in Almaty.

     Space for most ALTEL switches, cell sites and associated equipment is
provided by Kazakhtelekom. ALTEL also uses space in a Kazakhtelekom exchange
building in Almaty for office and administrative purposes and leases other
premises in Almaty which combines its central warehouse and a larger customer
service center and retail outlet. ALTEL has also established, and will continue
to establish, customer service centers in each city in which service is offered.
Virtually all space for customer service centers and equipment not provided by
Kazakhtelekom is leased, although ALTEL has purchased its facilities in Taraz,
one base station site and building in Chimkent and a base station building in
Karaganda.

     In November 1997, the official political capital of Kazakhstan was moved
from Almaty to Astana. Although ALTEL does have a presence in Astana, the
long-term effect of this move on ALTEL's business remains uncertain. For
example, ALTEL could need to incur the cost of moving its administrative
functions to Astana. Currently, both the number of customers in Astana and the
traffic between Almaty and Astana are increasing, but there is a risk that the
move could result in reduced cellular activity in Almaty in the future.

  PRODUCTS AND SERVICES

     ALTEL customers may choose from three types of cellular service: service
within a single city, service within Kazakhstan as a whole, and full service
including international access. Optional services include call waiting, three
party conferencing, call forwarding, voice mail and busy transfer. ALTEL markets
cellular telephones and related equipment manufactured by Motorola and Philips.

     ALTEL offers a roaming facility between the home city of the subscriber and
other cities served by the ALTEL network. In addition, as of December 31, 1998,
ALTEL had established roaming agreements with a total of 18 other cellular
operators, including: (i) BEELINE (Vimpelcom) in Moscow and Samara; (ii) Fora in
St. Petersburg; (iii) Digital Sotovaya Svyaz in the Ukraine; (iv) Katel in
Kyrgyzstan; and (v) Uzdunrobita in Uzbekistan.

     ALTEL introduced a prepaid cellular service in Almaty in August 1998 (under
the name "TUMAR"), thereby adding to its existing service offerings. ALTEL
expects to introduce the prepaid service in additional regions, include Astana,
during 1999. In addition to further reducing the potential for bad debts, this
system also permits ALTEL to market a portable unit having fewer features and
more economical pricing, thus enabling ALTEL to expand into a new and
potentially much larger market segment than that to which it has addressed its
marketing efforts to date. As of December 31, 1998, TUMAR had 6,964 active
subscribers.

     ALTEL markets its cellular services through its own outside direct sales
force, which targets corporate and government accounts and high volume
consumers, together with customer service centers. Although ALTEL's standard
service includes individuals, it has most appeal to businesses which constitute
around 90% of the customer base. In contrast, the TUMAR prepaid services are
targeted almost exclusively to middle

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<PAGE>   36

income domestic individuals (including students). With this differentiation,
ALTEL believes that it has broad appeal across the community.

     ALTEL does business under the registered trade names "ALTEL" and "TUMAR"
and features these names in all of its marketing and promotional activity. ALTEL
uses a variety of marketing channels to promote its services, including
television, radio, newspapers, billboards and sponsorship of concerts and other
popular events. ALTEL believes that both the identification of the "ALTEL" and
"TUMAR" trade names with its services, and its marketing activities, have been
effective in stimulating demand for its products and services.

  OPERATIONS

     Billing and Tariffs

     Tariffs for ALTEL customers are posted in U.S. Dollars. Government
regulations determine the currency in which invoices may be paid, which depends
upon the residency status of the customer. Domestic subscribers may pay only in
Tenge, while foreign subscribers are permitted to pay in Tenge or U.S. Dollars.
Commencing March 1998, ALTEL is now required to issue a tax invoice with each
bill stating the amount in Tenge as of the billing date. However, to date, ALTEL
has still been able to receive payment in Tenge at the U.S. dollar exchange rate
on the date payment is made.

     Under the terms of its license, ALTEL is free to establish the rates for
all cellular services provided on its network, without prior approval from the
KMOC. ALTEL's pricing is subject to review by the Kazakh Anti-Monopoly
Commission. ALTEL currently employs one pricing structure for all of its
customers, but Kazakh government agencies are offered a 25% discount on
activation and a 35-40% discount on monthly access fees and airtime charges.
Currently, ALTEL has 123 subscribers in this category and management does not
expect this number to increase significantly over time.

     A new ALTEL subscriber currently pays a one-time activation fee and makes a
security advance to cover monthly fees and usage charges which depends on
whether the subscriber has international, inter-city or local access,
respectively. Non-residents of Kazakhstan pay higher security advances. Monthly
access fees vary depending on whether the customer chooses local service alone,
inter-city service or full international service. Basic usage charges vary
between peak and off-peak calls, plus the applicable tariffs for international
and inter-city calls. In addition, there is a monthly fee for each optional
service, including call waiting, three party conferencing, call forwarding,
itemized billing and busy transfer. ALTEL also charges its subscribers a fee for
the ability to roam to other regional cities. ALTEL periodically offers special
tariff-related promotions which include discounts on certain elements of the
tariff schedule when packaged together. In addition, certain customers are
offered volume discounts on the tariff schedule. ALTEL has also introduced
air-time tariff plans, providing discounts to users, based on the periods that
they intend to use the phone and whether their calls are predominantly incoming
or outgoing. All tariffs include VAT at the rate of 20%.

     The basic connection fee for the TUMAR prepaid service is a one time fee,
depending on whether the customer provides the handset or if the customer
purchases the handset from ALTEL. No monthly access fees are charged to TUMAR
customers, and the usage charges are higher for outgoing calls than they are for
incoming calls, but do not vary depending on the time the call is made or
received. TUMAR introduced a new tariff plan in February 1999, with a connection
fee, a per day usage charge and a charge for outgoing calls, but no charge for
incoming calls. TUMAR expects to introduce discounts to its air-time tariffs
during March 1999. TUMAR customers can currently only make local calls within
Almaty.

     ALTEL's tariffs have been recently revised in light of competition from the
GSM licenseholders, which have offered low introductory tariffs to attract
customers. ALTEL expects that competition from the GSM operators will continue
to exert downward pressure on the tariffs for both ALTEL and TUMAR.

     Interconnection

     ALTEL is dependent on its interconnection to networks operated by
Kazakhtelekom for the completion of its local, long distance and international
calls. ALTEL pays an annual license fee to the KMOC in lieu of

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<PAGE>   37

all frequency or interconnection charges, equal to up to 6% of its after-tax
profits as calculated by the Kazakh statutory audit. ALTEL pays Kazakhtelekom a
tariff in respect of local calls, and enjoys a preferential tariff in respect of
long distance and international calls which provides ALTEL with an average
margin of 25% on such calls. Kazakhtelekom has recently been authorized, in
connection with its appointment as the exclusive operator of the Kazakh national
network, to levy interconnection charges, and to do this on a basis which yields
it a profit. There can be no assurance that Kazakhtelekom will not use this
authority to start assessing interconnection charges against ALTEL,
notwithstanding that ALTEL is already paying a license fee expressly stated to
be in lieu of interconnection charges.

  TELECOMMUNICATIONS LICENSE

     ALTEL holds a 15-year renewable license issued in February 1994 for the
creation and operation of cellular communications networks in Kazakhstan for
local, long distance and international calling, using the 800 MHZ frequency band
and "AMPS" technology. Under the terms of the license ALTEL was required to
provide cellular services to Almaty and ten to twelve additional regional
centers by the end of 1996, a condition which has been met. See "-- Network and
Facilities."

     The license specifies that ALTEL is to be the exclusive provider of
cellular service in Kazakhstan for the first five years of the license term, a
period which expired in February 1999. The license is transferable upon approval
by 75% of ALTEL's shareholders.

     In 1998, before the expiration of the exclusivity period, ALTEL commenced
discussions with the KMOC on substituting a new license with revised terms for
its existing license. One aspect of such new license would have been the
elimination of the exclusivity provisions in return for other concessions,
including an extension of the basic term of the license. Although the
exclusivity period has since expired according to the terms of the license,
ALTEL and the KMOC are continuing to discuss the terms of a new license for
ALTEL.

  EQUIPMENT AND OTHER OPERATING AGREEMENTS

     ALTEL purchased from Motorola the infrastructure equipment required for the
cellular systems to be installed in Almaty and eighteen other regional centers
throughout Kazakhstan. Pursuant to a separate agreement, Motorola agreed to
furnish services with respect to the equipment, which included system design,
installation, optimization, system engineering, program management, software
maintenance and on-site switch maintenance.

     Both agreements expire in May 1999. Motorola and ALTEL are currently in
discussions regarding a new agreement.

  EMPLOYEES

     As of December 31, 1998, ALTEL had 340 employees, all of whom were
full-time. Of these employees, 337 were Kazakh nationals and three were
expatriate managers. The number of employees involved in branch operations was
140. None of its employees is subject to a collective bargaining agreement.
ALTEL believes that its relations with its employees are good.

BELCEL

  OVERVIEW

     BELCEL, in which the Company acquired an indirect 50% interest in August
1998, currently operates the only national cellular network in Belarus. The
other 50% of BELCEL is held by the Minsk City Telephone Network (45%) and the
Minsk Regional Telephone Network (5%).

     The Company's primary objectives for BELCEL are to increase revenues and
cash flows through increased subscriber penetration, usage, network coverage and
roaming with neighboring countries.

     BELCEL, a Belarussian joint venture, was formed in 1991.

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<PAGE>   38

  NETWORK AND FACILITIES

     BELCEL's cellular telecommunications network in Belarus currently consists
of one switch in Minsk and 40 base stations providing service in Minsk, Brest,
Grodno, Vitebsk, Gomel, Mogilev, Borisov, Baranovichi, Lida, Molodechno, Naroch,
Bobruisk, Mozyr, Orsha, Polotsk, and Novopolotsk. As of December 31, 1998,
BELCEL's cellular telecommunications network covered a geographic area of
approximately 4.9 million people, representing 47% of the total population, in
16 centers of population. BELCEL commenced cellular service in May 1993. As of
December 31, 1998, BELCEL had 12,200 active subscribers, compared to 8,500
subscribers as of December 31, 1997. During the month of December 1998, BELCEL's
subscribers generated monthly recurring revenues of $26 per subscriber.

     The BELCEL network enjoys full interconnect for local, long distance and
international services. Calls to fixed line phones and international calls are
completed using the national and international network of Beltelecom.
International calls are switched through a digital exchange in Minsk.

  OPERATIONS

     Billing and Tariffs

     Subscribers are billed monthly in Belarussian Rubles for access charges,
call charges, and toll charges and optional services. Recent legislative changes
permit non-resident organizations to be billed and pay for airtime in U.S.
dollars.

     Throughout 1998 BELCEL had to comply with legislation designed to reduce
overall inflation in Belarus to 24% per annum. Ruble tariffs were only allowed
to increase by 2% per month. This did not match the falling value of the
Belarussian Ruble against the dollar, and consequently the services offered by
BELCEL became, in hard currency terms, very cheap. This resulted in rapid
customer growth in the second half of the year. BELCEL's customers pay a monthly
access fee of the equivalent of $10 for all services, the outgoing call tariff
for calls within Belarus is 7 cents per minute and incoming calls cost 5 cents
per minute. Charges for international calls are banded into regions.

     Interconnection

     BELCEL is dependent on its interconnection to networks operated by
Beltelecom for the completion of its local, long distance and international
calls. BELCEL pays no annual license fee to the Government but pays $350,000 per
year for frequency usage and for circuits rented from Beltelecom at a price
calculated according to the legislation of Belarus. BELCEL pays Beltelecom a
tariff in respect of local calls, and enjoys a preferential tariff in respect of
long distance and international calls which provides BELCEL with an average
margin of 40% on such calls. All payments to Beltelecom are made in Belarussian
Rubles.

     BELCEL has entered into a series of agreements with CMG, SoftPro and
Ericsson AB ("Ericsson") for the purchase of the equipment required for its
cellular network. BELCEL's total capital expenditure budget for 1999 is
approximately $3 million, which it expects to be funded from cash generated by
the business.

  TELECOMMUNICATIONS LICENSE

     BELCEL holds a 15-year renewable license issued in July 1992 for the
creation and operation of cellular communications networks in Belarus for local,
long distance and international calling, using the 450 MHz frequency band and
"NMT" technology. Under the terms of the license BELCEL was required to install
30 base stations by the end of the fifth year, a condition which has been met.

CARRIER SERVICES BUSINESS

     The Company is currently developing a long distance carrier services and
private line business (the "Carrier Services Business") under the name
"PLDncompass", which is targeted at telecommunications carriers and corporate
customers in the United States and Europe which require telecommunications
services to and from Russia, the other C.I.S. countries and the Baltic States.
The Company has contracted with Cable

                                       36
<PAGE>   39

& Wireless Communications ("CWC") of the United Kingdom and Sonera of Finland
for the delivery of 21 2Mbps circuits for this purpose.

     The first phase of the business commenced during the fourth quarter of 1998
with the launch of private line services between Russia and the United States
and to date, customer contracts have been signed and are operational for 10 Mbps
of circuit capacity generating approximately $170,000 per month in gross
revenues.

     The second phase of development, the launch of wholesale carrier services
in Europe, is anticipated to commence during the second quarter of 1999. The
Company will aggregate, through Company-owned facilities in London, long
distance traffic from European telecommunications carriers bound for those
targeted countries and then deliver the traffic over leased and owned circuit
capacity. Where necessary, the Company will utilize digital circuit
multiplication equipment (DCME) on such circuits to create enhanced network
efficiencies. The Company will, where possible, use the facilities of its local
operating companies to either terminate the traffic at its ultimate destination,
in the case of Russian traffic, or as hubs to the country of final destination,
in the case of calls to other countries of the C.I.S. and the Baltic States.

     The Company has contracted to co-locate its first operating facilities in
the UK at the CWC telecommunications facilities management center in London. The
Company is presently negotiating a long-term lease for a dedicated operational
U.K. facility which it anticipates will be available for service during the
third quarter of 1999. Additional sites in Europe will be determined in the
light of customer demand and market de-regulation.

     The Company expects to expand this operation to offer carrier services to
other telecommunications operators in the United States. To this end, the
Company has contracted for a U.S. operations' facility site in New York City and
has acquired capacity in a trans-Atlantic cable between New York and London from
where traffic will be delivered (via the CWC and Sonera capacity described
above) to Russia. The Company anticipates developing the U.S.-based business
during 1999.

     The Company has obtained licenses in the United States and the United
Kingdom for the provision of these long distance services.

     The development of this business is expected to be financed from a
combination of internally generated cash, vendor financing, funds from the
Senior Note escrow account and new financing.

     The Company is presently negotiating a Global Purchase Agreement with
Ericsson for the supply of switching, transmission, and billing systems for this
new operation. This supply agreement will also include the purchase of equipment
to upgrade the capacity of the switching and transmission networks at the
Company's operating companies in Russia, as well as vendor financing for the
equipment purchases. The Company anticipates completing the arrangements with
Ericsson during the second quarter of 1999.

     The Company believes that the Carrier Services Business is an important way
to reduce its reliance on, and exposure to, Russia and the other countries of
the C.I.S., with the generation of new revenues and cashflow in the U.S. and
Europe, while creating a competitive advantage through leveraging the
infrastructure already in place in its local operating businesses.

OTHER OPERATIONS

  CPY YELLOW PAGES LIMITED

     Yellow Pages, a Cyprus company in which the Company holds a 100% interest,
is the owner of one of the most comprehensive databases of Russian and foreign
businesses in St. Petersburg and publisher of what is primarily a business to
business directory. As of December 31, 1998, Yellow Pages had 68 employees in
St. Petersburg who handle all of the graphic design and database management.
Yellow Pages hires part-time workers for the periodic update of the directory.
The Company utilizes the database of Yellow Pages to the benefit of PeterStar
and BCL, particularly in achieving more effective target marketing and in
operator services.

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  PLD MANAGEMENT SERVICES LIMITED

     PLD Management Services Limited ("PLDMS") is a wholly owned subsidiary of
the Company based in the United Kingdom that to date has performed certain
management, commercial and technical consulting, investor relations, new
business development, corporate finance and accounting services for and on
behalf of the Company. The Company has transferred most of these functions to
New York City. PLDMS has charged, and will continue to charge, the costs it
incurs in providing its services, principally salaries, travel and office costs,
to both the Company and its subsidiaries. As of December 31, 1998, PLDMS had
eight employees, all of whom were full-time.

COMPETITION

  PETERSTAR COMPANY LIMITED

     PeterStar is building and operating its business in a highly competitive
environment. PeterStar does not have an exclusive license to provide
telecommunications services in St. Petersburg, and a number of other entities,
including Russian companies and international joint ventures, are competing with
PeterStar for a share of the St. Petersburg telecommunications market. A number
of such companies (or their joint venture partners) are larger than PeterStar
and have greater access to capital or resources.

     Although PTN has historically supported the development of PeterStar, PTN
and PeterStar must be regarded as competitors in the telephony segment. PTN can
offer its customers the same core services as PeterStar, notwithstanding the
lower transmission quality and call completion rates of the PTN network.
Furthermore, PTN has recently completed the installation of a modern fiber optic
loop in St. Petersburg which, when fully operational, will significantly enhance
its ability to carry traffic and could therefore compete with PeterStar.
Although PeterStar believes that PTN will require substantial additional capital
to completely modernize its network, PTN, either alone or through Telecominvest,
is free at any time to enter into joint venture arrangements with other foreign
partners to modernize its network independently of PeterStar. While PeterStar
believes that there is a constructive working relationship between PeterStar and
PTN, there can be no assurance that PTN will not in the future start to compete
more aggressively with PeterStar and/or that future disputes between the
partners will not occur and/or that PTN will not seek another partner. See
"-- Risk Factors -- Risks Involving PeterStar Company Limited and Baltic
Communications Limited -- Dependence on Interconnect Parties" and "-- Ownership
and Management of Operating Subsidiaries -- PeterStar Company Limited."

     The other major competitors to PeterStar are: (i) Global One, the
international joint venture between Sprint, DT, France Telecom and its Russian
partner, the telegraph office, which provides national and international voice
and data services to certain destinations; and (ii) Sovintel, a joint venture
between Rostelecom and GTS, which is currently based in Moscow, both of which
have been expanding their operations in St. Petersburg. Since they are generally
unable to compete effectively with PeterStar based on quality, these competitors
principally compete on the basis of price, thereby exerting some price pressure
on PeterStar.

     Other competitors include: (i) Combellga, a joint venture of CominCom,
BelgaCom, Alcatel Bell and MMTS which operates an international overlay network
in Moscow and has been attempting to penetrate the St. Petersburg market,
offering international access similar to BCL, as well as long distance access to
Moscow; (ii) JS Leivo, a joint venture of LenEnergo and Imatran Voima of Finland
which provides outgoing international access; (iii) St. Petersburg Teleport,
which offers only outgoing international services and offers lower priced
services; and (iv) Metrocom, which provides local data access in St. Petersburg.
In addition, the three cellular operators in St. Petersburg are competitors of
PeterStar because they offer local, long distance and international access. At
the same time, each cellular operator uses PeterStar to deliver its traffic.

  TELEPORT-TP

     Teleport-TP is building and operating its business in a highly competitive
environment. Both in the market for international telecommunications services
and the pan-Russian long distance market, Teleport-TP

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faces competition from a number of entities, including Russian companies and
international joint ventures. A number of such companies (or their joint venture
partners) are larger than Teleport-TP and have greater access to capital or
resources.

     International Network Services

     In providing international circuits and direct dial services in Moscow,
Teleport-TP faces competition from a number of operators offering similar
services. Such operators, including Comstar, Combellga, Telmos and Sovintel, are
primarily targeting Russian and foreign businesses in the city, replicating the
services that PeterStar is providing in St. Petersburg. In terms of providing
international circuits, Teleport-TP faces direct competition from the Russian
Space Communications Corporation, the state owned operator which uses both
Intelsat and Russian satellites, and indirectly from Rostelecom, which owns
capacity in and operates the international cable facilities connecting the
Russian Federation to the telecommunications networks of the major global
carriers.

     Long Distance Network Services

     In providing long distance services, Teleport-TP faces competition from a
number of sources, both on a national and regional basis. Teleport-TP faces
competition from Rostelecom in the provision of long distance access to the
local telephone companies. Rostelecom currently appears to support the continued
development of Teleport-TP and Rostelecom stands to gain from its relationship
with Teleport-TP, not only as a Teleport-TP shareholder but also to the extent
that expansion of the Teleport-TP network facilitates the modernization of the
Rostelecom network on a targeted basis. There are no other commercial national
networks of the same scale as the Rostelecom network, although there are a
number of private networks, including those of the Ministries of Defense and
Railways, that could, if funding were made available, provide further
competition to Teleport-TP.

     At this time, it is unclear what impact the consolidation of the
government's telecommunications holdings and the auction of significant stakes
in Sviazinvest will have on the Russian telecommunications market in general and
Teleport-TP in particular. See "-- Telecommunications in the Former Soviet
Union -- Telecommunications in the Russian Federation."

     Teleport-TP also faces competition from other Western-financed entities
seeking to provide various forms of higher bandwidth voice and data
communications services throughout Russia, including: (i) TeleRoss, a subsidiary
of GTS, which is offering service in 12-15 cities using the Russian domestic
satellite systems; (ii) Rosnet, principally a provider of data network services;
(iii) Aerocom, a satellite and fiber optic-based carrier's carrier based in
Moscow, which provides international circuits via the Russian Express satellite
network; (iv) Belcom, a private carrier providing international point-to-point
leased circuits to the oil and gas companies in remote locations, and secondly
closed user group services to communities of interest; and (v) Moscow Teleport,
a satellite based provider of services targeted at the corporate user.

  ALTEL

     Until 1998, ALTEL was the only licensed national cellular operator in
Kazakhstan. In 1998, the KMOC awarded two licenses for the development of a
national GSM network in Kazakhstan. One license was issued to Kcell, a joint
venture of TurkCell and Kazakhtelekom, and the other license was issued to
Kmobile, a joint venture of Telsim, a Turkish company, and local Kazakh
interests. Active marketing was begun by Kcell in early February 1999 and by
Kmobile in mid-February 1999. Management of ALTEL currently believes that, by
virtue of its cost structure and its market penetration to date, together with
its recently introduced prepaid service, it is in a good position to compete
with the new GSM operations. However, ALTEL is currently assessing the impact of
the GSM licenses on its business, and there can be no assurance that ALTEL will
in fact be able to compete successfully with the new licensees.

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  BELCEL

     BELCEL is the only licensed national cellular operator in Belarus. While
the government of Belarus has announced that it is considering licensing a GSM
operator in Belarus, no action towards the award of such a license has been
taken, and it is not possible to predict whether, if ever, such a license may be
issued.

OWNERSHIP AND MANAGEMENT OF OPERATING SUBSIDIARIES

  PETERSTAR COMPANY LIMITED

     Ownership Structure

     The Company holds its 71% interest in PeterStar through NWE Cyprus (60%)
and PLD Holdings (11%). It acquired its 60% interest held through NWE Cyprus at
various times over the period 1992-96. The Company acquired PLD Holdings in
August 1998 as part of the transactions with News and Cable & Wireless.

     The remaining 29% of PeterStar is held by Telecominvest, which is in turn
owned 51% by an affiliate of Commerzbank AG, a major German bank, 25% by PTN and
24% by SPMMTS. Telecominvest was originally a joint venture between PTN and
SPMMTS formed to act as a holding company for their respective interests in a
number of telecommunications ventures in Northwest Russia.

     Relationship with Other Equity Holders

     Under the PeterStar foundation documents, a general meeting of shareholders
may take action through a simple majority of those present. Accordingly, since
the Company has a 71% interest in PeterStar, it should be assured of being able
to take whatever action it requires once a meeting is constituted. However,
representatives of 75% of the ordinary shares must first be present to
constitute a quorum. Thus, it is possible for Telecominvest (and Commerzbank,
through its control position in Telecominvest) to prevent action from being
taken by ensuring that there is no quorum at a shareholders meeting.

     Also, pursuant to the PeterStar foundation documents, the shareholders have
rights of first refusal to purchase any shares which any shareholder wishes to
transfer, and to purchase any shares held by any shareholder who is bankrupt or
goes into liquidation.

     PeterStar is dependent on PTN for the completion of most of its calls, and
the PeterStar network is linked to the PTN network, giving PeterStar access to
PTN's large local subscriber base. In addition, PeterStar is dependent on PTN's
buildings, ducts and tunnels in order to house its exchanges and to reach its
customers. Until 1998, PTN permitted PeterStar to house its exchanges in PTN
buildings and use its other facilities without paying rent or call charges.
Commencing in 1998, PeterStar has been required to pay a local line rental
charge to PTN, although roughly half of the fee otherwise payable during 1998
was offset against amounts owed to PeterStar by PTN in respect of the
Vassilievski Island project. The aggregate amount paid to PTN in 1998 for line
rental charges was $1.3 million. The amount of the 1999 line rental charged has
not yet been determined, but PeterStar expects once again to offset amounts due
from PTN against such charges during 1999. However, any change in the terms on
which PeterStar has access to PTN's facilities, or any restrictions imposed by
PTN on the completion of calls from the PeterStar network, could have a material
adverse effect on PeterStar and, in turn, the Company. Given the extent of the
reliance of PeterStar upon PTN, PTN is clearly in a position to exercise a high
degree of influence over PeterStar's affairs as a practical matter, even as an
indirect minority shareholder.

     Notwithstanding its ability to influence PeterStar's affairs, the Company
believes that PTN will continue to support the development of PeterStar's
business as presently planned, and that PTN's business objectives are basically
consistent with PeterStar's own plans.

     Management

     The board of directors of PeterStar consists of eight individuals, with
three each being appointed by NWE Cyprus and Telecominvest, and one being
appointed by PLD Holdings. The eighth director is the

                                       40
<PAGE>   43

General Director, who is nominated by NWE Cyprus subject to final approval by
the shareholders. As the owner of NWE Cyprus and PLD Holdings, the Company has
the indirect right to appoint four of the eight directors of PeterStar, and to
nominate the General Director who also sits on the Board.

     Inasmuch as six of the eight directors must be present to constitute a
quorum, the possibility exists that the Telecominvest directors (or any three
other directors) may be able from time to time to prevent the creation of a
quorum. Once a quorum is present, however, the Company is currently reasonably
assured of a majority of the votes on the board, on the basis that the General
Director, who is an NWE Cyprus appointee, will vote with the four
Company-appointed directors. Even if the General Director votes with the
Telecominvest directors, the Company can still achieve a majority of votes
because the PeterStar foundation documents specify that the person designated as
Chairman of the Board (whom NWE Cyprus is entitled to appoint) also has a
casting vote in the event of a tie vote among the board of directors.

     The day-to-day management of PeterStar is the responsibility of the General
Director and a management board which is composed of the PeterStar divisional
directors. The PeterStar operational divisions are: Sales and Marketing,
Finance, Technical and Operations and Administration.

     The officers of PeterStar are as follows:


<TABLE>
<S>                                                     <C>
Sergei Kuznetsov....................................    General Director
Rick Macy...........................................    Commercial Director
</TABLE>


     Sergei Kuznetsov became General Director of PeterStar in September 1998.
Prior to joining PeterStar, he had been, since July 1995, the General Director
of Telecominvest, the company formed by PTN and SPMMTS to hold their interests
in St. Petersburg and Northwest Russia. Before that, Mr. Kuznetsov was the
initial General Director of Delta Telecom, Russia's first mobile
telecommunications company. Prior to that time Mr. Kuznetsov's career had been
in PTN where he rose to become the chief engineer of the Necrasovski regional
node. He received his degree from the North West Scientific Institute in St.
Petersburg. He received an MBA degree from Columbia University and attended the
management program at the Fuqua School of Management of Duke University. He is a
director of a number of companies including PTN, Telecominvest and PeterStar.

     Rick Macy joined PeterStar as Commercial Director in April 1998, replacing
Stephen Gardner who then became Vice President -- Commercial, Russia for PLD.
Prior to joining PeterStar, Mr. Macy was the Commercial Director, Moscow for
Millicom, where he was responsible for the sales and marketing of all of
Millicom's Russian cellular joint ventures. Previously, he was Area Sales
Manager for Harris Corporation, responsible for their European markets. He also
spent four years as an electronics technician in the U.S. Navy.


     Service Agreement


     PeterStar entered into a service agreement, dated as of January 1, 1999,
with NWE Cyprus, pursuant to which, for a one-year term, NWE Cyprus will provide
management services to PeterStar, including advice and assistance with respect
to the design, implementation, operations, marketing and expansion of
PeterStar's network for a one-year term. NWE Cyprus invoices PeterStar quarterly
for these services in U.S. Dollars. PeterStar has had similar agreements with
NWE Cyprus for all years dating back to 1992.

     PLD Telekom Inc. Representative Office

     In 1997, the Company established a representative office of the Company in
St. Petersburg. The office is co-located at the premises of BCL. The Company
employs as its Representative Director Peter Owen Edmunds, formerly with
PeterStar, and two administrative staff members. Mr. Owen Edmunds, who was
previously the Deputy General Director and Sales and Marketing Director of
PeterStar, formed part of the initial team from the Company that helped
formulate the development of PeterStar commencing in April 1992. Prior to
joining the Company, Mr. Owen Edmunds served for 14 years as an officer in the
British Army. He served in the United Kingdom and Germany, ending his military
career in Berlin on the Five

                                       41
<PAGE>   44

Nation Liaison team. Mr. Owen Edmunds underwent Russian language training in the
service and is a qualified Russian interpreter.

  TECHNOCOM LIMITED

     Ownership Structure

     The Company holds a 80.4% voting interest in Technocom, with the balance
being held by Plicom (14.57%) and Elite (5.03%). In November 1997, the Company
acquired: (i) 30 Technocom ordinary shares (or approximately 15.1% of the total
such shares issued) held by Plicom, an Irish company beneficially owned by the
family interests of Mr. Mark Klabin, for $18.5 million in cash; and (ii) 29
Technocom ordinary shares (or approximately 14.6% of the total such shares
issued) held by Elite, an Irish company beneficially owned by a trust advised by
Dr. Boris Antoniuk, for $6.25 million in cash and 1,316,240 shares of the
Company's Common Stock.

     Technocom's principal asset is its equity interest in Teleport-TP. The
shareholders of Teleport-TP are Technocom (38.5%), Rostelecom (44%), Roscomm
(10%) and Technopark (7.5%). During 1996, Technocom's direct and indirect
interests in Teleport-TP were increased to 49.33% through: (i) the acquisition
of a 55.51% interest in Technopark, a 7.5% shareholder in Teleport-TP; and (ii)
the acquisition by Roscomm (in which Technocom holds a 66.67% interest) of a 5%
interest previously held in trust for the VVC. The completion of these
transactions by Technocom has given Technocom the ability to control 56% of the
voting shares in Teleport-TP and nominate three of the five seats on the
Teleport-TP board, thereby permitting the consolidation of Teleport-TP's
financial results into the Company's consolidated financial statements under
U.S. GAAP effective December 31, 1996.

     Technocom also owns a 49% beneficial interest in MTR-Sviaz. The remaining
51% is owned by Mosenergo, the Moscow city power utility. MTR-Sviaz is a joint
venture formed to modernize and commercialize a portion of Mosenergo's internal
telecommunications network.

     Technocom also holds a 50% interest in Rosh Telecom, a venture with ECI, an
Israeli equipment supplier. Rosh Telecom is the exclusive agent for ECI in the
Russian Federation. Technocom is currently negotiating to sell its interest in
Rosh Telecom to Plicom.

     Technocom also has an effective 100% of SCS. SCS acts as Teleport-TP's
marketing arm for satellite circuit capacity made available by Teleport-TP to
international television agencies with occasional broadcasting requirements.

     Relationship with Other Equity Holders

     In connection with the November 1997 acquisitions of portions of the
Technocom interests held by Plicom and Elite, the Company entered into a revised
put and call option agreement with Plicom and Elite.

     Under these arrangements as originally structured, the remaining ordinary
shares of Technocom held by these shareholders (29 shares, or approximately
14.6% of the total ordinary shares outstanding, in the case of Plicom, and 10
shares, or approximately 5% of the total ordinary shares outstanding, in the
case of Elite) were to have been independently valued in 1999 and the Company
had the right to call, and Plicom and Elite had the right to put, their
respective interests at the per share value established by the valuation.

     These arrangements were restructured as follows. In the case of the
interest held by Plicom, while the date on which the put or call could be
exercised did not change, the valuation procedure was eliminated and the "put
and call" price for its interest was set at a fixed $17,500,000. In the case of
Elite, two of its remaining ten ordinary shares were made subject to a new put
and call arrangement which would come into effect in 1998, with the "put and
call" price to be $1 million or, at Elite's option, that number of shares of the
Common Stock which resulted from dividing $1 million by the lower of $5.85 and
the average closing price of such shares over the preceding ten trading days.
The remaining eight ordinary shares continued to be subject to the existing put
and call arrangements in 1999, except that the valuation would be made by the
Company and the amount paid pursuant to the exercise of either the put or the
call could not exceed $9,620,689 or be less than

                                       42
<PAGE>   45

$6,689,655. See "-- Risk Factors -- Risks Involving the Company -- Technocom
Minority Shareholders' Put Options."

     The success of Teleport-TP's business is very dependent upon the continuing
support of Rostelecom. Rostelecom holds a 44% interest in Teleport-TP, and Mr.
Oleg Belov, the general director of Rostelecom, is Rostelecom's representative
on the Teleport-TP board of directors.

     Currently, Rostelecom is Teleport-TP's largest customer for its
international network services, accounting for approximately 30% of total
Teleport-TP revenues in 1998, as compared to 27% in 1997. As of December 31,
1998, Teleport-TP leased approximately 800 active circuits via Intelsat and
Eutelsat to Rostelecom, pursuant, as to the Intelsat circuits, to a contract
which was originally signed in December 1992 and is now automatically renewed
for additional one year terms unless otherwise terminated by either party and,
as to the Eutelsat circuits, to a ten-year contract which commenced in September
1995.

     Additionally, to date Rostelecom has supported all of Teleport-TP's plans
(and related license applications) for the expansion of its "Satelink" network
in Russia, even though Rostelecom is the principal provider of national and
international long distance service in Russia, and thus in direct competition
with Teleport-TP. Rostelecom's motivation appears to be its equity interest in
Teleport-TP as well as the fact that Teleport-TP's network provides improved
telecommunications links with areas of the Russian Federation which Rostelecom
is unable to serve fully, or at all, and thus increases traffic utilizing
Rostelecom's own network.

     In view of the importance of the relationship of Rostelecom to Teleport-TP
and the central position which Rostelecom plays in the Russian
telecommunications industry, Rostelecom is clearly in a position to exercise
considerable influence over Teleport-TP's affairs, notwithstanding the fact that
it holds a minority position in the company and its representative on the board
of directors is also in a minority. While there is no guarantee that Rostelecom
will continue to support the expansion of Teleport-TP, the Company knows of no
reason to believe, based on the nature of its support to date and the benefits
it receives from the relationship, that Rostelecom will not continue to support
Teleport-TP in the future.

     Management

     Technocom is managed by a board of directors consisting of five members,
three of whom are designated by the Company, with Plicom and Elite, Technocom's
other shareholders, each nominating one member. The day-to-day management of
Technocom is currently the responsibility of John Armley, who is the Chief
Operating Officer of Technocom. Mr. Mark Klabin and Dr. Boris Antoniuk provide
significant operational and oversight services to Technocom pursuant to
consulting agreements. The Company has provided, and will continue to provide,
logistical, engineering and project management support to the development of
Teleport-TP's satellite-based long distance network, the costs associated with
which are borne by Technocom.

     In connection with the Company's acquisition of the additional interests in
Technocom in November 1997, Technocom entered into an amendment to its
consulting agreement with Plicom (under which Plicom makes available the
services of Mr. Klabin), amending and increasing the duties to be performed
thereunder, increasing the annual fee payable thereunder from $100,000 to
$200,000, providing for the payment of expenses reasonably incurred, and
specifying that the agreement will terminate once the Company has acquired the
remainder of Plicom's interest in Technocom. Technocom also entered into an
amendment to its existing consulting agreement with Elite (under which Dr.
Antoniuk's services are provided), increasing the annual fee from $108,333 to
$158,333. Separately, both Mr. Klabin and Dr. Antoniuk have agreed not to
compete with the Company in the field of telecommunications in the former Soviet
Union both while they are directors of Technocom and for two years after they
cease to be directors of Technocom.

     Michael Maltby became Chief Financial Officer of Technocom in February
1998. Prior to joining Technocom, he was the Finance Director of BELCEL. From
1995 to 1996, Mr. Maltby was a Financial Systems Accountant for Comstar in
Moscow. Previously, he was a chartered accountant with Ernst & Young where he
worked in the London, St. Petersburg and Moscow offices.

                                       43
<PAGE>   46

  ALTEL

     Ownership Structure

     The Company's 50% interest in ALTEL is held by WTC, a British Virgin
Islands corporation and a wholly owned indirect subsidiary of the Company. The
shares of WTC are held by the Company through NWE Cyprus. The other 50% interest
in ALTEL is currently held by Kazakhtelekom, a joint stock company which is
owned by the government of Kazakhstan and which operates the public telephone
network in that country (the authority to operate such network having been
recently confirmed by the grant to Kazakhtelekom of specific authority to act as
the exclusive operator of the public network in Kazakhstan and as representative
of the Kazakh government in international telecommunications matters). In May
1997, the Kazakh government announced that it had sold a 40% stake in
Kazakhtelekom to Daewoo. However, in March 1998, it was reported that Daewoo had
sold a portion of its stake (reported to be approximately 10% of Kazakhtelekom)
to an unnamed third party. It was later confirmed that Daewoo had sold its
entire stake in Kazakhtelekom to Kazcommertzbank, a commercial bank based in
Kazakhstan. It is understood that the Kazakh government is seeking to sell a 15%
stake in Kazakhtelekom to private investors.

     Relationship with Other Equity Holders

     The relationship between WTC and Kazakhtelekom is governed principally by
the terms of a joint venture agreement entered into in December 1993. The
agreement sets forth the respective capital contributions of the parties. In the
case of the Kazakh partner, these consisted of the cellular license and
frequencies, as well as all physical facilities required for the operation of
the cellular network. As required, WTC contributed cash, equipment, property and
services with an aggregate value of $20.0 million by February 1995. WTC has no
obligation to make any additional contributions. Should the board of directors
of ALTEL determine that ALTEL requires an additional capital contribution, then
each shareholder will be required to contribute its proportionate share of the
capital contribution or face dilution.

     Each ALTEL shareholder has the same voting, distribution and liquidation
rights, except that upon a liquidation, WTC is entitled to receive out of any
distributions the first $20.0 million for its capital contribution plus any
subsequent capital contributions not matched by Kazakhtelekom.

     Under current Kazakh legislation, neither party is permitted to sell,
assign, pledge or otherwise transfer its equity interest in ALTEL without first
offering such interest to the other party

     ALTEL and Kazakhtelekom entered into an interconnection agreement pursuant
to which Kazakhtelekom agreed to provide ALTEL with access to the public
switched telephone network in Kazakhstan for the fifteen year term of ALTEL's
current license free of charge (but subject to payment of certain charges to
local operators for carriage and termination of calls from ALTEL's network).
While there is no reason to suppose that Kazakhtelekom will not honor this
commitment, the loss of, or any significant limitation on its access to the
network could have a material adverse effect on the operations of ALTEL.

     While WTC may have the power, pursuant to the management structure
described below, to direct the operations or determine the strategies of ALTEL,
management believes that it is unlikely, in view of the pivotal importance of
Kazakhtelekom to the business of ALTEL, that any significant initiatives would
be undertaken by WTC without the consent of Kazakhtelekom. To date,
Kazakhtelekom has not used its position to undermine initiatives proposed by
WTC, nor to cause ALTEL to take any action to WTC's detriment; however, there
can be no assurance that it will not do so in the future.

     It is not known what effect on ALTEL, or its license or business, the
recent designation of Kazakhtelekom as the exclusive operator of the public
network will have. In addition, Kazakhtelekom is a participant in one of the
joint ventures which was recently granted a national GSM license in Kazakhstan
and it remains unclear what impact this participation will have on ALTEL's
business. All of these developments will present new uncertainties and
challenges for ALTEL. See "-- Risk Factors -- Risks Involving ALTEL."

     In connection with the grant of its telecommunications license in 1994, WTC
agreed to lend the KMOC up to $3 million on commercial terms for use for various
KMOC projects. During 1995, the Company

                                       44
<PAGE>   47

advanced $3 million to Monogram Finance Group Limited ("MFGL") in exchange for a
convertible promissory note due on February 20, 2000. The note is convertible at
any time prior to February 29, 2000 into common stock of MFGL representing 50%
of its total issued and outstanding common stock. Its sole asset is an agreement
to acquire a 50% interest in Monogram Telecommunications Limited, a Bermuda
company ("MTL"). MTL has an agreement to acquire 100% of an Irish company known
as Kazakhstan Telecommunications Development Corporation Limited ("KTDC"). KTDC
has agreed in principle with the government of Kazakhstan to assist the
government in connection with the privatization of Kazakhtelekom. While the
Company believes that this arrangement satisfies the commitment given by WTC to
the KMOC, there can be no assurance that the KMOC will not still call upon WTC
to advance, and that WTC will not be obligated to pay, the $3 million.

     Management


     ALTEL is currently managed by a board of directors consisting of six
members, three designated by Kazakhtelekom and three by WTC. WTC designates the
Chairman of the Board who has a casting vote in the event of a tie vote. At
least four members of the board are required to approve any of the following
actions: amendment of ALTEL's charter, dissolution, voluntary bankruptcy,
approval of the annual budget, acquisition of assets or businesses in excess of
$5.0 million or any disposition or transfer of the ALTEL license, other
investments in excess of $1.0 million or incurring indebtedness in excess of
$2.0 million. These arrangements cannot be changed without WTC's consent.
Accordingly, while there may be some question about the enforceability of these
arrangements, WTC believes that it has the ongoing ability to make all
significant strategic, operating, financing and investing decisions on behalf of
ALTEL through the arrangements described above, although it is not likely that
it would choose to take action without the approval of Kazakhtelekom.


     ALTEL has two co-chief executive officers ("Co-CEOs") and a treasurer who
is also the chief financial officer ("CFO"), and may appoint other officers as
the board determines. In addition, ALTEL has a chief Kazakh financial officer
("CKFO") who reports directly to the CFO and who is responsible for accounting
matters under Kazakh law as well as serving as a liaison between ALTEL and the
Kazakh tax authorities. One of the Co-CEOs and the CKFO are appointed by the
directors who are designees of Kazakhtelekom and the other Co-CEO and the CFO
are appointed by the directors who are designees of WTC. The Co-CEO appointed by
the WTC directors has the ultimate responsibility for the management of ALTEL,
subject to the authority of the board of directors.

     The current officers are as follows:

<TABLE>
<S>                                         <C>
Rex Power...............................    Co-Chief Executive Officer
Maxut Sauranbekov.......................    Co-Chief Executive Officer
Michael Leaver..........................    Chief Financial Officer
Natalia V. Sauranbekova.................    Chief Kazakh Financial Officer
</TABLE>

     Rex Power joined ALTEL in June 1997. He is a registered chartered engineer
and a registered European engineer. Prior to joining ALTEL, he worked for Cable
& Wireless for over 30 years, mostly in overseas assignments, including
management positions in Nigeria, Saudi Arabia and Macau. Additional positions
with Cable & Wireless included Regional Business Manager for the Bermuda,
Caribbean and Atlantic Islands Region and General Manager, Eastern
Russia/Director, Special Projects in the Northeast Asia Region, Hong Kong and
Japan.

     Maxut Sauranbekov became Co-Chief Executive Officer of ALTEL in June 1997.
He joined ALTEL in October 1994 as Vice President for Marketing, Sales and
Customer Service and then served as Vice President for Corporate Affairs. Prior
to joining ALTEL, he worked for eight years in various other commercial and
financial ventures.

     Michael Leaver joined ALTEL as Chief Financial Officer in April 1998. From
1995 until joining ALTEL, he was Deputy General Director of Uralwestcom, a
cellular telephony operator in Yekaterinburg.

                                       45
<PAGE>   48

Previously, Mr. Leaver was the Financial Director for Kiev Tetra Pak, a
Ukrainian joint venture, for three years during its start-up phase.

     Natalia V. Sauranbekova has more than seven years experience in finance.
For over three years, she was Financial Director at Kazryastechnika, which
provided research and planning services for the KMOC, and prior to that she was
an economist with a number of Kazakh government agencies. She is married to Mr.
Maxut Sauranbekov, one of the two Co-Chief Executive Officers.

     Recent changes in applicable Kazakh legislation will require that the
management arrangements described above will need to be revised. However,
although it seems clear that the existing arrangements cannot be completely
preserved in their present form, because of the imprecision in some of the
drafting and also because of the lack of precedents due to the newness of the
legislation, it is difficult to state to what extent these arrangements will
need to be revised. In addition, ALTEL is actively exploring the option of
converting to a different legal form which may permit the preservation of, if
not all, at least a substantial portion of the management arrangements described
above in their current form. ALTEL does not expect to resolve this issue before
the middle of 1999.

     ALTEL entered into Consulting and Information Services Agreements with the
Company and Kazakhtelekom, each dated January 1, 1998, pursuant to which such
parties provide certain consulting, information, management services and
personnel expertise to ALTEL. In consideration for these services, ALTEL pays
consulting fees, in the case of the Company, of $25,000 per month plus 3.4% of
ALTEL's gross revenues, and, in the case of Kazakhtelekom, of 300,000 Tenge per
month plus 1% of ALTEL's gross revenues. These contracts are each for a one year
term automatically renewable for successive one year periods unless terminated
by either party.

                                       46
<PAGE>   49

RISK FACTORS

     This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company's operating subsidiaries, proposed changes in the
Company's corporate structure and centers of operations and interpretations and
actions of certain regulatory authorities, including in the United States,
Russia, Kazakhstan and Belarus, as well as information contained elsewhere in
this Report where statements are preceded by, followed by or include the words
"believes," "expects," "anticipates" or similar expressions. For such statements
the Company claims the protection of the safe harbor for forward-looking
statements contained in the private Securities Litigation Reform Act of 1995.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in this Report and in the documents
incorporated herein by reference. Furthermore, this document constitutes a Year
2000 Readiness Disclosure Statement, and the statements herein are subject to
the Year 2000 Information and Readiness Disclosure Act, and the Company hereby
claims the protection of such Act for this document and all information
contained herein.

  COUNTRY RISKS

     General.  Foreign companies conducting operations through affiliates in the
Russian Federation, Kazakhstan and Belarus face significant political, economic,
currency, legal and social risks. For example, a report released February 20,
1997 by the United States Embassy in Moscow on the commercial environment in the
Russian Federation listed the following general difficulties affecting trade and
investment in the Russian Federation, most of which are also encountered in
Kazakhstan and Belarus, and some or all of which could affect the ability of the
Company or its operating businesses to conduct or realize income from their
businesses:

     -  ownership disputes
     -  high taxes, and a frequently changing tax regime
     -  high operating costs
     -  lack of systematic and accessible credit information
     -  corruption and commercial crime
     -  financial illiquidity of many firms
     -  changing requirements from regulatory bodies
     -  lack of market information
     -  an infant commercial legal framework
     -  cultural and language differences
     -  infrastructure problems
     -  payments, arrears and frozen accounts
     -  frequent changes in governmental personnel

     Political Risks.  Since the breakup of the Soviet Union, the political
situation in the Russian Federation, Kazakhstan and Belarus has been
characterized by uncertainty and instability.

     Russia.  In the Russian Federation, there have been significant tensions
between the executive and legislative branches of the government and efforts by
the regions and autonomous republics of the Russian Federation to gain a greater
degree of independence (the most dramatic example of which was the conflict in
Chechnya). Lack of consensus between local and regional authorities and the
federal government often results in the enactment of conflicting legislation at
various levels and may result in political instability. This lack of consensus
may have negative economic effects on the Company, which could be material to
its operations.

     In addition, Communist and nationalist parties wield strong influence in
the lower house of Parliament (the Duma) and have made gains in regional
governorships which could result in a slow down or reversal of the development
of a free market economy.

                                       47
<PAGE>   50

     During the transformation to a market-oriented economy in the Russian
Federation, legislation has been enacted to protect property against
expropriation and nationalization. However, a resurgence in nationalism could
result in pressures for the reduction or even elimination of non-Russian
ownership of Russian businesses, and there can be no assurance that such
recently enacted protections would be enforced in the event of an attempted
expropriation or nationalization. Legislation to restrict foreign ownership in
the telecommunications industry is introduced from time to time and, while not
expected to become law, is symptomatic of these increasingly nationalistic
attitudes.

     There is also significant instability in the executive branch. Boris
Yeltsin, President of the Russian Federation, has been unable because of
ill-health to carry out the many and significant responsibilities of that
office. Instead, he has increasingly delegated his responsibilities to
ministerial appointees, while at the same time endeavoring to retain, and
demonstrate, his continuing constitutional powers by making frequent changes in
his appointments. All of this has served to create significant uncertainty, not
only as to the policies his government will pursue, but also as to whether the
government is likely to take any action to deal with the many significant
problems which the Russian Federation faces.

     Additionally, he has announced that he will not run for re-election in
2000, which has set off a race between a number of candidates anxious to succeed
him. The efforts of these other candidates to be elected as President, and the
resulting change in leadership at that time, could result in additional
political instability and also substantial changes in government policies. Any
such matters could have a material adverse effect on the Company.

     Kazakhstan.  The political situation in Kazakhstan is characterized by
one-man rule by President Nursultan Nazarbayev who demonstrates considerable
political power. While such concentration of power may at times be perceived as
providing a stabilizing influence, it also increases the risk of nepotism,
arbitrary decision-making and significant policy changes in the event of
succession.

     Belarus.  In Belarus, President Aleksandr Lukashenko essentially controls
the organs of government. In addition, his rule is characterized by outside
observers as autocratic because of a perceived lack of tolerance for opposition.
In addition, President Lukashenko has made recent moves to re-unite Belarus with
the Russian Federation, although it is unclear whether any such reunification
will occur.

     Russian Economic and Political Turmoil.  During 1998, there was
considerable turmoil and uncertainty in the Russian financial markets, prompted
in large part by a drop in commodity prices and economic problems in Russia,
together with the crisis in the Asian financial markets which began in late
1997. These developments were accompanied by a substantial decline in the
Russian stock market. These developments led the Russian government to raise
interest rates significantly and to seek special assistance from the
International Monetary Fund. In August 1998, the Russian government announced a
substantial widening of the trading band in which the Russian Rouble would be
permitted to float, together with a moratorium on certain foreign debt payments.
Thereafter the Rouble dropped substantially in value and traded outside of the
high end of the band, and the Russian government did not intervene to stop this
trading, thereby effectively acquiescing to a major devaluation of the Rouble.
In the latter part of 1998 and the first months of 1999, the Rouble has further
declined in value and is expected to continue to decline in value during 1999,
perhaps significantly.

     Also in August 1998 the Russian government announced a 90-day moratorium on
debt repayments. This moratorium caused considerable difficulties for Russian
banks and businesses with hard currency obligations, as well as significantly
impairing the ability of such banks and businesses, as well as the Russian
government itself, to access the Western capital markets. The difficulties
experienced by the Russian banks in turn caused difficulties for their
customers, as bank transfers and deposits were frozen in many cases. The Russian
government itself has effectively defaulted on substantial amounts of its debt,
and is engaged in negotiations with Western banks and institutions (which reach
back several months) to restructure this indebtedness. Continuation of these
conditions for any significant period of time could have serious long-term
effects on the Russian economy. At the present time, it is impossible to predict
whether or when any resolution of these problems is likely.

                                       48
<PAGE>   51

     Also in August 1998, the Russian government experienced a significant
upheaval, with the dismissal of the reformist government led by Sergei Kiriyenko
and its replacement by one led by the current Prime Minister Yevgeny Primakov.
The current government has yet to propose a plan to address Russia's economic
and financial difficulties, one result of which has been to cause the
International Monetary Fund to delay further assistance to the Russian
government. At the same time, the fact that President Boris Yeltsin appears to
be playing a less active role in the day-to-day governing of the country, and
the possibility that he may decide (as he is constitutionally permitted) to once
more reshuffle his government, have created increased uncertainty about the
future political situation in Russia, which in turn has created additional
concern about the ability of the government to deal with the many problems
currently afflicting the Russian economic system.

     At the present time, it is not possible to predict the complete effect of
the continuing economic, financial and political difficulties in Russia,
although they have made for a difficult business environment in Russia. Although
demand for the Company's telecommunications services continued during the
economic and banking crisis in the second half of 1998, the economic
difficulties in Russia have adversely affected the Company's operating
subsidiaries and the Company's consolidated results for the year ended December
31, 1998. As described in more detail in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the Company's operating
subsidiaries incurred a significant foreign exchange loss in 1998, together with
decreased revenue growth and increased collections problems, and the Company
expects that revenue growth and margins will remain under pressure, and that the
average age of its receivables is likely to continue to grow as collections
problems increase. The Company is not yet able to predict the effects of the
ongoing difficulties on its results for 1999, but the continuing economic
difficulties in Russia will likely continue to have an adverse effect on the
Company in current and future reporting periods, and there can be no assurance
that such adverse effects will not be material.

     Economic Risks -- Uncertain Pace of, and Difficulties Experienced in,
Economic Reform; Reliance on Foreign Economic Aid.  Until recently, the
economies of the Russia Federation, Kazakhstan and Belarus were administered by
the central authorities of the former Soviet Union. Following the collapse of
those authorities and the command economy they managed, the governments of both
the Russian Federation and Kazakhstan sought to implement policies designed to
introduce free market economies into their respective countries. While these
policies have met with some success, the economies of both the Russian
Federation and Kazakhstan have been characterized by high unemployment, high
rates of business failure, the deterioration of certain sectors of the economy,
high government debt relative to gross domestic product and declining real
wages. In both the Russian Federation and Kazakhstan real economic improvement
has been limited to specific regions (the Moscow and St. Petersburg regions in
Russia, and Almaty in Kazakhstan). The Russian Federation is still experiencing
a lack of political consensus as to the scope, content and pace of free market
reforms. No assurance can be given that policies to introduce or support a free
market economy will continue to be implemented in either the Russian Federation
or Kazakhstan, that these countries will remain receptive to foreign investment
or that the economies of the Russia Federation or Kazakhstan will stabilize. The
failure of any of these to occur could have a material adverse effect on the
Company. In addition, the Russian Federation currently receives substantial
financial assistance from several foreign governments and international
organizations. To the extent any of this financial assistance is reduced or
eliminated, economic development in the Russian Federation may be adversely
affected, and any resulting difficulties in the Russian economy could have a
material adverse effect on the Company.

     Conversely, while the Government of Belarus initially sought to introduce
free market reforms, more recently the President has reversed this direction, so
that the economy, while manifesting some free market characteristics, has
essentially returned to a regime of centralized control. This has resulted in a
declining economy, rampant inflation and falling standards of living. It is not
possible to predict how, or when, these conditions may improve.

     -- Limited Experience with Free Market Economy.  Russian, Kazakh and
Belarus businesses have limited operating history in free market conditions and
have had limited experience compared with Western companies with the entering
into and performance of contractual obligations. Accordingly, as compared to
Western companies, such businesses are often characterized by management that
lacks experience in
                                       49
<PAGE>   52

responding to changing market conditions and limited capital resources with
which to develop their operations. In addition, the Russian Federation,
Kazakhstan and Belarus have limited infrastructure to support a market system,
and banks and other financial systems are not well developed or well regulated.
Businesses therefore may experience difficulty in obtaining working capital
facilities. Moreover, these countries' banking system have faced and may
encounter in the future liquidity crises as well as other problems arising as a
result of under-capitalization of the banking sector as a whole. The experiences
gained from the financial and banking crisis in Russia in the last two quarters
of 1998 demonstrate how fragile the Russian banking system is, and at the same
time how dependent Western investors are on such system. Another general Russian
banking crisis in particular could have a material adverse effect on the
Company's operations and financial performance and on the ability of its
customers to pay amounts due. While neither Kazakhstan nor Belarus have
experienced a similar crisis, there is the potential for such a crisis in both
countries and the effects of any such crisis would likely be as severe.

     Restrictions on Currency Conversion; Historical Volatility in Currency
Prices.  None of the Russian Rouble, the Kazakh Tenge or the Belarussian Ruble
is convertible outside of their home countries.

     In Belarus, there are significant (and increasing) controls on currency
conversion, including requirements that exports only be sold for hard currency
which must then be converted into Belarussian Rubles at a low "official" rate of
exchange. While there is some trading at the higher "unofficial" rates of
exchange, the Belarussian Ruble is essentially inconvertible.

     In Russia and Kazakhstan, a market exists for the conversion of Roubles and
Tenge into other currencies, but it is limited in size and is subject to rules
limiting the purposes for which conversion may be effected. The history of
trading in the Russian Rouble and Kazakh Tenge against the U.S. Dollar has been
characterized by significant declines in value and considerable volatility,
although the Russian Rouble and the Kazakh Tenge experienced relative stability
against the U.S. dollar during 1996 and 1997. However, during 1998 and the early
part of 1999, the Russian Rouble has been under considerable pressure and
suffered substantial declines against the U.S. Dollar and other currencies.
After remaining relatively stable during 1998, the Kazakh Tenge has lost
significant value in the first four months of 1999, reflecting concerns about
the health of the country's economy and a decision by the government of
Kazakhstan to cease providing support for its currency. See "-- Russian Economic
and Political Turmoil."

     In general, PeterStar, ALTEL and, to a lesser extent, Teleport-TP post
their tariffs in U.S. Dollars, and receive payment in local currency at the U.S.
dollar exchange rate prevailing on the date of payment. These operating
businesses face an exchange risk to the extent that they experience any
difficulty in converting the local currency payment received into U.S. Dollars.
In addition, they face a risk that the local currency weakens against the U.S.
Dollar during the period between the customer instructing its bank to pay the
operating business and the day the payment is actually received by the operating
business. Historically, this time period has been short and the exchange risks
arising from this particular issue have therefore been minimal. However, the
Company's operating businesses experienced significant foreign exchange losses
in the third and, to a lesser extent, fourth, quarter of 1998, due principally
to delays in clearing payments within the Russian banking system.

     However, virtually all of Teleport-TP's Satelink tariffs are denominated in
Russian Roubles, meaning that it is fully exposed to exchange losses with
respect to revenues from the Satelink business, both in respect of the currency
conversion problems described in the preceding paragraph and in respect of more
dramatic loss of value (in U.S. Dollar terms) resulting from devaluation of the
Russian Rouble. Currently, over 20% of its total revenues are derived from this
business. Both the percentage and amount of revenues which are exposed to such
foreign exchange losses are likely to grow as the Satelink business grows.

     All of these factors, and others, may serve to increase the Company's
exposure to foreign exchange losses in the future, the effect of which cannot
currently be predicted. No assurance can be given that the Company's operating
businesses which bill in U.S. dollar equivalents will be able to continue to
post their tariffs in U.S. Dollars and collect payments in local currencies in
amounts determined by reference to the value of the U.S. Dollar, or that they
will continue be able to process such payments without banking delays or to
exchange local currencies for U.S. Dollars without significant difficulties,
delays or costs.
                                       50
<PAGE>   53

     In addition, no assurance can be given, in respect of Belarus where
government controls have made the currency essentially inconvertible, that the
Company will be able to develop billing and payment strategies to deal with this
situation.

     It is not practical or economical for the Company to hedge its exchange
risks. See "Quantitative and Qualitative Disclosure About Market Risk." Any of
these developments, in conjunction with further declines, or volatility, in the
value of the Russian Rouble, the Belarussian Ruble or the Tenge against the U.S.
Dollar, could have a material adverse effect on the Company. See also "-- Risks
Involving the Company -- Currency Controls."

     Legal Risks -- Underdeveloped Legal System.  The Russia Federation,
Kazakhstan and Belarus lack fully developed legal systems. Russian, Kazakh and
Belarussian law is evolving rapidly and in ways that may not always coincide
with market developments, resulting in ambiguities, inconsistencies and
anomalies, and ultimately in investment risk that would not exist in more
developed legal systems. Furthermore, effective redress in Russian, Kazakh and
Belarussian courts in respect of a breach of law or regulation, or in an
ownership dispute, may be difficult to obtain.

     Risks associated with the Russian, Kazakh and Belarussian legal systems
include: (i) the untested nature of the independence of the judiciary and its
immunity from economic, political or nationalistic influences; (ii) the relative
inexperience of judges and courts in commercial dispute resolution, and
generally in interpreting legal norms; (iii) inconsistencies among laws,
presidential decrees and governmental and ministerial orders and resolutions;
(iv) often times conflicting local, regional and national laws, rules and
regulations; (v) the lack of judicial or administrative guidance on interpreting
the applicable rules; (vi) retroactive changes in laws and regulations; and
(vii) a high degree of discretion on the part of government authorities and
arbitrary decision-making which increases, among other things, the risk of
property expropriation. The result has been considerable legal confusion,
particularly in areas such as company law, property, commercial and contract
law, securities law, foreign trade and investment law and tax law. No assurance
can be given that the uncertainties associated with the existing and future laws
and regulations of the Russian Federation, Kazakhstan or Belarus will not have a
material adverse effect on the Company. In addition, there is no guarantee that
a foreign investor would obtain effective redress in any court. No treaty exists
between the United States and the Russian Federation, Kazakhstan or Belarus for
the reciprocal enforcement of foreign court judgments.

     Furthermore, the relative infancy of business and legal cultures in the
Russia Federation, Kazakhstan and Belarus are reflected in the inadequate
commitment of local business people, government officials, agencies and the
judicial system to honor legal rights and agreements, and generally to uphold
the rule of law. Accordingly, the Company may, from time to time, confront
threats of, or actual, arbitrary or illegal revision or cancellation of its
licenses and agreements, and face uncertainty or delays in obtaining legal
redress, any of which could have a material adverse effect on the Company.

     -- Possible Additional Liability of Shareholders.  The Civil Code of the
Russian Federation and the Law of the Russian Federation on Joint Stock
Companies generally provide that shareholders in a Russian joint stock company
are not liable for the obligations of the joint stock company, and only bear the
risk of loss of their investment. However, if a company (an "effective parent")
is capable of determining decisions by another company (an "effective
subsidiary"), and such capability is provided for in the charter of the
effective subsidiary or in a contract between the companies, and if the
effective parent gives obligatory directions to the effective subsidiary, such
effective parent bears joint and several responsibility for transactions
concluded by such effective subsidiary in carrying out such directions. In
addition, an effective parent is secondarily liable for an effective
subsidiary's debts in the event an effective subsidiary becomes insolvent or
bankrupt resulting from the action or inaction of an effective parent which is
capable of determining decisions of the effective subsidiary whether as a result
of the effective parent's ownership interest, pursuant to the terms of a
contract between the companies or in any other way. In such instances, other
shareholders of the effective subsidiary may claim compensation for the
effective subsidiary's losses from the effective parent which caused the
effective subsidiary to take action(s) or fail to take action(s) knowing that
such action(s) or failure to take action(s) would result in losses. Accordingly,
it is possible that the Company may be deemed to be an

                                       51
<PAGE>   54

effective parent of certain of its subsidiaries and therefore be liable in
certain cases for the debts of its effective subsidiaries. Such liability could
have a material adverse effect on the Company.

     The Company believes that the applicable legislation in Kazakhstan and
Belarus does not contain any similar provisions.

     -- Limited Protection of Minority Shareholders.  Russian laws regulating
ownership, control and corporate governance of Russian companies may, in some
cases, provide limited protection to shareholders, particularly minority
shareholders. Disclosure and reporting requirements, and anti-fraud and insider
trading legislation have only recently been enacted and most Russian companies
and managers are not accustomed to such restrictions on their activities. The
concept of fiduciary duties on the part of management or directors to their
companies or shareholders is also new and is not well developed. See "-- Risks
Involving the Company -- Potential Conflicts of Interest." Additionally,
procedural protections to which U.S. shareholders are accustomed, such as
contingent fee arrangements or the ability to bring class actions, are as yet
still unknown in Russia.

     The concept of minority shareholder rights has not yet been tested in
Kazakhstan or Belarus, and it is therefore difficult to predict how a court
confronted with the issue would rule.

     Social Risks.  The political and economic changes in the Russian
Federation, Kazakhstan and Belarus since the break up of the former Soviet Union
have resulted in significant social dislocations, as existing governing
structures have collapsed and new ones are only beginning to take shape. The
resulting broad decline in the standard of living has often resulted in
substantial political pressure on the government to slow or even reverse the
economic policies currently being pursued. In addition, such decline in the
standard of living has led in the past, and could lead in the future, to labor
and social unrest. Such labor and social unrest may have political, social and
economic consequences, such as increased support for a renewal of centralized
authority, increased nationalism (with restrictions on foreign investment in the
Russian, Kazakh or Belarussian economy) and increased violence, any of which
could have a material adverse effect on the Company.

     In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generating businesses, and an increased integration of
Russian organized crime with major international criminal organizations. A
substantial increase in property crime in large cities has also been reported.
Finally, the local and international press have reported high levels of official
corruption in the locations where the Company's operating businesses operate. No
assurance can be given that organized or other crime or claims that the Company
or any of its operating businesses has been involved in official corruption will
not in the future have a material adverse effect on the Company.

     Official Data Reliability.  The official data published by Russian federal,
regional and local governments and federal agencies, and by the Kazakh and
Belarussian governments and their respective agencies, are substantially less
complete or reliable than those of Western countries, and there can be no
assurance that the official sources from which certain of the information set
forth herein has been drawn are reliable. Official statistics may also be
produced on different bases than those used in Western countries. Any discussion
of matters relating to the Russian Federation, Kazakhstan or Belarus herein must
therefore be subject to uncertainty due to concerns about the completeness or
reliability of available official and public information.

  RISKS INVOLVING THE COMPANY

     History of Losses.  The Company has reported net losses during each of its
years of operations and there can be no assurance that the Company will be able
to generate profits in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

     Repayment of Travelers Financing.  The Company is currently obligated to
pay the Travelers Parties the sum of $13,420,000 on or before April 30, 1999.
See "Recent Developments -- Travelers Financing." This obligation came due on
December 31, 1998 and the Travelers Parties deferred payment on that date, and
have further deferred the date for payment on a number of dates following, in
order to allow the Company time in order to arrange for its payment. While
management of the Company believes that, as long as progress towards
                                       52
<PAGE>   55

settlement of such obligations is being made, the Travelers Parties will be
willing to agree to additional payment deferrals, there can be no assurance that
they will do so, or that they will not demand payment in full of the Series A
and Series B Notes. Failure on the part of the Company to make payment in full
would constitute an Event of Default under the Series A and Series B Notes,
entitling the Travelers Parties to exercise their rights and remedies under the
Revolving Credit Agreement. In addition, the occurrence of such an Event of
Default would trigger the cross-default provisions contained in the Indentures
governing the Senior Notes and the Convertible Notes. In the latter case, the
holders of those Notes would be entitled to accelerate those Notes and demand
their payment in full. If such an event was to occur, and the Company was unable
to reach some accommodation with the holders of the Senior and Convertible Notes
and the Travelers Parties, the Company would have to resort to extraordinary
measures, including making sales of assets under distressed conditions or
ultimately seeking the protection of the bankruptcy courts.

     Technocom Minority Shareholders' Put Options.  The Company has a put and
call agreement with Plicom under which Plicom has the right after June 30, 1999
to require the Company to acquire its remaining 14.57% holding in Technocom, and
the Company has the right to require Plicom to sell such holding, for a purchase
price of $17.5 million. The Company has a further put and call option agreement
with Elite under which Elite has: (i) the right after June 30, 1998 to require
the Company to acquire 2 of its remaining shares in Technocom, and the Company
has the right to require Elite to sell such shares, for a purchase price of $1
million or, at Elite's option, that number of shares of Common Stock which
results from dividing $1 million by the lower of $5.85 and the average closing
price of such shares over the preceding ten trading days; and (ii) the further
right after June 30, 1999 to require the Company to acquire its 8 remaining
shares in Technocom, and the Company has the right to require Elite to sell such
shares, for a purchase price based on the Company's valuation of Technocom, but
which in all events will not be less than $6,689,655 nor more than $9,620,689.
The Company currently does not anticipate having sufficient funds on hand to
meet its repurchase obligations in the event that either Plicom or Elite was to
exercise its rights to put its shares to the Company after June 30, 1999. The
Company is engaged in efforts to address this, including arranging for alternate
financing or, in lieu of such financing, reaching some accommodation with the
minority shareholders regarding their put options. In the event that no
additional financing can be arranged nor any alternate accommodation reached and
either party exercises its rights to put its shares to the Company for cash, the
Company would have to resort to extraordinary measures, including making sales
of assets under distressed conditions or ultimately seeking the protection of
the bankruptcy courts.

     Year 2000.  While the Company believes that it should not encounter
material problems as a result of its own equipment not being Year 2000
compliant, its businesses may encounter disruptions in service as a result of
noncompliance on the part of other traffic carriers, particularly those in
Russia and other C.I.S. countries on which they are dependent for the completion
of their calls. The Company believes that the Year 2000 compliance of the
Russian and other C.I.S. parties with which the Company's operating businesses
interact appears to be substantially behind that of Western parties, and that it
is unlikely that those parties will be able to become fully Year 2000 compliant,
given the limited amount of time left for this, and the severe funding
constraints faced by those parties. Additionally, the Russian government has
recently announced, in response to the Kosovo crisis, an intention to limit its
cooperation in efforts to deal with potential Year 2000 problems. Accordingly,
there is a significant risk that the Company's operating businesses may
experience disruptions in their operations as a result of their C.I.S.
interconnect partners not being able to complete calls or pass traffic to those
businesses. Additionally, the billing systems of those interconnect partners may
also be disrupted, resulting in those partners being unable to make timely
settlements with the Company's operating businesses. All of these items have the
potential to adversely impact the operations of its operating subsidiaries, and
such adverse impact, on both the businesses of such subsidiaries and the
Company's own financial results, may be material. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Issues."

     Capital Requirements.  Assuming the Company is able to resolve the issues
related to the Travelers financing and the Technocom minority shareholders' put
options (see "-- Repayment of Travelers Financing" and "-- Technocom Minority
Shareholders' Put Options"), the Company will continue to have capital
requirements in three main areas.

                                       53
<PAGE>   56


     -- Capital Expenditures and Working Capital for Operating Businesses.  The
Company has to provide for the capital expenditures and working capital needs of
its operating businesses until such time as such operating businesses become
self-sustaining. To date, its existing operating businesses have largely
achieved that position. The Company has significant cash; however, the bulk of
this (representing proceeds of the Senior Notes) is being held in escrow and can
only be released from escrow upon compliance with certain conditions. Those
conditions include a specific requirement that the funds be used solely to
acquire assets for use in a telecommunications business. This requirement means,
among other things, that these funds cannot be used for the working capital
needs of the operating businesses, or to pay for civil engineering and related
works required in connection with the installation of telecommunications
networks. In addition, the Company has found compliance with the conditions for
release of funds burdensome, in that it is time consuming and expensive.


     -- Acquisitions and Other Business Development.  The Company needs funds to
acquire and/or develop new businesses. Again, the funds in escrow can only be
used for this to the extent that equipment is being purchased; start up costs
and working capital have to be met out of other Company funds.

     -- Payment of Principal and Interest on Outstanding Indebtedness.  The
Company has significant debt service requirements. In addition to its need to
repay $13,420,000 due under the Series A and Series B Notes to the Travelers
Parties as described above, the Company is obligated under the Senior Notes and
the Convertible Notes issued in June 1996. These Notes accreted until December
1, 1998, when interest on the full accreted value became payable annually
thereafter in cash. Until May 31, 1998 these Notes accreted at the rate of 14%
per annum. As a result of the Company not raising $20,000,000 in additional
equity by May 31, 1998, as of June 1, 1998 they commenced to accrete at 14.5%
per annum. As of December 1, 1998, the accreted value of the Senior Notes on the
Company's balance sheet was $112.9 million. The first semi-annual payment of
interest in cash, due June 1, 1999, will be at least $8.9 million. The exact
amount of the semi-annual interest payment will depend on the interest rate then
payable. The Senior Notes come due in full on June 1, 2004. The Convertible
Notes (in the principal amount of $26,500,000) come due on June 1, 2006, and
bear interest, payable semi-annually in cash, at the rate of 9% per year.

     The Travelers Parties have reserved their rights to claim Default Warrants
with an exercise price of $0.01 per share, and also to claim that the exercise
price of the Travelers Warrants and the Additional Warrants has been reset from
$8.65 to $0.01. See "Business -- Recent Developments -- Travelers Financing."
The issuance of the Default Warrants could result in the issuance of a
substantial number of additional shares of Common Stock upon their exercise. In
addition, any adjustment of the exercise price on the Travelers Warrants and the
Additional Warrants would result in the issuance of the shares of Common Stock
at a significant discount, resulting in substantial dilution to the holders of
the Company's Common Stock.

     The Company also faces significant structural challenges in generating the
cash required to meet its obligations with respect to its indebtedness. See
"-- Holding Company Structure; Barriers to Realizing Cash from Subsidiaries."

     Possible Effects of Insufficient Capital Resources.  In addition to the
special issues raised by the Travelers financing and the Technocom minority
shareholders' put options (see "--Repayment of Travelers Financing" and
"-- Technocom Minority Shareholders' Put Options"), the need to meet its capital
requirements may necessitate the Company raising funds in a public or private
equity or debt offering. If the Company is required to conduct such an offering,
its ability to do so on acceptable terms, if at all, will be affected by several
factors, including financial market conditions and the value and performance of
the Company at the time of such offering or refinancing, which in turn may be
affected by many factors, including economic and industry cycles. There can be
no assurance that such an offering can or will be completed on satisfactory
terms.

     Failure to generate sufficient funds for its capital requirements in the
future, whether from operations or additional debt or equity financing, or
difficulties encountered in providing capital to its operating businesses, may
require the Company to delay or abandon some or all of its anticipated
expenditures and expansions, or in an extreme case to sell some or all of its
assets, any of which could have a material adverse effect upon the growth of the
Company's businesses and on the Company.
                                       54
<PAGE>   57

     Also, failure to generate funds for its capital requirements in a timely
manner could lead to the Company defaulting under equipment purchase contracts,
which could lead to the loss of important equipment, or under the indebtedness
referred to above, which could result in acceleration and actions by the holders
of such indebtedness to realize upon guarantees and other security for such
indebtedness. Any of such events could have a material adverse impact upon the
Company and its shareholders.

     Limitations on Activities Imposed by Indentures and Revolving Credit
Agreement.  The Indentures pursuant to which the Senior Notes and the
Convertible Notes were issued were issued in the June 1996 Placement, and the
Revolving Credit Agreement pursuant to which the Revolving Credit Notes were
issued in November 1997, contain covenants which impose substantial restrictions
upon activities in which the Company may wish to engage. These covenants also
cover the activities of the Company's "Restricted Subsidiaries", meaning
companies in which the Company has directly or indirectly a greater than 50%
interest (but specifically including ALTEL). These covenants, which in many
cases are extremely complex, include restrictions upon the types, amounts and
terms of indebtedness which may be incurred (including the giving of guarantees)
and of the security which may be given for such indebtedness, restrictions upon
payment of dividends (other than by subsidiaries to the Company), bars on
additional investments other than those falling within relatively narrow
exceptions (such as investments in wholly-owned subsidiaries, or to increase the
size of the Company's interest in a subsidiary), limits on sale-leaseback
transactions or the issuance of preferred stock, restrictions on transactions
with affiliates unless certain conditions are met, and the requirement that
sales of assets be made for 75% cash proceeds and all of the proceeds be
re-invested within one year or used to pay indebtedness. In addition, as a
result of the Company not having raised $20,000,000 in additional equity by May
31, 1998, under the terms of the Revolving Credit Notes, the Company is not
permitted, until such equity is raised, to make any unscheduled debt repayments
or to make any capital expenditures (or fund any subsidiary's capital
expenditures) other than out of the proceeds of the Senior Notes being held in
escrow. These covenants impose substantial restraints upon the ability of the
Company and its subsidiaries to conduct their respective businesses, and upon
their capacity to engage freely in transactions which may be beneficial or to
respond timely to opportunities they may encounter and, to this extent, could
affect the growth and development of these companies. Additionally, their
breadth and complexity raises the possibility that the Company or a subsidiary
may inadvertently breach a covenant, thereby triggering a default and possible
acceleration of the indebtedness. While the Company may endeavor to obtain
waivers of particular covenants or of possible breaches thereof, that procedure
is cumbersome and slow and not conducive to prompt decision making. Finally, the
requirement that the Company only access the funds in escrow may impact its
ability to respond promptly to its subsidiaries' capital expenditure needs. See
"-- Capital Requirements."

     Effect of Substantial Leverage.  As of December 31, 1998, the Company had
$151.8 million of consolidated long-term debt and shareholders' equity of $124.9
million.

     In addition to the special issues raised by the Travelers financing and the
Technocom minority shareholders' put options (see "-- Repayment of Travelers
Financing" and "-- Technocom Minority Shareholders' Put Options"), the
substantial degree to which the Company is leveraged could have important
consequences including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate or other purposes may be
limited; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of interest on, and the principal of, its debt;
(iii) the agreements governing the Company's indebtedness contain certain
restrictive financial and operating covenants which could limit the Company's
ability to compete and expand; and (iv) the Company's substantial leverage may
make it more vulnerable to economic downturns, limit its ability to withstand
competitive pressures and reduce its flexibility in responding to changing
business and economic conditions. Certain of the Company's competitors currently
operate on a less leveraged basis and have significantly greater operating and
financial flexibility than the Company.

     Holding Company Structure; Barriers to Realizing Cash from
Subsidiaries.  As a holding company that conducts virtually all of its business
through subsidiaries, the Company has essentially no source of cash other than
distributions and other payments from its subsidiaries. In order to pay cash
interest on the Senior Notes, the Convertible Notes and the Revolving Credit
Notes or the principal amount of the Notes and the Revolving
                                       55
<PAGE>   58

Credit Notes at maturity, or to redeem or repurchase the Notes or the Revolving
Credit Notes, or to fund its working capital requirements, the Company will be
required to obtain the necessary cash from its subsidiaries. As set forth
hereinafter, there may be a number of legal and other hurdles to be overcome in
connection with obtaining such cash from its subsidiaries.

     The ability of the Company's subsidiaries to make payments to the Company
may be constrained by: (i) their own ability to generate sufficient cash from
their operations; (ii) the level of taxation, particularly corporate profits and
withholding taxes, in the jurisdictions in which they operate; (iii) exchange
controls and repatriation restrictions in effect in the jurisdictions in which
they operate; and (iv) the ownership interests of other investors in the
Company's subsidiaries.

     Taxation.  Taxes payable by Russian, Kazakh and Belarussian companies are
substantial and include value-added taxes ("VAT"), excise taxes, export taxes
and income taxes. The tax risks of investing in the Russian Federation,
Kazakhstan and Belarus can be substantial. Obtaining the benefits of any
relevant tax treaties can be extremely difficult due to the documentary and
other requirements imposed by the Russian, Kazakh and Belarussian authorities
and, in the case of Russia and Kazakhstan, the unfamiliarity of those
administering the tax system with the international tax treaty system or their
unwillingness to recognize the treaty system, while in the case of Belarus, its
very status under the tax treaties to which it may be a party remains very
unclear. For example, a recent instruction issued by the Russian State Tax
Service mandates full withholding regardless of tax treaty status and requires
the recipient to seek to obtain a refund for withholding in excess of treaty
amounts. The need to deal with these issues may negate or impair tax planning
initiatives undertaken by the Company to reduce its and its subsidiaries'
overall tax obligations. Furthermore, the taxation systems in the Russian
Federation, Kazakhstan and Belarus are at an early stage of development and are
subject to varying interpretations, frequent changes and inconsistent and
arbitrary enforcement at the federal, regional and local levels. In certain
instances, new taxes and tax regulations have been given retroactive effect.

     Currency Controls -- Risks of Changing Regulatory and Administrative
Environment.  Belarus currently effectively prevents the making of all payments
in hard currency and the repatriation of capital and profits. While applicable
legislation in both the Russian Federation and Kazakhstan currently permits the
repatriation of profits and capital and the making of other payments in hard
currency, the ability of the Company to repatriate such profits and capital and
to make such other payments is dependent upon the continuation of the existing
legal regimes for currency control and foreign investment, administrative
policies and practices in the enforcement of such legal regimes and the
availability of foreign exchange in sufficient quantities in those countries.

     The Company's ability to repatriate distributions and other payments in
hard currency will be dependent upon the continued ability of the Company's
operating subsidiaries, where applicable, to bill their customers in U.S.
Dollars or the equivalent amount of local currency, as well as their ability to
freely exchange local currency receipts into U.S. Dollars. See "-- Country
Risks -- Restrictions on Currency Conversion; Historical Volatility in Currency
Prices." There can be no assurance that, because of future changes in Russian
and Kazakh currency regulations, the Company's ability to fully and/or on a
timely basis realize benefits from its operations in the Russian Federation and
Kazakhstan through the receipt of hard currency payments will continue.

     In respect of Belarus, the Company is unlikely to be able to repatriate
other than incidental amounts of funds from BELCEL because of exchange control
restrictions, and the further fact that the Belarussian Ruble is effectively
inconvertible.

     -- Currency Licensing Requirements.  Under current currency regulations in
the Russian Federation and Kazakhstan, while there do not appear to be
additional administrative requirements for the payment of dividends or interest
on debt, until January 1999, specific licenses from both the Central Bank and
the National Bank of Kazakhstan were required for the making of equipment lease
payments to a foreign lessor and for repayments of principal on debt with a term
of more than 180 days. As of January 1999, the Central Bank required licenses
for any such obligations with a term of more than 90 days. Failure to obtain
such currency licenses where required can result in the imposition of fines and
penalties. While the requirements for
                                       56
<PAGE>   59

obtaining such licenses largely involve the production of documentation, not
only are the documentary requirements themselves burdensome, but there can be no
assurance that the entity granting the licenses may not impose additional,
substantive requirements for the grant of a license or deny a request for a
license on an arbitrary basis. See "-- Country Risks -- Legal
Risks -- Underdeveloped Legal System." Furthermore, the time typically taken by
the Central Bank and the National Bank of Kazakhstan to issue such licenses can
be lengthy. In the case of the Central Bank, delays of up to one year or more in
the issuance of licenses have not been uncommon. The failure of the Company to
obtain, or any significant delay in the issuance of, such licenses could
substantially delay the time at which the Company may receive payments under
such leases. To address this problem, and based on the Company's belief that
currency licenses are presently not required in the Russian Federation for
payments under installment sales contracts, the Company has now commenced
providing equipment to its operating businesses on an installment sales basis
rather than through leasing and, as a result of the Consent Solicitation, the
Indentures were amended to permit the Company to do this. However, there is no
assurance that the Central Bank or other relevant Russian entity will not
construe the applicable currency legislation as requiring licenses for
installment sales as well as leases. Failure to obtain currency licenses, where
required, can result in the imposition of fines and penalties, significant
delays in delivering equipment to the Company's operating businesses and
resulting difficulties in generating cash flows from the Company's operating
businesses in the Russian Federation.

     Finally, the Company's ability to repatriate distributions and other
payments in hard currency will be dependent upon the continued ability of the
Company's operating subsidiaries in Russia and Kazakhstan to bill their
customers in the U.S. dollars or the equivalent amount of local currency, as
well as their ability to exchange freely local currency receipts into U.S.
dollars. There can be no assurance that, because of changes in Russian and
Kazakh currency regulations, and/or because of a recurrence of the financial,
banking and currency crises which afflicted the Russian Federation in the latter
part of 1998, the Company's ability to fully and/or on a timely basis realize
benefits from its operations in the Russian Federation and Kazakhstan through
the receipt of hard currency payments will continue. The Company does not
anticipate being able to receive distributions from BELCEL due to the fact that
the Belarussian Ruble is effectively inconvertible.

     -- Licensing Requirements for Prior Investments.  Until 1995, most direct
foreign investment in the Russian Federation appears to have been made without
licenses from the Central Bank, due to the lack of clear guidelines from the
Central Bank governing such investments. However, in 1995 the Central Bank
confirmed that licenses were required for such direct foreign investments and
that upon application it would issue licenses specifically authorizing such
direct foreign investments in Russian companies. In response to private
inquiries, the Central Bank also indicated that it would consider retroactive
licensing of previously made direct foreign hard currency investments upon
appropriate application. The Company is actively reviewing with the managements
of its operating subsidiaries its obligations to comply with these licensing
requirements, particularly on a retroactive basis. If the Central Bank were to
determine that the Company did not hold the required licenses, this could give
rise to substantial fines and penalties.

     -- Possible Effects of Currency Controls and Regulations on the Company's
Ability to Meet its Obligations.  There can be no assurance that, due to the
risks outlined above, the Company will not experience difficulties or delays in
receiving cash flows from its operating subsidiaries. Any such difficulties or
delays could materially affect the Company's ability to make payments on its
outstanding indebtedness and could result in defaults in the Company's payment
obligations under that indebtedness or an acceleration of the maturity of that
debt. In addition, the Company's ability to meet its working capital
requirements or to declare and pay dividends to its shareholders could be
adversely affected by any cash flow restrictions experienced by the Company.

     Anti-Monopoly Committee Approval.  Under Russian anti-monopoly legislation,
transactions which potentially influence competition in the Russian Federation
are subject to the disclosure to and/or prior consent of the Russian
Anti-Monopoly Committee. The Anti-Monopoly Committee generally has wide
discretion to approve or disapprove transactions falling within the scope of its
authority, though in practice transactions are rarely challenged. The time
typically required by the Anti-Monopoly Committee to review a proposed
transaction varies between three and four months. Failure to obtain prior
consent may constitute grounds for the Anti-Monopoly Committee to seek a court
decision declaring the relevant transaction null and
                                       57
<PAGE>   60

void. In particular, transactions (including rental or lease transactions) which
involve the acquisition of more than 20% of a Russian company's stock or the
transfer of assets amounting to more than 10% of the assets of a transferor to a
transferee, are subject to prior consent of the Anti-Monopoly Committee.

     This requirement on its face applies to companies leasing assets to other
companies, such as Technocom, PLDCA and PLD Leasing, which would therefore need
to obtain such consent before leasing equipment to the Company's operating
subsidiaries. While the Company has been advised that such requirement should
not apply to such arrangements, there can be no assurance that the Anti-Monopoly
Committee will concur and accordingly that the Anti-Monopoly Committee will not
require such consent. Although the Company does not believe that equipment
leases could have an anti-competitive effect in the Russian Federation, no
assurance can be given that consent from the Anti-Monopoly Committee will be
granted. The refusal of the Anti-Monopoly Committee to give consent to any
equipment leases could have a material adverse effect upon the Company.

     Absence of Complete Control; Dependence on Local Partners.  The Company's
principal assets are its interests in its operating subsidiaries. The Company
holds a 71% ordinary share interest in PeterStar and a 50% interest in ALTEL.
The Company also has a 80.4% interest in Technocom, which in turn currently has
a 49.33% direct and indirect beneficial economic interest (56.0% voting
interest) in Teleport-TP and a 49% interest in MTR-Sviaz. Finally, the Company
holds a 50% ordinary share interest in BELCEL. While the Company may have the
ability, in the case of PeterStar, ALTEL, BELCEL and Teleport-TP, to direct the
operations or determine the strategies of such subsidiaries under the terms of
their respective constituent documents, the enforceability of some of the
Company's rights is uncertain. See "-- Country Risks -- Legal Risks." Further,
the other shareholders may, as a practical matter, be able to impede the
Company's ability to exercise effective control. In addition, the Company would
be unlikely to take significant initiatives without the approval, in the case of
PeterStar, of Telecominvest and PTN; in the case of ALTEL, of Kazakhtelekom; in
the case of BELCEL, of the Minsk Regional Telephone Network and the Minsk City
Telephone Network; and, in the case of Teleport-TP, of Rostelecom. See
"-- Ownership and Management of Operating Subsidiaries." Certain of the
Company's operating subsidiaries are dependent on continued access, on favorable
terms, to the facilities of certain of the Company's partners, and this may
adversely affect the Company's ability to rely on its legal rights to influence
the conduct of the business of its operating subsidiaries. In summary, the
absence of complete legal control by the Company over the operations of
PeterStar, ALTEL, Teleport-TP and BELCEL, coupled with the dependence of these
ventures on continued access to the facilities of the Company's partners, could
have a material adverse effect on the Company. Finally, PeterStar, Technocom,
Teleport-TP and ALTEL are all restricted subsidiaries under the Senior Note
Indenture and the Convertible Note Indenture, and the Company is required by the
terms of such indentures not to permit its restricted subsidiaries to violate
the various covenants contained in such Indentures. See "-- Limitations on
Activities Imposed by Indentures and Revolving Credit Agreement." There can be
no assurance that the Company will always be in a position to comply with this
obligation, and its failure to do so could cause a default under the Senior Note
Indenture or the Convertible Note Indenture.

     Susceptibility to Political and Other Pressures.  Although the governments
of the countries and regions in which the Company operates may be limited in the
extent to which they can legally direct the Company's policies, in practice they
may be able to exercise significant influence. As a consequence, not only may
the Company's activities be restrained if a governmental entity is not
supportive, but the Company may be forced to take action to support policies or
agendas of the government which are not in its commercial or other interests. In
addition, in order to maintain good working relationships with its partners, the
Company may need to take certain actions which may not necessarily be in its
commercial or business interests. See "-- Risks Involving PeterStar Company
Limited and Baltic Communications Limited -- Dependence on PTN Facilities."

     Dependence on Key Management.  The Company's various operating businesses
are managed by a small number of key management personnel, both expatriate and
local. The Company generally is not in a position unilaterally to appoint local
managers, which must usually be done in conjunction with its local partner, so
that the Company is not able to ensure the continued availability of any given
individual's services. While all expatriates are employed under employment
agreements by a subsidiary of the Company, no assurance can be
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<PAGE>   61

given that their services or the services of these other key individuals will
continue to be available to the Company's operating subsidiaries. In addition,
the Company is dependent on its core management team of James Hatt, Simon
Edwards and Ian Armour, as well as Peter Owen Edmunds, who heads the Company's
representative office in St. Petersburg. Neither the Company nor its operating
subsidiaries carry "key-man" insurance with respect to these individuals. The
Company could be materially and adversely affected if any key management
personnel should cease to be active for any reason in the management at the
corporate and/or operating subsidiary level.

     Competition.  The Company is developing and operating its businesses in
highly competitive environments. A number of companies compete with the
Company's operating businesses, many of which have access to greater financial
and technical resources than the Company. There can be no assurance that the
Company will be able to overcome successfully the competitive pressures to which
it is subject, both in the markets in which it currently operates and in markets
into which it might expand. Furthermore, in many instances the Company's
partners in its operating businesses are also potential -- and in some cases
actual -- competitors. For example, PTN has recently completed the installation
of a fiber optic network in St. Petersburg which, when fully operational, will
improve call completion rates on the PTN network and could provide a serious
alternative to PeterStar's network and permit PTN to compete more effectively
for business in St. Petersburg. In addition, while Rostelecom appears to be
generally supportive of the development of Teleport-TP's long distance network,
such network is in direct competition with the national long distance network
operated by Rostelecom, and there can be no assurance that Rostelecom will
continue to support the development of Teleport-TP's network. Similarly, ALTEL's
cellular network in Kazakhstan could be seen as being in competition with the
national network operated by Kazakhtelekom. ALTEL also faces substantial
competition from operators which were recently awarded GSM licenses in
Kazakhstan, one of which is a consortium which includes Kazakhtelekom.
Similarly, the Belarussian government has recently announced plans to award
additional cellular licenses. At this time it is unclear what impact the
consolidation of the Russian government's holdings in Sviazinvest and Rostelecom
and the sale of significant stakes in Sviazinvest to Russian and foreign
investors will have on the Russian telecommunications market in general and the
Company in particular.

     Potential Conflicts of Interest.  Each of the Company's principal partners
in PeterStar, ALTEL and Teleport-TP have interests that may conflict with those
of the Company.

     PTN, which holds its interest in PeterStar through Telecominvest and is the
main provider of basic telephony services in St. Petersburg, already competes to
some degree with PeterStar for customers and may increasingly become a
substantial competitor with the eventual upgrading of its telecommunications
network. Kazakhtelekom, the public switched telephone network operator and the
Company's partner in ALTEL, may be a significant competitor for ALTEL's cellular
operations when it improves the telephony services it provides in Kazakhstan by
upgrading its fixed wire telecommunications network. In addition, Kazakhtelekom
is a participant in one of the joint ventures which was recently awarded a
national GSM license in Kazakhstan. Rostelecom, the Russian telecommunications
company that is Technocom's principal partner in the Teleport-TP venture,
competes with Teleport-TP, both directly and indirectly through joint ventures
with other international companies in the provision of telephony and related
services Finally, certain directors of the Company's operating subsidiaries also
act as directors or officers of its partners in the Russian Federation and
Kazakhstan.

     In light of these competing interests, and, in particular, the extent of
the legal and practical control that the Company's partners have over the
affairs of the Company and its operating subsidiaries, any or all of the
companies named above may use their influence, through the directors they
appoint to the boards of the Company and its operating subsidiaries or
otherwise, to benefit themselves or other businesses in which they have an
interest at the expense of the Company and its operating subsidiaries, subject
to such limited fiduciary duties as they may have under applicable law.
Moreover, such persons are not obliged (except for such obligations as they may
have under applicable law) to allocate to the Company and its operating
businesses corporate opportunities of which they become aware through the
directors referred to above or otherwise. No assurance can be given that the
fiduciary duty and corporate opportunity doctrines that exist under United
States law will provide adequate protections to the Company's shareholders
against the pursuit of such
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conflicting interests. Kazakh and Belarussian law currently provide no
protection in this regard and, while Russian corporate law has recently
introduced the concept of the fiduciary duties of corporate officers and
directors, the law is too new for any prediction to be made as to how much
protection it will, in fact, provide. The pursuit of conflicting interests by
the persons referred to above could have a material adverse effect on the
Company.

     Impact of Auction of Stakes in Sviazinvest on the Company and the
Telecommunications Market in Russia.  In 1997, it was reported that,
notwithstanding its previously announced plans to have Sviazinvest compete with
Rostelecom, the Russian government had consolidated its telecommunications
holdings in Sviazinvest and Rostelecom by transferring its shareholding in
Rostelecom (38% of the common stock, and 51% of the voting stock) to
Sviazinvest. The balance of the shares in Rostelecom remain in the hands of
private investors. In April 1997, the government announced that it was seeking
to sell 49% of Sviazinvest in two auctions, one as to a 25% stake open to
Russian and foreign investors and the other as to a 24% stake open only to
Russian investors. In July 1997, the government announced that the 25% stake had
been sold to a consortium which included Oneximbank and Renaissance Capital, for
a purchase price of $1.875 billion. Following this auction, the Russian
government announced its intention to increase the size of the other stake being
sold to 25% minus two shares. The schedule for the sale of the second stake has
been delayed following the August 1998 financial crisis, and the structure of
any such sale (including whether foreign participation will be permitted) has
not been announced. While it is not yet clear how the proceeds of this sale will
be employed, it is understood that the government wishes to have a substantial
part, if not all, of the proceeds allocated to its current budget deficit. Prior
to the August 1998 crisis, Sviazinvest had announced plans to raise $400 million
through a Eurobond offering in 1998, but that offering was also delayed as a
result of the Russian financial crisis. In light of all of the foregoing, it is
unclear what impact the consolidation of the government's telecommunications
holdings and the auction of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.

     Regulatory Uncertainties.  The Company's operating businesses operate in
uncertain regulatory environments. The Russian telecommunications system is
currently regulated by the RFCTI, the Kazakh telecommunications system is
currently regulated by the KMOC and the Belarussian telecommunications system is
currently regulated by the Belarus Ministry of Posts, Telecommunications and
Informatics, largely through the issuance of licenses. Despite the 1995
enactment of the Telecommunications Law in Russia, considerable uncertainty
still exists as to the application and interpretation of many of its terms.
There is currently no comprehensive legal framework with respect to the
provision of telecommunications services in Kazakhstan or Belarus, although a
number of laws, decrees and regulations govern or affect the telecommunications
sector. Further, the recently announced appointment of Kazakhtelekom as the
exclusive operator of the public telephone network in Kazakhstan and/or the
participation of Kazakhtelekom in one of the joint ventures recently granted a
national GSM license in Kazakhstan, may lead to restructuring of the
telecommunications sector in Kazakhstan, the effects of which are difficult to
predict at the present time.

     While the RFCTI appears to have succeeded to all of the powers and
authorities of the Former MOC, it is not yet clear whether it will in fact
continue to operate in the same manner and wield the same influence as the
Former MOC. In particular, it is unclear whether the RFCTI will be able to
control the actions of local and regional governmental authorities who may
endeavor to impose new conditions upon operators in their respective
jurisdictions or areas of influence. As an example, significant delays in the
rollout of Teleport-TP's long distance network have been caused by
administrative difficulties experienced with local and regional governmental
authorities. See "-- Risks Involving Technocom Limited and
Teleport-TP -- Capital and Management Resources Required for Network Expansion;
Management of Growth."

     The absence of adequate regulation in the telecommunications sector has
meant that decisions, including the granting and renewal of licenses, may at
times be made by governmental officials without reference to precedent or
procedure.

     Furthermore, the introduction of regulation of tariffs, or any other type
of regulation, could have far-reaching, and potentially materially adverse,
effects on the Company. In particular, there is considerable uncertainty as to
what impact the transfer of authority to regulate local tariffs to Regional
Committees will

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have on local tariffs in Russian. See "Telecommunications in the Former Soviet
Union -- Telecommunications in the Russian Federation."

     Limitations on Ability to Transfer Interests.  The terms of the PeterStar,
BELCEL and ALTEL shareholder and joint venture agreements, and the terms of the
shareholder and joint venture agreements relating to Teleport-TP and MTR-Sviaz,
impose restrictions on the Company's ability to transfer its interests in such
companies and give the other shareholders in such companies certain pre-emptive
and other similar rights. It is likely that the Company's ability to transfer
its interests in other future investments will be similarly limited. The
restrictions on, and other provisions relating to the sale of these interests,
and the lack of liquidity in the market for interests the Company now holds or
may acquire, may impede their resale by the Company. While it may be possible to
arrange for negotiated sales with one or more buyers, the Company may not be
able to realize value from these interests, or acceptable terms, in a timely
manner or at all.

     Management of Growth.  The Company is at a relatively early stage of
development and has experienced, and may continue to experience, rapid growth
resulting from the continued development of PeterStar, ALTEL, Teleport-TP and
its other operating businesses. The Company's future growth will require the
Company to manage its expanding operations and to adapt its operational systems
to respond to changes in the business environment. The expansion of the
Company's operations has placed and will continue to place significant demands
on the Company and its management to improve the Company's operational,
financial and management information systems, to develop further the management
skills of the Company's managers and supervisors and to continue to train,
motivate and effectively manage the Company's employees. The failure of the
Company to manage its growth effectively could have a material adverse effect on
the Company.

  RISKS INVOLVING PETERSTAR COMPANY LIMITED AND BALTIC COMMUNICATIONS LIMITED

     Limited Operating History.  PeterStar was formed in May 1992 and started
operating a modern digital telephone exchange network in St. Petersburg in
February 1993. BCL, which was acquired by the Company in April 1996, was also
formed in 1992 to provide international direct dial and private line services
for foreign companies in St. Petersburg. While both PeterStar and BCL generated
profits in the years ended December 31, 1997 and 1998, in view of their limited
operating history there can be no assurance that PeterStar or BCL will be able
to generate sufficient revenues or control their costs enough to remain
profitable in the future.

     Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses.  PeterStar's business is dependent on the maintenance
of its principal telecommunications license which permits it to operate a public
telephone system in the Russian Federation for a term expiring in November 2004.
Other licenses that have been issued to PeterStar include a dedicated network
license (expiring September 2001), a data communications license (expiring May
2001), a telematics license (expiring May 2001) and a videoconferencing license
(expiring June 2001). The main PeterStar license, governing the provision of
public telecommunications services, sets the number of lines which PeterStar may
have in St. Petersburg and the surrounding region at 106,000, and requires that
capacity equal to 74,200 lines be introduced by June 1999. However, management
of PeterStar believes that the maximum and minimum number of lines are not
strict requirements but are instead designed to provide general guidance as to
the number of lines intended to be included on the system. As of December 31,
1998, PeterStar had 168,166 active lines, of which 108,278 were provided to
cellular operators. Based on its experience in renewing existing, and obtaining
new, licenses and its general knowledge of the licensing environment in Russia,
management of PeterStar does not believe that its license would be terminated or
re-negotiated, that it would be forced to reduce the number of its subscribers,
or that other penalties would be imposed, by reason of its exceeding its 106,000
line ceiling, but there can be no assurance that the RFCTI would not take a
different position. The dedicated network license permits PeterStar to provide
long distance and international telephone transmission services to dedicated
network operators (such as BCL) in St. Petersburg and the surrounding region for
a term expiring in September 2001. The dedicated network license sets the number
of lines which PeterStar may have at no less than 30,000 and requires that
capacity equal to 21,000 lines be introduced by September 1999. Once again,
based on its experience in renewing existing, and obtaining new, licenses and
its general knowledge of the licensing environment in Russia, management of
PeterStar believes that these maximum and minimum number of lines
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are not strict requirements but are instead designed to provide general guidance
as to the number of lines intended to be included on the system. There can be no
assurance that the RFCTI would not interpret the provisions of the licenses
differently, which in turn could result in the revocation of the licenses or
their renegotiation on terms unfavorable to PeterStar or the imposition of
penalties. It is not possible to calculate the amount of any penalties which
might be imposed, which are in the discretion of the RFCTI.

     BCL's primary license permits it to provide long distance and international
telephone, facsimile and data transmission services to private networks in St.
Petersburg and the surrounding region for a term expiring on December 31, 2003.
Based on its experience in renewing existing, and obtaining new, licenses and
its general knowledge of the licensing environment in Russia, management of BCL
believes that, so long as it is being actively utilized, BCL's license will be
renewed at the end of its current term. The license limits the number of
subscribers to 100,000 and requires that 70,000 of these be in place by January
2001. Based on its experience in renewing existing, and obtaining new, licenses
and its general knowledge of the licensing environment in Russia, management of
BCL believes that the maximum and minimum line numbers are not strict
requirements but are instead designed to provide general guidance as to the
number of lines intended to be included on the system. As of December 31, 1998,
BCL had a total of approximately 1,200 lines. Based on that knowledge and
experience, BCL has no reason to believe that its license would be terminated if
it either exceeded 100,000 lines or failed to have 70,000 lines in place by
January 2001, but there can be no assurance that the RFCTI would not interpret
the license provisions differently, which in turn could result in the revocation
of its license or its renegotiation on terms unfavorable to BCL or the
imposition of penalties. It is not possible to calculate the amount of any
penalties which might be imposed, which are in the discretion of the RFCTI.

     No assurance can be given that either PeterStar or BCL will be able to
maintain its licenses, that the terms will not be interpreted, altered or
renegotiated to its disadvantage or that they will be renewed upon expiration.
The loss of, or a substantial limitation upon the terms of, either PeterStar's
or BCL's licenses could have a material adverse effect on the Company.


     Dependence on Interconnect Parties.  PeterStar is dependent on PTN, SPMMTS
and other operators for the completion of most of its calls. The PeterStar
network is linked to the PTN network, which gives PeterStar access to PTN's
large local subscriber base. PeterStar is required by the terms of its license
to route all long distance and international calls through the public network.
PeterStar has been able to negotiate favorable tariffs for interconnection fees
and carrier charges with both PTN and SPMMTS. PeterStar's current interconnect
agreements with PTN and SPMMTS are open-ended agreements, while the
interconnection fees and carrier charges payable under the interconnect
agreements are subject to renegotiation between the parties from time to time.
The agreements provide for automatic extensions at the end of their term unless
otherwise terminated by either party. There can be no assurance, however, that
PeterStar will continue to have access to the PTN network or that PeterStar will
continue to receive such favorable tariffs. The loss of access to such network
or increases in such tariffs could have a material adverse effect upon the
Company.


     Dependence on PTN Facilities.  PeterStar is also dependent on PTN's
buildings, ducts and tunnels in order to house its exchanges and to reach its
customers. Prior to 1998, PeterStar has not been required to pay rent to PTN to
house its exchanges in PTN buildings, nor has it paid rentals for ducts or
tunnels. Commencing in 1998, PeterStar has been required to pay a local line
rental charge to PTN, although roughly half of the fee otherwise payable during
1998 was offset against amounts owed to PeterStar by PTN in respect of the
Vassilievski Island project. The aggregate amount paid to PTN in 1998 for line
rental charges was $1.3 million. The amount of the 1999 line rental charged has
not yet been determined, but PeterStar expects to be able to offset amounts due
from PTN against such charges during 1999. However, any change in the terms on
which PeterStar has access to PTN's facilities, or any restrictions imposed by
PTN on the completion of calls from the PeterStar network, could have a material
adverse effect on PeterStar and, in turn, the Company.

     Capital and Management Resources Required for Expansion of Direct Dial
Services; Management of Growth.  PeterStar has commenced several projects
designed to expand its direct dial services in St. Petersburg and Northwest
Russia. PeterStar has undertaken with PTN an infrastructure project centering on
the replacement of analog exchanges with digital exchanges for certain parts of
the network on Vassilievski

                                       62
<PAGE>   65

Island, a city district in St. Petersburg. This project requires the conversion
of approximately 30,000 business and residential lines that have previously been
operated by PTN, after which such lines become a part of the PeterStar network.
In addition, PeterStar plans to further enhance its transit network capabilities
in order to provide continued support to the cellular and other network
providers in terminating traffic in St. Petersburg and to the national and
international gateway. PeterStar also expects to increase its operating presence
in Northwest Russia through the targeted development of digital infrastructure
to connect business customers and develop operational relationships with the
regional telephone companies. These projects represent a major expansion of
PeterStar's operations which have and will require substantial capital and
special management efforts if they are to be carried into effect successfully.
See "-- Risks Involving the Company -- Capital Requirements."

     Pressure to Provide Residential Service.  The Vassilievski Island project
also represents part of a continuing effort on the part of PTN to modernize a
portion of its network. The local calling element of residential service is
presently provided free of charge (other than connection fees and line rental
charges), and there has been considerable political resistance to the
introduction of time-based charges for local calls. Even after calling charges
have been introduced, it is likely to remain a low margin business for the
foreseeable future. Even though PTN has now been privatized, the Company does
not believe that the pressures on PTN to improve residential service have
lessened. Although the Company believes that PeterStar has fulfilled its
commitment to the residential customers, there can be no assurance that PTN will
not continue to try to involve PeterStar in this effort, or that PTN's continued
support for PeterStar's access to the business market may be linked to
PeterStar's further commitment to develop the residential market in St.
Petersburg.

  RISKS INVOLVING ALTEL

     Limited Operating History.  ALTEL was formed in January 1994 and commenced
commercial operations in September 1994. Although ALTEL generated profits for
the years ended December 31, 1997 and 1998, there can be no assurance that ALTEL
will be able to generate sufficient revenues or control its costs sufficiently
to remain profitable in the future.

     Reliance on Telecommunications License.  ALTEL's business is dependent on
the 15-year renewable license issued in February 1994 for the creation and
operation of cellular communications networks in Kazakhstan for local, long
distance and international calling, using the 800 MHZ frequency band and "AMPS"
technology. Under the terms of the license ALTEL was required to provide
cellular services to Almaty and ten to twelve additional regional centers by the
end of 1996, a condition which has been met. The license specifies that ALTEL is
to be the exclusive provider of cellular service in Kazakhstan for the first
five years of the license term, which period expired in February 1999. In 1998,
before the expiration of the exclusivity period, ALTEL commenced discussions
with the KMOC on substituting a new license with revised terms for its existing
license. One aspect of any such new license would have been the elimination of
the exclusivity provisions in exchange for other concessions. Although such
exclusivity has since terminated according to the terms of the license, ALTEL
and the KMOC are continuing to discuss the terms of a new license for ALTEL. See
"-- ALTEL -- Telecommunications License." Although such discussions are
continuing, there can be no assurance that any new license issued by the KMOC
will not contain revised terms which are detrimental to ALTEL's business.

     Issuance of Additional Telecommunications Licenses.  Until 1998, ALTEL was
the only licensed national cellular operator in Kazakhstan. In 1998, the KMOC
awarded two licenses for the development of a national GSM network in
Kazakhstan. One license was issued to Kcell, a joint venture of included
TurkCell and Kazakhtelekom, and the other license was issued to Kmobile, a joint
venture of Telsim, a Turkish company, and local Kazakh interests. Active
marketing was begun by Kcell in early February 1999 and by Kmobile in
mid-February 1999. Management of ALTEL currently believes that, by virtue of its
cost structure and its market penetration to date, it is in a good position to
compete with the new GSM operations. However, ALTEL has already experienced some
downward pressure on its tariffs as a result of competition from the new
licensees. ALTEL is currently assessing its response to the new competition, and
there can be no assurance that it will in fact be able to compete successfully
with the new licensees.

                                       63
<PAGE>   66

     Effect of Network Expansion on Management Resources; Management of
Growth.  ALTEL has engaged in a significant expansion of its cellular network,
from its initial base of operations in Almaty to a total of 12 cities throughout
Kazakhstan as of December 31, 1998. The timing of such expansion was dictated by
the terms of the license, so that in some regions it occurred at a time when
economic activity in those regions was still at a sufficiently low level as to
raise a question as to whether, and if so, when, cellular service in such
regions will be commercially viable. Furthermore, because of the distances
involved, the difficulty of hiring, training and supervising staff at remote
locations and the underdeveloped nature of the business infrastructure, such as
banks and professional advisers in many of the proposed locations for expansion,
the establishment and provision of cellular service have presented, and will
continue to present, significant challenges to the management of ALTEL, and
there can be no assurance that these challenges will be met successfully in all
cases. In addition, further network development is planned on a targeted basis
to address key market sectors. Failure to manage the ALTEL network, and any
future expansion of the network, successfully could have a material adverse
effect on the Company.

     Effect of Sale of Stake in Kazakhtelekom on ALTEL and the
Telecommunications Market in Kazakhstan.  Since its formation, ALTEL has been
50% owned, directly or indirectly, by the government of Kazakhstan. ALTEL
believes that the attitude of the government towards its operations has
generally been favorable and that this has derived in some part from the
government's interest in ALTEL. Currently, the government's 50% interest in
ALTEL is held through Kazakhtelekom, which until May 1997 was owned 100% by the
government. In May 1997, the Kazakh government announced that it had sold a 40%
interest in Kazakhtelekom to Daewoo, creating considerable uncertainty as to the
government's attitude towards Kazakhtelekom. In March 1998, it was reported that
Daewoo had sold a portion of its stake (reported to be approximately 10%) to an
unnamed third party. It was later confirmed that Daewoo had sold its entire
stake in Kazakhtelekom to Kazcommertzbank, a commercial bank based in
Kazakhstan. It is understood that the Kazakh government is seeking to sell a 15%
stake in Kazakhtelekom to private investors. In addition, the KMOC recently
issued a revised license to Kazakhtelekom specifically naming it as the
exclusive national network operator in Kazakhstan, and giving it a wide range of
powers to carry out this function. The Company has not yet fully assessed what
impact these matters may or will have on ALTEL and its business. There can be no
assurance that the government's favorable attitude towards ALTEL will continue
to the same degree. Any significant change in the government's attitude toward
ALTEL could have a material adverse effect on the Company.

     Dependence on Interconnect Parties.  Under the terms of its license, ALTEL
is entitled to interconnection free of charge to networks operated by
Kazakhtelekom, the public switched telephone network operator, for the
completion of its local, long distance and international calls. The loss of, or
any significant limitation on, its access to such network could have a material
adverse effect on the Company. Further, under its revised license, Kazakhtelekom
was directed to assess interconnection charges for connection to its network,
and to levy such charges on a basis which will yield it a profit. Kazakhtelekom
may try to use this authority to endeavor to assess interconnection charges on
ALTEL, notwithstanding the fact that its license exempts it from payment of such
charges. The imposition of such interconnection charges would impact ALTEL's
profitability, perhaps materially.


     Effect of Recent Legislative Changes on Management Structure.  Recent
changes in applicable Kazakh legislation will require that the management
arrangements for ALTEL will need to be revised. However, although it seems clear
that the existing arrangements cannot be completely preserved in their present
form, because of the imprecision in some of the drafting and also because of the
lack of precedents due to the newness of the legislation, it is difficult to
state to what extent these arrangements will need to be revised. In addition,
ALTEL is actively exploring the option of converting to a different legal form
which may permit the preservation of, if not all, at least a substantial portion
of its management arrangements in their current form. ALTEL does not expect to
resolve this issue before the middle of 1999.


  RISKS INVOLVING TECHNOCOM LIMITED AND TELEPORT-TP

     Limited Operating History.  Technocom was formed in January 1992. Until
1995, its principal business was Teleport-TP, which commenced operations in late
1993. In view of their limited operating history, there
                                       64
<PAGE>   67

can be no assurance that they will generate sufficient revenues or control their
costs sufficiently to become and remain profitable in the future. Nor can there
be any assurance that Technocom's other businesses, all of which have only just
commenced operations or are still in the planning stage, will become or remain
profitable.

     Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses.  Teleport-TP's business is dependent on four
telecommunications licenses from the RFCTI, although it holds a total of 12 such
licenses. Two of these principal licenses expire in 2004, one in 2002 and one in
2001. One of the licenses, expiring in November 2004, limits the number of
subscribers under such license to 18,050 (15,000 within Moscow's city limits)
and requires that 12,635 be in place by November 1997. Another license, expiring
in October 2004, limits the number of subscribers to 1,700 and requires that
1,190 be in place by October 1997. Teleport-TP did not meet these minimum
subscriber numbers. The third license, expiring in January 2002, provides that
the installed subscriber capacity of Teleport-TP's data network must permit the
connection of at least 70,000 subscribers by December 2000 and at least 100,000
subscribers by the expiration of the term of the license, but it does not impose
any limit on the number of subscribers. The fourth license, expiring in 2001,
provides that the total installed capacity of Teleport-TP's long distance
network should be at least 100,000 numbers with at least 70,000 numbers
operational by May 2000. Based on its experience in renewing existing, and
obtaining new, licenses and its general knowledge of the licensing environment
in Russia, management of Teleport-TP believes that the subscriber numbers are
not strict requirements but are instead designed to provide general guidance as
to the number of subscribers intended to be included on the system. Based on
that knowledge and experience, management further believes that, so long as a
license is being actively utilized, such license will not be terminated nor
other sanctions imposed if Teleport-TP failed to have the minimum number of
subscribers in place by the specified date or if it exceeded the maximum number
of subscribers permitted by the license, but there can be no assurance that the
RFCTI would not take a different position, which in turn could result in the
revocation of the license or its renegotiation on terms unfavorable to
Teleport-TP or the imposition of penalties. It is not possible to calculate the
amount of any penalties which might be imposed, which are in the discretion of
the RFCTI. The loss of, or the failure to obtain renewal of, or any substantial
limitation upon the terms of, any of Teleport-TP's licenses could have a
material adverse effect on the Company.

     No assurance can be given that Teleport-TP will be able to maintain its
licenses, that the terms will not be interpreted, altered or renegotiated to its
disadvantage or that they will be renewed upon expiration. See "-- Country
Risks -- Legal Risks." The loss of, or a substantial limitation upon the terms
of, Teleport-TP's licenses could have a material adverse effect on the Company.

     Although Teleport-TP's failure to satisfy any of the conditions of the
foregoing licenses could result in the revocation of such licenses, which in
turn could have a material adverse effect upon Teleport-TP and the Company, the
management of Technocom believes that this would be unlikely to occur as long as
Teleport-TP is otherwise providing needed services to its customers. The Company
also knows of no reason why any of these licenses will not be renewed upon their
expiration; however, the expiration of these licenses without renewal, or their
renewal on less favorable terms, could have a material adverse impact upon the
Company.

     Dependence on Rostelecom as Customer; Necessity to Further Develop Customer
Base.  Rostelecom accounted for approximately 30% of Teleport-TP's total
revenues for the year ended December 31, 1998, as compared to 27% for the year
ended December 31, 1997. Teleport-TP will seek, through the installation of its
long distance network facilities, to develop a substantial alternative customer
base in order to reduce its dependence on Rostelecom; however, there can be no
assurance that it will be able to do so successfully. Thus, for the immediate
future Rostelecom will likely remain Teleport-TP's single largest customer.
While the risk of Rostelecom taking action which could harm Teleport-TP should
be ameliorated because of the fact that Rostelecom itself owns 44% of
Teleport-TP, any significant negative change in the relationship with Rostelecom
could have a material adverse effect upon both Teleport-TP and Technocom.
Additionally, while Rostelecom currently utilizes approximately 800 circuits, it
is only contractually committed to utilize, on a long-term basis, 100 circuits.
Until Teleport-TP is able to develop a broader customer base, any significant
cutback by Rostelecom in the number of circuits it utilizes could have a
material adverse impact on Teleport-TP and Technocom.

                                       65
<PAGE>   68

     In addition, at this time it is unclear what impact the consolidation of
the Russian government's holdings in Sviazinvest and Rostelecom and the sale of
significant stakes in Sviazinvest to Russian and foreign investors will have on
the Russian telecommunications market in general and the Company and Technocom
in particular. See "-- Risks Involving the Company -- Impact of Auction of
Stakes in Sviazinvest on the Company and the Telecommunications Market in
Russia."

     Dependence on MGTS Facilities.  Teleport-TP is dependent upon the
facilities of MGTS for the operation of its existing network in Moscow, since a
substantial part of the fiber optic cabling it uses is laid in the ducts of MGTS
pursuant to agreements under which Teleport-TP pays MGTS for the use of such
facilities. The agreements between Teleport-TP and MGTS are one year agreements
which are subject to automatic one year renewals unless MGTS provides a timely
notice of cancellation. The current agreements expire on December 31, 1999.
Technocom knows of no reason why MGTS would refuse to renew these agreements.
However, the failure on the part of MGTS to renew these agreements or to honor
their terms could have a material adverse effect on Teleport-TP.

     Dependence on MTR-Sviaz Facilities.  Teleport-TP is dependent upon the
facilities of MTR-Sviaz to terminate certain traffic to users on the MTR-Sviaz
network. MTR-Sviaz uses leased circuits from a number of providers, access to
the Teleport-TP fiber cable facilities and the Mosenergo internal communications
network to terminate its calls. Teleport-TP uses the MTR-Sviaz facilities to
locate its Internet gateway, from which links to Internet service providers
(ISPs) are provided via leased and dial-up lines on the public network.
Furthermore, Teleport-TP acts as the long distance gateway for subscribers to
the MTR-Sviaz network.

     In addition, like many major Russian companies, Mosenergo experiences
liquidity problems from time to time. While the relationship with Mosenergo has
the potential to be mutually beneficial as described above, the increased
dependence on the Mosenergo network may make Technocom more vulnerable to
Mosenergo's liquidity problems, both in terms of pressure for financial support
for the expansion of its network, and in its ability to achieve prompt
settlement of accounts.

     Capital and Management Resources Required for Network Expansion; Management
of Growth -- Capital and Management Resources.  Technocom, through Teleport-TP,
has commenced a major program for the provision to cities and other locations
throughout the Russian Federation of satellite-based long distance and
international telecommunications service (the latter through Teleport-TP's
international gateway in Moscow). Installation of the first phase of the long
distance network program commenced in 1996, with 36 sites installed as of
December 31, 1998. The Company currently plans to install equipment in a total
of 45 sites by mid-1999. This installation program represents a major expansion
of Teleport-TP's operations which has required, and will continue to require,
substantial capital and special management efforts if it is to be carried into
effect successfully. See "-- Risks Involving the Company -- Capital
Requirements."

     Further expansion of the network program beyond the initial 45 sites will
be defined by customer demand and, therefore, has yet to be fully determined.
The ability of the Company to expand such a program further will also be heavily
dependent on the efforts of management, as well as the availability of
additional capital on favorable terms or internally generated cash. Failure on
the part of Teleport-TP to manage the development of this network successfully
could have a material adverse effect on the Company.

     -- Difficulties in Implementing Network Expansion.  Teleport-TP has
experienced significant delays in its network roll-out program. Factors in these
delays have included: (i) logistical difficulties installing sites during the
winter season; (ii) unsuitable local site conditions; (iii) administrative
difficulties with local and regional governmental authorities; (iv) technical
interconnect difficulties with local switching exchanges; and (v) lack of
suitable human resources. In particular, notwithstanding the licenses granted to
Teleport-TP by the Former MOC, and administered by its successor, the RFCTI,
local and regional governmental authorities have imposed, and may continue to
attempt to impose, licensing and other conditions with respect to Teleport-TP's
operations in their respective jurisdictions or areas of influence. The need on
the part of Teleport-TP to comply with such unanticipated local initiatives has
significantly delayed, and may continue to delay, the implementation of the
network program.

                                       66
<PAGE>   69

     For the program to be commercially successful, Teleport-TP will have to
identify commercially viable markets for its services in each of the locations
which it intends to serve. In many areas of the Russian Federation the economic
conditions are still very weak and growth rates uncertain, and hence the ability
of a particular region to be, or to become within the short term, a successful
market for the network may be difficult to gauge. The results of operations will
be directly affected by Teleport-TP's success in identifying economically viable
locations for the development of its network.

     Furthermore Teleport-TP has had, and in all likelihood will continue to
have, to form alliances with suitable regional partners. There can be no
assurance that the arrangements made so far, or any future arrangements, will
prove to be commercially viable.

     -- Significant Competition.  Teleport-TP anticipates significant
competition from other companies seeking to serve the Russian long distance
telephone market. While Rostelecom, the principal long distance carrier in the
Russian Federation, appears to be supportive of Teleport-TP's development
program, any decision by Rostelecom to compete directly with Teleport-TP or to
impede the implementation of Teleport-TP's network could have a material adverse
effect upon the program itself and upon the Company. See "-- Dependence upon
Rostelecom as Customer; Necessity to Further Develop Customer Base." In
addition, at this time, it is unclear what impact the consolidation of the
Russian government's telecommunications holdings (including Rostelecom) in
Sviazinvest and the auction of significant stakes in Sviazinvest will have on
the Russian telecommunications market in general and the Company in particular.
See "-- Risks Involving the Company -- Impact of Auction of Stakes in
Sviazinvest on the Company and the Telecommunications Market in Russia."

  RISKS INVOLVING BELCEL

     The Company acquired its interest in BELCEL in August 1998 and is in the
process of assessing the risks involving BELCEL and its operations. The
principal risks affecting BELCEL are:

     - BELCEL is as reliant as the Company's other operating companies on the
       licenses under which it operates. The termination, non-renewal or
       re-negotiation on unfavorable terms of these licenses could have a
       material adverse effect on BELCEL's business and operations.

     - BELCEL's business has been and will continue to be adversely affected by
       the weak state of the Belarus economy.

     - BELCEL's ability to service its U.S. dollar -- and other hard
       currency -- denominated indebtedness and other obligations will be
       severely impacted by the inconvertibility of the Belarussian Ruble, the
       currency in which it receives payments from customers. This could lead to
       default in respect of those hard currency obligations, which could have a
       material adverse effect upon its business.

     - BELCEL's operations are dependent upon the facilities of Beltelekom, the
       Belarussian national telephone operator, for the connection of its calls.
       These facilities are of limited capacity and in urgent need of upgrading,
       which will inhibit the further expansion of BELCEL's network and customer
       base.

     - BELCEL will likely be dependent upon the availability of Western
       expatriate personnel to oversee its operations. Recent initiatives by the
       Government of Belarus which may restrict the entry of such personnel into
       Belarus may adversely affect the Company's ability to oversee and develop
       BELCEL's business.


     At the same time, the impact of these risks upon the Company is
significantly ameliorated by the fact that the Company's investment in BELCEL,
which the Company valued at approximately $2.8 million, is relatively
insignificant in relation to the Company's overall assets, and the further fact
that the Company intends to limit further investment in BELCEL until such time
as the uncertainties described above have been better defined and/or the
commercial viability of any additional investment has been established.


                                       67
<PAGE>   70

ITEM 2.  PROPERTIES

     Executive Offices and Representative Office.  The Company has its executive
office in New York, New York, consisting of approximately 11,000 square feet of
office space, which it has leased through December 2005.

     The Representative Office of PLD is located within the premises of BCL in
St. Petersburg.

     PLD Management Services Limited.  PLD Management Services Limited, a wholly
owned English subsidiary of the Company, maintains an operational support
facility in London, England where it leases approximately 2,400 square feet of
office space pursuant to a long-term lease.

     PeterStar Company Limited.  PeterStar's principal office, which it leases
from PTN, is located on Vassilievski Island, St. Petersburg, Russia. Its
principal switches are also located at this site. PeterStar also occupies other
space in St. Petersburg which is used to house other switching and transmission
equipment.

     Baltic Communications Limited.  BCL's principal office, which it leases on
a commercial basis, is located in the Admiralteiski district of St. Petersburg,
Russia. BCL's commercial and technical facilities are located at this location.

     Technocom Limited.  Technocom uses Teleport-TP's office space and does not
own any real property. Teleport-TP leases premises, which also house its
administrative functions, at VVC. Teleport-TP's core network, comprising the
switching facilities and the four Intelsat and Eutelsat earth stations, are also
located at VVC.

     ALTEL.  Space for most ALTEL switches, cell sites and associated equipment
is provided by Kazakhtelekom. ALTEL also uses space in a Kazakhtelekom exchange
building in Almaty for office and administrative purposes and leases other
premises in Almaty which combines its central warehouse and a larger customer
service center and retail outlet. ALTEL has also established, and will continue
to establish, customer service centers in each city in which service is offered.
Virtually all space for customer service centers and equipment not provided by
Kazakhtelekom is leased, although ALTEL has purchased its facilities in Taraz,
one base station site and building in Chimkent and a base station building in
Karaganda.

     BELCEL.  BELCEL's principal office, which it leases on a commercial basis,
is located in central Minsk. BELCEL's customer service center and switch is also
located at this site. BELCEL also leases space for its interconnect equipment in
the buildings housing the national and international exchanges, and leases space
to house its base stations in Minsk and the other cities and regions in which it
is operating.

     The Company believes that its offices and the various facilities used by
PeterStar, BCL, ALTEL, BELCEL, Technocom and Teleport-TP are suitable and
adequate for their respective current businesses and operations.

ITEM 3.  LEGAL PROCEEDINGS

     Neither the Company nor its subsidiaries are parties to any material legal
proceedings.

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 1998.

                                    PART II

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

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY


     The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "PLDI" (as of March 6, 1997). Prior to this date it was quoted under
the symbol "PLDIF." The Company's Common Stock is also listed on The Toronto
Stock Exchange under the symbol "PLD." It is also traded on the Berlin,


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<PAGE>   71


Frankfurt and Munich Stock Exchanges. Prior to the continuance of the Company
from Ontario to Delaware on February 28, 1997 (the "Continuance"), the Company's
Common Stock was referred to as "Common Shares." The Common Shares began trading
on The Toronto Stock Exchange on September 28, 1987 and on the Nasdaq National
Market on February 18, 1993. The Company's principal market, based on the
percentage of trading volume, is the Nasdaq National Market.


     The following table sets forth the high and low closing prices for the
Company's Common Stock, as reported by Nasdaq, for each full quarterly period
within the two most recent fiscal years. The prices below represent prices
between dealers, without adjustment for retail mark-ups, mark-downs or
commissions, and may not reflect actual transactions.

<TABLE>
<CAPTION>
                                                     CLOSING PRICES
                                                   ------------------
                                                    HIGH        LOW
                                                   -------    -------
<S>                                                <C>        <C>
1997
  First quarter..................................  $8.000     $     5.625
  Second quarter.................................  $5.875     $     4.4375
  Third quarter..................................  $9.250     $     4.875
  Fourth quarter.................................  $9.750     $     5.250

1998
  First quarter..................................  $8.125     $     5.500
  Second quarter.................................  $9.3125    $     6.4375
  Third quarter..................................  $8.000     $     1.125
  Fourth quarter.................................  $3.000     $     1.250
</TABLE>

     On March 29, 1999, the closing sale price for a share of Common Stock as
reported on the Nasdaq National Market was $3.00. As of March 26, 1999, there
were 306 holders of record of the Company's Common Stock.

     The Company did not declare dividends on its Common Stock in 1998 and does
not intend to declare dividends on its Common Stock in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

     During the three years ended December 31, 1998, the following issuances of
unregistered securities of the Company were made:

     (a) On June 12, 1996, the Company issued the following securities: (i)
$123,000,000 aggregate principal amount at maturity of Senior Notes; (ii)
123,000 Placement Warrants to purchase an aggregate of 4,182,000 shares of
Common Stock; and (iii) $26,500,000 aggregate principal amount of Convertible
Notes. The Senior Notes and the Placement Warrants were initially issued as
Units, and the Placement Warrants became separable from the Senior Notes on
December 12, 1996.

     The Units and the Convertible Notes were issued to Smith Barney Inc., as
initial purchaser (the "Initial Purchaser"), in a transaction exempt from the
registration requirements of the Securities Act pursuant to Regulation D. The
Initial Purchaser then sold the Units and the Convertible Notes to a limited
number of U.S. institutional investors in transactions exempt from the
registration requirements of the Securities Act pursuant to Rule 144A thereof.
Discounts and commissions of approximately $4.6 million were paid to the Initial
Purchaser in connection with the issuance of the Units and the Convertible Notes
and the Company agreed to indemnify the Initial Purchaser against certain
liabilities, including those arising under the Securities Act. In addition, the
Company issued an aggregate of 100,000 warrants (the "Initial Purchaser
Warrants") to the Initial Purchaser in consideration for its financial advisory
activities on behalf of the Company.

     The Convertible Notes are convertible into shares of Common Stock, at a
price of $6.90 per share. Each $1,000 principal amount of Convertible Notes is
convertible into 144.93 shares of Common Stock. The Placement Warrants are
exercisable at any time on or before June 1, 2006 into shares of Common Stock,
at a

                                       69
<PAGE>   72

price of $6.60 per share. Each Placement Warrant is exercisable for 34 shares of
Common Stock. The Initial Purchaser Warrants are exercisable at any time on or
before April 30, 2001 into shares of Common Stock, at a price of $4.70 per
share. Each Initial Purchaser Warrant is exercisable for one share of Common
Stock.

     The net proceeds from the issuance of the Senior Notes were used for
repayment of the Company's bank facility, capital expenditures for the operating
businesses and general corporate purposes. The proceeds from the Senior Notes,
except for the repayment of the bank facility and the amounts to be used for
general corporate purposes, were deposited into an escrow account for the
benefit of the holders of the Senior Notes. As of March 31, 1998, the balance in
the escrow account was approximately $34.3 million. The net proceeds from the
issuance of the Convertible Notes were used for the acquisition of $20 million
of Preferred Shares of Technocom and for general corporate purposes.

     In August 1998, the Securities and Exchange Commission declared effective
the registration statements with respect to the resale by the holders thereof of
the Convertible Notes and Placement Warrants and the shares of Common Stock
issuable thereunder. In October 1998, the Company completed the Exchange Offer
in respect of the Senior Notes. See "Business -- Recent
Developments -- Registration of Outstanding Securities; Completion of Exchange
Offer."

     (b) On November 26, 1997, the Company issued $12.32 million in Series A
Notes and $3.1 million in Series B Notes, to The Travelers Parties. The Series A
Notes and the Series B Notes were issued to a limited number of institutional
investors in reliance upon Section 4(2) of the Securities Act of 1933 as a
transaction not involving a public offering. No commissions were paid to any
underwriter, broker or dealer in connection with such issuance. The net proceeds
from the issuance of the Series A Notes and the Series B Notes were used in
connection with the Company's acquisition of additional interests in Technocom.

     The Series B Notes were to have come due on September 30, 1998, but their
maturity date was deferred to December 31, 1998. The Series A Notes also would
have come due on December 31, 1998, but their maturity date, together with the
maturity date for the Series B Notes, was deferred by the Travelers Parties, the
holders of such Notes, from time to time thereafter, the latest such deferral
having been given on February 28, 1999 and giving a new maturity date for both
series of Notes of April 30, 1998. Both the Series A Notes and the Series B
Notes are secured by the Company's inventory and accounts receivable. In
addition, the Series A Notes are secured by 28 of the Technocom shares acquired.

     In addition to issuing the Series A and Series B Notes, the Company also
issued to the Travelers Parties a total of 423,000 warrants to purchase Common
Stock at $8.625 at any time up to December 31, 2008. As a result of not making
certain "targeted reductions in commitment", in the period July through December
1998 the Company issued a further 182,000 warrants to purchase shares of Common
Stock at $8.625 at any time up to December 31, 2008 to the Travelers Parties.

     All of the foregoing warrants were issued in reliance upon Section 4(2) of
the Securities Act of 1933 as transactions not involving a public offering. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance. There were no cash proceeds from the issuance of such warrants.

     (c) In partial consideration for the acquisition of additional interests in
Technocom from Elite, on November 26, 1997, the Company issued, at the direction
of Elite, an aggregate of 1,316,240 shares of Common Stock to P.S. Marketing &
Consulting Services Limited, a Gibraltar company. The shares of Common Stock
were issued to a single institutional investor in reliance upon Section 4(2) of
the Securities Act of 1933 as a transaction not involving a public offering. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance.

     (d) On May 29, 1998, the Company issued an aggregate of 196,458 shares (the
"Ultra Pass Shares") of the Company's Common Stock to the shareholders of Ultra
Pass Systems Limited, a Scottish company, in connection with the Company's
acquisition of 98% of the share capital of Ultra Pass. The Ultra Pass Shares,
which were issued in reliance upon Section 4(2) of the Securities Act of 1933 as
a transaction not involving a public offering, are "restricted" securities but
the holders thereof have demand registration rights. No commissions were paid to
any underwriter, broker or dealer in connection with such issuance. There were
no cash proceeds from the issuance of the Ultra Pass Shares.
                                       70
<PAGE>   73

     (e) In connection with the Company's consent solicitation relating to
certain amendments to the indentures governing the Company's Senior Notes and
Convertible Notes intended to give the Company more flexibility in conducting
its business and also to clarify certain provisions of those indentures, the
Company issued Consent Warrants to those holders of the Senior Notes and the
Convertible Notes which consented to the amendments. The Company issued a total
of 123,000 five-year Consent Warrants to purchase 1.8 shares of Common Stock at
$6.90 per share to the holders of the Senior Notes, and a total of 22,700
five-year Consent Warrants to purchase 2 shares of Common Stock at a price of
$6.90 per share to the holders of the Convertible Notes. If all of the Consent
Warrants are exercised, the Company will issue a total of 266,800 shares of
Common Stock. The Consent Warrants were issued in reliance upon Section 4(2) of
the Securities Act of 1933 as a transaction not involving a public offering. The
Company has agreed to register the resale of the shares issuable upon exercise
of the Consent Warrants.

     (f) On August 14, 1998, the Company issued an aggregate of 4,326,041 shares
(the "Transaction Shares") of Common Stock in a series of transactions with
Cable & Wireless and News, as described above. See "Business -- Recent
Developments -- Transactions with Cable & Wireless and News." The Company issued
500,000 Transaction Shares to Cable & Wireless in consideration of the
acquisition by the Company of a 50% indirect interest in BELCEL; Cable &
Wireless transferred such Transaction Shares to News as part of the series of
transactions. An additional 3,826,041 Transaction Shares were issued by the
Company to News in consideration of the acquisition by the Company of an
additional 11% interest in PeterStar.

     The Transaction Shares, which were issued in reliance upon Section 4(2) of
the Securities Act of 1933 as transactions not involving a public offering, are
"restricted" securities but News, as the holder of all of the Transaction
Shares, has demand registration rights with respect to such Shares. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance. There were no cash proceeds from the issuance of the Transaction
Shares.

     (g) On November 30, 1998 (but effective September 30, 1998), the Company
entered into the News Revolving Credit Agreement under which News agreed to
advance up to $8.1 million to the Company. On March 22, 1999 News agreed to
increase the amount it would advance to $9.1 million and on April 22, 1999 News
further increased the amount it would advance to $9.55 million. Each advance
under the News Revolving Credit Agreement bears interest at an annual rate of
20% and is repayable on June 30, 1999. Advances are evidenced by notes which are
convertible at News' option into shares of Common Stock of the Company at
conversion rates determined as of the date of issue of the applicable note. In
addition, in the event that News guarantees obligations of the Company, a note
is issued reflecting the Company's reimbursement obligation should such
guarantee be called. Amounts so guaranteed are treated as advances under the
News Revolving Credit Agreement, meaning that they count with respect to the
$9.55 million ceiling on total advances. In addition, in the event a guarantee
is called, the Company will owe interest on its reimbursement obligation at the
annual rate of 20% calculated from the date News makes payment under its
guarantee. Notes issued in respect of reimbursement obligations, together with
interest thereon, are also convertible into shares of Common Stock at conversion
rates determined as of their date of issue. News can cease making advances at

                                       71
<PAGE>   74

any time and for any reason. Currently, however, the full amount available under
the News Revolving Credit Agreement has been used, and notes have been issued to
News as follows:

<TABLE>
<CAPTION>
DATE      PRINCIPAL AMOUNT   TYPE   CONVERSION PRICE   NO. OF SHARES
----      ----------------   ----   ----------------   -------------
<S>       <C>                <C>    <C>                <C>
9/30/98      $1,100,000       G          $1.120            982,143
10/31/98      1,000,000       G           1.300            769,231
11/30/98      1,000,000       G           1.945            514,139
11/30/98      1,000,000       A           1.945            514,139
12/18/98      2,500,000       A           1.459          1,713,502
1/27/99       1,500,000       A           1.544            971,503
3/22/99       1,000,000       A           2.550            392,157
4/22/99         450,000       A           2.112            213,068
             ----------                                  ---------
Total         9,550,000                                  6,069,882
</TABLE>

---------------
A -- refers to notes issued in respect of actual advances

G -- refers to notes issued in respect of guarantees given by News

     The notes issued under the News Revolving Credit Agreement were issued, and
any shares which are issued upon conversion of such Notes will be issued, in
reliance upon Section 4(2) of the Securities Act of 1933 as transactions not
involving a public offering. No commissions were paid to any underwriter, broker
or dealer in connection with such issuances.

ITEM 6.  SELECTED FINANCIAL DATA

     The following summary consolidated financial and operating data was derived
from, and should be read in conjunction with, the audited Consolidated Financial
Statements of the Company and the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contained elsewhere herein. Prior to the Continuance the Company's audited
Consolidated Financial Statements were prepared in accordance with Canadian
GAAP, which differ in certain respects from U.S. GAAP. See Note 15 to the
Company's audited Consolidated Financial Statements. As a result of the

                                       72
<PAGE>   75

Continuance, the consolidated financial data presented below for the fiscal year
1994 has been restated in accordance with U.S. GAAP.


<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                      --------------------------------------------------------
                                        1998        1997        1996        1995        1994
                                      --------    --------    --------    --------    --------
                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
  Operating revenues................  $145,360    $114,424    $ 61,966    $ 29,120    $  8,526
  Operating expenses:
     Direct costs (excludes
       depreciation)................    45,348      39,186      21,709      10,382       3,172
     General and administrative.....    57,672      38,716      24,791      18,168       9,042
     Depreciation...................    14,745      10,433       5,226       3,837       1,232
     Amortization...................    11,326       7,867       4,883       4,659       3,802
     Taxes other than income
       taxes........................     6,321       6,204       2,490       1,220          --
                                      --------    --------    --------    --------    --------
          Total operating
            expenses................   135,412     102,406      59,099      38,266      17,248
                                      --------    --------    --------    --------    --------
  Operating income/(loss)...........     9,948      12,018       2,867      (9,146)     (8,722)
                                      --------    --------    --------    --------    --------
  Loss before income taxes and
     minority interest..............   (23,561)     (3,428)     (6,271)    (13,440)     (9,491)
  Income taxes......................     9,864       7,739       3,669       1,490          --
  Loss before minority interest.....   (33,425)    (11,167)     (9,940)    (14,930)     (9,491)
  Minority interest.................     9,386       9,399       2,521         551          --
                                      --------    --------    --------    --------    --------
  Net loss..........................  $(42,811)   $(20,566)   $(12,461)   $(15,481)   $ (9,491)
                                      ========    ========    ========    ========    ========
Loss per common share...............  $  (1.21)   $  (0.64)   $  (0.39)   $  (0.49)   $  (0.78)
                                      ========    ========    ========    ========    ========
Weighted average number of shares of
  common stock outstanding (basic
  and diluted)......................    35,274      32,061      31,579      31,315      12,663
</TABLE>


<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31,
                                      --------------------------------------------------------
                                        1998        1997        1996        1995        1994
                                      --------    --------    --------    --------    --------
                                                           (IN THOUSANDS)
<S>                                   <C>         <C>         <C>         <C>         <C>
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents(1)......  $  4,579    $ 17,256    $ 40,674    $ 15,676    $ 56,710
  Non-cash working capital
     deficiency.....................   (20,578)    (18,642)    (26,440)    (22,001)    (17,706)
  Escrow funds......................    14,908      33,868      40,984          --          --
  Property and equipment, net.......   168,937     134,998      93,039      45,357      21,718
  Telecommunications licenses,
     net............................    77,359      81,837      72,310      49,583      54,099
  Goodwill, net.....................    36,368      12,709       1,796       2,011          --
  Other investments and other
     assets.........................    15,128      17,092      37,256      27,282      18,925
  Investment in Teleport-TP(2)......        --          --          --      23,564      15,699
  Total assets......................   352,108     335,586     306,357     178,092     171,760
Long-term debt......................   151,814     133,516     107,954          --          --
Shareholders' equity................   124,877     127,231     137,954     135,832     147,470
</TABLE>

---------------
(1) The December 31, 1996 and 1995 balances include cash of $9.0 million and
    $6.1 million, respectively, held on deposit as collateral to secure bank
    indebtedness of the same amount.

(2) Teleport-TP became a consolidated subsidiary as of December 31, 1996 as a
    result of the acquisition of an additional ownership interest on December
    20, 1996.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in

                                       73
<PAGE>   76

the countries of the former Soviet Union and the Commonwealth of Independent
States, the commencement of certain programs and the proposed offering of
certain services by the Company's operating subsidiaries, proposed changes in
the Company's corporate structure and centers of operations, the impact of Year
2000 issues on the Company's operations and interpretations and actions of
certain regulatory authorities, including in the United States, Russia,
Kazakhstan and Belarus, as well as information contained elsewhere in this
report where statements are preceded by, followed by, or include the words
"believes," "expects," "anticipates," and similar expressions. For such
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in the Report.

     Furthermore, this document constitutes a Year 2000 Readiness Disclosure
Statement, and the statements herein are subject to the Year 2000 Information
and Readiness Disclosure Act, and the Company hereby claims the protection of
such Act for this document and all information contained herein.

BASIS OF PRESENTATION

     The Company's key interests at December 31, 1998 include a 71% equity
interest in PeterStar, which provides telecommunications services in St.
Petersburg, Russia; a 50% equity interest in ALTEL, which provides cellular
services in Kazakhstan; a 50% interest in BELCEL, which provides cellular
services in Belarus; and an 80.4% equity interest in Technocom which, through
its 49.3% equity interest in Teleport-TP, operates an international teleport in
Moscow, fiber optic networks in Moscow and its environs and a satellite-based
long distance network across Russia.

     EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.

     Certain of the Company's subsidiaries pay management fees to their
shareholders, including the Company. The figures presented for the subsidiaries
reflect all payments of such fees (i.e. management fees are included in
operating expenses in the same way as other expenses of the subsidiary).
Profitability measures -- EBITDA, operating profit and net income -- are
therefore quoted after accounting for such payments.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997


     Overview.  The definition of EBITDA is given in the previous section. It is
commonly used as an indicator of the ability of a business to generate cash
flows from its operating activities. Management therefore considers it to be a
relevant and useful measure for investors. The Company reported a net loss of
$42.8 million ($1.21 per share) and operating income of $9.9 million on revenues
of $145.4 million for the year ended December 31, 1998, compared to a net loss
of $20.6 million ($0.64 per share) and operating income of $12.0 million on
operating revenues of $114.4 million reported in 1997. EBITDA was $23.9 million
in 1998 as compared with $30.3 million in 1997. In 1998 net cash provided by
operating activities amounted to $19.9 million, with net cash used in investing
and financing activities amounting to $20.8 million and $11.8 million,
respectively. This compares to 1997 when net cash provided by operating and
financing activities amounted to $10.8 million and $6.7 million respectively,
and net cash used in investing activities amounted to $40.9 million. Cash flows
generated by operating subsidiaries are generally retained by those businesses
to finance capital expenditures, service long term debt and provide working
capital. Funds in excess of subsidiaries' requirements are distributed to
shareholders.


                                       74
<PAGE>   77

     Revenues.  Revenues increased 27% from $114.4 million in 1997 to $145.4
million in 1998. This increase was primarily a result of the strong year-on-year
revenue growth in PeterStar and ALTEL, which in 1998 together accounted for 77%
of the Company's consolidated revenues. PeterStar's subscriber line numbers
reached 168,166 by the end of the year, up 53,392 over the previous year.
ALTEL's number of subscribers increased to 21,395, up 10,293 over last year, its
accelerated rate of growth being primarily due to the introduction of prepaid
cellular service in August 1998. Teleport-TP added an additional seven earth
stations in the C.I.S. in 1998 which will become contributors to overall
revenues as they become fully operational in 1999.

     The following table shows the Company's consolidated revenues by principal
operating subsidiary for 1998 and 1997 and the percentage growth in revenues
between the periods:

<TABLE>
<CAPTION>
                                        YEAR ENDED                    YEAR ENDED
                                    DECEMBER 31, 1998             DECEMBER 31, 1997              %
                                --------------------------    --------------------------    CHANGE OVER
                                   ($ MILLION)         %         ($ MILLION)         %      PRIOR PERIOD
                                -----------------    -----    -----------------    -----    ------------
<S>                             <C>                  <C>      <C>                  <C>      <C>
PeterStar.....................         72.4           49.8%          54.5           47.6%       32.8%
ALTEL.........................         39.5           27.2%          30.0           26.2%       31.7%
Technocom.....................         22.2           15.3%          21.0           18.4%        5.7%
BCL...........................          9.9            6.8%           7.6            6.6%       30.3%
Other.........................          1.4            0.9%           1.3            1.2%        7.7%
                                      -----          -----          -----          -----        ----
                                      145.4          100.0%         114.4          100.0%       27.1%
</TABLE>


     Although revenue growth was significant in 1998, the rate of revenue growth
decreased from 85% in 1997 to 27% in 1998. The reduced rate of revenue growth
for the year as a whole was largely the result of a slow down in revenue growth
late in the year, attributable to the operating businesses feeling the effects
of the Russian economic crisis. This resulted in the loss of some customers
(principally customers of the three cellular operators in St. Petersburg whose
calls are routed over the PeterStar network), as well as reduced calling
activity among businesses who remained customers. In the case of Teleport-TP,
where tariffs to certain customers were quoted in Roubles, revenues were
adversely affected by the Rouble devaluation. In addition, receipts slowed in
the last half of the year, with the businesses having to devote more resources
to the process of collecting receivables. In the case of ALTEL, weaker economic
conditions, although not as severe as those in Russia, coupled with customer
pressure on tariffs in anticipation of increased competition from other
licensees, resulted in somewhat slower revenue growth (31.7% versus 57.1%). The
Company expects that revenue growth in ALTEL will continue to be hampered by
pressure on tariffs following the commencement of operations by two new
competitors in early 1999.


     Management believes that revenues for its existing businesses in 1999 are
unlikely to grow at the same rate as they have in recent years. Given the many
uncertainties in the Russian political and economic situation at the present
time, exacerbated by the absence of strong leadership or effective economic
planning, it is extremely difficult to make any accurate assessment of the
prospects for the Company's businesses in 1999. It is not possible to rule out
further deterioration in the Russian economic situation which would likely
impact the Company's businesses adversely. See "Business -- Recent
Developments -- Russian Economic and Political Turmoil." While management
believes that it is taking all available measures to protect the Company and its
businesses from the negative effects of any further problems in Russia, there
can be no assurance that those measures will be successful.


     At the same time the Company expects the slower revenue growth projected
for Company's existing businesses to be offset to some degree by growth in
revenues from PLD's new international carrier services business (the "Carrier
Services Business"), which is expected to become a contributor to the Company's
revenues in 1999. See "Business -- Carrier Services Business."



     Direct costs (excludes depreciation).  Direct costs increased 15.6% to
$45.3 million in 1998 from $39.2 million recorded in 1997. Direct costs, as a
percentage of revenues, decreased from 34.3% in 1997 to 31.2% in 1998. Tariff
reductions experienced at the operating level continued to be offset by
reductions in carrier charges levied by the operating companies' carriers.
However, margins are generally expected to come under pressure in 1999 due to
the continuing impact of the Russian economic crisis.


                                       75
<PAGE>   78

     General and administrative expenses.  General and administrative expenses,
which include salaries and sales and marketing expenses in all of the Company's
operating subsidiaries, together with corporate office overhead, increased 49%
to $57.7 million in 1998 from $38.7 million in 1997. This increase has been
required to support the Company's efforts to grow revenues during the year and
to expand its businesses through acquisitions and other transactions.


     As a percentage of revenues, general and administrative expenses increased
to 40% in 1998 from 34% in 1997 reflecting additional costs principally in
PeterStar, ALTEL and at the corporate level, as well as an approximate $3.2
million provision for a finance lease receivable from one lessee. The increase
in corporate general and administrative expense of approximately $4 million was
the result of additional costs incurred relating to the Company's Cardlink
business, which is in the process of implementing wireless card validation
systems using proprietary technology, and the Company's Carrier Services
Business, as well as non-recurring professional costs relating to the evaluation
of potential acquisitions by the Company.


     Depreciation.  Depreciation increased 41% to $14.7 million in 1998 compared
to $10.4 million incurred in 1997 reflecting the investment of over $46.6
million in property and equipment over the past 12 months and a full year of
depreciation for assets placed in service in 1997. Depreciation will likely
continue to grow as capital expenditures will continue, albeit at a slower pace,
over the coming year. Depreciation represented 10% of revenues in 1998 compared
to 9% in 1997, but over time is expected to decrease as a percentage of revenues
as the Company nears completion of the build-out of its core networks.

     Amortization expense.  In 1998, the Company incurred total amortization
charges of $13.1 million compared to $9.0 million in 1997. Of the 1998 charges,
$11.3 million related to the amortization of goodwill and of telecommunications
licenses held by PeterStar, ALTEL and Teleport-TP and $1.8 million related to
amortization of deferred financing costs. Deferred financing costs relating to
the June 1996 high yield offering are amortized over eight years, the term of
the Senior Notes, while deferred financing costs relating to the November 1997
revolving credit financing were fully amortized by the end of 1998.

     The increase in amortization expense in 1998 was primarily due to the
acquisition by the Company in November 1997 of an additional 29.65% interest in
Technocom for consideration, including acquisition costs, of $33.3 million. The
excess of the purchase price over identifiable, tangible assets, amounting to
$27.1 million, was allocated to goodwill and telecommunications licenses. The
amount allocated to goodwill ($11.1 million) is being amortized over 20 years
and the amount allocated to Teleport-TP's licenses ($16.0 million) is being
amortized over its remaining term which expires in 2004. This acquisition
resulted in additional amortization charges of $2.9 million in 1998.

     In addition, effective September 30, 1998, the Company acquired an
additional 11% interest in PeterStar for consideration of $33.9 million. The
excess of the purchase price over identifiable, tangible assets, amounting to
$28.1 million, has been allocated to goodwill and telecommunications licenses.
The value allocated to goodwill ($24.7 million) is being amortized over 20 years
and the value allocated to PeterStar's licenses ($3.4 million) is being
amortized over its remaining term which expires in 2004. This acquisition
resulted in additional amortization charges of $0.4 million in 1998 which will
increase to an annual charge of $1.8 million in 1999.

     ALTEL's telecommunications license, which expires in 2009, is also being
amortized over its remaining term and resulted in an amortization charge of $2.1
million in 1998, unchanged from a year ago.

     The Company does not anticipate any problems renewing the
telecommunications licenses currently held by any of its subsidiaries upon their
expiry although no assurance can be provided in this regard.

     Share of income/(loss) from equity investments.  The Company's share in
losses from equity investments increased from $0.5 million in 1997 to $1.0
million in 1998. The 1998 loss consisted of a 50% share of MTR-Sviaz's loss of
$1.0 million, a 50% share of BELCEL's fourth quarter loss of $0.6 million and a
50% share of Rosh Telecom's net loss of $0.4 million.

     Interest and other income.  Interest and other income of $2.4 million in
1998 compared with $3.6 million earned in 1997. The 1998 figure included $1.3
million earned on the Company's funds held in escrow and a

                                       76
<PAGE>   79

$0.5 million tax indemnity payment from Cable and Wireless plc relating to
Baltic Communications Limited. The 1997 comparative figure includes a $1.0
million gain related to the Company's disposal of its 10.4% interest in SPMMTS
in June 1997 for gross proceeds of $17.2 million.

     Interest expense.  Interest expense of $22.0 million in 1998 compared with
$17.8 million incurred in 1997 and consisted of interest on bank indebtedness
and short-term borrowings of $2.4 million, interest accreted on the Senior Notes
of $17.2 million and interest expense related to the Convertible Notes of $2.4
million. Interest on the Senior Notes becomes payable in cash semi-annually
commencing June 1999 while interest on the Convertible Notes is currently paid
in cash semi-annually. The increase in interest expense in 1998 reflects
primarily the interest paid on the $15.4 million Revolving Credit Notes issued
to Travelers, which commenced in November 1997 and carried an annual interest
rate of 12% to May 31, 1998, increasing to 15% on June 1, 1998. See "Liquidity
and Capital Resources."

     Foreign exchange loss.  In 1998, the Company incurred foreign exchange
losses of $5.3 million as compared to $0.3 million a year ago. The significant
increase in losses in 1998 relate to the substantial devaluation of the
Company's Rouble cash balances in August and September when the extreme market
conditions resulting from the Russian financial crisis caused major disruptions
in the Russian banking system. This prevented the Company's subsidiaries from
converting Roubles into hard currency at a time when the value of the Rouble was
depreciating significantly.

     At the same time, foreign exchange losses were also incurred when payments
made by customers in Roubles at Russian banks were not credited immediately to
the operating subsidiaries' accounts, due to banking delays. The Company has
sought, and will continue to seek, to limit the effects of such conditions by
minimizing the amount of Rouble balances held by its subsidiaries and by taking
measures to accelerate collection and currency conversion procedures in so far
as this is possible in the current banking and legislative environment.

     Income taxes.  The income tax charge for 1998 was $9.9 million compared
with $7.7 million in 1997. The provision for income taxes relates substantially
to current income taxes in the Company's Russian and Kazakh businesses.

     Minority interest.  Minority interest relates principally to the minority
shareholdings held in three of the Company's subsidiaries -- PeterStar (29%),
ALTEL (50%) and Technocom (19.6%). Minority interest of $9.4 million for the
year compared with $9.4 million in 1997. Effective September 30, 1998, the
Company acquired an additional 11% of PeterStar. Accordingly, PeterStar's
minority interest percentage reduced to 29% from 40% effective October 1, 1998.

     The following table compares the results of operations of the Company's
principal operating subsidiaries in 1998 with 1997:


<TABLE>
<CAPTION>
                                           PETERSTAR         ALTEL          TECHNOCOM            BCL
                                           YEAR ENDED      YEAR ENDED       YEAR ENDED        YEAR ENDED
                                          ------------    ------------    --------------    --------------
                                          1998    1997    1998    1997    1998     1997     1998     1997
                                          ----    ----    ----    ----    -----    -----    -----    -----
                                                                    ($ MILLION)
<S>                                       <C>     <C>     <C>     <C>     <C>      <C>      <C>      <C>
Revenues................................  72.4    54.5    39.5    30.0     22.2     21.0      9.9      7.6
Operating income/(loss) -- $............  24.5    20.5    15.4    10.9    (13.5)    (3.6)     1.1      1.2
Operating income/(loss) -- %............  33.8%   37.6%   39.0%   36.3%   (60.8)%  (17.1)%   11.1%    15.8%
Net income/(loss) -- $..................  17.8    16.5     9.2     7.2    (16.1)    (4.5)     0.4      0.8
Net income/(loss) -- %..................  24.6%   30.3%   23.3%   24.0%   (72.5)%  (21.4)%    4.0%    10.5%
EBITDA -- $.............................  28.1    24.1    19.2    13.9     (6.7)    (1.5)     1.0      1.7
EBITDA -- %.............................  38.8%   44.2%   48.6%   46.3%   (30.2)%   (7.0)%   10.1%    22.4%
% PLD ownership at end of period........  71.0%   60.0%   50.0%   50.0%    80.4%    80.4%   100.0%   100.0%
</TABLE>


YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996

     Overview.  The Company reported a net loss of $20.6 million ($0.64 per
share) and operating income of $12.0 million on revenues of $114.4 million for
the year ended December 31, 1997, compared to a net loss of

                                       77
<PAGE>   80

$12.5 million ($0.39 per share) and operating income of $2.9 million on
operating revenues of $62.0 million reported in 1996. EBITDA of $30.3 million
reported in 1997 compared with $12.1 million in 1996.

     Revenues.  Revenues increased 85% from $62.0 million in 1996 to $114.4
million in 1997. This increase was primarily a result of the strong year-on-year
revenue growth in PeterStar and ALTEL and the consolidation of a full year's
revenues from BCL and Teleport -- TP in 1997. PeterStar's subscriber line
numbers increased to 114,744 by the end of the year, up from 52,005 the previous
year. ALTEL's number of subscribers increased to 11,102, up from 6,957 the
previous year.

     The following table shows the Company's consolidated revenues by principal
operating subsidiary for 1997 and 1996 and the percentage growth in revenues
between the periods:

<TABLE>
<CAPTION>
                                             YEAR ENDED              YEAR ENDED
                                         DECEMBER 31, 1997       DECEMBER 31, 1996           %
                                        --------------------    --------------------    CHANGE OVER
                                        ($ MILLION)      %      ($ MILLION)      %      PRIOR PERIOD
                                        -----------    -----    -----------    -----    ------------
<S>                                     <C>            <C>      <C>            <C>      <C>
PeterStar.............................      54.5        47.6%      32.5         52.4%       67.7%
ALTEL.................................      30.0        26.2%      19.1         30.8%       57.1%
Technocom.............................      21.0        18.4%       4.7          7.6%      346.8%
BCL...................................       7.6         6.6%       5.3          8.5%       43.4%(1)
Other.................................       1.3         1.2%       0.4          0.7%      225.0%
                                           -----       -----       ----        -----       -----
                                           114.4       100.0%      62.0        100.0%       84.5%
</TABLE>

---------------
(1) Revenues in 1996 are for the nine months ended December 31, 1996 only.


     Direct costs (excludes depreciation).  Direct costs increased 80.5% to
$39.2 million in 1997 from $21.7 million recorded in 1996. Direct costs, as a
percentage of revenues, decreased marginally in 1997 to 39.3%. Any tariff
reductions experienced at the operating level were generally offset by
reductions in carrier charges levied by the operating companies' carriers.


     General and administrative expenses.  General and administrative expenses
increased 56% to $38.7 million in 1997 from $24.8 million in 1996. This
increase, in all functional areas, including sales and marketing, customer
service, technical, and finance and administration, reflected the continued
growth in the scale and extent of the operating businesses and the full
consolidation of BCL and Teleport-TP. As a percentage of revenues, these costs
exhibited a downward trend, falling from 40% in 1996 to 34% in 1997.

     Depreciation.  Depreciation increased 100% to $10.4 million in 1997
compared to $5.2 million incurred in 1996 reflecting the investment of over
$43.0 million in property and equipment during the year as the build-outs of the
PeterStar. ALTEL and Teleport-TP networks progressed. Depreciation represented
9.1% of revenue in 1997 compared to 8.4% in 1996.

     Amortization expense.  In 1997, the Company incurred total amortization
charges of $9.0 million compared to $5.6 million in 1996. Of the 1997 charges,
$7.4 million related to the amortization of telecommunications licenses held by
PeterStar ($2.6 million), ALTEL ($2.1 million) and Teleport-TP ($2.7 million)
and $1.2 million related to amortization of deferred finance costs. In 1996,
amortization charges of $2.5 million relating to Teleport-TP were included in
Technocom's share of losses from equity investments.

     Share of income/(loss) from equity investments.  The Company's share in
losses from equity investments decreased from $2.7 million in 1996 to $0.5
million in 1997. In 1996, Teleport-TP's net earnings were included in this
figure. In 1997, they were fully consolidated within Technocom.

     Interest and other income.  Interest and other income of $3.6 million in
1997 compared with $4.9 million earned in 1996. The 1997 figure includes a $1.0
million gain related to the Company's disposal of its 10.4% interest in SPMMTS
in June 1997 for gross proceeds of $17.2 million. The 1996 figure was comprised
primarily of interest earned on the $46.0 million put into escrow during the
year plus interest earned on funds held by Technocom.

                                       78
<PAGE>   81

     Interest expense.  Interest expense of $17.8 million in 1997 compared with
$10.0 million incurred in 1996 and consisted of interest on bank indebtedness
and short-term borrowings of $1.3 million, interest accreted on the Senior Notes
of $14.1 million and interest paid on the Convertible Notes of $2.4 million.

     Foreign exchange loss.  In 1997, the Company incurred foreign exchange
losses of $0.3 million as compared to $0.6 million in 1996 which related to
unfavorable movements in the U.S. exchange rate vis-a-vis a number of foreign
currencies during the year in relation to the Company's net monetary assets.

     Income taxes.  The income tax charge for 1997 was $7.7 million compared
with $3.7 million in 1996. The provision for income taxes relates substantially
to current income taxes in the Company's Russian and Kazakh businesses and its
increase over 1996 reflects the increased operating profitability of these
subsidiaries during the year.

     Minority interest.  Minority interest related principally to the minority
shareholdings held in PeterStar (40%), ALTEL (50%) and Technocom (19.6%).
Minority interest of $9.4 million in 1997 compared with $2.5 million in 1996
reflecting the improved profitability of these businesses during the year.

     The following table compares the results of operations of the Company's
principal operating subsidiaries in 1997 with 1996:


<TABLE>
<CAPTION>
                                   PETERSTAR         ALTEL          TECHNOCOM             BCL
                                   YEAR ENDED      YEAR ENDED       YEAR ENDED         YEAR ENDED
                                  ------------    ------------    --------------    ----------------
($ MILLION)                       1997    1996    1997    1996    1997     1996     1997     1996(1)
-----------                       ----    ----    ----    ----    -----    -----    -----    -------
<S>                               <C>     <C>     <C>     <C>     <C>      <C>      <C>      <C>
Revenues........................  54.5    32.5    30.0    19.1     21.0      4.7      7.6       5.3
Operating income/ (loss) -- $...  20.5     8.0    10.9     6.0     (3.6)    (0.4)     1.2       1.1
Operating income/ (loss) -- %...  37.6%   24.6%   36.3%   31.4%   (17.1)%   (8.5)%   15.8%     20.8%
Net income/(loss) -- $..........  16.5     5.9     7.2     4.5     (4.5)    (0.3)     0.8       0.8
Net income/(loss) -- %..........  30.3%   18.2%   24.0%   23.6%   (21.4)%   (6.4)%   10.5%     15.1%
EBITDA -- $.....................  24.1    10.3    13.9     7.8     (1.5)    (0.6)     1.7       1.4
EBITDA -- %.....................  44.2%   31.7%   46.3%   40.8%    (7.0)%  (12.8)%   22.4%     26.4%
% PLD ownership at end of
  period........................  60.0%   60.0%   50.0%   50.0%    80.4%    50.8%   100.0%    100.0%
</TABLE>


---------------
(1) Nine months ended December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES


  GENERAL


     For the year ended December 31, 1998, a total of $19.9 million in cash was
generated from operations (1997 -- $10.8 million; 1996 -- $15.6 million), $20.8
million was used in net investing activities (1997 -- $40.9 million;
1996 -- $88.2 million) and $11.8 million was used in financing activities
(1997 -- $6.7 million provided by financing activities; 1996 -- $97.6 million
provided by financing activities).

     Funds held in escrow at December 31, 1998 decreased to $14.9 million from
$33.9 million at the end of 1997 reflecting various escrow draw downs used to
finance capital equipment purchases. As of December 31, 1998, the Company had a
working capital deficit of $16.0 million compared to a working capital deficit
of $1.4 million at the end of 1997.

     As of December 31, 1998, the Company reported consolidated total assets of
$352.1 million ($335.6 million as of December 31, 1997) which consisted of $37.4
million in current assets (including $4.6 million in cash and cash equivalents),
$168.9 million in property and equipment, $77.4 million in unamortized
telecommunications licenses relating to PeterStar, ALTEL and Teleport-TP, escrow
funds of $14.9 million and other investments, goodwill and other assets of $51.5
million, including $10.6 million in goodwill, net of amortization, relating to
the Company's November 1997 acquisition of an additional 29.65% interest in

                                       79
<PAGE>   82

Technocom and $24.3 million in goodwill, net of amortization, relating to the
Company's August 1998 acquisition of an additional 11% interest in PeterStar.

     Long-term indebtedness of $151.8 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was 43%
as of December 31, 1998, compared to $133.5 million or 40% of total assets as of
December 31, 1997.

     Shareholders' equity of $124.9 million, as of December 31, 1998, compared
with $127.2 million as of December 31, 1997, and consisted of $244.8 million in
common stock and additional paid-in capital offset by the Company's deficit of
$119.9 million. The Company's ratio of long-term indebtedness to equity at
December 31, 1998 was 122% compared to 105% at December 31, 1997.


  INCREASE IN INTEREST RATE ON INDEBTEDNESS


     Under the terms of the Company's $123.0 million Senior Note offering placed
in June 1996, the Company was required to raise $20.0 million in an equity
financing by May 31, 1998. The Company did not do so, and as a result, the
interest rate on the Senior Notes increased from 14% to 14.5% as of June 1,
1998, and will remain at 14.5% until the end of the semi-annual interest period
in which such an offering is completed. The first semi-annual cash payment of
interest on the Company's 14% Senior Notes, amounting to $8.9 million, will come
due on June 1, 1999. The Company currently expects to pay most, if not all, of
this out of funds in the escrow account established in respect of these Notes.

     The obligation to raise $20.0 million in equity by May 31, 1998 was also a
requirement under the terms of the $12.32 million Series A and $3.1 million
Series B Revolving Credit Notes issued to the Travelers Parties in November 1997
in connection with the Company's additional investment in Technocom. See
"Business -- Recent Developments -- Travelers Financing." As a result of the
Company's not raising such equity, the annual interest rate on the Series A and
B Notes increased from 12% to 15% as of June 1, 1998.


  ACQUISITION OF ULTRA PASS



     During the second quarter of 1998 the Company purchased 98% of the
authorized and issued share capital of Ultra Pass from its shareholders. In
consideration for the purchase of the Ultra Pass shares, the Company paid
$500,000 in cash and issued 196,458 shares of its Common Stock, which were
ascribed a value of approximately $1.8 million.



  COMMITMENTS AND SOURCES OF FUNDS FOR 1999



     Operating Businesses.  The Company has historically funded the needs of its
operating businesses for capital expenditures and operating expenses out of the
proceeds of its financing activities, including supplier financing, proceeds
from sales of assets and, to the extent these existed, distributions from its
operating businesses (in the form of dividends and management fees). Except for
its Cardlink business and the Carrier Services Business, the Company's operating
businesses have largely become self-sustaining, in that they have been able to
pay for capital expenditures and operational expenses out of internally
generated cash flows from operations and/or have been able to arrange their own
financing, including supplier financing. Some supplier financing is back-to-back
financing arranged by the Company, where PLDCA, a wholly owned subsidiary of the
Company, acquires equipment, pays the supplier and resells the equipment to the
operating business. The principal source of funds for the latter activity has
been the escrow funds, discussed in greater detail below.



     The Company plans to endeavor to accelerate the implementation of its
Cardlink business and Carrier Services Business, to the extent possible, in
1999. While Cardlink is not anticipated to require significant immediate cash,
development of the first phase of the Carrier Services Business is expected to
require approximately $17.0 million. The Company is currently negotiating with
an Ericsson company for a vendor financing arrangement for the Carrier Services
Business. Both the Cardlink business and the Carrier Services Business are
expected to be self-sustaining (in terms of generating sufficient cash to
fund -- or support financing for -- their operating and capital needs) in 2000.


                                       80
<PAGE>   83


     To the extent that the operating businesses (other than Cardlink and the
Carrier Services Business) experience lower than expected revenues, higher
operating costs or higher development costs, so that they are no longer able to
fund their activities internally, the Company has the choice to provide
financing support itself, or cause the businesses to scale back or slow down the
build-out of their networks and/or to cut costs. The Company has already
initiated a number of these actions in response to the economic difficulties in
Russia or Kazakhstan, and anticipates continuing to take such actions in the
event that its businesses appear to need additional support.



     In the event that the Company is unable to fully support the planned
implementation of the Carrier Services Business in 1999, it has the option to
defer capital expenditures scheduled for 1999 to 2000 or later, and to scale
back the development of its network. This will result in reduced traffic being
handled by, and reduced revenues from this business during 1999. The Company is
currently unable to quantify the effect on revenues of any such deferrals or
scaling back of development.



     The Company.  The Company has to date funded its own operations from the
same sources as it has funded its operating businesses, namely, proceeds of its
financing activities, including supplier financing, proceeds from sales of
assets and, to the extent these existed, distributions from its operating
businesses. As the operating businesses have become self-sustaining, so too has
the level of distributions (including management fees) from its operating
businesses increased. The Company anticipates receiving approximately $8.0
million in distributions (including management fees) from its operating
businesses in 1999.



     Expatriate employees working for the Company's operating businesses in
Russia, Kazakhstan and Belarus are employed through NWE Cyprus, which also acts
as an intermediate holding company for three of the Company's operating
businesses -- PeterStar, ALTEL and Yellow Pages. On an overall basis, the funds
received by NWE Cyprus through management fees and dividends are currently
sufficient to enable it to make the monthly salary and other payments due to
such expatriates. However, due to timing differences between receipt of
management fees/dividends and requirements to pay salaries etc on a regular
basis, the Company periodically has to provide "top-up" funding to NWE Cyprus,
but the amounts involved are insignificant. Should the levels of management fees
and dividends reduce in future, the Company could, if necessary, reduce the
number of its expatriate employees, although this would have a detrimental
effect upon its ability to monitor and support its operating businesses.



     The Company has the following commitments upcoming during the remainder of
1999 and intends to deal with them as set forth below. To the extent that the
Company is unable to deal with any or all of the commitments described below,
the Company could be required to resort to extraordinary measures, including
making sales of assets under distressed conditions or ultimately seeking the
protection of the bankruptcy courts. The Company believes that certain of its
assets, notably its interests in PeterStar and ALTEL, are readily saleable, but
that, given that they could be sold under distressed conditions, the Company
would be unlikely to receive full value for either of them. The Company would be
receptive to entering into a transaction with another company with greater
financial resources as an alternative to having to enter into sales of assets
under distressed conditions or to take other extraordinary measures, and has
this option under active consideration. However, there can be no assurance that
such a transaction can be accomplished.



     Travelers Financing.  In November 1997, in connection with its acquisition
of additional interests in Technocom, the Company issued $12.32 million of
Series A Notes and $3.1 million of Series B Notes. For further details, please
refer to "Business -- Recent Developments -- Travelers Financing." As noted
therein, a portion of the Series B Notes has been paid off and the Travelers
Parties have given the Company a series of payment deferrals with respect to the
remaining principal amounts due under the Notes. At the same time the Company
has continued to make monthly interest payments due on the Notes on a current
basis. As of the date hereof, a total of $13.42 million in principal is unpaid
under the Series A and the Series B Notes.


     Management of the Company is actively engaged in pursuing ways in which to
settle the Company's obligations to the Travelers Parties. While management
believes that, as long as progress towards settlement of such obligations is
being made, the Travelers Parties will be willing to agree to additional payment
deferrals, there can be no assurance that they will do so, or that they will not
demand payment in full of the Series A and Series B Notes. The Company's failure
to make payment in full could result in a cross-default under and
                                       81
<PAGE>   84


acceleration of the Senior Notes and the Convertible Notes and other
indebtedness. This in turn could require the Company to resort to extraordinary
measures, including making sales of assets under distressed conditions or
ultimately seeking the protection of the bankruptcy courts. See "Risk
Factors -- Risks Involving the Company -- Repayment of Travelers Financing."



     Obligations under Senior and Convertible Notes.  In June 1996 the Company
issued to a limited number of U.S. institutional investors $123,000,000
aggregate principal amount at maturity of Senior Notes and $26,500,000 aggregate
principal amount of Convertible Notes. In March 1998 the Indentures pursuant to
which such Notes were issued were amended pursuant to a Consent Solicitation. In
October 1998 the Senior Notes were exchanged for Exchange Notes of substantially
similar tenor pursuant to an Exchange Offer. For further details, please refer
to "Business -- Recent Developments -- The Consent Solicitation"; and
"-- Registration of Outstanding Securities; Completion of Exchange Offer."



     Under the terms of the Senior Note Indenture, approximately $37.0 million
of the proceeds of the sale of the Senior Notes was required to be placed in
escrow and released solely to acquire assets for use in a telecommunications
business. As of February 28, 1999, the Company has used approximately $27.4
million to fund purchases of equipment for its operating businesses, by having
PLDCA purchase equipment using the funds in escrow and then reselling the
equipment to the operating businesses, and the balance of such funds remain
available for such purposes (or for the payment of interest on the Senior and
Convertible Notes). However, the limitation on the use of proceeds to acquire
assets has meant that the Company has not been able to use the funds in escrow
for working capital needs of its operating businesses, nor to pay for other
expenses associated with setting up a telecommunications network. Furthermore,
the Company has found compliance with the conditions for the release of funds
from escrow to be burdensome, in that it is time consuming and expensive.
Finally, the covenants of the Indentures impose substantial restrictions upon
the Company's activities. For further details, please see "Business -- Risk
Factors -- Capital Requirements -- Capital Expenditures and Working Capital for
Operating Businesses;" and "-- Limitations on Activities Imposed by Indentures
and Revolving Credit Agreement."



     Interest in the amount of $1,192,500 is payable semi-annually in cash on
the Convertible Notes. The Company has made all such interest payments to date.
The next two payments in the amount of $1,192,500 each are due on June 1 and
December 1, 1999. The Company anticipates making such payments out of cash on
hand or out of funds held in the escrow account.



     The Senior Notes have accreted at the rate of 14% per annum since issue
through May 31, 1998 and, because of the matters described above in "-- Increase
in interest rate on indebtedness", at the rate of 14.5% since such date through
November 30, 1998. The Company is required to pay interest in cash on the Senior
Notes commencing June 1, 1999 and semi-annually thereafter. The installment of
interest due on June 1, 1999 is $8,917,500, and a similar amount will be due on
December 1, 1999. The Company anticipates making such payments out of funds in
the escrow account and cash on hand.



     News Revolving Credit Agreement.  On November 30, 1998, News entered into
the News Revolving Credit Agreement with the Company pursuant to which News
agreed to advance $8.1 million (subsequently increased to $9.55 million) to the
Company. For further details, please refer to "Business -- Recent
Developments -- News Revolving Credit Agreement"; and "Market for Registrant's
Common Equity and Related Stockholder Matters -- Recent Sales of Unregistered
Securities."



     The amounts payable under the News Revolving Credit Agreement are due on
June 30, 1999; however, the Company believes that, based upon its relationship
with News as the major stockholder of the Company, it will both be able to defer
payment of the amounts due until such time as it can satisfactorily handle such
repayment, and be able to call upon News for additional financing for emergency
matters, if required.



     Technocom Put/Call.  In addition, the Company may become obligated to make
payments in July 1999 of up to $28.1 million to Plicom and Elite, the two
minority shareholders of Technocom, as a result of the following. The Company
has put and call agreements with Plicom and Elite which, following the November
1997 acquisition by the Company of a portion of each of their interests in
Technocom, beneficially own 14.57% and 5.03%, respectively, of the ordinary
shares of Technocom. Under the put and call option


                                       82
<PAGE>   85

agreement with Plicom, Plicom has the right, commencing June 30, 1999 and
continuing until June 30, 2019, to require the Company to acquire its remaining
holding in Technocom, and the Company has the right to require Plicom to sell
such holding, for a purchase price of $17.5 million. Under its put and call
option agreement with Elite, Elite has: (i) the right, commencing June 30, 1998
and continuing until June 30, 2019, to require the Company to acquire 2 of its
remaining shares in Technocom, and the Company has the right to require Elite to
sell such shares, for a purchase price of $1 million or, at Elite's option, that
number of shares of Common Stock which results from dividing $1 million by the
lower of $5.85 and the average closing price of such shares over the preceding
ten trading days; and (ii) the further right, commencing June 30, 1999 and
continuing until June 30, 2019, to require the Company to acquire its 8
remaining shares in Technocom, and the Company has the right to require Elite to
sell such shares, for a purchase price based on the Company's valuation of
Technocom, provided that such purchase price shall not be less than $6,689,655
nor more than $9,620,689.


     The Company currently does not anticipate having sufficient funds on hand
to meet its repurchase obligations in the event that either Plicom or Elite was
to exercise its rights to put its shares to the Company. The Company is engaged
in efforts to address this, including arranging for alternate financing or, in
lieu of such financing, reaching some accommodation with the minority
shareholders regarding their put options. The Company believes that, if required
in the absence of any other alternatives, such minority shareholders will agree
to an accommodation which will enable the Company to meet its commitments to the
minority shareholders in a manner which does not require the Company to resort
to extraordinary measures. In the event that no additional financing can be
arranged nor any alternate accommodation reached and either party exercises its
rights to put its shares to the Company for cash, the Company would have to
resort to extraordinary measures, including making sales of assets under
distressed conditions or ultimately seeking the protection of the bankruptcy
courts. See "Risk Factors -- Risks Involving the Company -- Technocom Minority
Shareholders' Put Options."



     Scientific Atlanta.  The Company has issued a note to Scientific Atlanta in
respect of amounts due under its supply contract with Scientific Atlanta for the
Satelink network being developed by Teleport, in the amount of $1,204,000, which
comes due on November 20, 1999. The Company anticipates having sufficient cash
on hand at the time in order to be able to make such payment.



     Operating Leases, etc.  The Company currently leases space at 43 Dover
Street in London, 505 Park Avenue in New York and 67 Broad Street in New York.
No rental is due with respect to 67 Broad Street, New York until July 1999. The
aggregate rental payable for these premises in 1999 is approximately $660,000.
The Company also has acquired an "indefeasible right of use" in a transatlantic
cable for $4.5 million, payable in twelve equal quarterly installments of
$375,000 each, the first of which is due in June 1999. The Company anticipates
meeting these obligations out of cash on hand.



     The Company's operating businesses all lease space for their operations,
some of which is provided free of charge by their local shareholders. All such
businesses anticipate paying such rentals, where applicable, on a current basis
during 1999.



     Other Capital Commitments.  As noted above, the Company's operating
businesses have ongoing capital requirements associated with the development of
their businesses. In no case is the Company specifically obligated to provide
capital to its operating businesses. (It was so obligated in the past, but all
such obligations have been met.) Furthermore, the Company is in a position to
control the level of commitments undertaken by its operating businesses, so as
to minimize the number of times when the Company may be required to step in to
support commitments made by an operating business. At the end of the day, the
Company's ultimate protection lies in being able to slow or, if necessary, stop
for a period of time, the development of the networks of one or more of its
operating businesses. In this respect the Company is closely monitoring the
situation of the one business which is likely to require significant capital
infusion, namely, its Carrier Services Business, to determine the rate at which
that business can be developed, consistent with the need of the Company to meet
its other obligations. In addition, the Company has had discussions with the
holders of the Senior and Convertible Notes relative to the release from escrow
of funds in order to support this business. While no commitment has been made to
release such funds, the Company believes that such holders are generally


                                       83
<PAGE>   86


supportive of the Carrier Services Business and are willing to work with the
Company, consistent with the protection of their own positions, in order to
develop such business.



     Guarantees and Other Commitments.  While the Company has guaranteed
obligations of its subsidiaries in the past, the only guarantee that is
currently outstanding is to Siemens in the amount of $1.6 million (as of
December 31, 1998) relating to equipment purchased by Technocom.



     Subsidiaries of the Company have guaranteed the Senior and Convertible
Notes, and two subsidiaries, BCL and WTC, have guaranteed the Revolving Credit
Notes.



EFFECTS OF NEWLY-ISSUED ACCOUNTING PRONOUNCEMENTS



     In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS 133 cannot be applied
retroactively to financial statements of prior periods. At the current time the
Company has not evaluated the impact SFAS 133 will have, if any.


     The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements is not
expected to have a material effect on the Company's consolidated financial
statements.

YEAR 2000 ISSUE

     The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result of the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19--). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process transactions,
incorrect data being generated and critical deadlines being overlooked. The
impact of these disruptions could be significant.

     The Company has conducted, and has caused each of its operating
subsidiaries to conduct a survey of the equipment and software used by them.

     The Company's business involves the supply of services. To the very limited
extent that it maintains actual inventory for sale (e.g., cellular telephone
equipment sold to subscribers for its cellular telephony services), it does not
manufacture such inventory itself but resells goods supplied by recognized
manufacturers of such goods.

     Its survey has involved testing of equipment as well as contacting the
manufacturers of equipment and producers of software (or review of materials
published by such parties, including websites) to assess such parties' Year 2000
readiness. Such survey has indicated that, except in a few instances, the
equipment and software which it uses are Year 2000 compliant. The Company is
taking steps to upgrade or replace those items which are not compliant. In many
cases the items required to be upgraded or replaced were due to be upgraded or
replaced in any event, so that the Company's exposure has been the acceleration
of already planned expenditures, rather than new or unanticipated expenditures.
The Company expects that essentially all of its upgrading and replacement work,
and any remaining testing required, will be complete by the end of the third
quarter of 1999.
                                       84
<PAGE>   87


     As of February 28, 1999, the Company has expended approximately $400,000
for remediation efforts and expects that its total remediation costs, including
scheduled upgrades and replacements of approximately $3,100,000, will be
approximately $4,000,000.


     Starting in January 1998, all operating businesses were required to use
their best efforts to obtain specific warranties of Year 2000 compliance from
parties with which they contract for products or services thereafter. While
almost all new contracts for products or services entered into since that date
have contained some form of warranty, these have generally been limited to
recovering of direct losses, and not indirect or consequential losses, such as
loss of revenues or profits. In consequence, the actual efficacy of such
warranties may be somewhat limited.

     Additionally, all operating businesses have been required to review the
terms under which they have heretofore supplied products and/or services to
third parties. No case has been identified in which any operating business has
specifically guaranteed Year 2000 compliance, and the Company has instituted a
policy regarding the giving of such guarantees in the future in order to control
and limit possible exposure thereunder. Further, since none of the operating
businesses manufacture equipment or produce proprietary software for customers
other than in exceptional cases, virtually all such transactions involve the
re-sale or assignment of products and services supplied by others. Accordingly,
the Company believes that, to the extent that such products and services are
either warranted or shown to be Year 2000 compliant, its own exposure is
commensurately reduced.

     While there can be no assurances that equipment failures will not occur,
the effect of such failures may be ameliorated by the fact that such equipment
is usually part of a network of facilities and equipment maintained by the
Company. This means that a failure in an individual component will not
necessarily cause a substantial disruption to the network as a whole, because no
individual item is critical to the operation of the network as a whole, and the
network also provides opportunities to by-pass the failure.

     The foregoing indicates that, to the extent that its business depends upon
equipment, software, facilities and networks under its control, the Company
believes that, by the year 2000, it will have taken all steps reasonably
required to ensure that those items are Year 2000 compliant, and that it has
reasonable contingency arrangements to deal with failures.

     The Company's principal Year 2000 risks arise from the fact that it is
dependent for the completion of its calls upon a variety of other traffic
carriers who provide interconnection and termination services. Since in many
cases there are a variety of routes over which traffic can be carried, it is
simply not possible for the Company to verify that each entity which could be
involved in providing telecommunications services to its operating subsidiaries
will be Year 2000 compliant. To a large extent, the Company is reliant in these
circumstances on the actions of the other telecommunications operators and
service providers to ensure that their counterparts are Year 2000 compliant.
While the Company believes that the parties providing these services which are
based in the United States and other Western countries are expected to be
substantially Year 2000 compliant, the Year 2000 compliance and readiness of the
Russian and other C.I.S. parties with which the Company's operating businesses
interact appears to be substantially behind that of Western parties. The Company
has been unable to determine with any degree of certainty the extent to which
its interconnect partners in the C.I.S. are non-compliant because those parties
have generally been reluctant to share this information. The recent decision by
the Russian government not to cooperate in Year 2000 compliance exercises,
prompted by the Kosovo crisis, is likely to make it more difficult for the
Company to obtain this information. Nevertheless the Company believes, based on
such reluctance and anecdotal and other evidence, that many of those partners,
particularly in those in the less developed regions of the Russian Federation or
the C.I.S., are substantially non-compliant.

     Furthermore, the likelihood that those parties will be able to become Year
2000 compliant seems problematical, given the limited amount of time left for
this, the severe funding constraints faced by those parties, principally as a
result of poor economic conditions in their home countries, and the possible
lack of governmental pressure on those parties.

                                       85
<PAGE>   88

     Accordingly, there is a significant risk that the Company's operating
businesses may experience disruptions in their operations as a result of their
C.I.S. interconnect partners not being able to complete calls or pass traffic to
those businesses. While the Company is unable to predict the extent or duration
of such disruptions, the possibility exists that they could be extensive, and
also take considerable time, perhaps even months, to correct.

     An additional risk is the likelihood that the billing systems of those
interconnect partners may also be disrupted, resulting in those partners being
unable to collect from their customers or to make timely settlements with the
Company's operating businesses.

     Accordingly, the Company believes that there is a considerable risk that it
will experience disruptions in providing telecommunications services to and from
the countries of the C.I.S. which it serves, and that those disruptions may be
substantial. Given its inability to obtain an accurate assessment of the extent
to which its C.I.S. partners may be non-compliant, it is impossible for the
Company to predict either the extent or the magnitude of those disruptions.
Nevertheless, they have the potential to adversely impact the operations of its
operating subsidiaries, and such adverse impact may be material.

     The Company has investigated the possibility of obtaining insurance against
liability arising out of claims that products or services supplied are not Year
2000 compliant, but has determined that such insurance is not obtainable upon
terms which are sufficiently comprehensive and/or is only obtainable upon terms
which are uneconomical given the level of perceived risk, and accordingly has
elected not to pursue such insurance.

TAXATION

     The Company and its subsidiaries are subject to a number of taxes in
different jurisdictions. The most significant taxes affecting the Company and
its subsidiaries are likely to be taxes in Russia, Kazakhstan and Belarus
(including withholding taxes) and income taxes payable by the Company in the
United States. Withholding taxes could apply to distributions by the Company's
operating businesses in Russia, Kazakhstan and Belarus and to distributions by
intermediate level companies in jurisdictions outside Russia, Kazakhstan,
Belarus and the United States. The Company has attempted to mitigate the
potential for withholding tax liabilities in Russia by structuring its interests
through a Cypriot holding company, thereby taking advantage of the double
taxation treaty between the Russian Federation and Cyprus. As a result of the
Continuance and its ability to take advantage of the double taxation treaties
between the United States and the Russian Federation and Kazakhstan,
respectively, the Company may elect to hold its interests through one or more
Delaware holding companies. Notwithstanding this, obtaining the benefits of
applicable tax treaties can be extremely difficult due to the documentary and
other requirements imposed by the Russian and Kazakh authorities. For example,
the Kazakh tax authorities require withholding on almost any kind of
out-payment, including management fees and expense reimbursements, not just
items of income, and additionally specify that an exemption application be
submitted in respect of every payment made (as opposed to permitting blanket
exemptions), while at the same time requiring non-standard certifications from
the home country taxing authority. In addition, a recent instruction issued by
the Russian State Tax Service mandates full withholding regardless of any treaty
and requires the recipient to seek to obtain a refund for withholding in excess
of treaty amounts, although in practice those refunds can be difficult to
obtain. The need to comply with these provisions may negate or impair tax
planning initiatives undertaken by the Company to reduce its and its
subsidiaries' overall tax obligations in Russia and Kazakhstan. As respects
Belarus, the opportunities for minimizing tax liabilities is very limited, given
the relatively undeveloped tax system in that country, and the uncertain status
of its tax treaty network.

     In general, the Company's Russian, Kazakh and Belarussian operating
businesses are faced with a wide variety of taxes, including property taxes,
advertising taxes, road taxes, housing taxes, transport taxes and education
taxes. In addition, PeterStar, Technocom and ALTEL are subject to corporate
profits taxes of 34%, 35% and 30%, respectively. The tax systems in Russia,
Kazakhstan and Belarus have changed rapidly in recent years and may undergo
additional changes, which may have a material adverse effect on the Company.

     Technocom established a representative office in Moscow in October 1995 and
registered this office with the relevant Russian tax authorities. This resulted
in Technocom becoming subject to profits and other
                                       86
<PAGE>   89

Russian taxes as of such date. Inasmuch as Technocom operated to some extent in
the Russian Federation prior to this date, without clarifying its tax status
with any Russian taxing authority, it is also possible that tax officials may
take the position that Technocom may be subject to VAT and/or profits and other
Russian taxes with respect to the period before October 1995.

     At December 31, 1998, the Company had operating loss carryforwards for U.S.
federal income tax purposes of approximately $56.2 million. In assessing the
realizability of the deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable future income during the periods
in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments.

     At December 31, 1996, the Company had operating loss carryforwards for
Canadian income tax purposes of approximately $36.0 million and allowable
capital loss carryforwards of approximately $19.0 million. Upon the Company's
emigration to the United States in February 1997, these losses did not carryover
for U.S. tax purposes.

CURRENCY CONTROLS

  THE RUSSIAN FEDERATION

     Exchange Controls.  Following the economic crisis in August and September
1998, the Russian Federation introduced more stringent procedural requirements
on Russian residents wishing to pay non-residents in hard currency. The main
reason for this was to attempt to reduce the level of illegal hard currency
outflows from the country. Significant documentary requirements may have to be
satisfied in respect of payments in U.S. Dollars between Russian residents
(which generally includes all Russian companies and citizens resident in Russia)
and non-residents (which generally includes non-Russian companies even if they
have a representative office or other permanent establishment in Russia) for
current currency transactions (generally those where payment is made within 90
days of the provision of goods and services). Payments in U.S. Dollars
classified as movements of capital (which generally includes direct investments,
portfolio investments, acquisition of real estate and payments made pursuant to
loan agreements, or agreements for the lease or sale of goods and services
having terms of over 90 days) are subject to licensing by the Central Bank. The
Company believes that all of its operating subsidiaries hold, or have applied
for and expect eventually to receive, all required Central Bank licenses. The
need to apply for Central Bank licenses can be burdensome, because of the
substantial documentary and other requirements involved and because of the
considerable length of time involved, often running into several months. Failure
to apply for the appropriate licenses, or to receive the outstanding licenses
could result in fines and penalties. See "Business -- Risk Factors -- Risks
Involving the Company -- Currency Controls." Finally, banks in Russia require
that certain hard currency transfers be accompanied by a "transaction passport"
setting forth that all required tax and regulatory requirements have been
followed. Other requirements may be introduced in the future by the Russian
Federation to further control hard currency payments from the country.

     Payments between Russian residents must generally be made in Roubles.
Russian companies may exchange Roubles for U.S. Dollars if they can document
U.S. Dollar-denominated liabilities that are due and payable within specified
periods. Russian companies are required to convert 75% of most hard currency
earnings into Roubles, but (as noted in the preceding sentence) may be able to
reconvert such amounts into hard currency if they can document hard currency
denominated liabilities that are due and payable within a specified period.
Roubles may not be lawfully exported from, or converted into, other currencies
outside of Russia.

     Availability of Hard Currency for Conversion Purposes. The ability of
foreign investors to convert Roubles into hard currency is also subject to the
availability of hard currency in the Russian currency markets. Although there is
an existing market within Russia for the conversion of Roubles into other
currencies, including the interbank currency exchange, over-the-counter and
currency futures markets, conversion of Roubles at times of crisis, such as in
August 1998, may be difficult.

     Exchange Rates.  Significant fluctuations in the value of the Rouble
against the U.S. Dollar and other hard currencies can also have a material
impact on the value of a foreign investor's Rouble dividend income or

                                       87
<PAGE>   90


Rouble proceeds from the sale of Rouble denominated securities. The history of
trading in the Russian Rouble against the U.S. Dollar has been characterized by
significant declines in value and considerable volatility, although the Russian
Rouble experienced relative stability against the U.S. dollar during 1996 and
1997. However, during 1998 and the early part of 1999, the Russian Rouble has
been under considerable pressure and suffered substantial declines against the
U.S. Dollar and other currencies. 1998 exchange losses incurred by Group
companies in Russia amounted to $4.7 million (1997: $0.1 million). Estimated
losses expected to be incurred by Group companies in Russia in the first three
months of 1999 amount to $0.3 million. During 1998 BELCEL incurred an exchange
gain of $0.9 million, with exchange gains expected to occur in the first three
months of 1999 amounting to $0.1 million. See "Risk Factors -- Country
Risks -- Russian Economic and Political Turmoil" and "-- Restrictions on
Currency Conversion; Historical Volatility in Currency Prices."


     Repatriation.  Although Russian law governing foreign investment guarantees
foreign investors the right to repatriate their earnings from Russian
investments, the Russian exchange control regime, including licensing
requirements administered by the Central Bank, may materially affect their
ability to do so and may increase the cost of such repatriation. See
"Business -- Risk Factors -- Risks Involving the Company -- Currency Controls."

     Impact upon the Company.  In general, the impact on the Company of the
Russian exchange controls regime has not been particularly adverse. While no
dividends have been paid by any of the operating subsidiaries in Russia,
payments of interest and management fees have been made relatively freely. The
need to apply for Central Bank licenses for certain types of transactions, and
the delays in the receipt of such licenses, has delayed the completion of
certain transactions. Additionally, the process of applying for such licenses
has been time consuming and expensive. Finally, delays in the receipt of
licenses has delayed the time at which the Company can start to realize
cashflows from the sale or leasing of assets to its operating subsidiaries in
Russia. See "Business -- Risk Factors -- Risks Involving the Company -- Currency
Controls -- Currency Licensing Requirements."

  KAZAKHSTAN

     Exchange Controls.  Kazakhstan currently has in place relatively liberal
policies governing hard currency transfers by Kazakh residents to non-residents.
Residents (which generally includes all Kazakh companies and citizens resident
in Kazakhstan) can use hard currency to pay non-residents (which generally
includes all non-Kazakh companies and their branch offices and representative
offices in Kazakhstan) for current currency transactions (generally those where
payment is made within 180 days of the provision of goods or services). Payments
in U.S. Dollars classified as movements of capital (which generally includes
direct investments, portfolio investments, payments with respect to real estate
and payments made after 180 days for goods and services) are subject to
licensing by the National Bank of Kazakhstan.

     Payments between Kazakh residents must generally be made in Tenge. Kazakh
companies may exchange Tenge for U.S. Dollars if they can document U.S.
Dollar-denominated liabilities that are due and payable within specified
periods. The National Bank of Kazakhstan does not currently require the
conversion of hard currency earnings into Tenge. Tenge may not be lawfully
exported from Kazakhstan or converted into other currencies outside of
Kazakhstan.

     Availability of Hard Currency for Conversion Purposes. The ability of
foreign investors to convert Tenge into hard currency is also subject to the
availability of hard currency in the Kazakh currency markets. Although there is
an existing market within Kazakhstan for the conversion of Tenge into other
currencies, including the interbank currency exchange and the over-the-counter
markets, the development of this market is uncertain.

     Exchange Rates.  Significant fluctuations in the value of the Tenge against
the U.S. Dollar and other hard currencies can also have a material impact on the
value of a foreign investor's Tenge dividend income or Tenge proceeds for the
sale of Tenge-denominated securities. In Kazakhstan a market exists for the
conversion of Tenge into other currencies, but it is limited in size and is
subject to rules limiting the purposes for which conversion may be effected. The
history of trading in the Kazakh Tenge against the U.S. Dollar has been
characterized by significant declines in value and considerable volatility,
although the Kazakh Tenge
                                       88
<PAGE>   91

experienced relative stability against the U.S. dollar during 1996 and 1997.
After remaining relatively stable during 1998, the Kazakh Tenge has lost
significant value in the first four months of 1999, reflecting concerns about
the health of the country's economy as a result of Russia's economic and
financial problems, and a decision by the government of Kazakhstan to cease
providing support for its currency. See "Risk Factors -- Country
Risks -- Russian Economic and Political Turmoil."

     Repatriation.  Kazakhstan's foreign investment legislation provides that
earnings from investments made by foreign investors may be freely repatriated
provided that all applicable fees and taxes have been paid. However, the
exchange control regime in Kazakhstan may materially affect an investor's
ability to do so and may increase the cost of such repatriation. See
"Business -- Risk Factors -- Risks Involving the Company -- Currency Controls."

     Impact upon the Company.  The Company has not experienced particular
difficulties with the Kazakh exchange control regime. Both dividends and
management fees have been received from ALTEL during 1998. While there are
paperwork requirements in relation to hard currency transfers, these have not
delayed the making of such transfers.

INFLATION

     Since the break-up of the Soviet Union, the economies of Russia, Kazakhstan
and Belarus have been characterized by high rates of inflation. Although in 1996
and 1997, inflation in the first two countries decreased substantially,
inflation in Russia increased dramatically following the August 1998 financial
crisis, and there increased risks of inflation in Kazakhstan. The inflation
rates in Belarus have been at hyperinflationary levels for some years, and as a
result the currency has essentially lost all intrinsic value. If the Company's
operating businesses are unable to increase prices in line with inflation, due
to competitive pressures or otherwise, the results of operations of the
Company's operating businesses may be adversely affected.

EXCHANGE RATES

     The following tables summarize the Rouble-U.S. Dollar and Tenge-U.S. Dollar
exchange rates since January 1995 (rates are not provided for the Belarussian
Ruble because this is essentially inconvertible):

                      ROUBLE/U.S. DOLLAR EXCHANGE RATES(1)

<TABLE>
<CAPTION>
MONTH                                                        1995     1996     1997      1998
-----                                                        -----    -----    -----    ------
<S>                                                          <C>      <C>      <C>      <C>
January....................................................  3.550    4.640    5.636     6.021
February...................................................  4.059    4.736    5.676     6.070
March......................................................  4.400    4.830    5.726     6.106
April......................................................  4.008    4.940    5.760     6.133
May........................................................  5.130    5.031    5.773     6.160
June.......................................................  4.958    5.105    5.771     6.198
July.......................................................  4.539    5.189    5.798     6.238
August.....................................................  4.405    5.352    5.824    10.050
September..................................................  4.445    5.396    5.861    15.910
October....................................................  4.495    5.455    5.887    16.650
November...................................................  4.509    5.511    5.917    18.225
December...................................................  4.578    5.550    5.997    20.620
</TABLE>

---------------
(1) Spot rate on the last business day of each month. The Rouble amounts have
    been revised to reflect the January 1998 revaluation of the Rouble in which
    existing Rouble amounts were divided by 1,000.

                                       89
<PAGE>   92

                      TENGE/U.S. DOLLAR EXCHANGE RATES(1)

<TABLE>
<CAPTION>
MONTH                                                         1995    1996    1997    1998
-----                                                         ----    ----    ----    -----
<S>                                                           <C>     <C>     <C>     <C>
January.....................................................  55.6    65.5    75.8     76.4
February....................................................  60.1    65.3    75.5     76.4
March.......................................................  60.8    66.0    75.3     76.5
April.......................................................  63.5    67.1    75.4     76.5
May.........................................................  64.3    66.9    75.5     76.6
June........................................................  64.3    67.2    75.6     76.8
July........................................................  63.2    67.5    75.5     77.3
August......................................................  59.0    68.1    75.6     78.6
September...................................................  60.9    68.8    75.6     80.2
October.....................................................  61.7    69.5    75.6     81.2
November....................................................  63.9    70.4    75.6     82.6
December....................................................  59.6    73.1    76.2     83.8
</TABLE>

---------------
(1) Spot rate on the last business day of each month.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company's finance department is responsible for the evaluation and, to
the extent practicable, management of the Company's exposure to market risks.

     The Company's primary market risk is related to the movement in foreign
currency exchange rates in the countries in which its operating businesses
operate: Russia, Kazakhstan and Belarus. See "Risk Factors -- Country
Risks -- Restrictions on Currency Conversion; Historical Volatility in Currency
Prices" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Currency Controls." The Company periodically evaluates
the materiality of its foreign exchange exposures and the financial instruments
available to mitigate this exposure. However, the Company does not currently
believe that it is practical or economical to hedge these foreign currency
exchange risks and as a result will continue to experience foreign currency
gains and losses.


     With the exception of certain vendor financing at the operating business
level (approximately $3.0 million in the aggregate), the Company's debt
obligations, and those of its operating businesses, are fixed rate obligations,
and are therefore not exposed to market risk from changes in interest rates. The
Company does not believe that it is exposed to a material market risk from
changes in interest rates. Furthermore, with the exception of the approximately
$3.0 million in vendor financing which is denominated in Euros, the Company's
long-term debt and that of its operating businesses is denominated in U.S.
dollars. The Company does not believe that this Euro-denominated debt exposes
the Company to a material market risk from changes in foreign exchange rates.


     The Company does not use any derivative instruments, either as a trading or
non-trading activity.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


     The consolidated financial statements of the Company and its subsidiaries
and supplementary data required by this item are attached to this report
beginning on page F-1. In addition, the financial statements of (i) NWE Capital
(Cyprus) Ltd. and Wireless Technology Corporations Limited, as pledgees and
guarantors under the terms of the Senior Notes and the Convertible Notes, (ii)
Baltic Communications Limited, PLD Leasing and PLDCA, as guarantors under the
terms of the Senior Notes and the Convertible Notes, and (iii) Technocom
Limited, as a pledgee under the terms of the Senior Notes and the Convertible
Notes, are attached to this report beginning on page F-36. No financial
statements are included for PLD Capital Limited, a Cypriot company, even though
it is a guarantor of the Senior Notes and Convertible Notes, because it is
inactive and is to be liquidated in 1999.


                                       90
<PAGE>   93

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information with respect to the
executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME                                        AGE                        POSITION
----                                        ---                        --------
<S>                                         <C>    <C>
James R.S. Hatt...........................   39    Chairman, President and Chief Executive Officer
Dr. Boris Antoniuk........................   50    Director and Group Director -- Russia and CIS
Edward Charles Dilley.....................   60    Director
Simon Edwards.............................   36    Director, Senior Vice President, Chief Financial
                                                   Officer and Treasurer
Gordon Humphrey...........................   58    Director
Gennady Kudriavtsev.......................   58    Director
Dr. Vladimir Kvint........................   49    Director
I. Martin Pompadur(1).....................   63    Director
David M. Stovel...........................   50    Director
E. Clive Anderson.........................   52    Senior Vice President, General Counsel and
                                                   Secretary
Ian Armour................................   50    Senior Vice President and Chief Operating Officer
John Davies...............................   52    Chairman, JSC ALTEL
</TABLE>

---------------
(1) Pursuant to the Director's Nomination Agreement, dated April 19, 1998,
    between the Company and News America Incorporated ("News"), News has the
    right to nominate four directors to the Board of Directors. To date, News
    has nominated Mr. Pompadur as its sole nominee on the Board of Directors.
    See "Certain Relationships and Related Transactions."

     Set forth below is selected biographical information for the executive
officers and directors of the Company.

     James R.S. Hatt has served as a Director of the Company since June 1994, as
Chief Executive Officer since January 1995 and as Chairman since June 1995. His
career has been exclusively devoted to building telecommunications businesses in
developed and emerging countries around the world. Prior to joining the Company,
Mr. Hatt worked in a number of senior positions at Cable and Wireless plc
("Cable & Wireless"), involved extensively in privatizations and new business
development. From 1988 to January 1995, he was Group Manager for Business
Development, Europe, where he was responsible for corporate development
activities in Europe, the Middle East, India, the CIS, the Baltic States and
Scandinavia.

     Dr. Boris Antoniuk has served as a Director of the Company since June 1997
and as Group Director -- CIS and Russia of the Company since November 1997. He
has many years' experience in the telecommunications field, having worked for
various government agencies and trade delegations in the Soviet Union and Russia
since 1974, including six years as head of the U.S. department of the USSR State
Committee for Science and Technology in Moscow and three years as economic
adviser to a deputy Prime Minister of the USSR Council of Ministers. Since the
economic liberalization of Russia, he has been involved in a number of
commercial ventures, including the publishing of several Russian computer
magazines. Dr. Antoniuk has served as general manager of Technocom and Chairman
and Chief Executive Officer of Teleport-TP since 1992. Both Technocom and
Teleport-TP are operating subsidiaries of the Company. He also holds the post of
Deputy Chairman of Technopark, a subsidiary of Technocom.

     Edward Charles Dilley has served as a Director of the Company since March
1999. He previously served as director of the Company, as a nominee of Navona
Communications Limited (the company through which
                                       91
<PAGE>   94

Cable & Wireless held its interest in the Company) from June 1997 to August
1998. Since January 1996, Mr. Dilley has been Director of Corporate Financial
Services for Cable & Wireless. Prior to joining Cable & Wireless, he was
employed by Barclays Bank for 40 years, including in several executive
positions. From 1988 to December 1995, he was Business Centre Director for
Barclays Bank.

     Simon Edwards has served as Director of the Company since June 1997, as
Chief Financial Officer of the Company since October 1995 and Senior Vice
President and Treasurer since February 1997. He was previously Director of
Finance for Cable & Wireless Europe from October 1994 to September 1995. From
July 1992 to October 1994, he held a number of corporate finance positions
within Cable & Wireless. From July 1988 to June 1992 he was a management
consultant with Arthur Andersen.

     Senator Gordon Humphrey has served as a Director of the Company since June
1997. He served two terms as United States Senator from the State of New
Hampshire, from 1979 to 1991, where he was a member of the Committee on Foreign
Relations, the Armed Services Committee and the Judiciary Committee. Upon his
return to the private sector in 1991, Senator Humphrey founded the Humphrey
Group, Inc., which serves clients in international commerce, with primary focus
on Russia and the CIS.

     Gennady Kudriavtsev has served as a Director of the Company since June
1997. He has many years of telecommunications experience in Russia and the
former Soviet Union. He has served as Director General of Intersputnik, a
Russian state-owned satellite operator, since 1992. Prior to the breakup of the
former Soviet Union, he served as Minister of Communications of the USSR.

     Dr. Vladimir Kvint has served as a Director of the Company since June 1997.
He is currently Professor, Management Systems and International Business, at
Fordham University Graduate School of Business and Adjunct Professor of
Management Strategy at the Stern School of Business, New York University. Dr.
Kvint is a Full Lifetime Member of the Russian Academy of Natural Sciences. From
1989 until 1995 he was a consultant to Cable & Wireless Executive Chairman, Lord
David Young. From 1992 to 1997, he was Director, Emerging Markets, for Arthur
Andersen LLP. He has published numerous articles and books on emerging Eastern
European markets.

     I. Martin Pompadur has served as a Director of the Company since May 1998.
Since June 1998, he has been Executive Vice President of News and President of
News Corporation Eastern and Central Europe. Since 1988, he has been the
President and CEO of RP Companies, Inc. and he is currently the Chairman, Chief
Executive Officer and Chief Operating Officer of a number of limited
partnerships which operate network-affiliated television stations, radio
stations and cable television systems. From 1977 to 1982, Mr. Pompadur was
President of Ziff Corporation and, prior to joining Ziff, he was with American
Broadcasting Companies for 17 years in several senior executive positions,
including as a member of its Board of Directors. Mr. Pompadur has been actively
involved in various business ventures in Moscow and the CIS since 1990.

     David Stovel has served as a Director of the Company since February 1993.
He has been President of Brawley Cathers Limited, an investment bank
headquartered in Toronto, Canada since 1987.

     E. Clive Anderson has served as Senior Vice President, General Counsel and
Secretary of the Company since June 1997. Prior to joining the Company, Mr.
Anderson was a partner at Morgan, Lewis & Bockius LLP from 1977 to 1997, where
he represented a number of international clients, including the Company.

     Ian Armour has served as Senior Vice President and Chief Operating Officer
of the Company since August 1998. Prior to joining the Company, Mr. Armour was a
telecommunications manager with Cable & Wireless from 1967 to 1998, including in
a number of Cable & Wireless' international ventures.

     John Davies is currently the Chairman of JSC ALTEL, one of the Company's
operating subsidiaries. He was the Deputy Chief Executive Officer of the Company
from June 1997 until August 1998 and Chief Operating Officer of the Company from
February 1998 until August 1998. Previously, from 1995 to 1997, he was a
director and partner in Beldi & Cie SA providing services to multinational
companies and an entrepreneur. From 1987 to 1995, he was one of the founding
directors of Financiere Indosuez, a subsidiary of the Suez Group, which was
active in cross-border mergers and acquisitions and corporate finance. Prior to

                                       92
<PAGE>   95

that, Mr. Davies served as a business consultant and a vice president for
international finance of a privately-owned shipping and commodity trading group.

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth for the years ended December 31, 1998, 1997
and 1996 certain compensation paid by the Company to its Chief Executive Officer
and the four other most highly paid executive officers of the Company.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                        LONG-TERM
                                                    ANNUAL COMPENSATION(1)             COMPENSATION
                                           ----------------------------------------    ------------
                                                                                        SECURITIES
                                                                     OTHER ANNUAL       UNDERLYING
NAME AND PRINCIPAL POSITION        YEAR     SALARY       BONUS      COMPENSATION(2)      OPTIONS
---------------------------        ----    ---------    --------    ---------------    ------------
<S>                                <C>     <C>          <C>         <C>                <C>
James R.S. Hatt..................  1998    $390,000           --       $181,536          880,000(3)
  Chairman, President              1997    $390,000     $117,000       $ 78,000              -0-
  and Chief Executive Officer      1996    $290,000     $191,000       $ 58,000          250,000
E. Clive Anderson................  1998    $300,000           --       $ 50,833          500,000(3)
  Senior Vice President and        1997    $175,000(4)  $ 52,500       $ 17,500(4)       500,000
  General Counsel                  1996          --           --             --               --
Ian Armour.......................  1998    $112,692(5)        --       $ 11,269(5)       500,000
  Senior Vice President and        1997          --           --             --               --
  Chief Operating Officer          1996          --           --             --               --
John Davies......................  1998    $300,000           --       $ 30,000          500,000(3)
  Chairman, JSC ALTEL              1997    $175,000(6)        --       $ 17,500(6)       500,000
                                   1996          --           --             --               --
Simon Edwards....................  1998    $325,000           --       $116,071          940,001(3)
  Senior Vice President, Chief     1997    $325,000     $ 97,500       $ 65,000              -0-
  Financial Officer and Treasurer  1996    $225,000     $165,000       $ 45,000          200,000
</TABLE>

---------------
(1) All amounts are stated in U.S. Dollars. In 1996 and 1997, certain amounts
    were paid to Messrs. Hatt and Edwards in British Pounds and have been
    converted into U.S. Dollars at a conversion rate of $1.50/L1.00. The amounts
    paid to Mr. Armour in 1998 were paid in British Pounds and have been
    converted into U.S. Dollars at a conversion rate of $1.60/L1.00.

(2) Other Annual Compensation consists of amounts paid in lieu of certain
    benefits and in lieu of vacation days not taken in 1998 and prior years.

(3) Includes options granted in connection with the Company's November 1998
    option repricing in replacement of previously granted options. See the
    tables "Option Grants in Last Fiscal Year" and "10-Year Option Repricings"
    for additional details of the repricing and the options granted in
    connection therewith.

(4) Mr. Anderson's employment with the Company commenced on June 1, 1997 and
    these amounts are the amounts paid to him during the period June 1 to
    December 31, 1997.

(5) Mr. Armour's employment with the Company commenced on August 17, 1998 and
    these amounts are the amounts paid to him during the period August 17 to
    December 31, 1998. His current base salary is $300,000 per year.

(6) Mr. Davies' employment with the Company commenced on June 1, 1997 and these
    amounts are the amounts paid to him during the period June 1 to December 31,
    1997.

                                       93
<PAGE>   96

     The following table summarizes stock options granted during 1998 to the
persons named in the Summary Compensation Table.

                       OPTION GRANTS IN LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                      PERCENT OF
                                        TOTAL                                                POTENTIALLY REALIZABLE VALUE OF
                                       OPTIONS                   CLOSING                          ASSUMED ANNUAL RATES
                                      GRANTED TO                 MARKET                    OF APPRECIATION FOR OPTION TERM(1)
                       OPTIONS        EMPLOYEES    EXERCISE   PRICE ON DATE   EXPIRATION   -----------------------------------
NAME                   GRANTED         IN 1998      PRICE       OF GRANT         DATE         0%          5%           10%
----                   -------        ----------   --------   -------------   ----------   --------    --------     ----------
<S>                    <C>            <C>          <C>        <C>             <C>          <C>         <C>          <C>
James R.S. Hatt......  93,333(2)         1.6%       $7.00       $9.015625       4/19/08    $188,124(2) $180,503(2)  $  410,876(2)
                       186,667(2)        3.2%       $8.00       $9.015625       4/19/08    $189,584(2) $412,581(2)  $  939,151(2)
                       329,999(3)(4)     5.7%       $3.00       $  2.4375      11/12/08          --    $622,604     $1,577,800
                       176,667(3)(5)     3.0%       $4.00       $  2.4375      11/12/08          --    $444,420     $1,126,247
                       93,334(3)(6)      1.6%       $5.00       $  2.4375      11/12/08          --    $293,486     $  743,752
E. Clive Anderson....  333,333(3)(4)     5.7%       $3.00       $  2.4375      11/12/08          --    $628,894     $1,593,741
                       166,667(3)(5)     2.9%       $4.00       $  2.4375      11/12/08          --    $419,264     $1,062,497
Ian Armour...........  166,666(7)        2.9%       $3.00       $  2.4375      11/12/08          --    $314,446     $  796,868
                       166,667(7)        2.9%       $4.00       $  2.4375      11/12/08          --    $419,264     $1,062,497
                       166,667(7)        2.9%       $5.00       $  2.4375      11/12/08          --    $524,080     $1,328,121
John Davies..........  333,333(3)(4)     5.7%       $3.00       $  2.4375      11/12/08          --    $628,894     $1,593,741
                       166,667(3)(5)     2.9%       $4.00       $  2.4375      11/12/08          --    $419,264     $1,062,497
Simon Edwards........  113,334(2)        1.9%       $7.00       $9.015625       4/19/08    $228,439(2) $219,185(2)  $  498,926(2)
                       226,667(2)        3.9%       $8.00       $9.015625       4/19/08    $230,209(2) $500,991(2)  $1,140,397(2)
                       306,666(3)(4)     5.3%       $3.00       $  2.4375      11/12/08          --    $578,581     $1,466,240
                       180,000(3)(5)     3.1%       $4.00       $  2.4375      11/12/08          --    $452,804     $1,147,495
                       113,334(3)(6)     1.9%       $5.00       $  2.4375      11/12/08          --    $356,376     $  903,126
</TABLE>


---------------
(1) Potential Realizable Values are based on an assumption that the stock price
    of the Common Stock starts equal to the exercise price shown for each
    particular option grant and appreciates at the annual rate shown (compounded
    annually) from the date of grant until the end of the term of the option.
    These amounts are reported net of the option exercise price, but before any
    taxes associated with exercise or subsequent sale of the underlying stock.
    The actual value, if any, an option holder may realize will be a function of
    the extent to which the stock price exceeds the exercise price on the date
    the option is exercised. The actual value to be realized by the option
    holder may be greater or less than the values estimated in this table.


(2) Granted in April 1998, but subsequently cancelled in connection with the
    November 1998 repricing of stock options and included in the option grants
    detailed in this table, the Summary Compensation Table and in the table
    "10-Year Option Repricings" below. These options, which are no longer
    outstanding, vested as to one-third of each grant on the date of grant
    (April 19, 1998) with one half of the remaining options scheduled to vest on
    April 19, 1999 and become exercisable on such date and the balance of the
    options scheduled to vest on April 19, 2000 and become exercisable on such
    date. See "Certain Relationships and Related Transactions -- Executive
    Officers and Directors."


(3) Granted in connection with the Company's November 1998 repricing of stock
    options granted under the Plan, in replacement of previously granted options
    which were deemed to be canceled in connection with the repricing. See the
    table "10-Year Option Repricings" below for details.


(4) Options vested in full on the date of grant (November 12, 1998) and were
    immediately exercisable.



(5) Options vest on November 12, 1999 (the first anniversary of the date of
    grant) and become exercisable on such date, unless the vesting is
    accelerated as described below.



(6) Options vest on November 12, 2000 (the second anniversary of the date of
    grant) and become exercisable on such date, unless the vesting is
    accelerated as described below.



(7) Granted on November 12, 1998 as part of a grant of options to purchase an
    aggregate of 500,000 shares of Common Stock. One-third of the options vested
    on the date of grant and were immediately exercisable. One half of the
    remaining options vest on November 12, 1999 and become exercisable on such
    date and


                                       94
<PAGE>   97


    the balance of the options vest on November 12, 2000 and become exercisable
    on such date, in each unless the vesting is accelerated as described below.



     All options granted under the Company's 1997 Equity Compensation Plan (the
"Plan"), including the options disclosed above, become immediately vested and
exercisable upon a "change of control" of the Company (as such term is defined
in the Plan). Upon the termination of an employee's employment with the Company,
all unvested options are cancelled and the employee can exercise all vested
options for a period of one year following termination.


     The following table summarizes option exercises during 1998 and the value
of vested and unvested options for the persons named in the Summary Compensation
Table at December 31, 1998. Year-end values are based upon a price of $1.8125
per share, which was the closing market price of a share of the Company's Common
Stock on the Nasdaq Stock Market on December 31, 1998.

                  AGGREGATED OPTION EXERCISES IN LAST YEAR AND
                             YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                          VALUE OF UNEXERCISED
                                                         NUMBER OF UNEXERCISED          IN-THE-MONEY OPTIONS AT
                                                      OPTIONS AT DECEMBER 31, 1998         DECEMBER 31, 1998
                       SHARES ACQUIRED     VALUE      ----------------------------    ----------------------------
NAME                     ON EXERCISE      REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
----                   ---------------    --------    -----------    -------------    -----------    -------------
<S>                    <C>                <C>         <C>            <C>              <C>            <C>
James R. S. Hatt.....        -0-           -0-          329,999         270,001           -0-             -0-
E. Clive Anderson....        -0-           -0-          333,333         166,667           -0-             -0-
Ian Armour...........        -0-           -0-          166,666         333,334           -0-             -0-
John Davies..........        -0-           -0-          333,333         166,667           -0-             -0-
Simon Edwards........        -0-           -0-          306,666         293,334           -0-             -0-
</TABLE>

     The Company does not currently grant any long-term incentives, other than
stock options, to its executives or other employees. Similarly, the Company does
not sponsor any defined benefit or actuarial plans at this time.

                                       95
<PAGE>   98

                           10-YEAR OPTION REPRICINGS

     The following table sets forth information concerning the repricing of
stock options held by the persons named in the Summary Compensation Table during
the last 10 years.

<TABLE>
<CAPTION>
                                        NUMBER OF                                               LENGTH OF ORIGINAL
                                       SECURITIES    MARKET PRICE                                  OPTION TERM
                                       UNDERLYING      OF STOCK     EXERCISE PRICE              (EXPIRATION DATE)
                                         OPTIONS      AT TIME OF      AT TIME OF       NEW          AT DATE OF
                                       REPRICED OR   REPRICING OR    REPRICING OR    EXERCISE      REPRICING OR
NAME                          DATE       AMENDED      AMENDMENT       AMENDMENT       PRICE         AMENDMENT
----                        --------   -----------   ------------   --------------   --------   ------------------
<S>                         <C>        <C>           <C>            <C>              <C>        <C>
James R. S. Hatt..........  11/12/98      70,000       $2.4375         $6.0973        $3.00           2/6/00
                            11/12/98      50,000       $2.4375         $  6.25        $3.00          6/20/01
                            11/12/98      25,000       $2.4375         $  6.25        $4.00          6/20/01
                            11/12/98     116,666       $2.4375         $  8.00        $3.00          6/20/01
                            11/12/98      58,334       $2.4375         $  8.00        $4.00          6/20/01
                            11/12/98      31,111       $2.4375         $  7.00        $3.00          4/19/08
                            11/12/98      31,111       $2.4375         $  7.00        $4.00          4/19/08
                            11/12/98      31,111       $2.4375         $  7.00        $5.00          4/19/08
                            11/12/98      62,222       $2.4375         $  8.00        $3.00          4/19/08
                            11/12/98      62,222       $2.4375         $  8.00        $4.00          4/19/08
                            11/12/98      62,223       $2.4375         $  8.00        $5.00          4/19/08
E. Clive Anderson.........  11/12/98     333,333       $2.4375         $5.0625        $3.00           5/1/07
                            11/12/98     166,667       $2.4375         $5.0625        $4.00           5/1/07
Ian Armour................        --          --            --              --           --               --
John Davies...............  11/12/98     333,333       $2.4375         $  5.25        $3.00          6/23/07
                            11/12/98     166,667       $2.4375         $  5.25        $4.00          6/23/07
Simon Edwards.............  11/12/98      60,000       $2.4375         $5.7812        $3.00          11/5/00
                            11/12/98      40,000       $2.4375         $  6.25        $3.00          6/20/01
                            11/12/98      20,000       $2.4375         $  6.25        $4.00          6/20/01
                            11/12/98      93,333       $2.4375         $  8.00        $3.00          6/20/01
                            11/12/98      46,667       $2.4375         $  8.00        $4.00          6/20/01
                            11/12/98      37,777       $2.4375         $  7.00        $3.00          4/19/08
                            11/12/98      37,778       $2.4375         $  7.00        $4.00          4/19/08
                            11/12/98      37,778       $2.4375         $  7.00        $5.00          4/19/08
                            11/12/98      75,556       $2.4375         $  8.00        $3.00          4/19/08
                            11/12/98      75,556       $2.4375         $  8.00        $4.00          4/19/08
                            11/12/98      75,557       $2.4375         $  8.00        $5.00          4/19/08
</TABLE>

EMPLOYMENT AGREEMENTS

     Pursuant to employment agreements, dated as of January 1, 1995, with the
Company and PLD Management Services Limited ("PLDMS"), James Hatt was employed
(i) as Chief Executive Officer of the Company at an initial annual salary of
$167,500 and (ii) as an Executive of PLDMS at an initial annual salary of pound
sterling 35,000. During 1996, Mr. Hatt's annual salaries under these agreements
were $237,500 and pound sterling 35,000, respectively. Effective as of August 1,
1997, and as a consequence of the Company moving its executive offices to the
United States, the agreement with PLDMS was terminated, and the agreement with
the Company was amended and restated so as, inter alia, to combine the salary
and other compensation arrangements previously provided by the two separate
agreements. Under the amended and restated agreement Mr. Hatt's current annual
base salary is $390,000. In addition to his salary, an amount equal to twenty
percent of his then current salary amount is payable by the Company to Mr. Hatt
annually in lieu of all pension and other benefits. The agreement may be
terminated without cause by either party upon six months prior written notice or
for cause

                                       96
<PAGE>   99

as specified; provided, that if Mr. Hatt gives notice of termination of
employment with the Company, the Company may, in its sole discretion, terminate
employment immediately upon the payment of the lump sum of six months' gross
salary. Mr. Hatt may also terminate his employment with the Company upon three
months prior written notice upon a Change of Control. Upon termination without
cause by the Company or upon termination by Mr. Hatt upon a Change of Control,
Mr. Hatt is to receive as a termination fee an amount equal to two times his
then current annual salary from the Company.

     E. Clive Anderson is employed as Senior Vice President, General Counsel and
Secretary of the Company pursuant to a Service Agreement, effective as of June
1, 1997, at an initial annual base salary of $300,000. In addition to his
salary, an amount equal to ten percent of his then current salary amount is
payable by the Company to Mr. Anderson annually in lieu of pension and other
benefits. The agreement may be terminated without cause by either party upon six
months prior written notice or for cause as specified. Mr. Anderson may also
terminate his employment with the Company upon three months prior written notice
upon a Change in Control of the Company. Upon termination without cause by the
Company or upon termination by Mr. Anderson upon a Change of Control, Mr.
Anderson is to receive as a termination fee an amount equal to three times his
then current annual salary from the Company.

     Ian Armour is employed as Senior Vice President and Chief Operating Officer
of the Company pursuant to a Service Agreement, effective as of August 17, 1998,
as amended, at an initial annual base salary of $300,000. In addition to his
salary, an amount equal to ten percent of his then current salary amount is
payable by the Company to Mr. Armour annually in lieu of pension benefits. The
agreement may be terminated without cause by either party upon six months prior
written notice or for cause as specified; provided that, if either party gives
notice of termination of employment with the Company (other than for cause), the
Company may, in its sole discretion, terminate such employment immediately upon
the payment of the lump sum of six months' gross salary. Mr. Armour may also
terminate his employment with the Company upon three months prior written notice
upon a Change in Control of the Company. Upon termination by Mr. Armour upon a
Change of Control, Mr. Armour is to receive as a termination fee an amount equal
to two times his then current annual salary from the Company.

     John Davies is employed pursuant to a letter agreement intended to be
effective as June 1, 1997, as amended, at an initial annual base salary of
$300,000. In addition, he receives an amount equal to ten percent of his then
current salary amount annually until such time as the Company is able to put in
place for his benefit a full range of fringe benefits, including pension
arrangements. The agreement may be terminated without cause by either party upon
six months prior written notice or for cause as specified. Mr. Davies may also
terminate his employment with the Company upon three months prior written notice
upon a Change of Control. Upon termination without cause by the Company or upon
termination by Mr. Davies upon a Change of Control, Mr. Davies is to receive as
a termination fee an amount equal to two times his then current annual salary
from the Company.

     Pursuant to employment agreements, dated as of October 1, 1995, with the
Company and PLDMS, Simon Edwards was employed (i) as Chief Financial Officer of
the Company at an initial annual salary of $107,500 and (ii) as an Executive of
PLDMS at an initial annual salary of pound sterling 45,000. During 1996, Mr.
Edwards' annual salaries under these agreements were $157,500 and pound sterling
45,000, respectively. As with Mr. Hatt, effective as of July 1, 1997 the
agreement with PLDMS was terminated and the agreement with the Company was
amended and restated. Under the amended and restated agreement Mr. Edwards'
current annual base salary is $325,000. In addition to his salary, an amount
equal to twenty percent of his then current salary amount is payable by the
Company to Mr. Edwards annually in lieu of all pension and other benefits. The
agreement may be terminated without cause by either party upon six months prior
written notice or for cause as specified; provided, that if Mr. Edwards gives
notice of termination of employment with the Company, the Company may, in its
sole discretion, terminate employment immediately upon the payment of the lump
sum of six months' gross salary. Mr. Edwards may also terminate his employment
with the Company upon three months prior written notice upon a Change in Control
of the Company. Upon termination without cause by the Company or upon
termination by Mr. Edwards upon a Change of Control, Mr. Edwards is to receive
as a termination fee an amount equal to two times his then current annual salary
from the Company.

                                       97
<PAGE>   100

COMPENSATION OF DIRECTORS


     Non-employee directors are paid annual directors' fees of $15,000 and fees
of $750 for each board meeting and $250 for each committee meeting attended, and
are reimbursed for expenses incurred in connection with attendance at Board of
Directors and Committee meetings. In addition, the chairman of each Committee
receives an additional annual fee of $5,000. The representatives of Navona
Communications Limited (the company through which Cable & Wireless held its
interest in the Company until August 1998) declined all such fees during 1997
and 1998. Similarly, Mr. Pompadur, as the representative of News, declined all
such fees during 1998. All directors are eligible to participate in the Plan.
The non-employee directors, subject to approval by the Board of Directors, are
automatically awarded 10,000 options upon becoming a director and a further
5,000 options annually, thereafter. The two Navona representatives on the Board
declined all such options during 1997 and 1998, and Mr. Pompadur declined such
options during 1998 as a News representative.


     See "Certain Business Relationships with Directors and Nominees" for (i) a
description of certain arrangements between the Company and News; and (ii) a
description of certain arrangements between the Company, Technocom and Dr.
Antoniuk.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     None.

                                       98
<PAGE>   101

     The following Compensation Committee Report and the Comparative Stock
Performance Graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Annual Report on Form 10-K, as
amended, into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

     The Board of Directors created the Compensation Committee (the "Committee")
to have the responsibility for implementing and administrating the Company's
compensation policies and programs for its executive officers.

     The Compensation Committee is responsible for setting the base salaries and
the total compensation levels of the Chief Executive Officer (the "CEO") and the
other executive officers of the Company having total annual compensation of over
$200,000 and for determining which executives, including the CEO, will be
granted stock options and the size of such grants. Mr. Hatt does not participate
in the approval of his compensation.

     Prior to the continuance of the Company from Ontario to Delaware in
February 1997, the Compensation Committee did not have the authority to approve
stock option grants, which were approved by the entire Board of Directors.

  COMPENSATION POLICIES

     The Company's compensation policies for executive officers are designed to
(a) provide competitive compensation packages that will attract and retain
superior executive talent, (b) link a significant portion of compensation to
financial results, so as to reward successful performance, and (c) provide
long-term equity compensation, to further align the interests of executive
officers with those of stockholders and further reward successful performance.
The principal components of the Company's executive officer compensation program
are base salary, annual cash incentive awards, and grants of stock options.
Pursuant to the terms of the Plan, the Company's executive officer compensation
program also includes grants of stock appreciation rights, restricted stock and
performance units.

     Base salary levels for the Company's executive officers are reviewed on an
annual basis by the Committee and are set generally to be competitive with other
companies of comparable size and geographic location, taking into consideration
the positions' complexity, responsibility, need for special expertise and
personal hardships due to extensive international travel. Individual salaries
also take into account individual experience and performance.

     The Company's bonus plan for its executive officers for the 1998 fiscal
year has not yet been determined. A determination as to whether any bonuses will
be paid in respect of 1998 will be made in the latter part of 1999.

  LONG-TERM COMPENSATION

     The Committee periodically considers the desirability of granting stock
options to officers and other employees of the Company. Prior to the Company's
continuance as a Delaware corporation in February 1997, stock option grants were
subject to approval by the entire Board of Directors. After February 1997, the
Committee was granted the authority to make such grants. The objective of these
grants are to align senior management and stockholder long-term interest by
creating a strong and direct link between the executive's accumulation of wealth
and stockholder return and to enable executives to develop and maintain a
significant, long-term stock ownership position in the Company's Common Stock.
Individual grants of stock options are based upon individual performance. The
Committee believes that its past grants of stock options have successfully
focused the Company's executive officers and other members of senior management
on building stockholder value.

                                       99
<PAGE>   102

  COMPENSATION OF CHIEF EXECUTIVE OFFICER

     In determining the compensation of Mr. Hatt, the Committee has taken into
consideration his experience, dedication, performance and contribution to the
growth of the Company and its operating subsidiaries over the past two years,
the personal hardships resulting from extensive international travel, including
long periods in the countries of the former Soviet Union, and Mr. Hatt's overall
management strengths and business acumen.

  STOCK OPTION REPRICING

     In November 1998, the Compensation Committee and the Board of Directors
reviewed the stock options previously granted under the Plan and the market
price of the Company's Common Stock since the Russian financial crisis in August
1998. The Committee recognized that options granted by the Company are utilized
as compensation and to provide incentives to improve the Company's performance
and thereby positively influence the market price for the Company's Common
Stock. At the same time, the Committee and the Board recognized that the Russian
financial crisis and other macroeconomic difficulties in Russia had led to steep
declines in the share prices of companies doing business in Russia, including
that of the Company. The steep decline in the market price of the Company's
Common Stock resulted in the options outstanding under the Plan being at
exercise prices significantly in excess of the current market price of the
Common Stock. Therefore, the outstanding stock options, if left in place, would
not achieve the objectives underlying the Plan.

     Accordingly, on November 12, 1998 (the "Repricing Date"), replacement stock
options were granted to replace the previously granted stock options under the
Plan, which were deemed to be cancelled in connection with the repricing. The
replacement options did not involve the grant of any additional shares, and were
granted at a premium to the stock price on the Repricing Date (which was
$2.4375). Under the terms of the repricing, all stock options granted to current
employees, directors and consultants of the Company which had vested as of the
Repricing Date were replaced with fully vested options having an exercise price
of $3.00 per share. The terms of the replacement options for previously granted
options which had not vested as of the Repricing Date varied depending on
whether the option holders' unvested options were scheduled to vest in one or
two tranches. Depending on the terms of the original options, such options were
replaced with options having exercise prices of $4.00 and $5.00 per share and
which vested in one or two tranches. All of the replacement stock options have a
term of ten years.

                                   * * * * *

                    Presented by the Compensation Committee:

                            Vladimir Kvint, Chairman
                                David M. Stovel
                             Edward Charles Dilley

                                       100
<PAGE>   103

COMPARATIVE STOCK PERFORMANCE GRAPH

     The graph below compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total stockholder return of: (i) the
Nasdaq Stock Market Composite Index (the "Nasdaq Index"); and (ii) the Nasdaq
Telecommunications Index, assuming an investment of $100 on December 31, 1993 in
each of the Common Stock of the Company, the stocks comprising the Nasdaq Index
and the stocks comprising the Nasdaq Telecommunications Index, and further
assuming reinvestment of dividends, if any.
[PERFORMANCE GRAPH]

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Section 16(a) of the Exchange Act requires that directors and certain
officers of the Company, and persons who own more than ten percent of the
Company's Common Stock, file with the Commission initial reports of ownership
and reports of changes of ownership of such Common Stock. Based solely on its
review of the copies of such reports received by the Company and written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that during the year ended December 31, 1998
all filing requirements applicable to its officers, directors and ten-percent
stockholders were satisfied, with the exception of the Initial Statements of
Beneficial Ownership on Form 3 for I. Martin Pompadur, a director of the
Company, and Ian Armour, a Senior Vice President and Chief Operating Officer of
the Company. Mr. Pompadur was elected a director of the Company on May 13, 1998
and was obligated to file an Initial Statement of Beneficial Ownership within 10
days of his appointment. However, due to an administrative oversight, this
filing was not made until October 14, 1998. Mr. Armour was appointed a Senior
Vice President and Chief Operating Officer of the Company on August 17, 1998 and
was obligated to file an Initial Statement of Beneficial Ownership within 10
days of his appointment. However, due to an administrative oversight, this
filing was not made until September 23, 1998.

                                       101
<PAGE>   104

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets forth certain information (as of March 31, 1999,
except as otherwise noted), with respect to shares of Common Stock beneficially
owned by owners of more than five percent of the outstanding Common Stock, by
all current directors and nominees, by the executive officers of the Company
named in the Summary Compensation Table included elsewhere in this Annual Report
and by all current directors and executive officers of the Company as a group.



<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES       PERCENT OF
BENEFICIAL OWNER                                         BENEFICIALLY OWNED(1)     CLASS(2)
----------------                                         ---------------------    ----------
<S>                                                      <C>                      <C>
News America Incorporated(3)...........................       18,223,081             43.7%
K. Rupert Murdoch(3)...................................       18,223,081             43.7%
Merrill Lynch & Co., Inc.(4)...........................        7,254,328             16.7%
Citigroup Inc.(5)......................................        2,259,230              6.0%
James R.S. Hatt(6).....................................          440,999              1.2%
Dr. Boris Antoniuk(7)..................................           10,000                *
Edward Charles Dilley(7)...............................           10,000             *
Simon Edwards(8).......................................          338,666             *
Gordon Humphrey(7).....................................           15,000             *
Gennady Kudriavtsev(7).................................           15,000             *
Dr. Vladimir Kvint(7)..................................           15,000             *
I. Martin Pompadur.....................................               --             *
David M. Stovel(7).....................................           27,500             *
E. Clive Anderson(9)...................................          353,433             *
Ian Armour(10).........................................          181,666             *
John G. Davies(7)......................................          333,333             *
All current directors and executive officers of the
  Company as a group (12 persons)......................        1,740,597              4.4%
</TABLE>


---------------
 (1) In accordance with Securities and Exchange Commission regulations, the
     table lists all shares as to which such persons have or share the power to
     vote or to direct disposition. The number of shares indicated includes
     shares issuable upon the exercise of outstanding stock options, warrants or
     convertible securities held by each individual or group to the extent
     exercisable or convertible at March 31, 1999 or within 60 days thereafter.
     Unless otherwise indicated, each person has the sole power to vote and to
     direct disposition of the shares listed as beneficially owned by such
     person.

 (2) Percentage for each individual or group calculated with reference to an
     aggregate of 37,846,789 shares of Common Stock outstanding at March 31,
     1999 and all shares issuable upon the exercise of outstanding stock
     options, warrants or convertible securities that are exercisable by such
     individual or group within 60 days of March 31, 1999. Percentages of less
     than 1% have not been indicated.


 (3) This information is based upon Amendment No. 1 to Schedule 13D, filed April
     12, 1999, with the Securities and Exchange Commission by The News
     Corporation Limited, News America Incorporated, NewsPLD LLC and K. Rupert
     Murdoch. The amount shown includes 14,381,780 shares of Common Stock and
     currently exercisable warrants to purchase 250,000 shares of Common Stock
     held by NewsPLD LLC, a wholly owned subsidiary of News America Incorporated
     (due to expire on June 22, 1999). The News Corporation Limited, News
     America Incorporated and Mr. Murdoch, as persons who may be deemed to
     control NewsPLD LLC, may be deemed to beneficially own the shares
     beneficially owned by NewsPLD LLC. The amount shown also includes 3,591,301
     shares of Common Stock issuable upon conversion of currently outstanding
     Revolving Credit Notes issued to News America Incorporated, which may be
     deemed to be beneficially owned by each of The News Corporation Limited,
     News America Incorporated and Mr. Murdoch. See "Certain Relationships and
     Related Transactions." NewsPLD LLC, News America Incorporated and Mr.
     Murdoch are each located at 1211 Avenue of the Americas, New York, NY
     10036.


                                       102
<PAGE>   105

 (4) This information is based upon Amendment No. 3 to Schedule 13G, filed
     February 5, 1999, with the Securities and Exchange Commission by Merrill
     Lynch & Co., Inc. ("Merrill Lynch"), which is located at World Financial
     Center, North Tower, 200 Vesey Street, New York, NY 10381, and Merrill
     Lynch Global Allocation Fund, Inc., which is located at 800 Scudders Mill
     Road, Princeton, New Jersey 08536. The amount shown includes shares of
     Common Stock issuable upon the conversion of 9% Convertible Subordinated
     Notes of the Company (CUSIP 71623PAC) (the "Convertible Notes") and upon
     exercise of certain warrants to purchase shares of Common Stock. In the
     aggregate, Merrill Lynch may be deemed to beneficially own 1,698,200 shares
     of Common Stock, $19,200,000 aggregate principal amount of Convertible
     Notes and 172,000 warrants. The Convertible Notes are convertible, at the
     rate of 144.93 shares per $1,000 principal amount, at a conversion price of
     $6.90 per share. The Schedule 13D does not distinguish between the various
     issuances of warrants and their respective terms held by Merrill Lynch.
     Merrill Lynch disclaims beneficial ownership of the securities of the
     Company.

 (5) This information is as of December 31, 1998 and is based upon Schedule 13G,
     filed January 22, 1999, with the Securities and Exchange Commission by
     Citigroup Inc., which is located at 153 East 53rd Street New York, NY
     10043. The Company believes that Citigroup Inc.'s holdings of the Company's
     securities consist of shares of Common Stock and warrants to purchase
     Common Stock, but the Schedule 13G does not distinguish between such
     securities. Citigroup Inc. disclaims beneficial ownership of the securities
     of the Company.

 (6) The amount shown includes currently exercisable options to purchase 329,999
     shares of Common Stock.


 (7) The amount shown consists entirely of currently exercisable options to
     purchase shares of Common Stock.



 (8) The amount shown includes currently exercisable options to purchase 306,666
     shares of Common Stock.



 (9) The amount shown includes currently exercisable options to purchase 333,333
     shares of Common Stock.



(10) The amount shown includes currently exercisable options to purchase 166,666
     shares of Common Stock.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



MERRILL LYNCH



     Merrill Lynch has disclosed that it owns 1,698,200 shares of Common Stock,
$19,200,000 aggregate principal amount of Convertible Notes (or 72.45% of the
total of such Notes outstanding) and 172,000 warrants to purchase Common Stock.
In addition, it is believed to hold approximately 70% of the total number of
Senior Notes outstanding. Most decisions to be taken by the holders of the
Senior and Convertible Notes (other than on certain fundamental matters such as
changes in the terms of payment or the security held for the Notes, which
require a unanimous vote) require, for their approval, the affirmative vote of
the holders of a majority in principal amount of the applicable issue of Notes.
Accordingly, Merrill Lynch is in a position by itself to take such decisions,
other than with respect to the fundamental matters referred to.



     In March 1998 the Indentures pursuant to which such Notes were issued were
amended pursuant to a Consent Solicitation. In October 1998 the Senior Notes
were exchanged for Exchange Notes of substantially similar tenor pursuant to an
Exchange Offer. For further details, please refer to "Business -- Recent
Developments -- The Consent Solicitation"; and "-- Registration of Outstanding
Securities; Completion of Exchange Offer."



NEWS AMERICA INCORPORATED



     News acquired its interest in the Company in August 1998 in a series of
transactions with the Company and Cable & Wireless. For further details, please
refer to "Business -- Recent Developments -- Transactions with Cable & Wireless
and News."


  DIRECTORS NOMINATION AGREEMENT

     In connection with News' acquisition of its stake in the Company in August
1998, the Company and News entered into the Directors Nomination Agreement
regarding, among other things, the nomination by the

                                       103
<PAGE>   106

Company of certain individuals designated by News for election as directors.
Pursuant to the terms of the Directors Nomination Agreement, the Company agreed
that it will use its best efforts to maintain the size of its Board at 10 and
cause the Board to elect as directors four individuals designated by News.
Thereafter, for the term of the Directors Nomination Agreement, the Company will
nominate the appropriate number of News designees for election by stockholders.
The Directors Nomination Agreement expires on April 19, 2008.

     Pursuant to the terms of the Directors Nomination Agreement, the number of
individuals that News shall be permitted to designate for nomination will be
based on the percentage of the issued and outstanding shares of Common Stock
then held by News, News Corporation and its subsidiaries and affiliates. In
addition, if the size of the Board is increased to greater than 10 directors,
the number of directors to be designated by News will be proportionately
adjusted, rounding up where necessary to the next highest whole number.

     In connection with entering into the Directors Nomination Agreement, the
Company and News also entered into a letter agreement, dated April 19, 1998,
providing for the Company and News to continue discussions concerning the size
of the Board and the number of persons that News may designate as nominees on
the Company's slate of nominees for election as director. Prior to executing the
Directors Nomination Agreement, the Company had been seeking to implement a
structure whereby the size of the Board would be expanded to 12 and News would
be entitled to designate six persons as nominees for the election to the Board.
Because of uncertainty as to whether the Nasdaq Rules would permit such number
of designees, the Company and News determined initially to include only four
members, of a total Board membership of 10 persons, as News' designees on the
Board, as reflected in the Directors Nomination Agreement. However, the Company
and News agreed to continue to discuss the issue of Board size and composition
with a view to preserving their original intent and, if successful, to take such
action as is reasonably necessary to expand the size of the Board to 12 and to
name a total of six persons to such an expanded Board as representatives of
News.

     To date, News has designated only one nominee as its designee to the Board
of Directors and has orally advised the Company that it does not currently
intend to nominate the additional three designees under the terms of the
Directors Nomination Agreement. Mr. Pompadur is News' current designee on the
Board of Directors.

  REVOLVING CREDIT AGREEMENT

     On November 30, 1998 (but effective September 30, 1998), the Company
entered into a revolving credit agreement with News (the "News Revolving Credit
Agreement") under which News agreed to advance up to $8.1 million to the
Company. On March 22, 1999, News increased the amount it would advance to $9.1
million and on April 22, 1999 News further increased the amount it would advance
to $9.55 million. Each advance under the News Revolving Credit Agreement bears
interest at an annual rate of 20% and is repayable on June 30, 1999. Advances
are evidenced by notes which, together with interest thereon, are convertible at
News' option into shares of Common Stock of the Company at conversion rates
determined as of the date of issue of the applicable note. In addition, in the
event that News guarantees obligations of the Company, a note is issued
reflecting the Company's reimbursement obligation should such guarantee be
called. Amounts so guaranteed are treated as advances under the News Revolving
Credit Agreement, meaning that they count with respect to the $9.55 million
ceiling on total advances. In addition, in the event a guarantee is called, the
Company will owe interest on its reimbursement obligation at the annual rate of
20% calculated from the date payment by News is made under its guarantee. Notes
issued in respect of reimbursement obligations, together with interest thereon,
are also convertible into shares of Common Stock at conversion rates determined
as of their date of issue. News can cease making advances at any time and for
any reason. Currently, however, the full amount available under the News
Revolving Credit Agreement has been advanced or applied in respect of News'
guarantees. Of the total $9.55 million of notes issued, notes aggregating $3.1
million have been issued in respect of guarantees of the Company's outstanding
indebtedness to The Travelers Insurance Company and The Travelers Indemnity
Company. An aggregate of 3,804,369 shares of Common Stock are issuable to News
upon conversion of the $6.45 million of Revolving Credit Notes representing
actual advances made to the Company.

                                       104
<PAGE>   107

TECHNOCOM MINORITY SHAREHOLDERS

     On November 26, 1997 the Company acquired a further 59 ordinary shares of
Technocom from the two minority shareholders of Technocom, thereby increasing
its percentage interest in Technocom from 50.75% to 80.4%. The Company acquired
29 of these shares from Elite, an Irish company beneficially owned by a trust
advised by Dr. Antoniuk, a director of the Company. The total consideration for
the shares purchased from Elite was $6.25 million in cash and 1,316,240 shares
of the Company's Common Stock. Sale of these shares is prohibited prior to
January 1, 2000.

     In addition, the Company restructured certain "put and call" arrangements
with the other two shareholders of Technocom. Under these arrangements as
originally structured the remaining ordinary shares of Technocom held by these
shareholders (10 shares, or approximately 5% of the total ordinary shares
outstanding, in the case of Elite) were to have been independently valued in
1999 and the Company had the right to call, and Elite and the other shareholder
had the right to put, their respective interests at the per share value
established by the valuation. These arrangements were restructured as follows.
In the case of Elite, two of its remaining ten ordinary shares were made subject
to a new put and call arrangement which would come into effect in 1998, with the
"put and call" price to be $1 million or, at Elite's option, that number of
shares of the Common Stock which resulted from dividing $1 million by the lower
of $5.85 and the average closing price of such shares over the preceding ten
trading days. The remaining eight ordinary shares continued to be subject to the
existing put and call arrangements in 1999, except that the valuation would be
made by the Company and the amount paid pursuant to the exercise of either the
put or the call could not exceed $9,620,689 or be less than $6,689,655.

     Technocom has entered into a consulting agreement with Elite for the
provision to Technocom of the services of Dr. Antoniuk for a period expiring on
June 30, 2002, pursuant to which Technocom paid Elite fees equal to $108,333 per
annum for the term of the agreement, reviewable periodically, plus the
reasonable expenses of Dr. Antoniuk. As of November 26, 1997, the annual fees
payable to Elite under this agreement were increased to $158,333.

     In addition, pursuant to a Service Agreement, dated as of November 26,
1997, with the Company, Dr. Antoniuk has been employed since such date as Group
Director -- Russia and CIS, at an annual salary of $50,000. The agreement may be
terminated without cause by either party upon six months prior written notice or
for cause as specified; provided that, if either party gives notice of
termination of employment with the Company, the Company may, in its sole
discretion, terminate such employment immediately upon the payment of the lump
sum of six months' gross salary. Dr. Antoniuk may also terminate his employment
with the Company upon three months prior written notice upon a Change in Control
of the Company. Upon termination without cause by the Company or upon
termination by Dr. Antoniuk upon a Change of Control, Dr. Antoniuk is to receive
as a termination fee an amount equal to two times his then current annual salary
from the Company.


EXECUTIVE OFFICERS AND DIRECTORS



     In April 1998, in connection with the discussions relating to the eventual
agreements with News and Cable & Wireless, the Board granted options to purchase
280,000 shares and 340,000 shares of Common Stock, respectively, to Mr. James
Hatt, President and Chief Executive Officer, and Mr. Simon Edwards, Chief
Financial Officer, in order to incentivize them to continue to grow the
Company's business and in recognition of the fact that they had not been granted
stock options in almost two years. Each grant vested as to one-third,
immediately, and was scheduled to vest as to the remaining two-thirds in 12 and
24 months, respectively. The exercise prices for the options were $7.00 per
share as to one-third of the grant and $8.00 per share as to the remaining
two-thirds. On the date of grant, the closing price of the Common Stock on the
Nasdaq National Market was $9.015625 per share. The exercise prices were set
below market to reflect the fact that the option grants were in part in lieu of
salary increases and in part to provide the incentives described above. These
options were subsequently cancelled and replaced with options granted in
connection with the Company's November 1998 option repricing, as described
below.


                                       105
<PAGE>   108


     On November 12, 1998, in recognition of the sharp fall in the Company's
stock price following the Russian financial crisis and other macroeconomic
difficulties in Russia, the Board and the Compensation Committee decided to
reprice the existing options granted to the Company's employees (including the
Company's executive officers) and directors. See "Executive
Compensation -- Report of the Compensation Committee on Executive
Compensation -- Stock Option Repricing." Pursuant to the repricing, all stock
options which had been granted to current employees, directors and consultants
were cancelled and replaced with options having reduced option prices, which
were still above the closing market price on the date of the repricing. See
"Executive Compensation -- 10 Year Option Repricings" for more information about
the stock options granted to the Company's executive officers in the repricing.


OTHER

     Since June 16, 1997, Dorothea Hatt, the wife of James Hatt, the Company's
Chairman, President and Chief Executive Officer, has been employed as Legal
Assistant of the Company at an annual salary of $75,000.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) 1. Financial Statements.  Financial Statements listed in the
            accompanying Index to Financial Statements and Financial Statement
            Schedules appearing on page F-1 are filed as part of this annual
            report on Form 10-K.

         2.  Exhibits.  (see (c) below).

     (b)Reports on Form 8-K

        None

     (c) Exhibits.

     The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  2       Certificate of Domestication. (Exhibit 3.1)(9)
  3.1     Certificate of Incorporation. (Exhibit 3.2)(9)
  3.2     By-Laws. (Exhibit 3.3)(9)
  4.1     Indenture, dated as of May 31, 1996, among the Registrant,
          as Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
          Limited, PLD Capital Limited, Baltic Communications Limited
          and Wireless Technology Corporations Limited as Guarantors,
          and The Bank of New York, as Trustee, with respect to
          $123,000,000 aggregate principal amount at stated maturity
          of 14% Senior Discount Notes due 2004 (the "Senior Note
          Indenture") (including exhibits B, C, D and K only).
          (Exhibit 4.1)(10)
  4.2     Indenture, dated as of May 31, 1996, among the Registrant as
          Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
          Limited, PLD Capital Limited, Baltic Communications Limited
          and Wireless Technology Corporations Limited as Guarantors,
          and The Bank of New York, as Trustee, with respect to
          $26,500,000 aggregate principal amount of 9% Convertible
          Subordinated Notes due 2006 (the "Convertible Note
          Indenture") (including exhibit B only). (Exhibit 4.2)(10)
</TABLE>

                                       106
<PAGE>   109


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  4.3     First Supplemental Indenture, Amendment Agreement, Consent
          and Waiver, dated as of March 20, 1998, among the
          Registrant, as Issuer, NWE Capital (Cyprus) Limited, PLD
          Asset Leasing Limited, PLD Capital Limited, Wireless
          Technology Corporations Limited and Baltic Communications
          Limited, as Guarantors, Clayton A. Waite and Apropos
          Investments Ltd., as nominee shareholders, and The Bank of
          New York, as Trustee. (Exhibit 4.3)(11)
  4.4     Second Supplemental Indenture, dated as of June 15, 1998,
          among the Registrant, as Issuer, NWE Capital (Cyprus)
          Limited, PLD Asset Leasing Limited, PLD Capital Limited, PLD
          Capital Asset (U.S.) Inc., Wireless Technology Corporations
          Limited and Baltic Communications Limited, as Guarantors,
          Clayton A. Waite and Apropos Investments Ltd., as nominee
          shareholders, and The Bank of New York, as Trustee.(14)
  4.5     Third Supplemental Indenture, dated as of January 12, 1999,
          among the Registrant, as Issuer, NWE Capital (Cyprus)
          Limited, PLD Asset Leasing Limited, PLD Capital Limited, PLD
          Capital Asset (U.S.) Inc., Wireless Technology Corporations
          Limited and Baltic Communications Limited, as Guarantors,
          Clayton A. Waite and Apropos Investments Ltd., as nominee
          shareholders, and The Bank of New York, as Trustee.(14)
  4.6     Global Exchange Note representing 14% Senior Discount Notes
          due 2004.(14)
  4.7     Global Note representing 9% Convertible Subordinated Notes
          due 2006. (Exhibit 4.4)(10)
  4.8     Warrant Agreement, dated as of May 31, 1996, between the
          Registrant and The Bank of New York as Warrant Agent.
          (Exhibit 4.9)(10)
  4.9     Warrant Certificate of the Registrant for 123,000 Warrants
          exercisable on or after December 10, 1996 and on or before
          June 12, 2006. (Exhibit 4.5)(10)
  4.10    Smith Barney Warrant Agreement, dated as of May 31, 1996,
          between the Registrant and The Bank of New York as Warrant
          Agent. (Exhibit 4.10)(10)
  4.11    Smith Barney Warrant Certificate of the Registrant for
          100,000 Warrants exercisable as to 50,000 Common Shares on
          or after June 12, 1996 and as to 50,000 Common Shares on or
          after October 30, 1996 and on or before April 30, 2001.
          (Exhibit 4.6)(10)
  4.12    Registration Rights Agreement, dated as of May 31, 1996,
          between the Registrant and Smith Barney Inc. (Exhibit
          4.7)(10)
  4.13    Purchase Agreement, dated May 24, 1996, between the
          Registrant and Smith Barney Inc. (without exhibits).
          (Exhibit 4.8)(10)
  4.14    Company Senior Note Escrow Account Agreement, dated as of
          May 31, 1996, among The Bank of New York as Escrow Agent, as
          Trustee under the Senior Note Indenture, as Trustee under
          the Convertible Note Indenture and the Registrant. (Exhibit
          4.11)(10)
  4.15    Company Convertible Note Escrow Account Agreement, dated as
          of May 31, 1996, among The Bank of New York as Escrow Agent,
          as Trustee under the Senior Note Indenture, as Trustee under
          the Convertible Note Indenture and the Registrant. (Exhibit
          4.12)(10)
  4.16    Leasing Company Escrow Account Agreement (PLD Asset Leasing
          Limited), dated as of May 31, 1996, among The Bank of New
          York as Escrow Agent, as Trustee under the Senior Note
          Indenture, as Trustee under the Convertible Note Indenture
          and PLD Asset Leasing Limited. (Exhibit 4.13)(10)
  4.17    Leasing Company Escrow Account Agreement (PLD Capital
          Limited), dated as of May 31, 1996, among The Bank of New
          York as Escrow Agent, as Trustee under the Senior Note
          Indenture, as Trustee under the Convertible Note Indenture
          and PLD Capital Limited. (Exhibit 4.14)(10)
  4.18    Leasing Company Escrow Account Agreement (PLD Capital Asset
          (U.S.) Inc.), dated as of June 15, 1998, among The Bank of
          New York as Escrow Agent, as Trustee under the Senior Note
          Indenture, and as Trustee under the Convertible Note
          Indenture and PLD Capital Asset (U.S.) Inc.(14)
</TABLE>


                                       107
<PAGE>   110

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  4.19    Company Senior Note Security and Pledge Agreement, dated as
          of May 31, 1996, by the Registrant in favor of The Bank of
          New York, as Trustee under the Senior Note Indenture, as
          Trustee under the Convertible Note Indenture, and as
          Collateral Agent. (Exhibit 4.15)(10)
  4.20    Company Convertible Note Security and Pledge Agreement,
          dated as of May 31, 1996, by the Registrant in favor of The
          Bank of New York, as Trustee under the Convertible Note
          Indenture, as Trustee under the Convertible Note Indenture,
          and as Collateral Agent. (Exhibit 4.16)(10)
  4.21    Leasing Company Security and Pledge Agreement (PLD Asset
          Leasing Limited), dated as of May 31, 1996, by PLD Asset
          Leasing Limited in favor of The Bank of New York, as Trustee
          under the Senior Note Indenture, as Trustee under the
          Convertible Note Indenture, and as Collateral Agent.
          (Exhibit 4.17)(10)
  4.22    Leasing Company Security and Pledge Agreement (PLD Capital
          Limited), dated as of May 31, 1996, by PLD Capital Limited
          in favor of The Bank of New York, as Trustee under the
          Senior Note Indenture, as Trustee under the Convertible Note
          Indenture, and as Collateral Agent. (Exhibit 4.18)(10)
  4.23    NWE Cyprus Senior Note Security and Pledge Agreement, dated
          as of May 31, 1996, by NWE Capital (Cyprus) Ltd. in favor of
          The Bank of New York, as Trustee under the Senior Note
          Indenture, as Trustee under the Convertible Note Indenture,
          and as Collateral Agent. (Exhibit 4.19)(10)
  4.24    Leasing Company Security and Pledge Agreement (PLD Capital
          Asset (U.S.) Inc.), dated as of June 15, 1998, by PLD
          Capital Asset (U.S.) Inc. in favor of The Bank of New York,
          as Trustee under the Senior Note Indenture, as Trustee under
          the Convertible Note Indenture, and as Collateral Agent.(14)
  4.25    Revolving Credit Agreement, dated as of November 26, 1997,
          between the Registrant, The Travelers Insurance Company and
          The Travelers Indemnity Company. (Exhibit 4.21)(11)
  4.26    Form of 12% Series A Senior Secured Revolving Credit Note.
          (Exhibit 4.22)(11)
  4.27    Form of 12% Series B Senior Secured Revolving Credit Note.
          (Exhibit 4.23)(11)
  4.28    Warrant Agreement, dated as of November 26, 1997, between
          the Registrant and The Bank of New York, as Warrant Agent.
          (Exhibit 4.24)(11)
  4.29    Form of Series A Warrant Certificate. (Exhibit 4.25)(11)
  4.30    Form of Series B Warrant Certificate. (Exhibit 4.26)(11)
  4.31    Registration Rights Agreement, dated as of November 26,
          1997, between the Registrant, The Travelers Insurance
          Company and The Travelers Indemnity Company. (Exhibit
          4.27)(11)
  4.32    Guaranty Agreement, dated as of November 26, 1997, made and
          given by Wireless Technology Corporations Limited and Baltic
          Communications Limited in favor of The Travelers Insurance
          Company and The Travelers Indemnity Company. (Exhibit
          4.28)(11)
  4.33    Trust Agreement, dated as of November 26, 1997, between the
          Registrant and The Bank of New York, as Trustee. (Exhibit
          4.29)(11)
  4.34    Security Agreement (Inventory and Receivables), dated as of
          November 26, 1997, between the Registrant and The Bank of
          New York, as Trustee. (Exhibit 4.30)(11)
  4.35    Pledge Agreement, dated as of November 26, 1997, between the
          Registrant and The Bank of New York, as Trustee. (Exhibit
          4.31)(11)
  4.36    Revolving Credit Agreement, dated as of September 30, 1998,
          between PLD Telekom Inc. and News America Incorporated,
          including the form of promissory note issuable
          thereunder.(14)
  4.37    Schedule of Promissory Notes issued under the Revolving
          Credit Agreement, dated as of September 30, 1998, between
          PLD Telekom Inc. and News America Incorporated.(14)
 10.1     PLD Telekom Inc. 1997 Equity Compensation Plan. (Exhibit
          10.1)(11)
</TABLE>

                                       108
<PAGE>   111

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.2     Service Agreement, dated August 1, 1997, between the
          Registrant and James R.S. Hatt. (Exhibit 10.2)(11)
 10.3     Employment Letter, effective June 1, 1997, between the
          Registrant and John G. Davies. (Exhibit 10.3)(11)
 10.4     Amendment, dated July 30, 1997, to Employment Letter between
          the Registrant and John G. Davies. (Exhibit 10.4)(11)
 10.5     Service Agreement, dated July 1, 1997, between the
          Registrant and Simon Edwards. (Exhibit 10.5)(11)
 10.6     Service Agreement, dated November 26, 1997, between the
          Registrant and Boris Antoniuk. (Exhibit 10.8)(11)
 10.7     Consultancy Agreement, dated December 28, 1994, between
          Technocom Limited and Elite International Limited. (Exhibit
          10.9)(11)
 10.8     Amendment, dated November 26, 1997, to the Consultancy
          Agreement between Technocom Limited and Elite International
          Limited. (Exhibit 10.10)(11)
 10.9     Service Agreement between the Registrant and Newmark Capital
          Limited dated as of January 1, 1995. (Exhibit 2(o))(8)
 10.10    Warrant to Purchase Common Shares, dated July 28, 1994,
          between the Company and Dominion Capital Inc. (Exhibit
          10.28)(4)
 10.11    Agreement to Purchase Warrants, dated July 28, 1994, between
          the Registrant and Cable & Wireless. (Exhibit 10.25)(4)
 10.12    Agreement dated May 31, 1992 between Tiller International
          Limited and the Registrant. (Exhibit 2(m))(1)
 10.13    Joint Venture Agreement, dated as of December 31, 1993,
          between Wireless Technology Corporations Limited and
          Kompania Besprovodnye Seti Sviazi. (Exhibit 3(b))(3)
 10.14    Interconnection Agreement, dated as of February 4, 1994,
          between the Ministry of Communications of the Republic of
          Kazakhstan and ALTEL. (Exhibit 3(d))(3)
 10.15    Amendment, dated February 28, 1996, to the Interconnection
          Agreement between Kazakhtelekom and ALTEL. (Exhibit
          10.28)(11)
 10.16    Cellular System Equipment Purchase Agreement dated as of May
          4, 1994 between ALTEL and Motorola Inc. (Exhibit 3(k))(3)
 10.17    Cellular System Installation & Optimization Agreement dated
          as of May 4, 1994 between ALTEL and Motorola Inc. (Exhibit
          3(l))(3)
 10.18    Put and Call Letter Agreement, dated as of June 3, 1994,
          between the Company and Monogram Telecommunications Limited.
          (Exhibit 3(i))(3)
 10.19    Subscription Agreement, dated February 21, 1995, for
          $3,000,000 convertible note issued to the Registrant by
          Monogram. (Exhibit 2(a))(7)
 10.20    Agreement for the Acquisition of Ninety Percent of the
          Issued Share Capital of St. Petersburg Mayoralty & Tiller,
          dated as of March 7, 1994, among the Registrant, Tiller
          International Limited and Dian A/O. (Exhibit 3(j))(3)
 10.21    Purchase Agreement between Baltic Communications Limited and
          the Registrant dated January 27, 1996. (Exhibit 2(a))(8)
 10.22    Side letter between the Registrant and Baltic Communications
          Limited dated January 27, 1996. (Exhibit 2(c))(8)
 10.23    Share Purchase Agreement, dated April 26, 1995, between Lant
          Investments Limited and the Registrant. (Exhibit 2(b))(7)
</TABLE>

                                       109
<PAGE>   112

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.24    Escrow Agreement among the Registrant, Lant Investments
          Limited and Montreal Trust Company of Canada. (Exhibit
          2(c))(7)
 10.25    Registration Rights Agreement, dated as of April 26, 1995,
          between the Registrant and Lant Investments Limited.
          (Exhibit 2(d))(7)
 10.26    Share Sale and Purchase Agreement, dated November 2, 1994,
          between the Registrant and Plicom Limited. (Exhibit 2.3)(4)
 10.27    Form of Subscription and Shareholder Agreement between the
          Registrant, Plicom Limited, Elite International Limited and
          Technocom Limited. (Exhibit 2.4)(6)
 10.28    Amendment, dated November 26, 1997, to Subscription and
          Shareholder Agreement between the Registrant, Plicom
          Limited, Elite International Limited and Plicom Limited.
          (Exhibit 10.42)(11)
 10.29    Form of Deed of Covenant between the Registrant and Plicom
          Limited. (Exhibit 2.5)(4)
 10.30    Form of Put and Call Option Agreement dated November 4, 1994
          between the Company and Plicom Limited. (Exhibit 10.20)(4)
 10.31    Amendment, dated November 26, 1997, to Put and Call Option
          Agreement between the Registrant and Plicom Limited.
          (Exhibit 10.46)(11)
 10.32    Amended and Restated Put and Call Option Agreement, dated
          November 26, 1997, between the Registrant and Elite
          International Limited. (Exhibit 10.47)(11)
 10.33    Share Purchase Agreement, dated November 26, 1997, among the
          Registrant, Technocom Limited, Plicom Limited and Mark
          Klabin. (Exhibit 10.48)(11)
 10.34    Share Purchase Agreement, dated November 26, 1997, among the
          Registrant, Technocom Limited and Elite International
          Limited. (Exhibit 10.49) (11)
 10.35    Securities Sale and Purchase Agreement between the
          Registrant and Redford Limited relating to SPMMTS. (Exhibit
          10.50)(11)
 10.36    Asset Exchange Agreement, dated April 19, 1998, between News
          America Incorporated and PLD Telekom Inc. (Exhibit 99.2)(13)
 10.37    Stock Purchase Agreement, dated April 19, 1998, between PLD
          Telekom Inc. and Cable and Wireless plc. (Exhibit 99.3)(13)
 10.38    Agreement for Lease, dated as of April 27, 1994, between the
          Registrant and The Scottish Life Assurance Company. (Exhibit
          3(o))(3)
 10.39    Lease, dated as of October 15, 1998, between G.S. 505 Park,
          LLC and the Registrant.(14)
 10.40    Lease, dated as of December 1, 1998, between 67 Broad Street
          LLC and the Registrant.(14)
 10.41    License Granted to ALTEL for the Operation of a Cellular
          Telecommunication System Providing Mobile
          Radiocommunications Services dated as of February 4, 1994.
          (Exhibit 3(c))(3)
 10.42    License No. 2463 issued to MTR-Sviaz dated September 21,
          1995 (Russian). (Exhibit 2(f))(8)
 10.43    License No. 4904 issued by the RSCC to PeterStar Company
          Limited for the provision of local, national and
          international telecommunications services via a dedicated
          network. (Exhibit 10.3)(10)
 10.44    License No. 4274 issued by the RSCC to PeterStar Company
          Limited for the provision of local and intercity telephone
          communications services. (Exhibit 10.4)(10)
 10.45    License No. N4199 issued by the RSCC to Teleport-TP for the
          provision of local and international telephone
          communications. (Exhibit 10.5)(10)
 10.46    License No. N4207 issued by the RSCC to Teleport-TP for the
          provision of international telecommunication services via
          dedicated network. (Exhibit 10.6)(10)
 10.47    License No. N4437 issued by the RSCC to Teleport-TP for the
          provision of international leased lines and circuits for the
          transmission of television signals. (Exhibit 10.7)(10)
 10.48    License No. 3654 issued to Teleport-TP for providing data
          transmission services. (Exhibit (2(e))(8)
</TABLE>

                                       110
<PAGE>   113

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 21       List of Subsidiaries.(14)
 23.1*    Consent of KPMG LLP.
 23.2*    Consent of KPMG LLP.
 23.3*    Consent of KPMG.
 23.4*    Consent of KPMG.
 23.5*    Consent of Moore Stephens.
 23.6*    Consent of KPMG LLP.
 23.7*    Consent of KPMG.
 23.8*    Consent of KPMG.
</TABLE>

---------------
  * Filed herewith

 (1) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
     year ended December 31, 1991.

 (2) Filed as an Exhibit to the Company's Form 8 Amendment to Form 20-F for the
     year ended December 31, 1991.

 (3) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
     year ended December 31, 1993.

 (4) Filed as an Exhibit to the Company's Registration Statement on Form F-1
     (File No. 33-86184).

 (5) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Company's
     Registration Statement on Form F-1 (File No. 33-86184).

 (6) Filed as an Exhibit to Pre-Effective Amendment No. 4 to the Company's
     Registration Statement on Form F-1 (File No. 33-86184).

 (7) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
     year ended December 31, 1994.

 (8) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
     year ended December 31, 1995.

 (9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated March
     7, 1997.

(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
     fiscal year ended December 31, 1996.

(11) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
     year ended December 31, 1997, as filed with the Commission on March 31,
     1998.

(12) Filed as an Exhibit to Amendment No. 2 to the Company's Annual Report on
     Form 10-K/A for the year ended December 31, 1997, as filed with the
     Commission on July 22, 1998.

(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated April
     22, 1998.

(14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
     year ended December 31, 1998, as filed with the Commission on March 31,
     1999.

                                       111
<PAGE>   114

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused Amendment No. 2 to this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in New York, New York on August 31, 1999.


                                          PLD TELEKOM INC.

                                          By: /s/ JAMES R. S. HATT
                                            ------------------------------------
                                            James R. S. Hatt
                                            President and
                                            Chief Executive Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934,
Amendment No. 2 to this report been signed by the following persons in the
capacities and on the dates indicated.



<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                     DATE
                     ---------                                     -----                     ----
<C>                                                  <S>                                <C>

                /s/ BORIS ANTONIUK                   Director                           August 31, 1999
---------------------------------------------------
                  Boris Antoniuk

             /s/ EDWARD CHARLES DILLEY               Director                           August 31, 1999
---------------------------------------------------
               Edward Charles Dilley

                 /s/ SIMON EDWARDS                   Director and Chief Financial       August 31, 1999
---------------------------------------------------    Officer (Principal Financial
                   Simon Edwards                       Officer and Principal
                                                       Accounting Officer)

               /s/ JAMES R. S. HATT                  Director, President and Chief      August 31, 1999
---------------------------------------------------    Executive Officer (Principal
                 James R. S. Hatt                      Executive Officer)

                /s/ GORDON HUMPHREY                  Director                           August 31, 1999
---------------------------------------------------
                  Gordon Humphrey

              /s/ GENNADY KUDRIATSEV                 Director                           August 31, 1999
---------------------------------------------------
                Gennady Kudriatsev

                /s/ VLADIMIR KVINT                   Director                           August 31, 1999
---------------------------------------------------
                  Vladimir Kvint

              /s/ I. MARTIN POMPADUR                 Director                           August 31, 1999
---------------------------------------------------
                I. Martin Pompadur

                 /s/ DAVID STOVEL                    Director                           August 31, 1999
---------------------------------------------------
                   David Stovel
</TABLE>


                                       112
<PAGE>   115

                       PLD TELEKOM INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM                                                          PAGE
----                                                          ----
<S>                                                           <C>
Independent auditors' report................................  F-2
Consolidated balance sheets as of December 31, 1998 and
  1997......................................................  F-4
Consolidated statements of operations for the years ended
  December 31, 1998, 1997 and 1996..........................  F-5
Consolidated statements of shareholders' equity for the
  years ended December 31, 1998, 1997 and 1996..............  F-6
Consolidated statements of cash flows for the years ended
  December 31, 1998, 1997 and 1996..........................  F-7
Notes to consolidated financial statements..................  F-9
</TABLE>

                                       F-1
<PAGE>   116

                          INDEPENDENT AUDITORS' REPORT

Shareholders and Board of Directors
PLD Telekom Inc.:

     We have audited the accompanying consolidated balance sheets of PLD Telekom
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

     We conducted our audit 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 audit provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PLD Telekom
Inc. and subsidiaries as of 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 has suffered recurring
losses, has a working capital deficiency, and does not presently have sufficient
funds on hand to meet its current debt obligations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                          KPMG LLP

New York, New York
March 30, 1999

                                       F-2
<PAGE>   117

                                AUDITORS' REPORT

Shareholders and Board of Directors
PLD Telekom Inc.:

     We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of PLD Telekom Inc. and subsidiaries for the
year ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

     We conducted our audit 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.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of the
Company and subsidiaries and their cash flows for the year ended December 31,
1996 in accordance with United States generally accepted accounting principles.

                                          KPMG LLP

Chartered Accountants
Toronto, Canada
March 21, 1997

                                       F-3
<PAGE>   118

                       PLD TELEKOM INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                1998         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents (note 7)........................  $   4,579    $ 17,256
  Trade receivables, net of allowance of $3,809 and $3,226,
     respectively...........................................     14,905      17,078
  Other receivables and prepaids............................      4,609       8,615
  Inventory.................................................      4,152       2,802
  Due from related parties (note 13(c)).....................      9,152       6,320
                                                              ---------    --------
     Total current assets...................................     37,397      52,071
Escrow funds (note 9).......................................     14,908      33,868
Property and equipment, net (note 4)........................    168,937     134,998
Telecommunications licenses (note 3), net of amortization of
  $37,737 and $26,294, respectively.........................     77,359      81,837
Due from related parties (note 13(c)).......................      2,011       3,011
Other investments (note 5)..................................      5,183       4,036
Goodwill, net of amortization of $1,656 and $575,
  respectively (notes 3(a) and (c)).........................     36,368      12,709
Other assets (note 6).......................................      9,945      13,056
                                                              ---------    --------
          Total assets......................................  $ 352,108    $335,586
                                                              =========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings (note 8)............................     18,124      20,320
  Accounts payable..........................................     10,293      11,692
  Accrued liabilities.......................................      4,463       4,882
  Taxes payable.............................................      3,664         944
  Due to related parties (note 13(d)).......................      4,639       5,336
  Deferred revenues.........................................      2,869       3,128
  Customer deposits.........................................      4,271       3,070
  Current portion of long-term debt.........................      5,073       4,085
                                                              ---------    --------
          Total current liabilities.........................     53,396      53,457
Long-term debt (note 9).....................................    151,814     133,516
Minority interest...........................................     22,021      21,382
Commitments and contingencies (note 14).....................
Shareholders' equity (notes 9 and 10):
  Preferred stock, par value $.01 per share.
  Authorized 100,000,000 shares; issued and outstanding
     446,884 shares.........................................          4           4
  Common stock, par value $.01 per share.
  Authorized 100,000,000 shares; issued and outstanding
     37,846,789 shares in 1998 and 33,324,290 shares in
     1997...................................................        378         333
Additional paid-in capital..................................    244,419     204,007
Accumulated deficit.........................................   (119,924)    (77,113)
                                                              ---------    --------
          Total shareholders' equity........................    124,877     127,231
                                                              ---------    --------
          Total liabilities and shareholders' equity........  $ 352,108    $335,586
                                                              =========    ========
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   119

                       PLD TELEKOM INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
              (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                           1998          1997          1996
                                                        -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
Revenues:
Telecommunications (note 13(a)).......................  $   143,474   $   112,468   $    60,562
  Finance lease income................................        1,886         1,956         1,404
                                                        -----------   -----------   -----------
                                                            145,360       114,424        61,966
Operating expenses:
  Direct costs (excludes depreciation)................       45,348        39,186        21,709
  General and administrative..........................       57,672        38,716        24,791
  Depreciation........................................       14,745        10,433         5,226
  Amortization........................................       11,326         7,867         4,883
  Taxes other than income taxes.......................        6,321         6,204         2,490
                                                        -----------   -----------   -----------
          Total operating expenses....................      135,412       102,406        59,099
                                                        -----------   -----------   -----------
          Operating income............................        9,948        12,018         2,867
Other income/(expense):
  Share of loss from equity investments, after
     amortization of licenses of $0, $0, and $2,477,
     respectively.....................................         (958)         (537)       (2,692)
  Interest and other income...........................        2,384         3,614         4,859
  Interest expense....................................      (21,953)      (17,846)       (9,973)
  Amortization of deferred financing costs............       (1,779)       (1,152)         (684)
  Foreign exchange loss...............................       (5,322)         (274)         (648)
  Other expense (note 16).............................       (5,881)          749            --
                                                        -----------   -----------   -----------
       Loss before income taxes and minority
          interest....................................      (23,561)       (3,428)       (6,271)
Income taxes (note 11)................................        9,864         7,739         3,669
                                                        -----------   -----------   -----------
       Loss before minority interest..................      (33,425)      (11,167)       (9,940)
Minority interest.....................................        9,386         9,399         2,521
                                                        -----------   -----------   -----------
       Net loss.......................................  $   (42,811)  $   (20,566)  $   (12,461)
                                                        ===========   ===========   ===========
Net loss per common share:
  Basic...............................................  $     (1.21)  $     (0.64)  $     (0.39)
                                                        ===========   ===========   ===========
  Diluted.............................................  $     (1.21)  $     (0.64)  $     (0.39)
                                                        ===========   ===========   ===========
Weighted average common shares outstanding............   35,274,151    32,061,070    31,579,201
                                                        ===========   ===========   ===========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>   120

                       PLD TELEKOM INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                     PREFERRED STOCK         COMMON STOCK
                                     ----------------   ----------------------
                                     NUMBER               NUMBER                 ADDITIONAL
                                       OF                   OF                    PAID-IN     ACCUMULATED
                                     SHARES    AMOUNT     SHARES      AMOUNT      CAPITAL       DEFICIT      TOTAL
                                     -------   ------   ----------   ---------   ----------   -----------   -------
<S>                                  <C>       <C>      <C>          <C>         <C>          <C>           <C>
Balance at December 31, 1995.......  446,884    $31     31,507,034   $ 179,887         --       (44,086)    135,832
Exercise of options................       --     --        189,000         991         --            --         991
Issuance of warrants (note 9)......       --     --             --          --     13,592            --      13,592
Net loss for the year..............       --     --             --          --         --       (12,461)    (12,461)
                                     -------    ---     ----------   ---------    -------      --------     -------
Balance at December 31, 1996.......  446,884     31     31,696,034     180,878     13,592       (56,547)    137,954
Increase in par value from none to
  $.01 (note 10)...................       --     --             --    (180,561)   180,561            --          --
Change in par value of preferred
  stock (note 10)..................       --    (27)            --          --         27            --          --
Common stock cancellations.........       --     --           (150)         --         --            --          --
Exercise of options and warrants...       --     --        312,166           3      1,736            --       1,739
Issuance of shares (note 3(c)).....       --     --      1,316,240          13      7,668            --       7,681
Issuance of warrants (note 8(a))...       --     --             --          --        423            --         423
Net loss for the year..............       --     --             --          --         --       (20,566)    (20,566)
                                     -------    ---     ----------   ---------    -------      --------     -------
Balance at December 31, 1997.......  446,884      4     33,324,290         333    204,007       (77,113)    127,231
Common stock cancellations.........       --     --             --          --         --            --          --
Exercise of options and warrants...       --     --             --          --         --            --          --
Issuance of shares (notes 3(a),
  3(f) and 3(g))...................       --     --      4,522,499          45     39,174            --      39,219
Issuance of warrants (notes 8(a)
  and 10(c)).......................       --     --             --          --        449            --         449
Non-cash compensation expense (note
  12)..............................       --     --             --          --        789            --         789
Net loss for the year..............       --     --             --          --         --       (42,811)    (42,811)
                                     -------    ---     ----------   ---------    -------      --------     -------
Balance at December 31, 1998.......  446,884    $ 4     37,846,789   $     378    244,419      (119,924)    124,877
                                     =======    ===     ==========   =========    =======      ========     =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>   121

                       PLD TELEKOM INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                1998       1997       1996
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(42,811)  $(20,566)  $(12,461)
  Adjustments to reconcile net loss to net cash provided
     by/(used in) operating activities:
     Depreciation and amortization..........................    27,850     19,452     10,793
     Accrued interest on senior discount notes..............    17,183     14,260      7,349
     Minority interest......................................     9,386      9,399      2,521
     Write-off of minority shareholder receivable...........     2,000         --         --
     Provision for finance lease receivable.................     3,203         --         --
     Write-down of asset....................................     2,000         --         --
     Gain on sale of SPMMTS.................................        --     (1,001)        --
     Deferred revenue.......................................      (259)     2,050       (898)
     Share of loss of equity investments....................       958        537      2,692
     Other..................................................       789         --        300
     Changes in operating assets and liabilities, net of
       effects of acquisitions:
       Decrease/(increase) in trade receivables.............     2,173     (6,550)    (2,478)
       Decrease/(increase) in other receivables and
          prepaids..........................................     4,009     (5,093)     1,827
       Increase in inventory................................    (1,350)      (962)      (392)
       Change in amounts due from or to related parties.....    (4,529)       386     (4,743)
       (Decrease)/increase in accounts payable, accrued
          liabilities, customer deposits, and other current
          liabilities.......................................      (683)    (1,119)    11,108
                                                              --------   --------   --------
          Net cash provided by operating activities.........    19,919     10,793     15,618
                                                              --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................   (39,538)   (38,990)   (43,201)
  Proceeds from sale of SPMMTS..............................        --     17,180         --
  Escrow funds..............................................    18,960      7,116    (40,984)
  Purchase of 30% investment in Technocom...................        --    (25,608)        --
  Teleport-TP finance lease and advances....................        --         --      3,916
  Cash paid for acquisition.................................      (500)        --         --
  Investments in Baltic Communications Limited, J.V.
     Technopark Limited and Teleport-TP, net of cash
     acquired...............................................        --         --     (7,515)
  Other investments.........................................        --        181       (140)
  Other assets..............................................       297       (747)      (267)
                                                              --------   --------   --------
          Net cash used in investing activities.............   (20,781)   (40,868)   (88,191)
                                                              --------   --------   --------
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-7
<PAGE>   122


<TABLE>
<CAPTION>
                                                                1998       1997      1996
                                                              --------   --------   -------
<S>                                                           <C>        <C>        <C>

CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term debt borrowings/(repayments)...................  $ (4,900)  $(10,929)  $(6,550)
  Proceeds from issuance of 12% Revolving Credit Notes......        --     15,420        --
  Repayment of credit notes.................................    (2,000)        --        --
  Proceeds from issuance of 14% Senior Discount Notes.......        --         --    87,697
  Proceeds from issuance of 9% Convertible Subordinated
     Notes..................................................        --         --    26,500
  Long-term debt repayment..................................    (5,074)        --        --
  Deferred financing costs..................................        --         --    (9,224)
  Proceeds from issuance of common stock....................        --      1,739       991
  Cash dividends paid to minority shareholders..............    (3,000)    (1,000)       --
  Loans from shareholders...................................     3,500         --    (1,843)
  Related company advances..................................        --         --        --
  Due to equipment supplier.................................        --         --        --
  Recapitalization of PeterStar.............................        --      1,427        --
  Other financing...........................................      (341)        --        --
                                                              --------   --------   -------
          Net cash (used in)/provided by financing
            activities......................................   (11,815)     6,657    97,571
                                                              --------   --------   -------
          (Decrease)/increase in cash and cash
            equivalents.....................................   (12,677)   (23,418)   24,998
Cash and cash equivalents at beginning of year..............    17,256     40,674    15,676
                                                              --------   --------   -------
Cash and cash equivalents at end of year....................  $  4,579   $ 17,256    40,674
                                                              ========   ========   =======
Supplementary disclosures:
  Non-cash investing and financing activities:
     Issuance of warrants...................................  $    449   $    423   $    --
                                                              ========   ========   =======
     Acquisition of equipment under capital lease...........  $  4,019   $     --   $    --
                                                              ========   ========   =======
     Issued shares for acquired businesses..................  $ 39,219   $     --   $    --
                                                              ========   ========   =======
     Supplier financing.....................................  $  7,037   $ 11,302   $    --
                                                              ========   ========   =======
     Issuance of common stock for a portion of purchase
       price of Technocom...................................  $     --   $  7,681   $    --
                                                              ========   ========   =======
Interest paid...............................................  $  5,574   $  3,381   $ 2,425
                                                              ========   ========   =======
Income taxes paid...........................................  $  6,690   $  7,424   $ 3,678
                                                              ========   ========   =======
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-8
<PAGE>   123

                       PLD TELEKOM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

(1) ORGANIZATION AND GOING CONCERN

  Business, Operations, Future Activities and Russian Business Environment

     The Company was previously incorporated under the laws of Ontario, Canada.
Effective February 28, 1997, PLD Telekom Inc. ("PLD" or the "Company") was
incorporated in the United States as a Delaware corporation. Through its
majority-owned and controlled subsidiaries, the Company is a provider of local,
long distance and international telecommunications services in the former Soviet
Union.

     The Company's telecommunications businesses are at various stages of
development and are growing rapidly in an emerging economy which, by its nature,
has an uncertain economic, political and regulatory environment. The general
risks of operating businesses in the former Soviet Union include the possibility
for rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations.

     Ultimate recoverability of the Company's investments is dependent upon its
ability to achieve and maintain profitability, which is dependent to a certain
extent on the stabilization of the economies of the former Soviet Union, the
ability to maintain the necessary telecommunications licenses and the ability to
obtain adequate financing to meet capital commitments.

     In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other world markets. Instability in
the market reform process could subject the Company to unpredictable changes in
the basic business environment in which it currently operates. Uncertainties
regarding the political, legal, tax or regulatory environment including the
potential for adverse and retroactive changes in any of these, could
significantly affect the Company's ability to operate commercially. Management
is unable to estimate what changes may occur or the resulting effects of any
such changes on the Company's financial position or future results from
operations.

     In 1998, the effects of adverse economic conditions in Russia included a
national liquidity crisis, devaluation of the rouble, higher interest rates, and
reduced opportunity for refinancing or refunding of maturing debts. In order to
partially address this situation, the Russian government announced policies
intended to address the structural weaknesses in the Russian economy and
financial sector.

     While the policies are intended to alleviate the economic crisis in Russia,
the immediate effects could include slower economic growth or decline, a
reduction in the availability of credit and the ability to service debt, an
increase in interest rates, changes and increases in taxes, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, and restriction
on convertibility of the rouble and movements of hard currency, an increase in
the number of bankruptcies of entities (including bank failures), labor unrest
and strikes resulting from the possible increase in unemployment, and political
unrest. These conditions and future policy changes could have a material adverse
effect on the operations of the Company and the realization and settlement of
its assets and liabilities.

     The accompanying financial statements reflects management's assessment of
the impact of this economic situation on the financial position of the Company.
Actual results could differ from management's current assessments and such
differences could be material. In addition, the effect on the Company's
financial position of future developments and access to further financial
information concerning the Company's customers, suppliers, financiers, and
others and their ability to continue to transact with the Company cannot
presently be determined. The financial statements therefore may not include all
adjustments that might ultimately result from these adverse conditions.

                                       F-9
<PAGE>   124
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Going Concern

     The Company has suffered recurring losses and has a working capital
deficiency. Additionally, as discussed in note 8(a), the Company has
approximately $13.4 million of Series A and Series B revolving credit notes due
to two related holders (hereinafter defined as the "Travelers Parties")
outstanding. $1.1 million of these notes were due to be repaid by September 30,
1998 and the remaining approximately $12.3 million of the notes were due to have
been repaid by December 31, 1998. The Travelers Parties have given the Company a
series of payment deferrals since December 31, 1998 with respect to these notes,
the last of which was given on February 28, 1999 and defers payment of the notes
to April 30, 1999. The Company does not presently have sufficient funds on hand
to make such payments and management is actively engaged in pursuing ways to
settle the Company's obligations to the Travelers Parties. In this context, the
Company is currently exploring a range of financing alternatives. Historically,
sources of financing have included private placements of common and preferred
shares and debt, asset and investment sales, shareholder loans and bank lines of
credit supported by shareholder guarantees. While management believes that, as
long as progress towards settlement of such obligations is being made, the
Travelers Parties will be willing to agree to additional payment deferrals,
there can be no assurance that they will not demand payment in full of the
Series A and Series B notes. The Company's failure to make payment in full could
result in a cross-default under and acceleration of the Senior Discount Notes
and the Convertible Subordinated Notes, which have an aggregate principal amount
of $149.5 million (see note 9). This in turn could require the Company to resort
to extraordinary measures, including making sales of assets under distressed
conditions or ultimately seeking the protection of the bankruptcy courts.

     In addition, should the minority shareholders in Technocom, who have the
right to put their Technocom shares to the Company from mid-1999 onwards (as
described in note 3(c)), elect to exercise these rights, then the Company's
inability to meet its obligations would be exacerbated. The Company is engaged
in efforts to address this issue, including through reaching some accommodation
with the minority shareholders regarding their put options. In the event that no
solution can be found, then this in turn could require the Company to resort to
extraordinary measures as outlined above.

     These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company's significant accounting policies are summarized as follows:

  (a) Basis of Presentation

     The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP).

     The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Investments in
affiliates in which the Company has significant influence, but does not exercise
control, are accounted for under the equity method. Investments of the Company
over which significant influence is not exercised are carried under the cost
method.

  (b) Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1998
and 1997, the Company's cash equivalents consist of term deposits of
approximately $1.4 million and $7.2 million, respectively.
                                      F-10
<PAGE>   125
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (c) Investments

     Management determines the appropriate classification of its investments at
the time of purchase and classifies them as trading, available-for-sale or
held-to-maturity in accordance with the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 1998 and 1997, the Company's
investments which are held in escrow, consist of U.S. Treasury Bonds with a
carrying value of $14.9 million and $33.9 million, respectively, and have been
classified as available-for-sale. In accordance with SFAS 115, the Company
carries its available-for-sale investments at fair value, with unrealized gains
and losses reported as a separate line item in shareholders' equity. Due to the
short maturity period (1998 -- maturing on January 5, 1999 and 1997 -- maturing
on January 7, 1998), the carrying value of these investments approximates its
fair market value at December 31, 1998 and 1997.

  (d) Revenue Recognition

     The Company records telecommunication revenues as earned, at the time
services are provided.

  (e) Inventory

     Inventory is stated at the lower of average cost or net realizable value
and is composed of telephony products held for resale to customers.

  (f) Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<S>                                                        <C>
Telecommunications equipment.............................     10 years
Buildings................................................   28.5 years
Leasehold improvements...................................     10 years
Office furniture and equipment (including computer
  equipment).............................................    3-5 years
Software.................................................      5 years
</TABLE>

     Interest cost incurred during the period of construction of property and
equipment is capitalized. The interest cost capitalized in 1998 and 1997
amounted to and $1.3 million and $0.9 million, respectively.

  (g) Intangible Assets

     Telecommunications licenses are being amortized on a straight-line basis
over the terms of the licenses.

     Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired and is being amortized on a straight-line basis over
periods ranging from ten to twenty years.

     Deferred financing costs represent costs incurred to issue debt. Deferred
financing costs are capitalized and amortized over the term of the related debt.

  (h) Fair Value of Financial Instruments

     The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, escrow funds, trade and other receivables, amounts due
from or to related parties, bank indebtedness and accounts payable approximate
fair value due to their short maturities. The fair value of long-term debt is
based on discounted cash flow analysis.

                                      F-11
<PAGE>   126
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (i) Reporting Currency and Foreign Currency Translation

     The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.

     Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."

     Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations.

  (j) Income Taxes

     Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.

  (k) Net Loss Per Common Share

     Basic Earnings (Loss) per Share (EPS) is computed by dividing income or
loss by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options, at the beginning of the
period being reported on.

     Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1998, 1997 and 1996.

     The Company had potentially dilutive common stock equivalents of
19,629,601, 11,715,914 and 10,285,080 for the years ended December 31, 1998,
1997 and 1996, respectively, which were not included in the computation of
diluted net loss per common share because they were antidilutive for the periods
presented.

  (l) 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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.

  (m) Equity Compensation

     The Company accounts for its stock option plan in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123 which allows entities to
continue to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based

                                      F-12
<PAGE>   127
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

method, as defined in SFAS No. 123, had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
required by SFAS No. 123. See Note 12.

  (n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

     Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

  (o) Comprehensive Income

     SFAS 130, "Reporting Comprehensive Income," was issued in June 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997 and 1996 comprehensive loss was equal to
consolidated net loss reported on the consolidated statement of operations. As
SFAS 130 only requires additional disclosures in the Company's consolidated
financial statements, its adoption did not have any impact on the Company's
consolidated financial position or results of operations.

  (p) Segments

     SFAS No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and
Related Information," was issued in June 1997. SFAS 131 establishes standards
for the manner in which public companies should report information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 for its annual reporting in 1998.

  (q) Reclassifications

     Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.

(3) BUSINESSES AND ACQUISITIONS

     The Company's key interests at December 31, 1998 include a 71% equity
interest in PeterStar Company Limited ("PeterStar"); a 50% equity interest in
ALTEL, formerly known as BECET International ("ALTEL"); an approximate 80%
equity interest in Technocom Limited ("Technocom"), which holds an approximate
49% equity interest in Teleport-TP ("Teleport-TP"); and a 50% interest in
BELCEL. The Company also owns 100% of Baltic Communications Limited ("BCL") and
100% of CPY Yellow Pages Limited ("Yellow Pages").

  (a) PeterStar

     PeterStar is a joint stock company registered in 1992 under the laws of the
Russian Federation to provide international and domestic telecommunications
services for St. Petersburg. In November 1994, PeterStar was

                                      F-13
<PAGE>   128
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

granted a new license to provide these services for a further ten years. The
license was reissued in June 1996 and requires that at least 74,200 lines be
introduced by June 1999. At December 31, 1998, PeterStar had 168,166 lines in
place.

     In October 1992, the Company acquired a 50% interest in PeterStar for
consideration of $19.8 million. An additional 9% interest was acquired in March
1994 for consideration of $8.2 million and an additional 1% interest was
acquired in April 1996 for $1.8 million. All of the consideration through April
1996 has been allocated to telecommunications licenses. The Company's interest
in PeterStar is owned by its wholly owned subsidiary, NWE Capital (Cyprus)
Limited ("NWE Cyprus"), a company incorporated in Cyprus.

     Effective September 30, 1998 the Company acquired an additional 11%
interest in PeterStar by acquiring 100% of the shares of PLD Holdings Limited, a
Bermuda company and the owner of that 11% interest, from News America
Incorporated ("News") -- which had acquired the interest from Cable and Wireless
plc. News is the owner, through an affiliate, of 38% of the Company's Common
Stock. The acquisition was accounted for by the purchase method of accounting.
The total consideration for the acquisition, including acquisition costs, was
approximately $33.9 million (the Company issued 3,826,041 shares of its common
stock with a market value of $8.73 per share) and was allocated to
telecommunication licenses, goodwill and purchase of minority interests in the
amounts $3.4 million, $24.7 million and $5.8 million, respectively. The goodwill
will be amortized on a straight-line basis over 20 years and the
telecommunication license will be amortized over its remaining term, which
expires in 2004.

  (b) ALTEL

     ALTEL provides cellular services pursuant to a 15-year license to operate a
cellular telephony system in Kazakhstan until February 2009. The Company's 50%
interest in ALTEL is owned by its wholly owned subsidiary, Wireless Technology
Corporations Limited ("WTC"), a company incorporated in the territory of the
British Virgin Islands, which in turn is owned by NWE Cyprus. In connection with
the acquisition of ALTEL, the Company was committed to provide financing of up
to $3.0 million to fund a number of special telecommunications projects
undertaken by the Ministry of Communications in Kazakhstan. Such amount, which
was paid in 1995, has been treated as additional cost of the Company's
investment in ALTEL.

  (c) Technocom

     The Company subscribed for preferred shares of Technocom, a company
incorporated in the Republic of Ireland, in the amount of $40.0 million, of
which $20.0 million was subscribed for on acquisition in 1994 and the remaining
$20.0 million was subscribed for in June 1996 from the proceeds of the financing
described in note 9. The preferred shares entitle the Company to the first $20.0
million of Technocom's dividend distributions. After receipt of such preference
dividends, all the preferred shares will be converted into a single ordinary
share of Technocom. The carrying value of the Company's investment in
Teleport-TP and minority interest were each increased by a total of $10.0
million in 1995/1996 to reflect the minority interest's ultimate share in the
preferred equity.

     On November 26, 1997, PLD acquired an additional 59 ordinary shares of
Technocom increasing its ownership from 50.1% to 80.4%. The total consideration
for the acquisition was $32.5 million, plus acquisition costs of approximately
$840,000 and was allocated to telecommunications licenses, goodwill, and
purchase of minority interest in the amounts of $16.0 million, $11.1 million,
and $6.2 million, respectively. Approximately $24.8 million was paid in cash and
the remainder in shares of PLD common stock (1,316,240 shares of common stock
with a fair market value of $5.85 per share, which cannot be sold until the year
2000). The cash element of the transaction was funded with escrowed funds and
with the proceeds from the Company's 12% Revolving Credit Notes (see note 8).

                                      F-14
<PAGE>   129
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition, on November 26, 1997, the Company restructured certain "put
and call" arrangements with the other two shareholders of Technocom. Under these
arrangements, as originally structured, the remaining ordinary shares of
Technocom held by these shareholders (29 shares, or approximately 14.6% of the
total ordinary shares outstanding, and 10 shares, or approximately 5% of the
total ordinary shares outstanding) were to have been independently valued in
1999 and the Company had the right to call, and the other two shareholders had
the right to put, their respective interests at the per share value established
by the valuation. The arrangements were restructured as a part of the
transaction whereby PLD acquired an additional interest in Technocom from such
shareholders, and PLD requested, and the shareholders agreed to, such
restructuring in consideration for PLD agreeing to acquire part of their
interests.

     These arrangements were restructured as follows. In the case of the holder
of the 29 shares, while the date on which the put or call could be exercised did
not change, the valuation procedure was eliminated and the "put and call" price
for its interest was set at a fixed $17.5 million. In the case of the holder of
the 10 shares, 2 of its remaining 10 ordinary shares were made subject to a new
put and call arrangement which would come into effect in 1998, with the "put and
call" price to be $1.0 million or, at the holder's option, that number of shares
of common stock which results from dividing $1.0 million by the lower of $5.85
and the average closing price of such shares over the preceding 10 trading days.
The remaining 8 ordinary shares continue to be subject to the existing put and
call arrangements in 1999, except that the valuation will be made by the Company
and the amount paid pursuant to the exercise of either the put or the call
cannot exceed $9.6 million or be less than $6.7 million.

     Both of the other two shareholders of Technocom provide services to
Technocom and PLD under management contracts with Technocom (see note 13(d)).

     On December 20, 1996, Technocom acquired 55.5% of the outstanding shares of
J.V. Technopark Limited ("Technopark") from the minority shareholders of
Technocom for $3.0 million. Technopark is incorporated in Russia and owns a 7.5%
equity interest in Teleport-TP and commercial property in Moscow. The
acquisition of Technopark has been accounted for using the purchase method.

  (d) Teleport-TP

     The Company currently controls 56% of the voting interests in Teleport-TP
through its ownership of Technocom (see note 3(c)), which has a 49.3% equity
interest in Teleport-TP. The Company originally acquired a 41.8% equity
investment in Teleport-TP through its acquisition of 50.8% of the outstanding
common stock of Technocom. In May 1996, Technocom acquired an additional 3.3%
indirect equity interest in Teleport-TP for cash consideration of $2.0 million,
substantially all of which was allocated to Teleport-TP's telecommunications
licenses. The additional interest was acquired through a company controlled by a
minority shareholder of Technocom.

     Teleport-TP is a Russian joint stock company which holds four principal
operating licenses. The first license expires in November 2004 and authorizes
Teleport-TP to provide long distance and international telecommunications
services to private networks within Moscow and, to a limited extent, elsewhere
in the Russian Federation. Teleport-TP is required by the terms of the license
to have at least 10,500 subscribers (which is 70% of the maximum number of
subscribers permitted under the license) in place by October 1999. Under the
terms of the license agreement, there are no penalties should Teleport-TP not
attain the required number of lines.

     The second license expires in October 2004 and permits the operation of
1,000 international leased circuits for the transmission of television and
telecommunications services. The third license, which expires in January 2002,
permits the provision of data services with interconnection to the public
network and requires capacity for 70,000 subscribers by December 2000. The
fourth license, which expires in May 2001, is an

                                      F-15
<PAGE>   130
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

overlay license which permits Teleport-TP to offer local, long distance and
international voice and data services which are interconnected to the public
telephone network in 40 regions across Russia.

     As a result of the acquisition of Technopark, the Company consolidated
Teleport-TP's balance sheet at December 31, 1996. The results of operations of
Teleport-TP have been included in the consolidated statements of operations from
January 1, 1997.

     Condensed financial information of Teleport-TP for the year ended December
31, 1996 is as follows:

<TABLE>
<CAPTION>
                                                                   1996
                                                              --------------
                                                              (IN THOUSANDS)
<S>                                                           <C>
Telecommunications revenues.................................     $11,104
Cost of sales...............................................       6,534
                                                                 -------
       Gross profit.........................................       4,570
                                                                 -------
Operating expenses:
General and administrative..................................       2,617
Other taxes.................................................         592
Depreciation of assets under capital lease..................       1,016
Other depreciation and amortization.........................         200
                                                                 -------
                                                                   4,425
                                                                 -------
       Operating income.....................................         145
Interest on capital lease...................................        (531)
Other interest and financing charges, net...................         251
                                                                 -------
       Earnings/(loss) before income taxes..................        (135)
Income taxes................................................          --
                                                                 -------
       Net loss.............................................     $  (135)
                                                                 =======
Technocom's interest therein................................         (75)
Amortization of excess purchase price.......................      (2,477)
                                                                 -------
       Share of Teleport-TP loss............................     $(2,552)
                                                                 =======
</TABLE>

     Teleport-TP's revenues for the years ended December 31, 1996 include sales
to its minority shareholder of $4.6 million, making Teleport-TP to some extent
economically dependent on its minority shareholder.

     Teleport-TP's cost of sales for the year ended December 31, 1996 includes
costs of $2.9 million charged by a company controlled by one of the minority
shareholders of Technocom.

     General and administrative expenses for the year ended December 31, 1996
include costs of $576,000 related to marketing services provided by a company
controlled by one of the minority shareholders of Technocom.

  (e) BCL

     Effective April 1, 1996, the Company acquired all of the outstanding shares
of BCL from Cable & Wireless and its Russian partners for cash consideration of
$3.0 million, plus acquisition costs of $253,000. BCL is a Russian joint stock
company which provides international direct dial, international pay phone and
private line services to a corporate customer base in St. Petersburg. BCL's
results of operations are included in the consolidated financial statements from
the date of acquisition.

     The acquisition has been accounted for using the purchase method.

                                      F-16
<PAGE>   131
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (f) Ultra Pass Systems Limited

     During the second quarter of 1998, the Company purchased 98% of the
authorized and issued share capital of Ultra Pass Systems Limited ("Ultra
Pass"), from the shareholders of Ultra Pass. In consideration for the purchase
of the Ultra Pass shares, the Company issued 196,458 of shares of its Common
Stock, par value $0.01 per share, having an aggregate market value of
approximately $1.8 million and paid $500,000 in cash. The acquisition has been
accounted for by the purchase method of accounting and the purchase price has
been allocated to licenses and software in the amounts of $0.8 million and $1.5
million, respectively.

  (g) CommStruct International Byelorussia BV

     Effective September 30, 1998 the Company acquired a 50% interest in BELCEL,
a mobile telephone business in the Republic of Belarus, together with certain
intercompany indebtedness, from Cable and Wireless plc. The Company acquired its
50% interest in BELCEL by acquiring all of the shares of CommStruct
International Byelorussia BV (CIBBV), a corporation organized under the laws of
the Netherlands, which owned such 50% interest. The acquisition was accounted
for by the purchase method of accounting. The total consideration for the
acquisition was 500,000 shares of common stock valued at approximately $4.4
million, which has been allocated as follows:

<TABLE>
<S>                                                           <C>
Fixed assets................................................  $1,211
Investment in and advances to BELCEL........................   3,184
Current assets..............................................      81
Current liabilities.........................................    (111)
                                                              ------
                                                              $4,365
                                                              ======
</TABLE>

(4) PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 1998 and 1997 consist of the
following:

<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Telecommunications equipment:
  Installed.................................................  $152,454    $123,902
  Uninstalled...............................................    33,649      10,396
Buildings...................................................     6,114       5,434
Office furniture and equipment (including computer
  equipment)................................................     7,524       6,129
Leasehold improvements......................................     6,734       6,082
Advances to equipment suppliers.............................     3,124       4,252
Motor vehicles..............................................     1,248       1,925
                                                              --------    --------
          Total property and equipment......................   210,847     158,120
Less: accumulated depreciation..............................   (41,910)    (23,122)
                                                              --------    --------
          Property and equipment, net.......................  $168,937    $134,998
                                                              ========    ========
</TABLE>

     Property and equipment at December 31, 1998 and 1997 includes
telecommunications equipment with a cost of $17.6 million, $16.5 million,
respectively which has been pledged under the terms of long-term installment
purchase agreements (see note 9).

                                      F-17
<PAGE>   132
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) OTHER INVESTMENTS

     Other investments at December 31, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Equity investment in BELCEL(a)..............................  $2,830    $   --
Equity investment in MTR-Sviaz(b)...........................   1,752     3,128
Equity investment in Rosh Telecom...........................      92       542
Investment in Gorizont-RT, at cost..........................     224       224
Other investments, at cost..................................     285       142
                                                              ------    ------
          Total.............................................  $5,183    $4,036
                                                              ======    ======
</TABLE>

  (a) Equity Investment in BELCEL

     As discussed in note 3(g), the Company acquired a 50% interest in BELCEL, a
mobile telephone business in Belarus, together with certain intercompany
indebtedness, from Cable and Wireless plc. The Company acquired its 50% interest
in BELCEL by acquiring all of the shares of CIBBV, a corporation organized under
the laws of the Netherlands, which owned such 50% interest. BELCEL is accounted
for using the equity method.

  (b) Equity Investment in MTR-Sviaz

     Technocom has a 49% equity interest in a Russian joint stock company,
MTR-Sviaz, which is a joint venture with Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. MTR-Sviaz holds two operating licenses and commenced
operations in late 1996. The first license authorizes MTR-Sviaz to provide local
and long distance leased line services within the city and region of Moscow.
Under the second license, MTR-Sviaz is authorized to provide local telephone
services through interconnection (via the Mosenergo network) with the public
switched telephone network within the city and region of Moscow. During 1998 and
1997, Technocom leased telecommunications equipment and access rights with a net
book value of $4.0 million and $4.7 million, respectively, to MTR-Sviaz under
finance leases. For the years ended December 31, 1998 and 1997, the Company
recorded finance lease income of $1.7 million and $2.0 million, respectively,
related to these leases. At December 31, 1998 and 1997, the investment in
MTR-Sviaz is composed of a finance lease receivable of $3.6 million and $4.5
million, offset by the Company's share of losses of MTR-Sviaz of $1.9 million
and $1.4 million, respectively.

     Future minimum lease payments receivable from MTR-Sviaz, by year and in the
aggregate, are as follows:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
<S>                                                             <C>
1999........................................................        $2,530
2000........................................................         1,704
2001........................................................           547
2002........................................................           547
2003........................................................           547
Thereafter..................................................         1,411
                                                                    ------
       Total minimum lease payments.........................         7,286
Amounts representing interest...............................        (3,667)
                                                                    ------
Present value of minimum lease payments.....................        $3,619
                                                                    ======
</TABLE>

                                      F-18
<PAGE>   133
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (c) Investment in St. Petersburg Intercity & International Telephone (SPMMTS)

     The Company held a 10.4% equity interest (13.9% voting interest) in SPMMTS,
a privatized Russian company which operates the long distance and international
gateway in St. Petersburg. In June 1997, the Company sold its investment in
SPMMTS for proceeds of $17.2 million. A gain of $1.0 million is included within
other expense in the consolidated statement of operations.

(6) OTHER ASSETS

     Other assets at December 31, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred financing costs, net of accumulated amortization of
  $3,615 and $1,836.........................................  $ 6,482    $ 7,811
Deferred charges............................................       --        861
Other.......................................................    3,463      4,384
                                                              -------    -------
                                                              $ 9,945    $13,056
                                                              =======    =======
</TABLE>

(7) CASH AND CASH EQUIVALENTS

     The Company's cash and cash equivalents at December 31, 1998 and 1997
consist of the following:

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Cash and cash equivalents on deposit:
  In Russia and Kazakhstan..................................  $ 3,468    $ 7,611
  Outside Russia and Kazakhstan.............................    1,111      9,645
                                                              -------    -------
                                                              $ 4,579    $17,256
                                                              =======    =======
</TABLE>

(8) SHORT-TERM BORROWINGS

     The Company's short-term borrowings at December 31, 1998 and 1997 consist
of the following:

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
12% Revolving Credit Notes(a)...............................  $13,420    $15,420
Notes payable(b)............................................    4,704      4,000
Bank loan facility(c).......................................       --        900
                                                              -------    -------
                                                              $18,124    $20,320
                                                              =======    =======
</TABLE>

  (a) 12% Revolving Credit Notes


     In November 1997, the Company issued $12.3 million in Series A secured
revolving credit notes (the "Series A Notes"), and $3.1 million in Series B
revolving credit notes (the "Series B Notes"), to The Travelers Insurance
Company and The Travelers Indemnity Company (collectively, the "Travelers
Parties"). Both the Series A Notes and the Series B Notes are secured by the
Company's inventory and accounts receivable. In addition, the Series A Notes are
secured by 28 of the 59 Technocom ordinary shares acquired (see note 3(c)). In
addition to issuing the Series A and Series B Notes, the Company also issued to
the Travelers Parties a total of 423,000 warrants to purchase Common Stock at
$8.625 at any time up to


                                      F-19
<PAGE>   134
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2008 (the "Travelers Warrants"). These warrants have been valued at
$423,000 and were amortized over the original term of the revolving credit
notes.

     Both the Series A and B Notes bear interest at an annual rate of 12%,
payable monthly in cash. This interest rate increased from 12% to 15% on June 1,
1998 as the Company did not raise $20.0 million in additional equity by May 31,
1998. The Series A and Series B Notes were required to be amortized starting in
July 1998.

     Pursuant to the terms of the Series A Notes and the Series B Notes, the
Company had the option of making certain "targeted reductions in commitment"
with respect to such Notes commencing in July 1998, or of issuing additional
warrants to purchase shares of the Company's Common Stock (the "Additional
Warrants") at an exercise price of $8.625 each, expiring on December 31, 2008.
The Company elected not to make any such "targeted reductions in commitment"
and, as a result, issued a total of 182,000 Additional Warrants to the Travelers
Parties. These warrants have been valued at $182,000 and were amortized over the
remaining original term of the debt.

     The Company made required amortization payments due with respect to the
Series B Notes on July 31 and August 31, 1998. The $1.1 million balance due on
the Series B Notes was payable in full on September 30, 1998 but, as a result of
News issuing a guarantee in respect of the amount due, the maturity date was
deferred by the Travelers Parties to December 31, 1998.

     The $1.0 million required payments due on the Series A Notes on October 31
and November 30, 1998 were also deferred by the Travelers Parties to December
31, 1998, also as a result of News issuing guarantees in respect of these
amounts due.

     On December 31, 1998 the Series A Notes matured and the balance due became
payable in full. Taking into account the amounts deferred, the total due under
the Series A and Series B Notes as of that date was $13.42 million.

     Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes are not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes are reset at
$0.01 per share. In addition, on December 31, 1998 and on the last day of each
succeeding month until the Revolving Credit Notes have been repaid in full, the
holders of the Series A Notes are entitled to receive 70,000 additional warrants
to purchase shares of the Company's Common Stock and the holders of the Series B
Notes are entitled to receive 32,000 additional warrants to purchase shares of
the Company's Common Stock, in each case at a price of $0.01 per share. All such
warrants, referred to as "Default Warrants", are to have an expiration date ten
years after their respective dates of issue.

     The Travelers Parties have given the Company a series of payment deferrals
since December 31, 1998 with respect to the amounts due under the Series A and
Series B Notes, the last of which was given on February 28, 1999 and defers
payment of the Notes to April 30, 1999. At the same time, the Travelers Parties
have expressly reserved their rights to claim all of the Default Warrants to
which they would be entitled under the formula described above, and also to
claim that the exercise price of the Travelers Warrants and the Additional
Warrants has been reset at $0.01 per share.

     On the basis that the Travelers Parties have only reserved their rights in
relation to the Default Warrants and the reset of the exercise price of the
Travelers Warrants and the Additional Warrants, the Company has taken the
position that: (i) the Default Warrants need not be recognized since they have
not been issued; and (ii) revaluation of the Travelers Warrants and Additional
Warrants to reflect an exercise price of $0.01 per share is not required.

                                      F-20
<PAGE>   135
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (b) Notes Payable

     Notes payable at December 31, 1998 include a promissory note issued to
Scientific Atlanta, Inc. for $1.2 million on May 20, 1998, in settlement for
equipment and services, and due on November 20, 1999.

     Also included are notes payable totalling $3.5 million issued to News in
November and December 1998.

     On November 30, 1998 (but effective September 30, 1998), the Company
entered into a revolving credit agreement with News (the "News Revolving Credit
Agreement") under which News agreed to advance up to $8.1 million to the
Company. On March 22, 1999, News increased the amount it would advance to $9.1
million. Each advance under the News Revolving Credit Agreement bears interest
at an annual rate of 20% and is repayable on June 30, 1999. Advances are
evidenced by notes which, together with interest thereon, are convertible at
News' option into shares of Common Stock of the Company at conversion rates
determined as of the date of issue of the applicable note. In addition, in the
event that News guarantees obligations of the Company, a note is issued
reflecting the Company's reimbursement obligation should such guarantee be
called. Amounts so guaranteed are treated as advances under the News Revolving
Credit Agreement, meaning that they count with respect to the $9.1 million
ceiling on total advances. In addition, in the event a guarantee is called, the
Company will owe interest on its reimbursement obligation at the annual rate of
20% calculated from the date payment by News is made under its guarantee. Notes
issued in respect of reimbursement obligations, together with interest thereon,
are also convertible into shares of Common Stock at conversion rates determined
as of their date of issue. News can cease making advances at any time and for
any reason. Currently, however, the full amount available under the News
Revolving Credit Agreement has been advanced or applied in respect of News'
guarantees. Of the total, notes aggregating $3.1 million have been issued in
respect of guarantees of the Series A and Series B Notes as described in (a)
above.

     Notes payable at December 31, 1997 consisted of a promissory note issued to
Scientific Atlanta on June 10, 1997. The promissory note, in settlement of
equipment and services, was paid on June 10, 1998.

  (c) Bank Loan Facility

     At December 31, 1998, the Company had no bank loan facility. In December
1997, PeterStar entered into a $2.0 million, one-year loan facility with BNP
Dresdner Bank for the purchase of telecommunications equipment. Interest was
charged on borrowed amounts at three-month LIBOR plus 2.5% per annum. The
amounts drawn on the loan facility at December 31, 1997 were $900,000. The bank
indebtedness was guaranteed by the Company.

(9) LONG-TERM DEBT

     The Company's long-term debt at December 31, 1998 and 1997 consists of the
following:

<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
14% Senior Discount Notes(a)................................  $112,897    $ 95,714
9% Convertible Subordinated Notes(a)........................    26,500      26,500
Supplier financing(b).......................................     9,233      11,302
Obligation under capital lease(b)...........................     3,184          --
                                                              --------    --------
          Total.............................................  $151,814    $133,516
                                                              ========    ========
</TABLE>

  (a) 14% Senior Discount Notes and 9% Convertible Subordinated Notes

     On June 12, 1996, the Company completed a $149.5 million private placement
consisting of: (i) 123,000 Units consisting of $123.0 million 14% Senior
Discount Notes ("Senior Notes") due 2004 and ten-year

                                      F-21
<PAGE>   136
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Warrants ("Placement Warrants") to purchase a total of 4,182,000 shares of
Common Stock ("Placement Warrant Shares") at a price of $6.60 per share; and
(ii) $26.5 million 9% Convertible Subordinated Notes ("Convertible Notes") due
2006, convertible into Common Stock of the Company at a price of $6.90 per
share. The Placement Warrants became separable from the Senior Notes on December
10, 1996.

     The 123,000 Units were issued at a discount for gross proceeds of $87.7
million, of which $13.6 million was allocated to the Placement Warrants and
$74.1 million was allocated to the Senior Notes for accounting purposes. The
Senior Notes had a zero coupon until December 1, 1998. After such date, the
notes require semi-annual cash interest payments on June 1 and December 1. The
difference between the carrying value and the principal amount of $123.0 million
is being charged to earnings on an effective yield basis which, together with
cash interest payments, results in an effective yield of 16.8%.

     The Convertible Notes require semi-annual cash interest payments on June 1
and December 1.

     The terms of the Senior Notes required the Company to raise additional
equity of at least $20.0 million by May 31, 1998. The Company did not raise the
additional equity, and as a result, the interest rate on the Senior Notes
increased from 14% to 14.5% as of June 1, 1998, and will remain at 14.5% until
the end of the semi-annual interest period in which such an offering is
completed.

     The Company is party to a Registration Rights Agreement pursuant to which
the Senior Notes were to have been exchanged for registered securities and the
Convertible Notes registered for the shelf by October 1996. Failure to cause the
registration to become effective in October 1996 resulted in additional interest
payable at a rate of $0.01 per week per $1,000 of accreted value of the Senior
Notes and principal amount of the Convertible Notes, increasing by $0.01 per
week for each 90-day period that the securities were not registered.

     On July 30, 1998, the Securities and Exchange Commission declared effective
the registration statements relating to: (i) the exchange offer (the "Exchange
Offer") pursuant to which the outstanding Senior Notes (the "Outstanding Senior
Notes") would be exchanged for identical Senior Notes which had been registered
under the Securities Act of 1933 (the "Exchange Notes"); (ii) the resale by the
holders thereof of the Convertible Notes and the shares of Common Stock issuable
upon the conversion thereof; and (iii) the resale by the holders thereof of the
Placement Warrants and the Placement Warrant Shares. As a result of the
effectiveness of the registration statement relating to the Convertible Notes
and the Common Stock issuable upon conversion thereof, additional interest
ceased to be payable with respect to the Convertible Notes on July 30, 1998.

     The Exchange Offer with respect to the Senior Notes commenced on August 28,
1998 and was completed at the close of business on October 9, 1998, with the
holders of 100% of the Outstanding Senior Notes tendering such Notes for
Exchange Notes. Upon completion of the Exchange Offer, the Exchange Notes were
issued in exchange for such Outstanding Senior Notes, in the form of a global
Exchange Note held through the facilities of the Depository Trust Company. As a
result of the completion of the Exchange Offer, additional interest ceased to be
payable with respect to the Senior Notes on October 9, 1998.

     All, or a portion, of the Senior Notes are redeemable at the option of the
Company after June 13, 2001 at 108% of the principal amount plus accrued and
unpaid interest, reducing to 104% for the year commencing June 1, 2002 and 100%
on or after June 1, 2003.

     The Convertible Notes are redeemable at the option of the Company on or
after June 1, 2000 under certain conditions at a redemption price equal to the
principal amount plus accrued and unpaid interest.

     The Senior Notes and the Convertible Notes were issued under the terms of
Indentures dated May 31, 1996. Pursuant to the Indentures, the Company has
pledged its investments in NWE Cyprus (which holds the Company's interests in
WTC and Yellow Pages, together with a 60% interest in PeterStar), WTC (which
holds the Company's interest in ALTEL), BCL, a wholly-owned special purpose
leasing subsidiary
                                      F-22
<PAGE>   137
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

incorporated in Cyprus, a wholly-owned special purpose subsidiary incorporated
in Delaware (since mid-1998), and the Company's investment in preferred stock of
Technocom. In addition, each of these subsidiaries (except Technocom) have
guaranteed the Senior Notes and the Convertible Notes.

     A portion of the net proceeds of $105.0 million (after agent's commission
and expenses) was used to meet the Company's $20.0 million commitment to
Technocom (see note 3(c)) and to repay a revolving credit facility in the amount
of $22.5 million. Under the terms of the Indentures, $46.0 million was deposited
into an escrow account which is invested in eligible cash equivalents, as
defined by the Indentures. The escrow funds are also pledged as security for the
Company's obligations under the Indentures. Escrow funds may be disbursed for
purposes of making qualifying investments of up to $9.0 million in
telecommunications companies operating in Russia or Kazakhstan, or for purposes
of investing in telecommunications equipment through the Company's special
purpose leasing subsidiary, which then leases that equipment to the Company's
operating subsidiaries. Investments in leases are also pledged as security under
the Indentures and all payments received under the terms of the leases are
required to be deposited into a separate escrow account, to be used to purchase
additional telecommunications equipment for lease. On or after November 30,
1998, the Company must also maintain sufficient funds in the escrow accounts to
meet the next interest payment due on both the Senior Notes and Convertible
Notes.

     In 1997, based upon the Company's experience in operating under the terms
of the Indentures since they were first executed in June 1996, the Company made
the determination to solicit the holders of the Senior Notes and the Convertible
Notes with a view to making certain amendments to the Indentures governing such
Notes, intended to give the Company more flexibility in conducting its business
and also to clarify certain provisions of those Indentures.

     Under each of the Indentures, the consents of holders of not less than a
majority in principal amount at stated maturity of each of the Senior Notes and
the Convertible Notes are required to authorize their amendment.

     On March 4, 1998, the Company mailed to the holders of record on March 3,
1998 of the Senior Notes and the Convertible Notes a consent solicitation
statement (the "Consent Solicitation"). Pursuant to the Consent Solicitation,
the Company offered to each holder of the Senior Notes who consented to the
amendment of the Senior Note Indenture, a five-year warrant to purchase 1.8
shares of Common Stock at a price of $6.90 per share for each $1,000 in unpaid
principal amount at stated maturity of the Senior Notes held by such holder, and
to each holder of the Convertible Notes who consented to the amendment of the
Convertible Note Indenture a five-year warrant to purchase 2 shares of Common
Stock at a price of $6.90 per share for each $1,000 in unpaid principal amount
of the Convertible Notes held by such holder.

     As of close of business on March 18, 1998, when the solicitation period
ended, parties holding 100% in principal amount at stated maturity of the Senior
Notes and 85.7% in principal amount at stated maturity of the Convertible Notes
had consented to the amendments. Pursuant to such consents, The Bank of New
York, as trustee under the Indentures, the Company and certain other parties
executed a supplemental indenture bringing the amendments to the Indentures and
certain related documents into effect. This supplemental indenture incorporated
a range of amendments to the Indentures of June 1996, the most important of
which -- from an operational perspective -- was to broaden the range of
transactions by which the Company can use escrowed funds in order to make
telecommunications assets available to its operating companies. The Company has
recognized $266,800 in deferred financing costs as a result of the issuance of
warrants, which is being amortized over the remaining life of the Senior Notes
and Convertible Notes.

     At December 31, 1998 and 1997, the fair value of the Convertible Notes and
Senior Notes approximates $76.9 million and their carrying value respectively.

                                      F-23
<PAGE>   138
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (b) Supplier Financing and Obligation Under Capital Lease

     Amounts payable under the terms of the supplier financing and capital lease
arrangements are as follows (see note 4):

<TABLE>
<CAPTION>
YEAR                                                              AMOUNT
----                                                          --------------
                                                              (IN THOUSANDS)
<S>                                                           <C>
1999........................................................     $ 6,332
2000........................................................       6,395
2001........................................................       4,647
2002........................................................       1,958
2003........................................................         855
                                                                 -------
                                                                  20,187
Less: amounts representing interest.........................      (2,697)
                                                                 -------
                                                                  17,490

Current portion.............................................       5,073
                                                                 -------
Long-term portion...........................................     $12,417
                                                                 =======
</TABLE>

     The above amounts have been calculated using interest rates of 5.5% to
8.5%.


(10) SHAREHOLDERS' EQUITY


  (a) Common Stock

     On February 28, 1997, as a result of the Company's continuance as a
Delaware corporation, the authorized capital stock was changed from an unlimited
number of common shares without nominal or par value to 100,000,000 common
shares with a par value of $.01 per share. As a result of the change in the par
value, the Common Stock was decreased by $180.6 million and additional paid-in
capital was increased by the same amount.

  (b) Preferred Stock

     The Company had the following preferred shares issued and outstanding at
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                              NUMBER OF
                                                               SHARES      1998     1997
                                                              ---------    -----    -----
                                                                           (IN THOUSANDS)
<S>                                                           <C>          <C>      <C>
Series II...................................................   405,217      $ 4      $ 4
Series III..................................................    41,667       --       --
                                                                            ---      ---
                                                                            $ 4      $ 4
                                                                            ===      ===
</TABLE>

     In addition, the capital stock was also changed from an unlimited number of
preferred shares issuable in series to 100,000,000 preferred shares with a par
value of $.01 per share issuable in series. As a result of the change in par
value, the preferred stock has been reflected at its par value in the 1997 and
1998 consolidated financial statements.

     The Series II and III preferred shares, issued at a price of Cdn.$1 (US
$0.74) per share, are redeemable at the option of the Company at Cdn.$1 per
share. The shares do not pay dividends and holders thereof do not have voting
rights.

                                      F-24
<PAGE>   139
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (c) Shares Reserved

     In addition to stock options outstanding (see note 12), the Company has
reserved 4,182,000 common shares for issuance on exercise of the Placement
Warrants and 3,840,580 common shares on conversion of outstanding Convertible
Notes (see note 9). In addition, at December 31, 1998, the Company has 400,000
warrants outstanding to purchase common shares of the Company at a
weighted-average exercise price of $6.69 of which 250,000 warrants at an
exercise price of Cdn.$11.31 were granted to Cable and Wireless plc in 1994 (and
purchased by News in August 1998), and 100,000 warrants at an exercise price of
US$4.70 were granted in 1996 to the agent in relation to the debt financing
described in note 9. All these warrants expire five years after the date of
grant.

     In connection with the issuance of the Series A and Series B Notes in
November 1997 (see note 8(a)), the Company issued to the Travelers Parties a
total of 423,000 warrants to purchase Common Stock at $8.625 at any time up to
December 31, 2008. In addition, between July and November 1998, the Company
elected to issue an additional 182,000 warrants to the Travelers Parties, on the
same terms as those issued in November 1997, instead of making certain targeted
amortization payments on the Series A and Series B Notes.

     At the end of March of 1998, in connection with the Consent Solicitation
(see note 9(a)), the Company issued a total of 123,000 five-year warrants to
purchase 1.8 shares of Common Stock at $6.90 per share to the holders of the
Senior Notes, and a total of 22,700 five-year warrants to purchase 2 shares of
Common Stock at a price of $6.90 per share to the holders of the Convertible
Notes. If all these warrants are exercised, the Company will issue a total of
266,800 shares of Common Stock.

(11) INCOME TAXES

     The geographic components of loss before income taxes and minority interest
are as follows:

<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
United States......................................  $(42,187)   $(35,163)   $     --
Canada.............................................        --          --     (20,829)
Russia and Kazakhstan..............................    18,144      31,735      14,558
Other..............................................       482          --          --
                                                     --------    --------    --------
                                                     $(23,561)   $ (3,428)   $ (6,271)
                                                     ========    ========    ========
</TABLE>

                                      F-25
<PAGE>   140
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The provision for income taxes, which relates substantially to current
income taxes in the Company's Russian and Kazakh businesses, differs from the
United States (34% -- February 28, 1997 to December 31, 1997 and 35% in 1998)
and Canadian (44% -- January 1, 1995 to February 27, 1997) Federal and
state/provincial statutory tax rates as follows:

<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                      -------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                   <C>        <C>         <C>
Provision for income taxes at statutory rates.......  $(8,246)   $ (1,166)   $ (2,760)
Add/(deduct) the tax effect of:
  Non-deductible amortization of licenses and
     goodwill.......................................    3,886       2,561       3,238
  Other non-deductible expenses.....................    4,181       2,273       1,753
  Concessions on capital expenditures...............     (726)     (3,854)     (1,000)
  Differences in Russian and Kazakh statutory tax
     rates..........................................     (997)       (210)     (1,696)
  Exchange differences..............................   (7,661)         --          --
  State tax, net of federal benefit.................   (2,787)         --          --
  Other.............................................      452          --          --
  Change in valuation allowance related to deferred
     tax assets.....................................   21,762       8,135       4,134
                                                      -------    --------    --------
     Provision for income tax.......................  $ 9,864    $  7,739    $  3,669
                                                      =======    ========    ========
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:

<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Deferred tax assets:
  Share issue costs.........................................  $     --    $     --
  Operating loss carryforwards..............................    24,368       8,929
  Capital loss carryforwards................................        --          --
  Basis in assets...........................................       920          --
  Other.....................................................        82          --
  Expenses not yet deducted for Russian and Kazakh tax
     purposes...............................................    19,736      18,646
                                                              --------    --------
                                                                45,106      27,575
Less: valuation allowance...................................   (30,008)     (8,246)
                                                              --------    --------
     Net deferred tax assets................................    15,098      19,329
                                                              --------    --------
Deferred tax liabilities:
  Debt issue costs..........................................        --      (1,160)
  Expenses not currently deducted for book purposes.........   (14,622)       (705)
  Tax on revenues not yet realized for Russian tax
     purposes...............................................       (31)    (17,464)
  Fixed assets, principally due to difference in
     depreciation...........................................      (476)         --
                                                              --------    --------
     Deferred tax liabilities...............................   (15,129)    (19,329)
                                                              --------    --------
                                                              $    (31)   $     --
                                                              ========    ========
</TABLE>

     At December 31, 1998 and 1997, the Company had operating loss carryforwards
for United States (U.S.) federal income tax purposes of approximately $56.2
million and $24.1 million, respectively. In assessing the realizability of the
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets

                                      F-26
<PAGE>   141
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. As a result of various sales of
company stock and issuances of new stock, a change in ownership for Federal
income tax purposes may have occurred. This would subject the future use of the
Company's Federal net operating loss to an annual limitation.

     At December 31, 1996, the Company had operating loss carryforwards for
Canadian income tax purposes of approximately $36.0 million and allowable
capital loss carryforwards of approximately $19.0 million. Upon the Company's
emigration to the United States in February 1997, the Company was deemed to
dispose of all its assets at fair value. As a result, a substantial portion of
the operating and capital loss carryforwards were utilized. Remaining losses do
not carry over for U.S. tax purposes.

(12) EQUITY COMPENSATION PLAN

     The Company has an Equity Compensation Plan (the "Plan"), which was
approved by the shareholders at the Annual Meeting in June of 1997. The Plan
amends and supersedes in its entirety the PLD Telekom Inc. Stock Option Plan
(the "Prior Plan"). No further grants will be made under the Prior Plan
following the adoption of the Plan and grantees under the Prior Plan have the
option of continuing to have existing grants covered by the terms of the Prior
Plan, or having these grants instead covered by the terms of the Plan.

     Pursuant to the Plan, the Company's Board of Directors may grant stock
options, stock appreciation rights, restricted stock and performance units to
directors, officers and key employees of, and certain consultants and advisors
to, the Company and its subsidiaries. The Plan is administered by a committee of
the Board of Directors of the Company consisting solely of "outside directors"
and to date awards under the Plan have been limited to stock options.

     The exercise price of each option is generally equal to the fair market
value of the shares of PLD's Common Stock on the date of grant. The maximum term
for which options are exercisable is ten years. Options shall become exercisable
in accordance with such terms and conditions, consistent with the Plan, as may
be determined by the committee. However, stock options granted to Non-Employee
Directors are immediately exercisable.

     On November 12, 1998 the Company's Board of Directors, wishing to further
incentivise management in light of the severe economic crisis in Russia and its
effect on the Company's share price, approved the granting of a total of
4,487,000 new stock options. 650,000 of these options were in respect of new PLD
employees and 3,837,000 were granted simultaneously with the cancellation of
3,837,000 options granted previously to existing employees and directors of the
Company. The options were granted with exercise prices of $3.00, $4.00 and $5.00
per share, as summarized in the table below. Options granted at $3.00 per share
vested immediately, options granted at $4.00 per share vest on November 12, 1999
and options granted at $5.00 per share vest on November 12, 2000. The market
price for the Company's shares on November 12, 1998 was $2.4375. The effect of
the cancellation and reissuance of these shares was to reduce the weighted
average exercise price of the Company's outstanding employee stock options to
$3.70 from $6.41 at the end of 1997.

     The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $1.27, $2.51 and $2.11, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 -- risk-free interest rate of 4.8%, expected
life of six years and expected volatility of 60%; 1997 -- risk-free interest
rate of 6.5%, expected life of six years and expected volatility of 40%; 1996
-- risk-free interest rate of 6.5%, expected life of five years and expected
volatility of 30%.

     The Company applies APB Opinion No. 25 in accounting for its Plan and,
recognizes compensation expense related to stock option grants only when the
fair market value of the related stock exceeds the exercise
                                      F-27
<PAGE>   142
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

price on the date of grant. Had the Company determined compensation cost based
on the fair value at the date of grant for its stock options under SFAS 123, the
Company's loss would have been increased to $44.9 million ($1.27 per share),
$22.9 million ($0.71 per share) and $13.6 million ($0.43 per share) for the
years ended December 31, 1998, 1997 and 1996, respectively. The pro forma loss
for the year reflects only options granted since January 1, 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS 123 is
not reflected in the pro forma loss for the year because compensation cost is
reflected over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.

     During 1998, the Company granted 790,000 options for which the exercise
price on the date of grant was less than the fair market value of the related
stock. As a result, total non-cash compensation expense of $1.1 million will be
recognized over the vesting periods of the options, of which $0.8 million was
expensed during the year.

     Changes in stock options outstanding are as follows:

<TABLE>
<CAPTION>
                                                                           WEIGHTED AVERAGE
                                                       NUMBER OF SHARES    EXERCISE PRICES
                                                       ----------------    ----------------
<S>                                                    <C>                 <C>
Outstanding at December 31, 1995.....................        981,500            $6.61
Granted..............................................      1,010,000            $7.38
Exercised............................................       (189,000)           $5.25
Canceled.............................................       (120,000)           $5.93
                                                          ----------            -----
Outstanding at December 31, 1996.....................      1,682,500            $7.25
Granted..............................................      1,405,000            $5.27
Exercised............................................       (302,166)           $5.68
Canceled.............................................        (15,000)           $5.25
                                                          ----------            -----
Outstanding at December 31, 1997.....................      2,770,334            $6.41
Granted..............................................      5,832,000            $4.54
Exercised............................................             --            $  --
Canceled.............................................     (3,975,334)           $6.83
                                                          ----------            -----
Outstanding at December 31, 1998.....................      4,627,000            $3.70
                                                          ==========            =====
</TABLE>

     At December 31, 1997 and 1996, the number of options exercisable was
1,395,331 and 382,500 and the weighted-average exercise price of those options
was $6.67 and $7.92, respectively.

     The following table summarizes information about the stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                  ------------------------------------   -----------------------
                                 WEIGHTED-
                    NUMBER        AVERAGE     WEIGHTED     NUMBER      WEIGHTED-
                  OUTSTANDING    REMAINING    AVERAGE    EXERCISABLE    AVERAGE
   RANGE OF           AT        CONTRACTUAL   EXERCISE       AT        EXERCISE
EXERCISE PRICES    12/31/98        LIFE        PRICE      12/31/98       PRICE
---------------   -----------   -----------   --------   -----------   ---------
<S>               <C>           <C>           <C>        <C>           <C>
 $   3.00          2,615,327        9.9        $3.00      2,615,327      $3.00
     4.00          1,263,335        9.9         4.00             --       4.00
     5.00            608,338        9.9         5.00             --       5.00
6.25 -- 10.12        140,000        1.0         8.51        110,000       8.71
</TABLE>

(13) RELATED PARTY TRANSACTIONS

     (a) PeterStar has entered into a barter agreement with an indirect minority
shareholder under which the two parties have exchanged services valued at $2.7
million, $3.4 million and $3.0 million during 1998, 1997

                                      F-28
<PAGE>   143
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


and 1996, respectively. The amounts are recorded in the consolidated statements
of operations as telecommunications revenues and direct costs. During 1998,
PeterStar paid $1.2 million to an indirect minority shareholder for certain of
these services.


     During 1998, PeterStar entered into a series of agreements with an indirect
minority shareholder under which PeterStar exchanged telecommunications
equipment for telecommunications and other facility infrastructures. The total
value of equipment exchanged during 1998 is $2.6 million. The infrastructure
received under this exchange has been valued at the same amount. As a result of
this arrangement PeterStar will be the sole provider of telecommunications
services to one of the districts of St. Petersburg.

     During 1998, PeterStar paid a total of $1.2 million on behalf of an
indirect minority shareholder. This amount has been capitalized as a prepayment
in relation to the purchase of an exchange building.

     (b) Direct costs for the years ended December 31, 1998, 1997 and 1996
include $4.4 million, $4.2 million and $3.3 million, respectively, paid to the
other shareholder of ALTEL in relation to the carriage of traffic over the
public telephone network. Balances outstanding of $0.5 million and $0.8 million
as of December 31, 1998 and 1997, respectively, in relation to these charges,
are included in due to related parties.

     (c) Amounts due from related parties at December 31, 1998 include $4.7
million principal and interest due from MTR-Sviaz in relation to a finance lease
(see note 5(b)), $2.6 million due from a minority shareholder of PeterStar under
short- and long-term loans, and $2.9 million due from a company controlled by a
minority shareholder of Technocom for telecommunications services.

     Amounts due from related parties at December 31, 1997 include $2.5 million
principal and interest due from MTR-Sviaz in relation to a finance lease (see
note 5(b)), $1.6 million and $3.0 million due from a minority shareholder of
PeterStar under short- and long-term loans, respectively, and $2.2 million due
from a company controlled by a minority shareholder of Technocom for
telecommunications services.

     (d) Amounts due to related parties at December 31, 1998 include a loan due
to the minority shareholder of Teleport-TP in the amount of $0.1 million, trade
payables of Teleport-TP in the amount of $3.2 million due to a company
controlled by one of the minority shareholders of Technocom, and payments due to
MTR-Sviaz for telephone services and connection charges in the amount of $0.2
million.

     Amounts due to related parties at December 31, 1997 include a loan due to
the minority shareholder of Teleport-TP in the amount of $0.5 million, trade
payables of Teleport-TP in the amount of $3.2 million due to a company
controlled by one of the minority shareholders of Technocom, a loan due to a
company controlled by a minority shareholder of Technocom in the amount of $0.3
million, payments due to MTR-Sviaz for telephone services and connection charges
in the amount of $0.3 million, and an amount due to a company controlled by one
of the minority shareholders of Technocom for equipment received from them in
the amount of $0.2 million.

     In 1998, 1997 and 1996, Technocom paid a total of $0.4 million, $0.2
million and $0.2 million, respectively, pursuant to two management contracts
with its two minority shareholders for provision of the services of two
directors of Technocom.

     (e) The Company guaranteed telephone billing system lease payments of an
indirect shareholder of PeterStar totaling $2.5 million. Lease payments of $0.1
million were due quarterly until July 1998. At December 31, 1995, full provision
was made for all amounts paid to date under the guarantee and for all future
amounts. The balances of $0 and $0.4 million remaining under the lease as of
December 31, 1998 and 1997 are included in other current liabilities.

     (f) General and administrative expenses for the years ended December 31,
1998, 1997 and 1996 include consulting fees of $5.6 million, $1.7 million and
$42,000, respectively, charged by a minority shareholder of PeterStar.

                                      F-29
<PAGE>   144
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     (g) The Company paid certain costs on behalf of, and made certain loans to,
PeterStar, resulting in an intercompany balance of approximately $27.0 million
at December 31, 1996. During 1997, an agreement was reached with the minority
shareholders to recapitalize PeterStar. The recapitalization of PeterStar in an
amount of $13.8 million was completed during September 1997, with such funds
being used to repay an equal amount of these advances. Negotiations with the
minority shareholders of PeterStar as to the repayment of the remaining
intercompany balance due to the Company were concluded in March 1998 and
resulted in a further reduction of approximately $5.3 million in PeterStar's
liability. The effect of this settlement was to increase minority interest
expense by approximately $2.1 million in 1997.

     (h) Consulting fees of $0.4 million, $0.1 million, and $0.1 million for the
years December 31, 1998, 1997 and 1996, respectively, were charged to ALTEL by
the other shareholder of ALTEL. There was no balance outstanding as of December
31, 1998 and 1997 in relation to these charges.

     (i) See also notes 3(a), (c), (d), (e), (g), 5(b) and 8(b).

(14) COMMITMENTS AND CONTINGENCIES

  (a) Currency Licenses

     Under applicable Russian currency control regulations, the Company's
Russian subsidiaries are required to have certain licenses from the Central Bank
of Russia to enable them to make payments of and accept receipts of hard
currency. While PeterStar, BCL and Teleport-TP have or have applied for all the
necessary licenses, failure to receive the remaining licenses could result in
fines and penalties. Management does not believe such fines and penalties would
be material.

  (b) Russian and Kazakh Taxation

     Certain of the Company's Russian and Kazakh subsidiaries have accrued
profits and other taxes based on interpretations of the law which may ultimately
be disputed by the Russian and Kazakh taxation authorities. The exposure to
additional profits and other taxes, fines and penalties is not determinable,
although the Company believes such amounts will not be material.

     The Russian taxation system is relatively new and is characterized by
numerous taxes and frequently changing legislation, which may be applied
retroactively and is often unclear, contradictory, and subject to
interpretation. Often, differing interpretations exist among numerous taxation
authorities and jurisdictions.

     Taxes are subject to review investigation by a number of authorities, who
are enabled by law to impose severe fines, penalties and interest charges.
Generally, tax filings are subject to inspection for a period of six years. The
occurrence of a review does not preclude subsequent review.

     These facts may create tax risks in Russia substantially more significant
than in other countries. Management believes that it has adequately provided for
tax liabilities based on its interpretation of tax legislation. However, the
relevant authorities may have differing interpretations and the effects could be
significant.

  (c) Purchase Commitments

     At December 31, 1998, PeterStar has commitments of approximately $3.4
million under long-term installment purchase agreements. The related contracts
provide for financing of the amounts over approximately five years.

                                      F-30
<PAGE>   145
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (d) Transponder Capacity

     Teleport-TP currently utilizes capacity on three Intelsat satellites for
the provision of its international and domestic long distance services, pursuant
to rolling fifteen year contracts with Intelsat. These agreements require
quarterly payments of $1.3 million for the remainder of their terms.

  (e) Management Services

     On January 1, 1998, ALTEL entered into an agreement with its other
shareholder, by which the shareholder would provide certain consulting services,
management support services and personnel expertise. Payments under this
agreement are 300,000 tenge per month ($3,580 at the December 31, 1998 exchange
rate) plus 1% of monthly gross revenues. The contract is for a one year term,
automatically renewable for successive one year periods unless terminated by
either party.

  (f) Motorola, USA

     Motorola, USA is the major supplier of ALTEL's network equipment. Under the
supply contract, ALTEL files preliminary purchase orders for the delivery of
equipment with a prepayment of 5% of the cost of the purchase order. Once a
purchase order is presented, ALTEL may be exposed to potential liabilities to
Motorola, USA in the amount of $1.2 million as at December 31, 1998.

  (g) Operating Leases

     As of December 31, 1998, the Company had long-term operating leases
primarily involving business facilities and equipment. The leases have varying
terms and contain renewal options. Future minimum lease payments under
non-cancelable operating leases consist of the following as of December 31, 1998
(in thousands):

<TABLE>
<S>                                                           <C>
1999........................................................  $1,524
2000........................................................   1,376
2001........................................................   1,040
2002........................................................     886
2003........................................................     872
Thereafter..................................................   2,720
                                                              ------
  Total future minimum lease payments.......................  $8,418
                                                              ------
</TABLE>

     Rent expense for the years ended December 31, 1998, 1997 and 1996 was $0.8
million, $0.6 million and $0.4 million, respectively.


     (h) The Company periodically guarantees certain obligations of its
subsidiaries. As of December 31, 1998, the only guarantee that is currently
outstanding is to Siemens in the amount of $1.6 million relating to equipment
purchased by Technocom.


                                      F-31
<PAGE>   146
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) CANADIAN ACCOUNTING PRINCIPLES

     These consolidated financial statements have been prepared in accordance
with U.S. GAAP which, in the case of the Company, conform with Canadian GAAP,
except as follows:

     (a) Net loss for the years ended December 31:

<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Net loss for the year, as reported.................  $(42,811)   $(20,566)   $(12,461)
Non-cash interest on Convertible Notes.............      (781)       (508)       (252)
                                                     --------    --------    --------
Net loss for the year under Canadian GAAP..........  $(43,592)   $(21,074)   $(12,713)
                                                     ========    ========    ========
</TABLE>

     Under Canadian GAAP, the Convertible Notes are a compound financial
instrument and the debt and equity elements of the instrument are separately
accounted for. For Canadian GAAP purposes, $13.9 million of the Convertible
Notes were classified as equity and $12.6 million were classified as debt on
issuance. Additional interest expense is charged to the consolidated statements
of operations to accrete the debt portion to the principal amount of $26.5
million at maturity which, together with cash interest payments, results in an
effective yield of 22.3%. Accordingly, long-term debt at December 31, 1998 and
1997 would amount to $139.5 million and $120.3 million, respectively, and
shareholders' equity would amount to $137.2 million and $140.4 million,
respectively, under Canadian GAAP.

     Effective December 31, 1996, the Company changed its Canadian GAAP policy
with respect to pre-operating costs. Such costs may not be capitalized under
U.S. GAAP and, therefore, all such costs have been retroactively expensed for
Canadian GAAP purposes. The change in accounting policy decreased the Canadian
GAAP loss in 1995 by $636,000. The deficit at December 31, 1995 was increased by
$2.2 million.

     Effective December 31, 1998, the Company adopted new Canadian accounting
standards for cash flow statements for Canadian GAAP purposes. These new
standards are substantially the same as U.S. GAAP reporting requirements for all
periods.

(16) OTHER EXPENSE

     At the end of 1998, as a result of the economic conditions in Russia, the
Company re-evaluated certain assets. As a result, the Company: (a) determined
that $1.7 million of costs relating to transactions the Company no longer
intends to pursue, should be written off; and (b) recorded a $2.0 million
valuation allowance related to a receivable from the minority shareholder of
PeterStar. Such receivable arose in the 1997 recapitalization of PeterStar (see
note 13(g)), at which time the Company advanced the minority shareholder the
funds for its pro rata contribution. In addition, during February 1999 the
Company entered into a transaction whereby it exchanged its ownership interest
in a company whose sole asset was a cargo ship, with a carrying value of $3.0
million, for a 37% interest in an entity that is developing a telemedicine
business in the former Soviet Union. The Company has determined that the
ownership interest has a fair value of approximately $1.0 million and, as a
result, has written down the carrying value of the asset exchanged to that
amount.

                                      F-32
<PAGE>   147
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following is a summary of selected quarterly financial data for the
years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                       1998 QUARTERS ENDED
                                       ---------------------------------------------------
                                       MARCH 31    JUNE 30     SEPTEMBER 30    DECEMBER 31
                                       --------    --------    ------------    -----------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>         <C>         <C>             <C>
Operating revenues...................  $35,166     $ 39,240      $ 37,583       $ 33,371
Operating income.....................    7,199        5,922         1,366         (4,539)
Interest and other income............      871          946           298            269
Interest expense.....................   (5,190)      (5,359)       (5,714)        (5,690)
Income taxes.........................    2,997        2,174         2,490          2,203
Minority interest....................    3,665        3,869         1,203            649
Net loss for the period..............   (4,509)      (5,358)      (11,934)       (21,010)
                                       =======     ========      ========       ========
Net loss per common share............  $ (0.14)    $  (0.16)     $  (0.33)      $  (0.56)
                                       =======     ========      ========       ========
</TABLE>

     Adjustments recorded in the fourth quarter of 1998, resulting principally
from the economic condition in Russia, are described in Note 16.

<TABLE>
<CAPTION>
                                                       1997 QUARTERS ENDED
                                        --------------------------------------------------
                                        MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                        --------    -------    ------------    -----------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>        <C>             <C>
Operating revenues....................  $23,891     $26,389      $29,534         $34,610
Operating income......................    2,481       2,634        2,872           4,031
Interest and other income.............    1,394       1,260          625             335
Interest expense......................   (4,269)     (4,120)      (4,457)         (5,000)
Income taxes..........................    1,074       2,366        2,048           2,251
Minority interest.....................    1,766       1,457        1,391           4,785
Net loss for the period...............   (4,342)     (3,725)      (5,377)         (7,122)
                                        =======     =======      =======         =======
Net loss per common share.............  $ (0.14)    $ (0.12)     $ (0.17)        $ (0.22)
                                        =======     =======      =======         =======
</TABLE>

     Minority interest for the fourth quarter of 1997 includes $2.1 million in
connection with the settlement reached with the minority shareholders of
PeterStar (see note 13(g)).

(18) OPERATIONS BY GEOGRAPHIC AREA AND INDUSTRY SEGMENT

     The Company is a major provider of local, long distance and international
telecommunications services in the Russian Federation and the former Soviet
Union. The activities of the Company are primarily segmented by reference to the
businesses of its principal operating subsidiaries.

     PeterStar provides integrated local, long distance and international
telecommunications services in St. Petersburg, Russia, through a fully digital
fiber optic network.

     Technocom, through Teleport-TP, provides dedicated international
telecommunications services to customers in Moscow and operates a satellite
based pan-Russian long-distance network.

     ALTEL is currently the major provider of national cellular service in
Kazakhstan.

     BCL provides dedicated international telecommunications services in St.
Petersburg, Russia.

     Other activities of the Company relate principally to its corporate head
office in New York, its operations center in London, and to smaller, less
significant businesses primarily in their start-up phase.

     The Company's main financial criteria for assessing the importance and
performance of its segments are by reference to revenues, earnings/(loss) before
income taxes and minority interest, and total assets.

                                      F-33
<PAGE>   148
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's operations by geographic region is as follows:

<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Revenues:
  Russia...........................................  $105,527    $ 84,412    $ 42,661
  Kazakhstan.......................................    39,548      30,012      19,305
  Other............................................       285           0           0
                                                     --------    --------    --------
          Total revenues...........................  $145,360    $114,424    $ 61,966
                                                     ========    ========    ========
Earnings/(loss) before income taxes and minority
  interest:
  Russia...........................................  $  5,054    $ 21,603    $  9,615
  Kazakhstan.......................................    13,090      10,132       4,943
  North America....................................   (42,187)    (35,163)    (20,829)
  Other............................................       482           0           0
                                                     --------    --------    --------
          Total earnings/(loss) before income taxes
            and minority interest..................  $(23,561)   $ (3,428)   $ (6,271)
                                                     ========    ========    ========
Total assets:
  Russia...........................................  $249,658    $216,107
  Kazakhstan.......................................    59,008      58,249
  North America....................................    38,793      61,230
  Other............................................     4,649           0
                                                     --------    --------
          Total assets.............................  $352,108    $335,586
                                                     ========    ========
</TABLE>

                                      F-34
<PAGE>   149
                       PLD TELEKOM INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's operations by segment is as follows:

<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Revenues:
  PeterStar........................................  $ 72,371    $ 54,536    $ 32,542
  Technocom........................................    22,180      20,980       4,706
  ALTEL............................................    39,548      30,012      19,305
  BCL..............................................     9,854       7,602       5,304
  Other............................................     1,407       1,294         109
                                                     --------    --------    --------
          Total revenues...........................  $145,360    $114,424    $ 61,966
                                                     ========    ========    ========
Earnings/(loss) before income taxes and minority
  interest:
  PeterStar........................................  $ 21,401    $ 25,739    $  8,846
  Technocom........................................   (16,420)     (4,831)       (152)
  ALTEL............................................    13,090      10,132       4,943
  BCL..............................................       395       1,191       1,031
  Corporate........................................   (42,982)    (35,673)    (20,971)
  Other............................................       955          14          32
                                                     --------    --------    --------
          Total earnings/(loss) before income taxes
            and minority interest..................  $(23,561)   $ (3,428)   $ (6,271)
                                                     ========    ========    ========
Total assets:
  PeterStar........................................  $132,814    $ 89,196
  Technocom........................................   106,055     117,987
  ALTEL............................................    59,008      58,249
  BCL..............................................     6,883       6,723
  Corporate........................................    36,491      61,467
  Other............................................    10,857       1,964
                                                     --------    --------
          Total assets.............................  $352,108    $335,586
                                                     ========    ========
</TABLE>

                                      F-35
<PAGE>   150

                         BALTIC COMMUNICATIONS LIMITED

                              FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

<TABLE>
<S>                                                           <C>
Independent auditors' report................................  F-37
Balance sheets..............................................  F-38
Statements of operations and retained earnings..............  F-39
Statements of cash flows....................................  F-40
Notes to financial statements...............................  F-41
</TABLE>

                                      F-36
<PAGE>   151

                          INDEPENDENT AUDITORS' REPORT

Shareholder and Board of Directors of
Baltic Communications Limited:

     We have audited the accompanying balance sheets of Baltic Communications
Limited as of December 31, 1998 and 1997, and the related statements of
operations and retained earnings and cash flows for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baltic Communications
Limited as of December 31, 1998 and 1997 and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997 and the nine
months ended December 31, 1996 in conformity with accounting principles
generally accepted in the United States.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9(c) to the
financial statements, the Company's parent, PLD Telekom Inc. (PLD) does not
presently have sufficient funds on hand to meet its current debt obligations.
The Company is a guarantor of such obligations. PLD's failure to make payment in
full when required could result in a claim being made against the Company under
its guaranty and a cross-default under and acceleration of other debt
obligations for which the Company is also a guarantor. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

     Without qualifying our opinion, we draw your attention to the information
contained in Note 1 to the financial statements regarding the uncertain
operating environment in Russia. The ultimate effect that these significant
economic uncertainties could have on the stated values, classification,
realisation or settlement of assets and liabilities stated in these financial
statements cannot presently be determined and accordingly no provisions have
been made.

     Without qualifying our opinion, we draw your attention to the disclosures
in Note 9 to the financial statements concerning the uncertainty relating to the
effects of the Year 2000 problem.


                                          KPMG


St. Petersburg, Russia
March 30, 1999

                                      F-37
<PAGE>   152

                         BALTIC COMMUNICATIONS LIMITED

                                 BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                 1998          1997
                                                              ----------    ----------
<S>                                                           <C>           <C>
ASSETS
Current assets:
  Cash......................................................  $  266,076    $  241,949
  Trade receivables, net of allowance (note 3)..............     995,919     1,239,370
  Due from related parties (note 7).........................     531,998            --
  Prepayments...............................................      80,800       167,908
  Prepaid taxes.............................................     171,759            --
  Inventory.................................................      76,025       214,394
                                                              ----------    ----------
          Total current assets..............................   2,122,577     1,863,621
Property and equipment, net (note 4)........................   4,668,005     4,801,791
Investments.................................................       8,000         8,000
Intangible assets, net (note 5).............................      84,052        49,505
                                                              ----------    ----------
          Total assets......................................  $6,882,634    $6,722,917
                                                              ==========    ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Accounts payable..........................................  $1,510,134    $1,871,857
  Accrued liabilities.......................................      87,177       154,288
  Deferred revenues.........................................       4,019         3,861
  Taxes payable.............................................     100,211       151,499
  Deferred income tax liability.............................      30,706            --
  Due to related parties (note 6)...........................     932,646       686,609
  Customer deposits.........................................      26,234        27,217
                                                              ----------    ----------
          Total current liabilities.........................   2,691,127     2,895,331
                                                              ----------    ----------
Shareholder's equity:
  Common stock (note 8).....................................   2,183,000     2,183,000
  Retained earnings.........................................   2,008,507     1,644,586
                                                              ----------    ----------
          Total shareholder's equity........................   4,191,507     3,827,586
                                                              ----------    ----------
          Total liabilities and shareholder's equity........  $6,882,634    $6,722,917
                                                              ==========    ==========
</TABLE>


                See accompanying notes to financial statements.
                                      F-38
<PAGE>   153

                         BALTIC COMMUNICATIONS LIMITED

                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
 YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
                                      1996


<TABLE>
<CAPTION>
                                                            1998          1997          1996
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
Revenues:
  Telecommunications revenues..........................  $9,780,176    $7,562,269    $5,266,803
  Other non-telecommunications revenues................      73,678        39,980        36,704
                                                         ----------    ----------    ----------
  Total revenues.......................................   9,853,854     7,602,249     5,303,507
                                                         ----------    ----------    ----------
Operating expenses:
  Direct costs (excludes depreciation).................   5,110,896     2,904,632     2,053,763
  General and administrative...........................   2,599,278     2,470,769     1,510,934
  Depreciation.........................................     575,708       557,494       331,256
  Amortization.........................................      12,943         6,783           319
  Taxes other than income taxes........................     447,429       422,094       323,266
                                                         ----------    ----------    ----------
          Total operating expenses.....................   8,746,254     6,361,772     4,219,538
                                                         ----------    ----------    ----------
          Operating income.............................   1,107,600     1,240,477     1,083,969
Other income/(expense):
  Interest income......................................       3,093        35,777         3,424
  Foreign exchange loss (note 1).......................    (672,087)      (43,082)       (7,206)
  Loss on disposal of property and equipment...........     (43,979)      (42,069)      (49,059)
                                                         ----------    ----------    ----------
          Income before income taxes...................     394,627     1,191,103     1,031,128
Income taxes (note 10).................................      30,706       383,255       194,390
                                                         ----------    ----------    ----------
          Net income...................................     363,921       807,848       836,738
                                                         ----------    ----------    ----------
Retained earnings, beginning of period.................   1,644,586       836,738            --
                                                         ----------    ----------    ----------
Retained earnings, end of period.......................  $2,008,507    $1,644,586    $  836,738
                                                         ==========    ==========    ==========
</TABLE>


                See accompanying notes to financial statements.
                                      F-39
<PAGE>   154

                         BALTIC COMMUNICATIONS LIMITED

                            STATEMENTS OF CASH FLOWS
 YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
                                      1996


<TABLE>
<CAPTION>
                                                            1998        1997          1996
                                                          --------    ---------    -----------
<S>                                                       <C>         <C>          <C>
Cash flows from operating activities:
Net income..............................................  $363,921    $ 807,848    $   836,738
Adjustments to reconcile net income to net cash provided
  by operating activities:
  Depreciation..........................................   575,708      557,494        331,256
  Amortization..........................................    12,943        6,783            319
  Loss on disposal of property and equipment............    43,979       42,069         49,059
Changes in operating assets and liabilities:
  (Increase)/decrease in trade receivables..............   243,451     (359,164)       355,754
  (Increase)/decrease in prepayments....................    87,108      (13,250)       (93,937)
  (Increase)/decrease in inventory......................   138,369     (143,949)        17,947
  (Increase)/decrease in prepaid taxes..................  (171,759)      16,765        (16,765)
  Increase in due from related parties..................  (531,998)          --             --
  Increase/(decrease) in due to related parties.........   246,037     (361,311)     1,047,920
  Increase/(decrease) in deferred revenues..............       158        3,861        (18,255)
  Decrease in customer deposits.........................      (983)      (1,642)       (10,530)
  Increase/(decrease) in taxes payable..................   (51,288)     151,499       (386,557)
  Increase/(decrease) in accrued liabilities............   (67,111)      83,318         70,970
  Increase in deferred income tax liability.............    30,706           --             --
  Increase/(decrease) in accounts payable...............  (361,723)      90,685       (912,575)
                                                          --------    ---------    -----------
     Net cash provided by operating activities..........   557,518      881,006      1,271,344
                                                          --------    ---------    -----------
Cash flows from investing activities:
  Capital expenditures..................................  (538,658)    (854,151)    (1,845,522)
  Proceeds on disposal of fixed assets..................     5,267       44,986          7,000
                                                          --------    ---------    -----------
     Net cash used in investing activities..............  (533,391)    (809,165)    (1,838,522)
                                                          --------    ---------    -----------
     Increase/(decrease) in cash........................    24,127       71,841       (567,178)
Cash at beginning of period.............................   241,949      170,108        737,286
                                                          --------    ---------    -----------
Cash at end of period...................................  $266,076      241,949        170,108
                                                          ========    =========    ===========
Supplementary disclosures:
Income taxes paid.......................................  $368,431    $ 240,047    $        --
                                                          ========    =========    ===========
</TABLE>


                See accompanying notes to financial statements.
                                      F-40
<PAGE>   155

                         BALTIC COMMUNICATIONS LIMITED

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

(1) BACKGROUND

  (a) Business, Operations and Future Activities

     Baltic Communications Limited (the "Company") was formed to provide
international direct dial, international payphone and leased line services to
business customers in St. Petersburg and the Leningrad Oblast. The Company was
incorporated on September 3, 1991 under the laws of the Russian Federation as a
closed joint stock company.

     On April, 1 1996 PLD Telekom Inc. ("PLD" or the "Parent") purchased 100% of
the common shares of the Company for a net purchase price of $2,183,000. Such
purchase price was allocated to the assets and liabilities of the Company as
follows:

<TABLE>
<S>                                                             <C>
Cash........................................................    $   737,000
Other current assets........................................      1,385,000
Fixed assets................................................      3,199,000
Current liabilities.........................................     (3,138,000)
                                                                -----------
                                                                $ 2,183,000
                                                                ===========
</TABLE>


     The Company's principal telecommunications license allows it to operate an
international, national and local telecommunications system in St. Petersburg;
this expires in 2003. Other licenses, all of which expire in 2001, are for
telematic services, rent of circuits, data services and the operation of a
dedicated national/international overlay network.


  (b) Russian Business Environment

     In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other environments.

     The immediate and ongoing effects of severe economic instability in Russia
include or may include slower economic growth or decline, a reduction in the
availability of credit and the ability to service debt, volatile interest rates,
changes and increases in taxes, higher inflation or hyperinflation, further
devaluation of the rouble, restrictions on convertibility and movements of
funds, bankruptcies including bank failures, and other severe economic and
political consequences. These conditions and future policy changes could have a
material adverse effect on the operations of the Company and the realisation and
settlement of its assets and liabilities.

     The accompanying financial statements reflect management's current
assessment of the impact of the economic situation on the financial position of
the Company. Actual results could differ from management's current assessments
and such differences could be material. In addition, the effect of future
developments on the Company's financial position and the ability of others to
continue to transact with the Company cannot presently be determined. The
financial statements therefore may not include all adjustments that might
ultimately result from these adverse conditions.

  (c) Uncertain Operating Environment in Russia

     The recoverability of the Company's assets, as well as the future operation
of the Company, may be significantly affected by the current and future economic
environment in Russia. The accompanying financial statements do not include any
adjustments with regard thereto.

                                      F-41
<PAGE>   156
                         BALTIC COMMUNICATIONS LIMITED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

  (d) Convertibility of the Rouble

     The Russian rouble is not a convertible currency outside the Russian
Federation and, accordingly, any conversion of Russian rouble amounts to US
dollars should not be construed as a representation that Russian rouble amounts
have been, could be, or will be in the future, convertible into US dollars at
the exchange rate used, or at any other exchange rate.

     The ability of the Russian government to maintain the stability of the
rouble will depend on many political and economic factors, including its ability
to control inflation and the availability of sufficient reserves to support the
rouble. Uncertainty also exists with respect to the Central Bank's policy
direction. The possibility of further restrictions on convertibility and
currency movements cannot be ruled out.

     As a result of the devaluation of the rouble during the latter part of 1998
the Company has suffered transaction losses of $672,087 (1997: a loss of
$43,082; 1996: a loss of $7,206).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company's significant accounting policies are summarised as follows:

  (a) Basis of Presentation

     The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).

     The financial statements have been presented on the push-down basis of
accounting.

     The accompanying financial statements present the financial position and
results of operations of the Company on a stand-alone basis. The Company incurs
and pays its own expenses. Management assistance is provided by the Parent under
the terms of negotiated management agreements and specific costs incurred by the
Parent on behalf of the Company are charged thereto. All intercompany
transactions and charges are disclosed in note 11, "Related Party Transactions."

     Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," on a stand-alone basis. Refer
to note 10, "Income Taxes."

     There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements -- refer to note 11, "Related Party
Transactions." Management of the Company believes that the accompanying
financial statements include all the costs incurred by the Company in its
operations.

  (b) Reporting Currency and Foreign Currency Translation

     The statutory accounts of the Company are maintained in accordance with
local accounting regulations and are stated in local currencies.

     Local statements are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 (SFAS 52), "Foreign Currency
Translation."

     Under SFAS 52, the financial statements of entities in highly inflationary
economies are measured in all cases using the U.S. dollar as the functional
currency. U.S. dollar transactions are shown at their historical value. Monetary
assets and liabilities denominated in local currencies are translated into U.S.
dollars at the prevailing period-end exchange rate. All other assets and
liabilities are translated at historical exchange rates. Results of operations
have been translated using the exchange rates effective at the date of the
transaction.

                                      F-42
<PAGE>   157
                         BALTIC COMMUNICATIONS LIMITED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Translation differences resulting from the use of these different rates are
included in the accompanying statements of operations except where otherwise
noted.

  (c) Revenue Recognition

     The Company records telecommunications revenues as earned, at the time
services are provided.

  (d) Inventory

     Inventory is stated at the lower of cost or net realisable value and is
comprised of spare parts for maintenance of the Company's transmission network
and telephony products held for resale to customers.

  (e) Property and Equipment

     Property and equipment and other assets are stated at cost less accumulated
depreciation and amortisation. Costs directly related to the installation of
telecommunications equipment are included in the cost of the equipment.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<CAPTION>
ASSET                                       ESTIMATED USEFUL LIFE
-----                                       ---------------------
<S>                                         <C>
Telecommunications equipment............       10 years
Office furniture and equipment..........        8 years
Motor vehicles..........................       7.5 years
Computer equipment......................        8 years
</TABLE>

  (f) Fair Value of Financial Instruments

     The carrying amounts reported in the balance sheets for cash, trade and
other receivables, amounts due to or from related parties, and accounts payable
approximate fair value due to their short maturity.

  (g) Income Taxes

     Tax on the profit or loss for the year comprises current tax and the change
in deferred tax. Current tax comprises tax payable calculated on the basis of
the expected taxable income for the year, using the tax rates enacted at the
balance sheet date, and any adjustment of tax payable for previous years.

     Deferred tax is provided using the balance sheet liability method on all
temporary differences between the carrying amounts for financial reporting
purposes and the amounts used for taxation purposes, except differences relating
to the initial recognition of assets or liabilities which affect neither
accounting nor taxable profit (taxable loss).

     The tax value of losses expected to be available for utilisation against
future taxable income is set off against the deferred tax liability within the
same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realised.

     Deferred tax is calculated on the basis of the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled.
The effect on deferred tax of any changes in tax rates is charged to the
statement of operations, except to the extent that it relates to items
previously charged or credited directly to equity.

  (h) Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
                                      F-43
<PAGE>   158
                         BALTIC COMMUNICATIONS LIMITED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ
from those estimates.

  (i) Impairment of Long-Lived Assets

     Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

  (j) Comprehensive Income

     SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997, and 1996 comprehensive income was equal
to net income reported in the statement of operations. As SFAS 130 only requires
additional disclosures in the Company's financial statements, its adoption did
not have any impact on the Company's financial position or results of
operations.

(3) TRADE RECEIVABLES

     Trade receivables at December 31, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                          1998         1997
                                                       ----------    ---------
<S>                                                    <C>           <C>
Trade receivables....................................  $1,113,564    1,303,650
Less: allowance for doubtful accounts................    (117,645)     (64,280)
                                                       ----------    ---------
  Trade receivables, net of allowance................  $  995,919    1,239,370
                                                       ==========    =========
</TABLE>

(4) PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 1998 and 1997 consists of the
following:


<TABLE>
<CAPTION>
                                                        1998           1997
                                                     -----------    ----------
<S>                                                  <C>            <C>
Telecommunications equipment.......................  $ 5,654,426     5,249,255
Office furniture and equipment.....................      627,792       758,934
Vehicles and leasehold improvements................      708,777       577,424
                                                     -----------    ----------
  Total property and equipment.....................    6,990,995     6,585,613
Less: accumulated depreciation.....................   (2,322,990)   (1,783,822)
                                                     -----------    ----------
  Property and equipment, net......................  $ 4,668,005     4,801,791
                                                     ===========    ==========
</TABLE>


                                      F-44
<PAGE>   159
                         BALTIC COMMUNICATIONS LIMITED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(5) INTANGIBLE ASSETS

     Intangible assets at December 31, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Computer software........................................  $40,264     35,637
Licenses.................................................   45,560     30,057
Other....................................................   27,361         --
                                                           -------    -------
  Total intangible assets................................  113,185     65,694
Less: accumulated amortisation...........................  (29,133)   (16,189)
                                                           -------    -------
  Intangible assets, net.................................  $84,052     49,505
                                                           =======    =======
</TABLE>

     Amortisation of intangible assets is provided over the estimated useful
life of 3-10 years.

(6) DUE TO RELATED PARTIES

     The Company's liability to related parties at December 31, 1998 and 1997
consists of the following:


<TABLE>
<CAPTION>
                                                            1998       1997
                                                          --------    -------
<S>                                                       <C>         <C>
PLD Telekom Inc.........................................  $615,000    455,000
PeterStar...............................................    37,875         --
PLD Management Services Limited.........................   256,254    231,609
Teleport-TP.............................................    23,517         --
                                                          --------    -------
                                                          $932,646    686,609
                                                          ========    =======
</TABLE>


(7) DUE FROM RELATED PARTIES

     The receivables due from related parties at December 31, 1998 and 1997
consists of the following:


<TABLE>
<CAPTION>
                                                              1998      1997
                                                            --------    ----
<S>                                                         <C>         <C>
PLD Telekom Inc...........................................  $182,553     --
PeterStar.................................................   103,797     --
Teleport-TP...............................................   237,985     --
CPY Yellow Pages Limited..................................     7,663     --
                                                            --------     --
                                                            $531,998     --
                                                            ========     ==
</TABLE>


(8) SHAREHOLDER'S EQUITY

  (a) Common Stock

     At December 31, 1998 and 1997 the Company had authorised share capital of
72,540 shares with a par value of 100 roubles each.

<TABLE>
<CAPTION>
                                                          1998         1997
                                                       ----------    ---------
<S>                                                    <C>           <C>
Issued and outstanding common shares with a par value
  of 100 roubles each................................  $    1,494        1,494
Additional paid-in capital...........................   2,181,506    2,181,506
                                                       ----------    ---------
Issued, outstanding and fully contributed............  $2,183,000    2,183,000
                                                       ==========    =========
</TABLE>

                                      F-45
<PAGE>   160
                         BALTIC COMMUNICATIONS LIMITED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

  (b) Distributable Reserves

     Distributable reserves are restricted to the retained earnings of the
Company which are determined according to Russian legislation. At December 31,
1998 and 1997 there are no reserves for distribution. No dividends have been
approved for payment.

(9) COMMITMENTS AND CONTINGENCIES

  (a) Taxation Contingencies

     Russia currently has a number of laws related to various taxes imposed by
both federal and regional governmental authorities. Applicable taxes include
value added tax, corporation tax ("profit tax"), a number of turnover based
taxes, and payroll (social) taxes, together with others.

     Laws related to these taxes have not been in force for significant periods,
in contrast to more developed market economies. Therefore, regulations are often
unclear, open to wide interpretation, and in some instances are conflicting.
Accordingly few precedents with regard to issues have been established. Often,
differing opinions regarding legal interpretation exist both among and within
government ministries and organisations (like the State Tax Service and its
various inspectorates), thus creating uncertainties and areas of conflict.

     Tax declarations, together with other legal compliance areas (such as
customs and currency control matters) are subject to review and investigation by
a number of authorities, which are enabled by law to impose extremely severe
fines, penalties and interest charges. These facts create tax risks in Russia
substantially more significant than typically found in countries with more
developed tax systems.

     The Company has had extensive tax inspections during the periods, which
have resulted in minimal penalties. These inspections have covered most of the
taxes applicable to the Company.

     Management believes that it has adequately provided for tax liabilities in
the accompanying financial statements. However, the risk remains that the
relevant authorities could take differing positions with regard to
interpretative issues and the effect could be significant.

  (b) The Year 2000 Issue (unaudited)

     The Year 2000 problem (or "Millennium Bug") arises as a result of
information systems and/or equipment with embedded chips that incorrectly read
the date 2000 and incorrectly perform calculations related to it. Any
information technology that relies on a time or date function may not operate
correctly, producing an inaccurate date when dealing with dates beyond 1999.

     The Company may experience the effects of the Year 2000 problem before, on,
or after January 1, 2000 and the effects on operations and financial reporting,
if not addressed, may range from minor errors to significant systems failures
which could affect the Company's ability to conduct normal business operations.

     It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.

     The Company is incurring significant costs in its efforts to mitigate any
possible effects of the Year 2000 problem. These costs totalled approximately
$100,000 in 1998, with approximately $80,000 planned to be spent during 1999.

  (c) Guarantees

     In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures.

                                      F-46
<PAGE>   161
                         BALTIC COMMUNICATIONS LIMITED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)


     As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. The Company is a
guarantor of such obligations. While management of PLD believe that, as long as
progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of April
30, 1999, there can be no assurance that the holders will grant such deferrals
or that they will not demand payment in full of the obligations. PLD's failure
to make payment in full could result in a claim being made against the Company
under its guarantee and a cross-default under and acceleration of the senior
discount notes and convertible subordinated notes for which the Company also
serves as a guarantor. These factors raise substantial doubt about the Company's
ability to continue as a going concern.


(10) INCOME TAXES

     At December 31, 1998 Company has deferred income tax liabilities of $30,706
(deferred tax assets of $94,000 as of December 31, 1997). As a result of the
rapid change in the regulatory environment and uncertainty surrounding the
Russian tax regime, the Company had provided a valuation allowance against the
deferred tax assets, calculated as of December 31, 1997.

     The tax effects of temporary differences that gave rise to the deferred tax
assets are as follows:

<TABLE>
<CAPTION>
                                                             1998     1997
                                                             ----    -------
<S>                                                          <C>     <C>
Expenses not yet deducted for Russian tax purposes.........  $ --     94,000
Less: valuation allowance..................................    --    (94,000)
                                                             ----    -------
  Deferred tax asset.......................................  $ --         --
                                                             ====    =======
</TABLE>

     The tax effects of temporary differences that give rise to the deferred tax
liabilities are as follows:

<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Income not recognised yet for Russian tax purposes.......  $30,706         --
                                                           -------    -------
  Deferred tax liability.................................  $30,706         --
                                                           =======    =======
</TABLE>

     The provision for current income taxes differs from that expected by
applying statutory tax rates as follows:


<TABLE>
<CAPTION>
                                                           1998        1997
                                                         ---------    -------
<S>                                                      <C>          <C>
Provision for income tax at statutory rates............  $ 130,227    393,064
Tax effect of temporary differences....................     30,706    (94,000)
Tax effect of non-deductible expenditures or losses
  deductible for statutory purposes....................   (130,227)    84,191
                                                         ---------    -------
Income tax expense.....................................  $  30,706    383,255
                                                         =========    =======
</TABLE>


 (11) RELATED PARTY TRANSACTIONS

     There have been various transactions with the following related parties:

     Teleport-TP, CPY Yellow Pages Limited, PeterStar, PLD Management Services
Limited and PLD Telekom Inc.

     These transactions are of a minor routine nature and generally involve the
provision of telecommunications services.

                                      F-47
<PAGE>   162

                          NWE CAPITAL (CYPRUS) LIMITED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM                                                          PAGE
----                                                          ----
<S>                                                           <C>
Independent auditors' report................................  F-49
Consolidated balance sheets as of December 31, 1998 and
  1997......................................................  F-50
Consolidated statements of operations for the years ended
  December 31, 1998, 1997 and 1996..........................  F-51
Consolidated statements of cash flows for the years ended
  December 31, 1998, 1997 and 1996..........................  F-52
Consolidated statements of shareholder's equity for the
  years ended December 31, 1998, 1997 and 1996..............  F-53
Notes to consolidated financial statements..................  F-54
</TABLE>

                                      F-48
<PAGE>   163

                          INDEPENDENT AUDITORS' REPORT

Shareholder and Board of Directors of
NWE Capital (Cyprus) Ltd.:

     We have audited the accompanying consolidated balance sheets of NWE Capital
(Cyprus) Ltd. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NWE Capital
(Cyprus) Ltd. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1998 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
16(d) to the consolidated financial statements, the Company's parent, PLD
Telekom Inc. (PLD) does not presently have sufficient funds on hand to meet its
current debt obligations. PLD's failure to make payment in full when required
could result in a cross-default under and acceleration of other debt obligations
for which the Company is a guarantor. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

     Without qualifying our opinion, we draw your attention to the information
contained in Note 1 to the financial statements regarding the uncertain
operating environment in Russia. The ultimate effect that these significant
economic uncertainties could have on the stated values, classification,
realisation or settlement of assets and liabilities stated in these financial
statements cannot presently be determined and accordingly no provisions have
been made.

     Without qualifying our opinion, we draw your attention to the disclosures
in Note 16 to the financial statements concerning the uncertainty relating to
the effects of the Year 2000 problem.


                                          KPMG


St. Petersburg, Russia
March 30, 1999

                                      F-49
<PAGE>   164

                           NWE CAPITAL (CYPRUS) LTD.

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                         (IN THOUSANDS OF U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents (note 7)........................  $  2,816      7,849
  Trade receivables, net of allowances of $1,788 and $3,002
     respectively...........................................    11,260     12,725
  VAT receivable............................................        --      2,154
  Other receivables and prepaids............................     2,024      3,266
  Due from related parties..................................        --        468
  Inventory.................................................     4,076      2,566
                                                              --------    -------
          Total current assets..............................    20,176     29,028
Property and equipment, net (note 6)........................   106,542     79,002
Telecommunications licenses, net of amortization of $24,077
  and $19,356, respectively (note 3)........................    37,663     42,286
Other receivables (note 4)..................................     2,012      3,012
Goodwill, net of amortization $789 and $574, respectively
  (note 5)..................................................     1,365      1,580
Other assets................................................       410        280
                                                              --------    -------
          Total assets......................................  $168,168    155,188
                                                              ========    =======
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank indebtedness (note 8)................................  $     --        900
  Accounts payable..........................................     1,980      1,971
  Accrued liabilities.......................................     2,640      3,044
  Customer deposits and advances............................     7,109      5,978
  Advances from other group companies (note 10).............    33,988     35,711
  Due to related parties....................................       462        818
  Current portion of long-term debt (note 9)................     3,479      2,180
                                                              --------    -------
          Total current liabilities.........................    49,658     50,602
                                                              --------    -------
Long-term liabilities:
  Advances from other group companies (note 10).............     4,669      6,627
  Long-term debt (note 9)...................................     7,165      7,975
                                                              --------    -------
          Total long-term liabilities.......................    11,834     14,602
                                                              --------    -------
Minority interest...........................................    28,113     19,391
Commitments and contingencies (note 16)
Shareholder's equity (note 12):
  Common stock, par value CY L1 per share. Authorised
     3,246,174 shares in 1998 and 1997; Issued and
     outstanding 3,246,174 shares in 1998 and 1997..........     7,082      7,082
  Contributed surplus.......................................    63,723     63,723
  Accumulated surplus/(deficit).............................     7,758       (212)
                                                              --------    -------
          Total shareholders' equity........................    78,563     70,593
                                                              --------    -------
          Total liabilities and shareholders' equity........  $168,168    155,188
                                                              ========    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-50
<PAGE>   165

                           NWE CAPITAL (CYPRUS) LTD.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                         (IN THOUSANDS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
                                                                1998       1997       1996
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Telecommunications revenues.................................  $113,041     85,588     52,651
Operating expenses:
  Direct costs (excludes depreciation)......................    29,081     23,120     17,527
  General and administrative................................    28,030     15,742     12,396
  Management fees...........................................     1,649      4,817      2,085
  Depreciation..............................................    10,266      7,194      4,758
  Amortization..............................................     4,935      4,936      4,884
  Taxes other than income taxes.............................     4,021      3,257      1,667
                                                              --------    -------    -------
          Total operating expenses..........................    77,982     59,066     43,317
          Operating income..................................    35,059     26,522      9,334
Other income/(expense):
  Interest and other income.................................       288        337        370
  Interest on long-term debt................................      (769)      (584)        --
  Foreign exchange loss (note 1)............................    (2,890)      (676)      (740)
  Other expense.............................................    (2,000)        --         (9)
  Settlement with minority shareholders (note 11)...........        --      5,339         --
                                                              --------    -------    -------
Income before income taxes and minority interest............    29,688     30,938      8,955
Income taxes (note 13)......................................     9,997      6,893      3,356
                                                              --------    -------    -------
          Income before minority interest...................    19,691     24,045      5,599
Minority interest...........................................    11,721     12,336      2,615
                                                              --------    -------    -------
          Net income........................................  $  7,970     11,709      2,984
                                                              ========    =======    =======
</TABLE>


          See accompanying notes to consolidated financial statements.
                                      F-51
<PAGE>   166

                           NWE CAPITAL (CYPRUS) LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                         (IN THOUSANDS OF U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                               1998        1997       1996
                                                              -------    --------    -------
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
  Net income................................................  $ 7,970      11,709      2,984
  Adjustments to reconcile net income to net cash provided
     by/(used in) operating activities:
     Depreciation and amortization..........................   15,202      12,130      9,642
     Minority interest......................................   11,721      12,336      2,615
     Settlement with minority shareholders (note 11)........       --      (5,339)        --
     Other..................................................    2,000         133          9
     Customer deposits and advances.........................    1,131       3,284        103
     Changes in working capital (note 14)...................     (332)    (10,047)      (331)
                                                              -------    --------    -------
       Net cash provided by operating activities............   37,692      24,206     15,022
                                                              -------    --------    -------
Cash flows from investing activities:
  Capital expenditures......................................  (32,056)    (19,367)   (20,652)
  Other assets..............................................     (130)         89        (58)
                                                              -------    --------    -------
          Net cash used in investing activities.............  (32,186)    (19,278)   (20,710)
                                                              -------    --------    -------
Cash flows from financing activities:
  Bank indebtedness.........................................     (900)        900         --
  Long-term debt............................................   (2,558)         --      6,247
  Advances from other group companies.......................   (4,081)     (3,591)     1,729
  Recapitalisation of PeterStar.............................       --       1,427         --
  Dividends paid............................................   (3,000)     (1,000)        --
                                                              -------    --------    -------
          Net cash (used in)/provided by financing
            activities......................................  (10,539)     (2,264)     7,976
                                                              -------    --------    -------
          (Decrease)/increase in cash and cash
            equivalents.....................................   (5,033)      2,664      2,288
  Cash and cash equivalents at beginning of year............    7,849       5,185      2,897
                                                              -------    --------    -------
  Cash and cash equivalents at end of year..................  $ 2,816       7,849      5,185
                                                              =======    ========    =======
Supplementary disclosures:
Non-cash investing and financing activities:
  Purchase of equipment with PLD advances and under
     long-term contracts....................................  $ 5,833      10,641      1,597
                                                              =======    ========    =======
  Recapitalisation of PeterStar (note 4)....................  $    --       4,012         --
                                                              =======    ========    =======
Interest paid...............................................  $ 1,685         728         --
                                                              =======    ========    =======
Income taxes paid...........................................  $10,133       6,924      3,999
                                                              =======    ========    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-52
<PAGE>   167

                           NWE CAPITAL (CYPRUS) LTD.

                CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
            (IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                                                            ACCUMULATED
                                      NUMBER OF              CONTRIBUTED     SURPLUS/
                                       SHARES      AMOUNT      SURPLUS       (DEFICIT)      TOTAL
                                      ---------    ------    -----------    -----------    --------
<S>                                   <C>          <C>       <C>            <C>            <C>
Balance at January 1, 1996..........      1,000    $    2      $    --       $(14,905)     $(14,903)
Conversion of promissory note from
  PLD Telekom Inc...................    928,591     2,000       18,000             --        20,000
Acquisition of WTC from PLD
  Telekom Inc.......................  2,316,583     5,080       45,723             --        50,803
Net income for the year.............         --        --           --          2,984         2,984
                                      ---------    ------      -------       --------      --------
Balance at December 31, 1996........  3,246,174     7,082       63,723       $(11,921)     $ 58,884
Net income for the year.............         --        --           --         11,709        11,709
                                      ---------    ------      -------       --------      --------
Balance at December 31, 1997........  3,246,174    $7,082      $63,723       $   (212)     $ 70,593
Net income for the year.............         --        --           --          7,970         7,970
                                      ---------    ------      -------       --------      --------
Balance at December 31, 1998........  3,246,174    $7,082      $63,723       $  7,758      $ 78,563
                                      =========    ======      =======       ========      ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-53
<PAGE>   168

                           NWE CAPITAL (CYPRUS) LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997
                          (THOUSANDS OF U.S. DOLLARS)

(1)  BUSINESS, OPERATIONS AND FUTURE ACTIVITIES

  (a) Background

     The Company is incorporated under the laws of Cyprus. The Company is a
wholly-owned subsidiary of PLD Telekom Inc. ("PLD" or the "Parent"). Through its
majority-owned and controlled subsidiaries, the Company is a provider of local,
long distance and international telecommunications services in the former Soviet
Union.

     The Company's telecommunications businesses are at various stages of
development and are growing in emerging economies which, by their nature, have
uncertain economic, political and regulatory environments. The general risks of
operating businesses in the former Soviet Union include the possibility for
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations.

     Ultimate recoverability of the Company's investments is dependent upon
their ability to maintain profitability, which is dependent to a certain extent
on the stabilisation of the economies of the former Soviet Union, the ability to
maintain the necessary telecommunications licenses and the ability to obtain
adequate financing to meet capital commitments.

     The Company is in a net current liability position and will require the
continued support of PLD in order to meet its obligations as they fall due.

  (b) Russian Business Environment

     In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other environments.

     The immediate and ongoing effects of severe economic instability in Russia
include or may include slower economic growth or decline, a reduction in the
availability of credit and the ability to service debt, volatile interest rates,
changes and increases in taxes, higher inflation or hyperinflation, further
devaluation of the rouble, restrictions on convertibility and movements of
funds, bankruptcies including bank failures, and other severe economic and
political consequences. These conditions and future policy changes could have a
material adverse effect on the operations of the Company and the realisation and
settlement of its assets and liabilities.

     The accompanying financial statements reflect management's current
assessment of the impact of the economic situation on the financial position of
the Company. Actual results could differ from management's current assessments
and such differences could be material. In addition, the effect of future
developments on the Company's financial position and the ability of others to
continue to transact with the Company cannot presently be determined. The
financial statements therefore may not include all adjustments that might
ultimately result from these adverse conditions.

  (c) Uncertain Operating Environment in Russia

     The recoverability of the Company's assets, as well as the future operation
of the Company, may be significantly affected by the current and future economic
environment in Russia. The accompanying financial statements do not include any
adjustments with regard thereto.

  (d) Convertibility of the Rouble

     The Russian rouble is not a convertible currency outside the Russian
Federation and, accordingly, any conversion of Russian rouble amounts to US
dollars should not be construed as a representation that Russian

                                      F-54
<PAGE>   169
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

rouble amounts have been, could be, or will be in the future, convertible into
US dollars at the exchange rate used, or at any other exchange rate.

     The ability of the Russian government to maintain the stability of the
rouble will depend on many political and economic factors, including its ability
to control inflation and the availability of sufficient reserves to support the
rouble. Uncertainty also exists with respect to the Central Bank's policy
direction. The possibility of further restrictions on convertibility and
currency movements cannot be ruled out.

     As a result of the significant devaluation of the rouble during the latter
part of 1998 the Company's subsidiary PeterStar has suffered foreign exchange
losses of approximately $2.9 million. The corresponding loss in 1997 was
approximately $0.7 million and in 1996 was approximately $0.7 million. The major
portion of the loss in 1998 relates to a period in August/September 1998, when
it was difficult to convert roubles into other currencies.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company's significant accounting policies are summarised as follows:

  (a) Basis of Presentation

     The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP) and present the financial position and results of operations of the
Company and subsidiaries (the "Company") on a stand-alone basis. The Company
incurs and pays its own expenses. Management assistance is provided by the
Parent under the terms of negotiated management agreements and specific costs
incurred by the Parent on behalf of the Company are charged thereto. All
intercompany transactions and charges are disclosed in note 15, "Related Party
Transactions".

     Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 13, "Income Taxes".

     Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or lease agreements and are not a result of
allocations of interest by the Parent or its subsidiaries.

     Telecommunications license amortization expense is based upon the cost of
the licenses. Amortization expense is calculated on a straight-line basis over
the terms of the licenses including the portion of the Parent's investment in
the Company which has been allocated to telecommunications licenses and pushed
down into the Company's consolidated financial statements.

     There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements. Refer to note 15, "Related Party
Transactions". Management of the Company believes that the accompanying
consolidated financial statements include all the costs incurred by the Company
in its operations.

  (b) Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

                                      F-55
<PAGE>   170
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  (c) Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1998
and 1997, the Company's cash equivalents consist of term deposits of $1.4
million and $4.6 million respectively.

  (d) Revenue Recognition

     The Company records telecommunication revenues as earned, at the time
services are provided with the exception of terminal sales. Terminal sales are
recognised when the equipment is delivered and the supporting contract is
signed.

  (e) Inventory

     Inventory is stated at the lower of average cost or net realisable value
and is comprised of telephony products held for resale to customers.

  (f) Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<S>                                                 <C>
Telecommunications equipment....................     10 years
Buildings.......................................     10 years
Office furniture and equipment..................    3-5 years
Leasehold improvements..........................     15 years
</TABLE>

     Interest costs incurred during the period of installation of
telecommunications equipment are capitalised. The interest cost capitalised in
1998 amounted to $1,289,628 (1997: $927,791, 1996: $0).

  (g) Telecommunications Licenses

     Telecommunications licenses are amortized on a straight-line basis over the
terms of the licenses.

  (h) Goodwill

     Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired of C.P.Y. Yellow Pages Limited, and is being
amortized on a straight-line basis over ten years.

  (i) Fair Value of Financial Instruments

     The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, trade and other receivables, amounts due from or to
related parties, bank indebtedness and accounts payable approximate fair value
due to their short maturities. The fair value of long-term debt is based on
discounted cash flow analysis.

  (j) Reporting Currency and Foreign Currency Translation

     The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.

     Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."

                                      F-56
<PAGE>   171
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the exchange rates effective at
the date of the transaction. Translation differences resulting from the use of
these different rates are included in the accompanying consolidated statements
of operations.

  (k) Income Taxes

     Tax on the profit or loss for the year comprises current tax and the change
in deferred tax. Current tax comprises tax payable calculated on the basis of
the expected taxable income for the year, using the tax rates enacted at the
balance sheet date, and any adjustment of tax payable for previous years.

     Deferred tax is provided using the balance sheet liability method on all
temporary differences between the carrying amounts for financial reporting
purposes and the amounts used for taxation purposes, except differences relating
to the initial recognition of assets or liabilities which affect neither
accounting nor taxable profit (taxable loss).

     The tax value of losses expected to be available for utilisation against
future taxable income is set off against the deferred tax liability within the
same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realised.

     Deferred tax is calculated on the basis of the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled.
The effect on deferred tax of any changes in tax rates is charged to the
statement of operations, except to the extent that it relates to items
previously charged or credited directly to equity.

  (l) 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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.

  (m) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

     The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", on January 1, 1996. SFAS
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

  (n) Comprehensive Income

     SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement
                                      F-57
<PAGE>   172
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that is displayed with the same prominence as other financial statements. The
Company adopted SFAS 130 as at January 1, 1998. For the years ended December 31,
1998, 1997, and 1996 comprehensive income was equal to net income reported in
the statement of operations. As SFAS 130 only requires additional disclosures in
the Company's financial statements, its adoption did not have any impact on the
Company's financial position or results of operations.

  (o) Reclassifications

     Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.

(3)  BUSINESSES AND ACQUISITIONS

     The Company's key interests at December 31, 1998 include a 60% equity
interest in PeterStar Company Limited ("PeterStar") and a 50% indirect equity
interest in ALTEL (before April 1998 named BECET International).

  (a) PeterStar

     PeterStar is a joint stock company registered in 1992 under the laws of the
Russian Federation to provide international and domestic telecommunications
services to St. Petersburg, Russia. In November 1994, PeterStar was granted a
license to provide these services for a further ten years. The license was
reissued in June 1996 and sets the number of lines which PeterStar may have and
requires that at least 74,200 lines be introduced by June 1999. At December 31,
1998, PeterStar had 168,166 lines in place.

     Other licenses, all of which expire in 2001, are for telematic services,
video conferencing, data services and the operation of a dedicated
national/international overlay network. These licenses are generally renewed on
application. Grounds for termination of licenses are broad and subjective and
there is little precedent upon which to determine the practical likelihood of
termination.

     In October 1992, PLD acquired a 50% interest in PeterStar for consideration
of $20.0 million. All of the consideration was allocated to telecommunications
licenses. This interest was subsequently transferred to the Company in exchange
for a promissory note in the amount of $20.0 million. During 1996 the promissory
note was exchanged for 928,591 shares of the Company.

     In March 1994, PLD acquired 90% of the outstanding shares of PMT Ltd., a
Russian company whose sole asset was a 10% interest in PeterStar, for
consideration of $8.2 million. PLD acquired the remaining 10% of PMT Ltd. in
April 1996 for consideration of $1.8 million. All of the consideration was
allocated to telecommunications licenses. In April 1996, PLD transferred its 10%
interest in PeterStar to the Company in exchange for a $10.0 million
non-interest bearing promissory note payable on demand and convertible to common
shares at the option of either PLD or the Company. This acquisition has been
accounted for using the continuity of interests method. Accordingly, PLD's
historical cost of the PeterStar telecommunications licenses transferred to the
Company is recorded in these financial statements and comparative figures have
been restated to reflect the historical net book value of the PeterStar licenses
and the related amortization expense.

  (b) ALTEL

     ALTEL provides cellular services pursuant to a 15 year license to operate a
cellular and mobile telephone system in Kazakstan until February 2009. The
Company's 50% interest in ALTEL is held by its wholly-owned subsidiary, Wireless
Technology Corporations Limited ("WTC"), a company incorporated in the territory
of the British Virgin Islands.

                                      F-58
<PAGE>   173
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In March 1994, PLD acquired all the outstanding shares of WTC for
consideration of $30.0 million. The acquisition was accounted for by the
purchase method. As of the date of acquisition, ALTEL had not commenced
operations and did not have any tangible assets or liabilities. Therefore, the
entire purchase price, including acquisition costs of $0.8 million was allocated
to telecommunications licenses. ALTEL commenced commercial operations in
September 1994. During 1994 and 1995, PLD contributed additional equity of $20.0
million to WTC which in turn contributed $20.0 million of working capital and
equipment to ALTEL in exchange for its 50% equity interest.

     On January 5, 1996, PLD transferred its shares in WTC to the Company for
consideration of 2,316,583 shares of the Company. This acquisition has been
accounted for using the continuity of interests method. Accordingly, PLD's
historical cost of the ALTEL license is recorded in these financial statements
and comparative figures have been restated to reflect the historical net book
value of the licenses and the related expense.

(4)  OTHER RECEIVABLES

     During 1997, a $13.6 million receivable by PLD from PeterStar was assigned
to the Company. This amount was subsequently repaid by PeterStar with proceeds
from a share issue. $4.0 million was advanced to a minority shareholder of
PeterStar so that it could participate in the share issue. $4.0 million of the
assigned amount is outstanding at December 31, 1998, all of which is classified
as long-term (1997: $4.0 million, of which $3.0 million was classified as
long-term and $1.0 million was classified as short-term). At the end of 1998, as
a result of the economic conditions in Russia, the Company recorded a $2.0
million valuation allowance against the $4.0 million receivable.

(5)  GOODWILL

     Effective April 26, 1995, PLD acquired all the outstanding shares of C.P.Y.
Yellow Pages Limited ("Yellow Pages"), a company incorporated in the Republic of
Cyprus, for consideration of $2.1 million. Yellow Pages publishes a Yellow Pages
directory and owns a database of Russian and foreign businesses in St.
Petersburg. The acquisition was accounted for by the purchase method and
substantially all of the consideration was allocated to goodwill.

     On March 1, 1996, PLD transferred the shares of Yellow Pages to the Company
in exchange for a non-interest bearing promissory note in the amount of $2.1
million. The note is payable in ten years and may be converted to common shares
at the option of either PLD or the Company. This transaction has been accounted
for as a transfer of assets between entities under common control and, as such,
the assets are reflected at PLD's historical cost.

                                      F-59
<PAGE>   174
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6)  PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 1998 and 1997 consist of the
following (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Telecommunications equipment:
  Installed.................................................  $ 84,388     68,492
  Uninstalled...............................................    31,289     11,473
Buildings...................................................     2,760      2,333
Office furniture and equipment..............................     5,714      4,156
Leasehold improvements......................................     5,929      5,277
Advances to equipment suppliers.............................     3,124      3,917
                                                              --------    -------
          Total property and equipment......................   133,204     95,648
Less accumulated depreciation...............................   (26,662)   (16,646)
                                                              --------    -------
  Property and equipment, net...............................  $106,542     79,002
                                                              ========    =======
</TABLE>

     Property and equipment includes telecommunications equipment with a cost of
$30.0 million (1997: $16.5 million) which has been pledged under the terms of
long-term instalment agreements and $0 (1997: $6.6 million) which has been
acquired under capital lease (notes 9 and 10).

(7)  CASH AND CASH EQUIVALENTS

     The Company's cash and cash equivalents at December 31, 1998 and 1997
consist of the following (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Cash on deposit:
  In Russia and Kazakstan...................................  $2,816    $6,621
  Outside Russia and Kazakstan..............................      --     1,228
                                                              ------    ------
                                                              $2,816     7,849
                                                              ======    ======
</TABLE>

(8)  BANK INDEBTEDNESS

     At December 31, 1998, the Company had no bank indebtedness. In December
1997, PeterStar entered into a $2.0 million, one-year loan facility with BNP
Dresdner Bank for the purchase of telecommunications equipment. Interest was
charged on borrowed amounts at three-month LIBOR plus 2.5% per annum. The
amounts drawn on the loan facility at December 31, 1997 were $0.9 million. The
bank indebtedness was guaranteed by PLD.

                                      F-60
<PAGE>   175
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9)  LONG-TERM INDEBTEDNESS

     Amounts payable under the terms of the long-term instalment purchase
agreements are as follows (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
Less than one year..........................................  $ 4,381     3,060
One to two years............................................    4,129     3,214
Two to three years..........................................    2,424     2,595
Three to four years.........................................    1,158     1,927
Four to five years..........................................      530     1,791
                                                              -------    ------
          Total minimum payments............................   12,622    12,587
Amounts representing interest...............................   (1,978)   (2,432)
                                                              -------    ------
                                                               10,644    10,155
Current portion.............................................    3,479     2,180
                                                              -------    ------
Non-current portion.........................................  $ 7,165     7,975
                                                              =======    ======
</TABLE>

     Amounts payable are in respect of purchases of telecommunications equipment
under long-term instalment purchase agreements. They represent future amounts
payable discounted at a rate of 8% per annum. They are secured by pledges of the
related assets until final payment is made in 2002.

(10)  ADVANCES FROM OTHER GROUP COMPANIES

     Amounts due to other group companies as of December 31, 1998 and 1997 are
as follows:

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
PLD Telekom Inc.............................................  $28,222    $33,701
PLD Capital Asset (U.S.) Inc................................   10,214         --
PLD Asset Leasing Limited...................................       --      7,384
PLD Management Services Ltd.................................      221      1,253
                                                              -------    -------
          Total.............................................   38,657     42,338
Current portion.............................................   33,988     35,711
                                                              -------    -------
Non current portion.........................................  $ 4,669    $ 6,627
                                                              =======    =======
</TABLE>

     The amounts due to PLD at December 31, 1998 and 1997, represent advances
($25.7 million) to PeterStar and NWE, and fees due to PLD for management
services ($2.3 million) provided to PeterStar and ALTEL. Such amounts have no
scheduled repayment terms and are classified as current.

     In September 1996, PeterStar entered into a capital lease for switching
equipment. The lessor of the equipment was PLD Asset Leasing Limited (PLDAL), a
Cypriot company and a wholly owned subsidiary of PLD. During the first six
months of 1998, PeterStar entered into three additional leases, with PLD as the
lessor. On June 25, 1998, the interests in all of these leases were transferred
to PLD Capital Asset (U.S.) Inc. (PLDCA), a United States company, which is also
wholly owned by PLD. The three additional leases entered into during 1998
resulted in approximately $2.1 million of equipment acquired under capital
leases and a capital lease liability of an equal amount. At the date of
transfer, the net liability under capital leases amounted to approximately $1.8
million. On the date of transfer, the capital leases were restructured as
installment purchase agreements with substantially the same payment terms.
Additionally, during 1998, PeterStar entered into an additional installment
purchase agreement with PLDCA for approximately $1.1 million of equipment. All
installment purchase agreements carry interest rates ranging from 8% to 10%.

                                      F-61
<PAGE>   176
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Future payments due under these installment purchase agreements, including
interest, are as follows:

<TABLE>
<S>                                                           <C>
1999........................................................  $ 6,220
2000........................................................    2,623
2001........................................................    2,338
2002........................................................      350
                                                              -------
          Total payments....................................   11,531
Less: amount representing interest..........................    2,436
                                                              -------
Principal amounts due.......................................    9,095
Add: accrued interest at December 31, 1998..................    1,119
                                                              -------
          Total due to PLDCA................................  $10,214
                                                              =======
</TABLE>

     $12.1 million in advances from PLD Telekom Inc. arose on the acquisition of
a 10% interest in PeterStar and on the acquisition of Yellow Pages (notes 3(a)
and 5).

(11)  SETTLEMENT WITH MINORITY SHAREHOLDERS

     During 1997, the Company and the minority shareholders of PeterStar reached
a settlement regarding management fees and other costs previously charged by the
Company, and expensed by PeterStar. As a result of the settlement, a charge to
PeterStar of $5.4 million was disallowed. This amount was reflected by the
Company as an increase in expenses.

(12)  COMMON STOCK

     At December 31, 1998 and 1997 the authorised capital stock of the Company
consists of 3,246,174 common shares with par value of CY (pound) 1 per share.
3,246,174 shares are issued and outstanding as of December 31, 1998 and 1997.

     Distributable reserves are restricted to the retained earnings of the
Company's subsidiaries which are determined according to Russian, Cypriot and
British Virgin Islands legislation. At December 31, 1998, that amount is the
rouble equivalent of $6.7 million (1997 -- $14.8 million). No dividends have
been approved for payment.

                                      F-62
<PAGE>   177
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13)  INCOME TAXES

     PeterStar and ALTEL are subject to income tax at statutory rates of 33% and
30%, respectively. The provision for income taxes, which relates substantially
to current income taxes in PeterStar and ALTEL, differs from the U.S. federal
and state statutory tax rates as follows (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                           1998       1997      1996
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Provision for income taxes at statutory rates...........  $10,391    10,828     3,134
Add/(deduct) the tax effect of:
  Exchange differences..................................   (7,661)       --        --
  Difference in rate....................................     (979)       58       692
  Foreign withholding taxes.............................      450        --        --
  Other.................................................      (96)       --        --
  Non-deductible amortization of licenses and
     goodwill...........................................    1,835       633       626
  Other non-deductible expenses.........................    4,075     1,045     1,348
  Concessions on capital expenditures...................     (726)   (3,775)   (2,292)
  Change in valuation allowance related to deferred tax
     assets.............................................    2,708    (1,896)     (152)
                                                          -------    ------    ------
          Provision for income tax......................  $ 9,997     6,893     3,356
                                                          =======    ======    ======
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
Deferred tax assets:
  Expenses not yet deducted for Russian and Kazakh tax
     purposes...............................................  $ 3,571       863
Less: valuation allowance...................................   (3,571)     (863)
                                                              -------    ------
                                                              $    --        --
                                                              =======    ======
</TABLE>

     As a result of the rapid change in the regulatory environment and
uncertainty surrounding the Russian and Kazakh tax regimes, the Company has
provided a valuation allowance against deferred tax assets.

                                      F-63
<PAGE>   178
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(14)  CHANGES IN WORKING CAPITAL

     Changes in working capital in each of the years in the three year period
ended December 31, 1998 consist of the following (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                               1998        1997       1996
                                                              -------    --------    -------
<S>                                                           <C>        <C>         <C>
Decrease/(Increase) in trade receivables....................  $ 1,465      (6,832)    (2,465)
Decrease/(Increase) in VAT receivable.......................    2,154      (1,528)       281
(Increase)/Decrease in other receivables and prepaids.......   (1,758)     (1,088)     1,592
Increase in inventory.......................................   (1,510)       (868)      (409)
Change in amounts due from or to related parties............     (288)        213         --
(Decrease)/Increase in amounts payable and accrued
  liabilities...............................................     (395)         56        670
                                                              -------    --------    -------
Changes in working capital..................................  $  (332)    (10,047)      (331)
                                                              =======    ========    =======
</TABLE>

(15)  RELATED PARTY TRANSACTIONS

     (a)  Petersburg Telephone Network ("PTN"), an indirect minority shareholder
          of PeterStar has provided PeterStar during the years 1998, 1997 and
          1996 with office space in St. Petersburg for no consideration.

     (b)  Lease payments for the office in Almaty and other premises of $0.3
          million, $0.1 million and $0.1 million for each of the years ended
          December 31, 1998, 1997 and 1996 were paid by ALTEL to Kazakhtelecom
          ("KT"), the other shareholder of ALTEL. There was no balance
          outstanding in relation to these leases as of December 31, 1998 and
          1997.

     (c)  PeterStar entered into a barter agreement with PTN under which the two
          parties have exchanged services valued at $2.7 million, $3.4 million
          and $3.0 million during 1998, 1997 and 1996, respectively. The amounts
          are recorded in the consolidated statements of operations as
          telecommunications revenues and direct costs. During 1998 the Company
          paid $1.2 million to PTN for certain of these services.

     (d)  Direct costs for the years ended December 31, 1998, 1997 and 1996
          include $4.4 million, $4.2 million and $3.3 million, respectively,
          paid to KT in relation to the carriage of traffic over the public
          telephone network. Balances outstanding of $0.5 million, $0.8 million
          and $0.2 million as of December 31, 1998, 1997 and 1996, respectively,
          in relation to these charges, are included in due to related parties.

     (e)  PeterStar entered into a capital lease with a wholly-owned subsidiary
          of PLD in 1996 (see note 10).

     (f)  During 1998, PeterStar entered into a series of agreements with PTN
          under which PeterStar exchanged telecommunications equipment for
          telecommunications and other facility infrastructures. The total value
          of equipment exchanged during 1998 is $2.6 million. The infrastructure
          received under this exchange has been valued at the same amount. As a
          result of this arrangement PeterStar will be the sole provider of
          telecommunications services to one of the districts of St. Petersburg.

     (g)  During 1998, PeterStar paid a total of $1.2 million on behalf of PTN.
          This amount has been capitalised as a prepayment in relation to the
          purchase of an exchange building.

     (h)  PLD charged management fees of $2.1 million related to PeterStar and
          $1.6 million related to ALTEL during the year ended December 31, 1998
          (1997 -- $2.0 million and $1.2 million, respectively; 1996 -- $1.2
          million and $0.9 million, respectively). These amounts are recorded in

                                      F-64
<PAGE>   179
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          the consolidated statements of operations as management fee expense.
          Balances outstanding of $0.1 million and $0.1 million as of December
          31, 1998 and 1997 respectively are included in advances from other
          group companies.

     (i)   PeterStar was charged management fees of $5.6 million, $1.7 million
           and $42,000 during 1998, 1997 and 1996, respectively, by OAO
           Telecominvest, a minority shareholder. These are included as general
           and administrative expenses in the consolidated statements of
           operations. As at December 31, 1998, PeterStar has prepaid a further
           $0.4 million in relation to management fees.


     (j)   Consulting fees of $0.4 million, $0.1 million and $0.1 million for
           the years ended December 31, 1998, 1997 and 1996 respectively, were
           paid by ALTEL to KT. These amounts are included in general and
           administrative expenses. There was no balance outstanding as of
           December 31, 1998 and 1997 in relation to these charges.


     (k)  Additional charges, related to management services of $0.1 million,
          $0.2 million and $26,000 for the years ended December 31, 1998, 1997
          and 1996 respectively, were charged to ALTEL by PLD and another PLD
          subsidiary. These amounts are recorded in the consolidated statements
          of operations as general and administrative expenses.

     (l)   PeterStar was charged $0 in service fees by PLD relating to recharged
           expenses and capital equipment in 1998 (1997: $3.6 million, 1996:
           $2.1 million). These amounts have been recorded in general and
           administrative expenses in the consolidated statements of operations
           or property and equipment in the consolidated balance sheets as
           appropriate.

     (m) During 1996 PeterStar entered into a five year instalment purchase
         agreement with PTN, an indirect minority shareholder, for
         telecommunications equipment. Total contract value was $13.7 million
         (note 9).

     (n)  During 1998, PeterStar entered into three year (1997: three to five
          year) instalment purchase agreements with wholly-owned subsidiaries of
          PLD for telecommunications equipment. The total contract value was
          $1.9 million (1997: $2.3 million) (note 10).

     (o)  During 1997, the Company forgave certain amounts due to it from
          PeterStar, resulting in a loss to the Company of $5.4 million (note
          11).

(16)  COMMITMENTS AND CONTINGENCIES

  (a) Purchase Commitments

     At December 31, 1998 PeterStar has commitments of approximately $3.4
million under long-term instalment purchase agreements. All commitments relate
to acquisition of the undelivered portion of telecommunications equipment from
suppliers as outlined in note 9. The related contracts provide for financing of
the amounts over approximately five years.

  (b) Russian and Kazak Taxation

     The PeterStar and ALTEL subsidiaries have accrued profits and other taxes
based on interpretations of the law which may ultimately be disputed by the
local taxation authorities.

     Russia currently has a number of laws related to various taxes imposed by
both federal and regional governmental authorities. Applicable taxes include
value added tax, corporation tax ("profit tax"), a number of turnover based
taxes, and payroll (social) taxes, together with others.

     Laws related to these taxes have not been in force for significant periods,
in contrast to more developed market economies. Therefore, regulations are often
unclear, open to wide interpretation, and in some instances

                                      F-65
<PAGE>   180
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

are conflicting. Accordingly few precedents with regard to issues have been
established. Often, differing opinions regarding legal interpretation exist both
among and within government ministries and organisations (like the State Tax
Service and its various inspectorates), thus creating uncertainties and areas of
conflict.

     Tax declarations, together with other legal compliance areas (as examples,
customs and currency control matters) are subject to review and investigation by
a number of authorities, which are enabled by law to impose extremely severe
fines, penalties and interest charges. These facts create tax risks in Russia
substantially more significant than typically found in countries with more
developed tax systems.

     PeterStar has had extensive tax inspections during the periods, which have
resulted in minimal penalties. These inspections have covered most of the taxes
applicable to PeterStar.

     Management believes that it has adequately provided for tax liabilities in
the accompanying financial statements. However, the risk remains that the
relevant authorities could take differing positions with regard to
interpretative issues and the effect could be significant.

  (c) Management Services

     On January 1, 1995, WTC entered into a two year agreement with PLD, under
which PLD would provide certain consulting, informational services, management
support services and personnel expertise. Payments under this agreement were
$25,000 per month plus 3% of monthly gross revenues. This agreement was renewed
for a further year on January 1, 1997 and was terminated as of December 31,
1997. On January 1, 1998, ALTEL entered into an agreement directly with PLD
covering the same range of services, with payments of $25,000 per month plus
3.4% of monthly gross revenues. This agreement was for a one year term,
automatically renewable for successive one year periods unless terminated by
either party.


  (d) Guarantees


     In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures.


     As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. While management
of PLD believe that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of April 30, 1999, there can be no assurance that the
holders will grant such deferrals or that they will not demand payment in full
of the obligations. PLD's failure to make payment in full could result in a
cross-default under and acceleration of the senior discount notes and
convertible subordinated notes for which the Company serves as a guarantor.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.


  (e) Motorola, USA

     Motorola, USA is the major supplier of ALTEL's network equipment. Under the
supply contract, ALTEL files preliminary purchase orders for the delivery of
equipment with a prepayment of 5% of the cost of the purchase order. Once a
purchase order is presented, ALTEL may be exposed to potential liabilities to
Motorola, USA in the amount of $1.2 million as at December 31, 1998.

  (f) The Year 2000 Issue (unaudited)

     The Year 2000 problem (or "Millennium Bug") arises as a result of
information systems and/or equipment with embedded chips that incorrectly read
the date 2000 and incorrectly perform calculations

                                      F-66
<PAGE>   181
                           NWE CAPITAL (CYPRUS) LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

related to it. Any information technology that relies on a time or date function
may not operate correctly, producing an inaccurate date when dealing with dates
beyond 1999.

     The Company may experience the effects of the Year 2000 problem before, on,
or after January 1, 2000 and the effects on operations and financial reporting,
if not addressed, may range from minor errors to significant systems failures
which could affect the Company's ability to conduct normal business operations.

     It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.

     The Company is incurring significant costs in its efforts to mitigate any
possible effects of the Year 2000 problem.

                                      F-67
<PAGE>   182

                           PLD ASSET LEASING LIMITED

                              FINANCIAL STATEMENTS

      YEAR ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED DECEMBER 31, 1996


                                    CONTENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent auditors' report................................  F-69
Balance sheet...............................................  F-70
Statements of operations and retained earnings/(deficit)....  F-71
Statements of cash flows....................................  F-72
Notes to the financial statements...........................  F-73
</TABLE>


                                      F-68
<PAGE>   183

                          INDEPENDENT AUDITORS' REPORT

SHAREHOLDER AND BOARD OF DIRECTORS

PLD ASSET LEASING LIMITED


     We have audited the accompanying balance sheets of PLD Asset Leasing
Limited as of December 31, 1997 and 1996, and the related statements of
operations and retained earnings/(deficit) and cash flows for the year ended
December 31, 1997 and the nine months ended December 31, 1996. 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 audit 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 audit provides a reasonable basis for our opinion.


     In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of PLD Asset Leasing Limited as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and the nine months ended December
31, 1996 in conformity with accounting principles generally accepted in the
United States.


                                          MOORE STEPHENS
                                          CHARTERED ACCOUNTANTS

Nicosia, Cyprus
May 20, 1998

                                      F-69
<PAGE>   184

                           PLD ASSET LEASING LIMITED

                                 BALANCE SHEETS

                        AS AT DECEMBER 31, 1997 AND 1996

                      (EXPRESSED IN UNITED STATES DOLLARS)


<TABLE>
<CAPTION>
                                                              NOTE       1997         1996
                                                              ----    ----------    ---------
<S>                                                           <C>     <C>           <C>
ASSETS
  CURRENT:
     Cash...................................................          $   10,482       10,490
     Lease payments receivable-interest.....................   5         782,849           --
     Lease payments receivable-principal....................   5       2,117,954      977,151
                                                                      ----------    ---------
                                                                       2,911,285      987,641
  NON CURRENT:
     Lease payments receivable-principal....................   5       4,483,483    5,624,287
                                                                      ----------    ---------
                                                                      $7,394,768    6,611,928
                                                                      ==========    =========
LIABILITIES & SHAREHOLDERS' EQUITY
  CURRENT LIABILITIES:
     Accounts payable.......................................   6              --    2,065,420
     Taxation payable.......................................              35,739           --
     Accrued liabilities....................................   3           8,281        5,667
     Due to PLD Telekom Inc.................................           6,638,607    4,571,121
                                                                      ----------    ---------
                                                                       6,682,627    6,642,208
SHAREHOLDER'S EQUITY/(DEFICIT)
  CAPITAL STOCK:
     Share capital -- 1,000 ordinary shares of Cy Pds 1 per
       share, issued and fully paid.........................   4           2,140        2,140
                                                                      ----------    ---------
                                                                      ----------    ---------
                                                                           2,140        2,140
Retained earnings/(deficit).................................             710,001      (32,420)
                                                                      ----------    ---------
                                                                         712,141      (30,280)
                                                                      ----------    ---------
                                                                      $7,394,768    6,611,928
                                                                      ==========    =========
</TABLE>


             The notes on pages F-73 and F-74 form an integral part
                         of these financial statements
                                      F-70
<PAGE>   185

                           PLD ASSET LEASING LIMITED


            STATEMENTS OF OPERATIONS AND RETAINED EARNINGS/(DEFICIT)


      YEAR ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED DECEMBER 31, 1996

                      (EXPRESSED IN UNITED STATES DOLLARS)


<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
REVENUE:
  Finance lease income......................................  $782,849    $     --

OPERATING EXPENSES:
  General and administrative................................     4,681      31,475
  Interest expense..........................................         8         945
                                                              --------    --------
  Total operating expenses..................................     4,689      32,420
                                                              ========    ========
Income/(loss) before income taxes...........................   778,160     (32,420)
Income taxes................................................    35,739          --
                                                              --------    --------
Net income/(loss)...........................................  $742,421     (32,420)
Retained earnings/(deficit), beginning of period............   (32,420)         --
                                                              --------    --------
Retained earnings/(deficit), end of period..................  $710,001    $(32,420)
                                                              ========    ========
</TABLE>


             The notes on pages F-73 and F-74 form an integral part
                         of these financial statements
                                      F-71
<PAGE>   186

                           PLD ASSET LEASING LIMITED

                            STATEMENTS OF CASH FLOWS

      YEAR ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED DECEMBER 31, 1996


                      (EXPRESSED IN UNITED STATES DOLLARS)



<TABLE>
<CAPTION>
                                                                 1997           1996
                                                              -----------    -----------
<S>                                                           <C>            <C>
CASH PROVIDED BY/(USED IN):
OPERATIONS:
Net income/(loss)...........................................  $   742,421    $   (32,420)
Non-cash items:
Changes in non-cash working capital.........................   (3,950,719)     1,093,936
                                                              -----------    -----------
                                                               (3,208,298)     1,061,516
INVESTING:
Lease payments receivable...................................    1,140,804     (5,624,287)
                                                              -----------    -----------
                                                                1,140,804     (5,624,287)
FINANCING:
Due to PLD Telekom Inc......................................    2,067,486      4,571,121
Issue of share capital and premium..........................            0          2,140
                                                              -----------    -----------
                                                                2,067,486      4,573,261
                                                              -----------    -----------
(Decrease)/increase in cash and cash equivalents............           (8)        10,490
Cash and cash equivalents, beginning of period..............       10,490              0
                                                              -----------    -----------
Cash and cash equivalents, end of period....................  $    10,482    $    10,490
                                                              ===========    ===========
</TABLE>


             The notes on pages F-73 and F-74 form an integral part
                         of these financial statements
                                      F-72
<PAGE>   187

                           PLD ASSET LEASING LIMITED

                       NOTES TO THE FINANCIAL STATEMENTS
                               DECEMBER 31, 1997
                      (EXPRESSED IN UNITED STATES DOLLARS)

1.  ACTIVITIES


     The Company has entered into a lease agreement at the end of 1996 to
provide telecommunications equipment to ZAO PeterStar, a Russian Company.


2.  ACCOUNTING POLICIES

     2.1.  ACCOUNTING CONVENTION

     The financial statements have been prepared under the historical cost
convention.

     2.2.  CURRENCY

     The books of the Company are maintained in United States Dollars and the
accompanying financial statements and notes thereto are expressed in this
currency.

     2.3.  TRANSLATION IN FOREIGN CURRENCIES

     Balances in foreign currency are translated at the closing rates prevailing
at the balance sheet date.


     Expenses denominated in currencies other than US$ are recorded in the
accounting records and stated in the financial statements at the amounts
actually converted into US$ at the rate ruling on the transaction date.


     2.4.  FINANCE LEASES


     Leases are recognised in the Company's balance sheet as a receivable equal
to the net investment in the lease. Unearned interest income is recognised in
the profit and loss at a constant periodic rate of return. Minimum lease
payments due within one year are shown as current assets.



3.  ACCRUED LIABILITIES



<TABLE>
<CAPTION>
                                                              1997     1996
                                                              US $     US $
                                                              -----    -----
<S>                                                           <C>      <C>
Professional fees...........................................  8,281    5,667
                                                              =====    =====
</TABLE>


4.  SHARE CAPITAL


     The Company's authorized share capital of Cy Pds 1,900,000 is made up of
1,900,000 ordinary shares with a par value of Cy Pds 1 each.


     The Company's issued and fully paid share capital amounts to Cy Pds 1,000
made up of 1,000 ordinary shares of Cy Pds 1 each.

     The amount of US $2,140 represents the equivalent of Cy Pds 1,000
translated at the exchange rate ruling on the date of issue.

                     The above notes form an integral part
                         of these financial statements
                                      F-73
<PAGE>   188
                           PLD ASSET LEASING LIMITED

                NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

5.  FINANCE LEASES


<TABLE>
<CAPTION>
                                                          1997         1996
                                                          US $         US $
                                                        ---------    ---------
<S>                                                     <C>          <C>
Gross investment in the lease.........................  8,800,000    8,800,000
Unearned interest income..............................  1,415,713    2,198,562
                                                        ---------    ---------
                                                        7,384,287    6,601,438
                                                        =========    =========
Amounts receivable within one year....................  2,900,804      997,151
Amounts receivable after more than one year...........  4,483,483    5,604,287
                                                        ---------    ---------
                                                        7,384,287    6,601,438
                                                        =========    =========
</TABLE>


6.  ACCOUNTS PAYABLE

     Represent amounts due to equipment suppliers relating to the finance lease
entered into by the Company.

7.  TAXATION

     The Company is liable to income tax under Section 28(a) of the Cyprus
Income Tax Laws.

     The Company has tax payable of US $35,739 (Cy Pds 18,379).

8.  SHAREHOLDERS ADVANCES

     The advances are interest free and without fixed date of repayment.

9.  SECURITIES, PLEDGES AND CHARGES


     a) The Company's shares have been pledged as collateral security in
relation to US $123 million of Senior Discount Notes issued by the parent
company.


     b) A charge has been established on the Company's receipts from the parent
company, fees receivable from subsidiaries and receipts from other leasing
companies as collateral for the US $123 million "Senior Discount Notes" issued
by the parent company.


     c) An assignment of the Company's lease rental receipts, receivable from
ZAO Peterstar amounting to US $8,800,000, has been made.


   All the above described charges, pledges and assignments are in favour of The
   Bank of New York.

10.  POST BALANCE SHEET EVENTS


     The Company allotted an additional 349,000 ordinary shares to the existing
shareholders on May 4, 1998, increasing the issued share capital to Cy Pds
350,000 (nominal value).


                     The above notes form an integral part
                         of these financial statements
                                      F-74
<PAGE>   189

                         PLD CAPITAL ASSET (U.S.) INC.

                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent auditors' report................................   F-76
Balance sheet as of December 31, 1998.......................   F-77
Statement of operations for the year ended December 31,
  1998......................................................   F-78
Statement of shareholder's equity for the year ended
  December 31, 1998.........................................   F-79
Statement of cash flows for the year ended December 31,
  1998......................................................   F-80
Notes to financial statements...............................   F-81
</TABLE>


                                      F-75
<PAGE>   190

                          INDEPENDENT AUDITORS' REPORT

Shareholder and Board of Directors
PLD Capital Asset (U.S.) Inc.:


     We have audited the accompanying balance sheet of PLD Capital Asset (U.S.)
Inc. as of December 31, 1998 and the related statements of operations,
shareholder's equity and cash flows for the year 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 audit.


     We conducted our audit 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 accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement preparation. We believe that
our audit provides a reasonable basis for our opinion.


     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PLD Capital Asset (U.S.)
Inc. as of December 31, 1998 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.


     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9(a) to the
financial statements, the Company's parent, PLD Telekom Inc. (PLD) does not
presently have sufficient funds on hand to meet its current debt obligations.
PLD's failure to make payment in full when required could result in a
cross-default under and acceleration of other debt obligations for which the
Company is a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.


                                          KPMG LLP


New York, New York
March 30, 1999

                                      F-76
<PAGE>   191

                         PLD CAPITAL ASSET (U.S.) INC.

                                 BALANCE SHEET

                            AS OF DECEMBER 31, 1998

                          (THOUSANDS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
                                                               1998
                                                              -------
<S>                                                           <C>
Assets:
  Current:
     Cash and cash equivalents..............................  $    10
     Other receivables and prepaids.........................      228
     Assets held for resale (note 5)........................    3,949
     Due from related parties -- installment sales contracts
      (note 3)..............................................    6,408
                                                              -------
          Total current assets..............................   10,595
  Escrow funds (note 4).....................................      528
  Due from related parties -- installment sales contracts
     (note 3)...............................................    3,806
                                                              -------
          Total assets......................................  $14,929
                                                              =======
Liabilities and Shareholder's Equity:
  Current liabilities:
     Accounts payable and accrued liabilities (note 6)......    1,977
     Due to related parties.................................    5,035
                                                              -------
          Total current liabilities.........................    7,012
  Commitments and contingencies (note 9)
  Shareholder's equity:
     Capital stock (note 7):
  Additional paid-in capital................................    6,641
  Retained earnings.........................................    1,276
                                                              -------
          Total shareholder's equity........................    7,917
                                                              -------
          Total liabilities and shareholder's equity........  $14,929
                                                              =======
</TABLE>


                See accompanying notes to financial statements.
                                      F-77
<PAGE>   192

                         PLD CAPITAL ASSET (U.S.) INC.

                            STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1998
                          (THOUSANDS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
                                                              1998
                                                              ----
<S>                                                           <C>
Revenues:
  Interest income...........................................  $813
Operating expenses:
  General and administrative................................    15
                                                              ----
Income before taxes.........................................   798
Income taxes (note 8).......................................   232
                                                              ----
Net income..................................................  $566
                                                              ====
</TABLE>


                See accompanying notes to financial statements.
                                      F-78
<PAGE>   193

                         PLD CAPITAL ASSET (U.S.) INC.

                       STATEMENT OF SHAREHOLDER'S EQUITY
                          YEAR ENDED DECEMBER 31, 1998
                          (THOUSANDS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
                                                                 1998
                                                              -----------
<S>                                                           <C>
BALANCE, BEGINNING OF YEAR..................................    $  712
Capitalization of loan from PLD Telekom Inc. ...............     6,639
Net income..................................................       566
                                                                ------
BALANCE, END OF YEAR........................................    $7,917
                                                                ======
</TABLE>


                See accompanying notes to financial statements.
                                      F-79
<PAGE>   194

                         PLD CAPITAL ASSET (U.S.) INC.

                            STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1998
                          (THOUSANDS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
                                                               1998
                                                              -------
<S>                                                           <C>
Cash provided by/(used in):
  Operations:
     Net income.............................................  $   566
     Non-cash items:
       Increase in deposits.................................     (228)
       Increase in assets held for resale...................   (3,949)
       Change in due from or due to related parties.........    2,205
       Increase in accounts payable and accrued
        liabilities.........................................    1,934
                                                              -------
                                                                  528
  Investing:
     Escrow.................................................     (528)
                                                              -------
                                                                 (528)
                                                              -------
Increase /(decrease) in cash and cash equivalents...........       --
Cash and cash equivalents, beginning of year................       10
                                                              -------
Cash and cash equivalents, end of year......................  $    10
                                                              =======
</TABLE>


                See accompanying notes to financial statements.
                                      F-80
<PAGE>   195

                         PLD CAPITAL ASSET (U.S.) INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1998

(1)  BUSINESS AND OPERATIONS


     PLD Capital Asset (U.S.) Inc. ("PLDCA" or "the Company") was incorporated
on March 24, 1998 under the laws of the State of Delaware and is a wholly-owned
subsidiary of PLD Telekom Inc. ("PLD" or the "Parent"). The Company was formed
as a special purpose subsidiary to enter into installment sales agreements in
respect of certain telecommunications equipment required by PLD's operating
subsidiaries located in Russia and Kazakhstan. During 1998, PLDCA assumed the
assets, liabilities and business of PLD Asset Leasing Limited (PLDAL). PLDCA has
recorded such assets and liabilities at the historical cost of PLDAL and has
reflected the results of operations of PLDAL from January 1, 1998 until June 30,
1998, the date of transfer, since the entities were under common control. PLDAL
is a Cypriot company wholly owned by the Parent, which existed to enter into
lease agreements with related companies. PLDAL is presently inactive and it is
the intention of the Parent to dissolve PLDAL.


     Upon assumption of PLDAL's business, the lease previously entered into with
a related company was restructured to be an installment sale.

     Additionally during 1998, PLD transferred installment sales agreements with
a combined carrying value of $1,824,000 it had previously entered into with
related companies to PLDCA. The Company has recorded these assets at the
historical cost of PLD and has recorded an intercompany liability to PLD at the
same amount.

     The accompanying financial statements present the financial position and
results of operations of the Company on a stand-alone basis. The Company incurs
and pays its own expenses. Specific costs incurred by the parent on behalf of
the Company are charged thereto. All intercompany transactions and charges are
disclosed in note 10, "Related Party Transactions".

     Income tax expense is based upon a calculation of current tax expenses and
deferred tax expenses in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 8, "Income Taxes".

     Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or installment sales agreements and are not a
result of allocations of interest by the Parent or its subsidiaries.

     There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of
negotiated management agreements. Refer to note 10, "Related Party
Transactions". Management of the Company believes that the accompanying
financial statements include all the costs incurred by the Company in its
operations.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company's significant accounting policies are summarized as follows:

  (a) Basis of Presentation

     The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).

                                      F-81
<PAGE>   196
                         PLD CAPITAL ASSET (U.S.) INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1998

  (b) Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Funds held in
escrow, totaling $528,000 at December 31, 1998, are shown separately under
non-current assets.

  (c) Revenue Recognition

     The Company records interest income on installment sales contracts as
earned.

  (d) Receivables

     Receivables reflect amounts owing pursuant to installment sales contracts
outstanding with PLD's operating subsidiaries and include accrued interest at
varying rates of interest.

  (e) Fair Value of Financial Instruments

     The carrying amounts reported in the balance sheet for cash and cash
equivalents, escrow funds, accounts receivable and accounts payable approximate
fair value due to their short maturities.

  (f) Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the year. Actual results could differ from those estimates.


  (g) Comprehensive Income



     SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the year ended December 31, 1998, comprehensive income was equal to net income
reported in the statement of operations. As SFAS 130 only requires additional
disclosures in the Company's financial statements, its adoption did not have any
impact on the Company's financial portion or results of operations.


(3)  INSTALLMENT SALES CONTRACTS

<TABLE>
<S>                                                           <C>
Installment sales contract payments due:
                              1999                             $6,189
                              2000                              2,654
                              2001                              2,338
                              2002                                350
                                                              -------
                                                               11,531
Amounts representing interest...............................    1,317
                                                              -------
Present value of installment sales contract payments due....  $10,214
                                                              =======
</TABLE>

                                      F-82
<PAGE>   197
                         PLD CAPITAL ASSET (U.S.) INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1998

(4)  ESCROW FUNDS

     At December 31, 1998, the Company had $528,000 deposited in an escrow
account maintained with the Bank of New York. Escrow funds are generally
invested in U.S. Treasury backed securities with maturities less than 30 days.
Use of the escrow funds is governed by the detailed provisions contained within
the revised indentures relating to PLD's senior discount notes which were issued
in June 1996.

(5)  ASSETS HELD FOR RESALE

     Assets held for resale, consisting solely of telecommunications equipment,
is stated at cost and includes assets acquired by the Company which have yet to
be accepted by a PLD subsidiary or which have yet to be used for billable
commercial services. Accordingly, no depreciation is charged on this equipment
as it has yet to be commissioned. At December 31, 1998, a total of $3,949,000 in
equipment had yet to be accepted or put into service by PLD subsidiaries.

(6)  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     A total of $1,948,000 was owed to suppliers by the Company at December 31,
1998 relating to telecommunications equipment yet to be delivered to and/or
accepted by PLD subsidiaries.

(7)  COMMON STOCK

     At December 31, 1998, the authorized capital stock of the Company consisted
of 1,000 shares of Common Stock with a par value of $0.01 per share, all of
which were issued and outstanding.

(8)  INCOME TAXES

     PLDCA is included in the consolidated federal and certain state and local
income tax returns of PLD. PLD accounts for its income taxes under the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
For Income Taxes (SFAS 109). In accordance with SFAS 109, when separate
financial statements are prepared for a member of a group that files a
consolidated return, the consolidated amount of current and deferred tax expense
for the consolidated group must be allocated among the members of the group. The
method of allocation must be consistent with the broad principles of SFAS 109.
For the Company's financial statements, a separate return method was utilized
for income taxes whereby current and deferred taxes were calculated by applying
the provisions of SFAS 109 as if the Company was a separate individual taxpayer.

     The components of income taxes for the year ended December 31, 1998 are as
follows:

<TABLE>
<S>                                                           <C>
Current
  Federal and foreign.......................................  $152,000
  State and local...........................................    80,000
                                                              --------
                                                               232,000
Deferred....................................................        --
                                                              --------
                                                              $232,000
                                                              ========
</TABLE>

     The effect of foreign and state income tax provisions caused the Company's
effective tax rate to differ from the U.S. statutory income tax rate during
1998.

     As of December 31, 1998, $217,000 of tax-related balances owed to PLD is
included under "due to related parties."

                                      F-83
<PAGE>   198
                         PLD CAPITAL ASSET (U.S.) INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1998

(9)  COMMITMENTS AND CONTINGENCIES

     (a) In June 1996, PLD issued senior discount notes and convertible
subordinated notes with an aggregate principal amount of $149.5 million. The
Company is a guarantor of the debt under the terms of the related indentures.


     As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. While management
of PLD believe that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of April 30, 1999, there can be no assurance that the
holders will grant such deferrals or that they will not demand payment in full
of the obligations. PLD's failure to make payment in full could result in a
cross-default under and acceleration of the senior discount notes and
convertible subordinated notes for which the Company serves as a guarantor.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.


     (b) As of December 31, 1998, the Company had entered into purchase
commitments with unaffiliated companies relating to telecommunications equipment
amounting to $2,051,000.

(10)  RELATED PARTY TRANSACTIONS

     PLDCA has sold to PeterStar Company Limited ("PeterStar")
telecommunications equipment valued at $9,815,000 pursuant to five installment
sales contracts either signed directly with PeterStar, or assigned from PLD and
PLDAL. The Company recorded interest income of $813,000 in respect of these
contracts in 1998. As of December 31, 1998, PeterStar owes PLDCA a total of
$10,214,000 in respect of these contracts.

     As of December 31, 1998, PLDCA owed PLD $4,818,000 in respect of assets
assigned or transferred to PLDCA during the year.


     During 1998, a loan from PLD amounting to $6,600,000 was contributed to
capital.


                                      F-84
<PAGE>   199

                               TECHNOCOM LIMITED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM                                                          PAGE
----                                                          ----
<S>                                                           <C>
Independent auditors' report................................  F-86
Consolidated balance sheets as of December 31, 1998 and
  1997......................................................  F-87
Consolidated statements of operations for the years ended
  December 31, 1998, 1997 and 1996..........................  F-88
Consolidated statements of shareholders' equity for the
  years ended December 31, 1998, 1997 and 1996..............  F-89
Consolidated statements of cash flows for the years ended
  December 31, 1998, 1997 and 1996..........................  F-90
Notes to consolidated financial statements..................  F-91
</TABLE>

                                      F-85
<PAGE>   200

                  REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TECHNOCOM LIMITED:

     We have audited the accompanying consolidated balance sheets of Technocom
Limited and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Technocom
Limited and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.

     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 has suffered recurring
losses, has a working capital deficiency, and does not presently have sufficient
funds on hand to meet its current obligations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                          KPMG
                                          Chartered Accountants

Dublin, Ireland
March 30, 1999

                                      F-86
<PAGE>   201

                       TECHNOCOM LIMITED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1997
                      (THOUSANDS OF UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                               1998       1997
                                                                US$        US$
                                                              -------    -------
<S>                                                           <C>        <C>
                                     ASSETS
CURRENT ASSETS:
  Cash and term deposits (note 4)...........................      390      4,671
  Trade receivables, net of allowance of $630
     (1997 -- $220).........................................    2,394      2,942
  Other receivables.........................................    1,880      2,806
  Due from related parties (note 12)........................    8,162      5,591
                                                              -------    -------
          TOTAL CURRENT ASSETS..............................   12,826     16,010
Property and equipment, net (note 5)........................   48,408     50,656
Telecommunications licenses, net (note 6)...................   31,904     36,632
Goodwill, net (note 7)......................................   10,572     11,129
Due from related parties (note 12)..........................    1,752      2,253
Other investments and assets, net (note 8)..................      593      1,307
                                                              -------    -------
          TOTAL ASSETS......................................  106,055    117,987
                                                              =======    =======
                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................    2,915      6,331
  Accrued liabilities.......................................      757      1,590
  Due to related parties (note 12)..........................   21,621     21,867
  Deferred taxes (note 11)..................................       --        549
  Taxes payable.............................................    3,571         --
  Supplier financing (note 9)...............................      759      1,905
                                                              -------    -------
          TOTAL CURRENT LIABILITIES.........................   29,623     32,242
Other liabilities...........................................       --        337
Due to related parties (note 12)............................    8,000        336
Supplier financing (note 9).................................    2,068      3,327
SHAREHOLDERS' EQUITY (note 10)
  Share capital.............................................        1          1
  Share premium.............................................   40,390     40,390
  Additional paid-in capital................................   46,439     45,756
  Retained deficit..........................................  (20,466)    (4,402)
                                                              -------    -------
          TOTAL SHAREHOLDERS' EQUITY........................   66,364     81,745
                                                              -------    -------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........  106,055    117,987
                                                              =======    =======
</TABLE>

        See accompanying notes to the consolidated financial statements
                                      F-87
<PAGE>   202

                       TECHNOCOM LIMITED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)


<TABLE>
<CAPTION>
                                                               1998       1997     1996
                                                              -------    ------    -----
                                                                US$       US$       US$
<S>                                                           <C>        <C>       <C>
REVENUES:
     Telecommunications.....................................   20,506    19,024    3,302
     Finance lease income...................................    1,674     1,956    1,404
                                                              -------    ------    -----
          TOTAL REVENUES....................................   22,180    20,980    4,706
OPERATING EXPENSES:
     Direct costs (excludes depreciation)...................   11,156    13,034    2,487
     General and administrative.............................   14,856     8,739    2,383
     Depreciation...........................................    3,665     2,561      138
     Amortization...........................................    5,968       281       10
     Other expenses and taxes...............................       --        --      125
                                                              -------    ------    -----
          TOTAL OPERATING EXPENSES..........................   35,645    24,615    5,143
OPERATING LOSS..............................................  (13,465)   (3,635)    (437)
OTHER INCOME/(EXPENSES):
     Share of losses of equity investments (note 3).........     (604)     (677)    (359)
     Interest income........................................      151       607    1,233
     Interest expense.......................................     (242)   (1,126)    (589)
     Other expense..........................................     (790)       --       --
     Foreign exchange loss..................................   (1,470)       --       --
                                                              -------    ------    -----
LOSS BEFORE TAXATION AND MINORITY INTEREST..................  (16,420)   (4,831)    (152)
Income taxes (note 11)......................................      356      (273)    (104)
                                                              -------    ------    -----
Loss before minority interest...............................  (16,064)   (5,104)    (256)
Minority interest...........................................       --       638      (19)
                                                              -------    ------    -----
NET LOSS....................................................  (16,064)   (4,466)    (275)
                                                              =======    ======    =====
</TABLE>


        See accompanying notes to the consolidated financial statements
                                      F-88
<PAGE>   203

                       TECHNOCOM LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                               1998       1997      1996
                                                              -------    ------    ------
                                                                US$       US$       US$
<S>                                                           <C>        <C>       <C>
BALANCE AT BEGINNING OF YEAR................................   81,745    40,455    20,730
Premium on shares issued....................................       --        --    20,000
Additional paid in capital..................................      683    45,756        --
Net loss....................................................  (16,064)   (4,466)     (275)
                                                              -------    ------    ------
BALANCE AT END OF YEAR......................................   66,364    81,745    40,455
                                                              =======    ======    ======
</TABLE>

        See accompanying notes to the consolidated financial statements
                                      F-89
<PAGE>   204

                       TECHNOCOM LIMITED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)


<TABLE>
<CAPTION>
                                                               1998       1997       1996
                                                              -------    -------    -------
                                                                US$        US$        US$
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................  (16,064)    (4,466)      (275)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Provision for loss on lease receivable....................    3,203         --         --
  Depreciation and amortization.............................    9,633      2,842        148
  Share of loss of equity investments.......................      604        677        359
  Minority interest.........................................       --       (638)        19
  Other.....................................................      200        337         --
Changes in operating assets and liabilities:
  Increase/(decrease) in trade receivables..................      548      1,019       (270)
  Increase/(decrease) in other receivables..................      422     (2,263)     2,455
  Changes in due from/to related parties....................     (585)    (2,440)     2,052
  (Decrease)/increase in accounts payable...................     (199)     3,104        (29)
  (Decrease)/increase in accrued liabilities................     (833)    (1,713)     3,440
                                                              -------    -------    -------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES.........   (3,071)    (3,541)     7,899
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease)/increase in bank indebtedness....................   (2,516)   (15,829)     7,951
Related party financing.....................................    7,842     12,886      4,757
Proceeds from issuance of preferred shares..................       --         --     20,000
                                                              -------    -------    -------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES.........    5,326     (2,943)    32,708
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................   (5,793)   (16,567)   (20,766)
Investment in Technopark, net of cash acquired..............       --         --     (2,866)
Investment in Teleport, net of cash acquired................       --         --     (2,133)
Other investments and assets................................     (743)      (275)       491
                                                              -------    -------    -------
NET CASH USED IN INVESTING ACTIVITIES.......................   (6,536)   (16,842)   (25,274)
                                                              -------    -------    -------
(Decrease)/increase in cash.................................   (4,281)   (23,326)    15,333
Cash at beginning of year...................................    4,671     27,997     12,664
                                                              -------    -------    -------
Cash at end of year.........................................      390      4,671     27,997
                                                              =======    =======    =======
SUPPLEMENTAL DISCLOSURES
  Non-cash financing activity: supplier financing...........       --      3,327         --
                                                              =======    =======    =======
Income taxes paid...........................................       --         --        238
                                                              =======    =======    =======
Interest paid...............................................      211      1,126        589
                                                              =======    =======    =======
</TABLE>


        See accompanying notes to the consolidated financial statements
                                      F-90
<PAGE>   205

                       TECHNOCOM LIMITED AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997
            (TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)

1  BUSINESS OPERATIONS AND FUTURE ACTIVITIES

     Technocom Limited and subsidiaries ("the Company") was incorporated under
the laws of the Republic of Ireland in January 1992. The Company's principal
activity is the provision of telecommunications services in Russia. The Company
conducts its business activities directly and through a number of subsidiaries
and other affiliates, most of which are incorporated in Russia. The Company
established a registered foreign representative office in Russia in October
1995. The Company's parent is PLD Telekom Inc. ("PLD", or the "Parent"), a
United States publicly listed company. The Company is dependent on the continued
financial support of its Parent to finance its ongoing operations. Both the
Parent and the Company have suffered recurring losses and working capital
deficiencies. Should the Parent cease to trade as a going concern, the Company
may have to resort to extraordinary measures, including making sales of assets
under distressed conditions or ultimately seek the protection of the bankruptcy
courts. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result form the outcome of this uncertainty.

     Ultimate recoverability of the Company's investments is dependent upon its
ability to achieve and maintain profitability, which is dependent to a certain
extent on the stabilisation of the economies of the former Soviet Union, the
ability to maintain the necessary telecommunications licenses and the ability to
obtain adequate financing to meet capital commitments.

     In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other world markets. Instability in
the market reform process could subject the Company to unpredictable changes in
the basic business environment in which it currently operates. Uncertainties
regarding the political, legal, tax or regulatory environment including the
potential for adverse and retroactive changes in any of these, could
significantly affect the Company's ability to operate commercially. Management
is unable to estimate what changes may occur or the resulting effects of any
such changes on the Company's financial position or future results from
operations.

     In 1998, the effects of adverse economic conditions in Russia included a
national liquidity crisis, devaluation of the rouble, higher interest rates, and
reduced opportunity for refinancing or refunding of maturing debts. In order to
partially address this situation, the Russian government announced policies
intended to address the structural weaknesses in the Russian economy and
financial sector.

     While the policies are intended to alleviate the economic crisis in Russia,
the immediate effects could include slower economic growth or decline, a
reduction in the availability of credit and the ability to service debt, an
increase in interest rates, changes and increases in taxes, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, and restrictions
on convertibility of the rouble and movements of hard currency, an increase in
the number of bankruptcies of entities (including bank failures), labour unrest
and strikes resulting from the possible increase in unemployment and political
unrest. These conditions and future policy changes could have a material adverse
effect on the operations of the Company and the realisation and settlement of
its assets and liabilities.

     The accompanying financial statements reflect management's assessment of
the impact of this economic situation on the financial position of the Company.
Actual results could differ from management's current assessments and such
differences could be material. In addition, the effect on the Company's
financial position of future developments and access to further financial
information concerning the Company's customers, suppliers, financiers and others
and their ability to continue to transact with the Company cannot presently be
determined. The financial statements therefore may not include all adjustments
that might ultimately result from these adverse conditions.

                                      F-91
<PAGE>   206
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company's significant accounting policies are summarised as follows:

  (a) Basis of presentation

     The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP).

     The company's parent is PLD. On November 26, 1997, PLD acquired 29.6% of
the common stock of the Company for $32.5 million plus acquisition costs of
$840,000, raising its interest to 80.4%. As of December 31, 1997, the parent's
investment in the company has been pushed down into the company's consolidated
financial statements and allocated to the cost of the telecommunications
licenses and goodwill. The company's consolidated balance sheet at December 31,
1998 and 1997, reflects the effect of this push down accounting and the related
amortization has been reflected in the Company's consolidated statement of
operations as of January 1, 1998. The cost of the telecommunications licenses is
amortised on a straight line basis over the terms of the related licenses.
Goodwill is amortised on a straight line basis over 20 years.

     The accompanying consolidated financial statements present the financial
position and results of operations of the Company on a stand-alone basis. The
Company incurs and pays its own expenses. All intercompany transactions and
charges are disclosed in note 12, "Related Parties".

     Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 11, "Income Taxes".

     Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or lease agreements and are not a result of
allocations of interest by the Parent or its subsidiaries.

     Telecommunications license amortization expense is based upon the cost of
the licenses. Amortization expense is calculated on a straight-line basis over
the terms of the licenses including the portion of the Parent's investment in
the terms of the licenses including the portion of the Parent's investment in
the Company which has been allocated to telecommunications licenses and pushed
down into the Company's consolidated financial statements.

     There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Management of the Company believes that the accompanying consolidated
financial statements include all the costs incurred by the Company in its
operations.

  (b) Principles of consolidation

     The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation. Investments in
affiliates in which the Company has significant influence, but does not exercise
control, are accounted for under the equity method. Investments of the Company
over which significant influence is not exercised are carried under the cost
method.

  (c) Cash and cash equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

                                      F-92
<PAGE>   207
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  (d) Revenue recognition

     All the Company's revenues are earned in Russia and consist of the supply
of telecommunications services and leasing of telecommunications equipment.

     All revenues are recorded as earned at the time services are provided.

  (e) Property and equipment

     Property and equipment are stated at cost less accumulated depreciation.
Costs directly related to the installation of telecommunications equipment are
included in the cost of the equipment. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets as follows:

<TABLE>
<S>                                                <C>
Telecommunications equipment...................      10 years
Buildings......................................    28.5 years
Leasehold improvements.........................      10 years
Office furniture and equipment.................     3-5 years
</TABLE>

  (f) Intangible assets

     Telecommunications licenses are amortized on a straight-line basis over the
terms of the licenses.

     Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired and is being amortised on a straight line basis over
periods ranging from five to ten years.

  (g) Net investment in finance leases


     The total net investment in finance leases included in the balance sheet
represents total lease payments receivable, net of unearned interest income
relating to future accounting periods. Unearned interest income is allocated to
accounting periods so as to give a constant rate of return on the net investment
in the lease.


  (h) Fair value of financial instruments

     The carrying amounts reported in the consolidated balance sheets for cash
and term deposits, trade and other receivables, amounts due from/to related
parties, bank indebtedness and accounts payable approximate fair value due to
their short maturities.

  (i) Reporting currency and foreign currency translation

     The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.

     Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."

     Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations.

                                      F-93
<PAGE>   208
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  (j) Income taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income or expense in the period it occurs.

  (k) 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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.

  (l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

     Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

  (m) Comprehensive income

     SFAS 130, "Reporting Comprehensive Income", was issued in June 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997 and 1996 comprehensive loss was equal to
net loss reported in the statements of operations. As SFAS 130 only requires
additional disclosures in the company's financial statements, its adoption did
not have any impact on the company's financial position or results of
operations.

  (n) Reclassification

     Certain reclassifications have been made to prior year's financial
statements to conform to the current year's presentation.

                                      F-94
<PAGE>   209
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3  TELECOMMUNICATIONS LICENSES AND SIGNIFICANT INVESTMENTS

     The Company's key interests at December 31, 1998 include approximately 49%
equity interests in (a) Teleport-TP ("Teleport") (56% voting interest) and (b)
MTR-Sviaz; and (c) an approximately 56% interest in J.V. Technopark Limited
("Technopark").

  (a) Teleport

     Teleport is a Russian joint stock company which holds four principal
operating licenses. The first license expires in November 2004 and authorizes
Teleport to provide long distance and international telecommunications services
to private networks within Moscow and, to a limited extent, elsewhere in the
Russian Federation. Teleport is required by the terms of the license to have at
least 10,500 subscribers (which is 70% of the maximum number of subscribers
permitted under the license) in place by October 1999. Under the terms of the
license agreement, there are no penalties should Teleport not attain the
required number of lines. The second license expires in October 2004 and permits
the operation of 1,000 international leased circuits for the transmission of
television and telecommunications services. The third license permits the
provision of data services with interconnection to the public network. This
expires in January 2002 and requires capacity for 70,000 subscribers by December
2000. The fourth license is an overlay license which permits Teleport to offer
local, long distance and international voice and data services which are
interconnected to the public telephone network in 40 regions across Russia. The
overlay license expires in May 2001.

     The Company initially held a 42% equity interest in Teleport. In May 1996,
the Company acquired an additional 3.3% indirect equity interest in Teleport for
cash consideration of US$2.0 million, substantially all of which has been
allocated to Teleport's telecommunications licenses. The additional interest was
acquired through a company controlled by a minority shareholder of Technocom.
The acquisition of Technopark, a company incorporated in Russia, on December 20,
1996 increased Technocom's equity interest in Teleport to 49.3% and its voting
interest to 56%.

     As a result of this acquisition, the Company consolidated Teleport's
balance sheet at December 31, 1996. The results of operations of Teleport have
been included in the consolidated statements of operations from January 1, 1997.

                                      F-95
<PAGE>   210
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Condensed financial information of Teleport for the year ended December 31,
1996 is as follows:

<TABLE>
<CAPTION>
                                                                 1996
                                                                ------
                                                                 US$
<S>                                                             <C>
Telecommunications revenues.................................    11,104
  Cost of sales.............................................     6,534
                                                                ------
     Gross profit...........................................     4,570
                                                                ------
  Operating expenses:
     General and administrative.............................     2,617
     Other taxes............................................       592
     Depreciation of assets under capital leases............     1,016
     Other depreciation and amortisation....................       200
                                                                ------
                                                                 4,425
                                                                ------
       Operating income.....................................       145
     Interest on capital lease..............................      (531)
     Other interest and financing charges, net..............       251
                                                                ------
     Loss before income taxes...............................      (135)
     Income taxes...........................................        --
                                                                ------
     Net loss...............................................      (135)
  Technocom's interest therein..............................       (75)
  Amortization of excess purchase price.....................    (2,477)
                                                                ------
     Share of Teleport loss.................................    (2,552)
                                                                ======
</TABLE>

     Teleport's revenues for the year ended December 31, 1996, include sales to
its minority shareholder of US$4.6 million making Teleport to some extent
economically dependent on its minority shareholder.

     Teleport's cost of sales for the year ended December 31, 1996 includes
costs of US$2.9 million charged by a company controlled by one of the minority
shareholders of Technocom.

  (b) MTR-Sviaz

     The Company has a 49% equity interest in a Russian joint stock company,
MTR-Sviaz, which is a joint venture with Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. MTR-Sviaz holds two operating licenses and commenced
operations in late 1996. The first license authorizes MTR-Sviaz to provide local
and long distance leased line services within the city and region of Moscow.
Under the second license, MTR-Sviaz is authorized to provide local telephone
services through interconnection (via the Mosenergo network) with the public
switched telephone network within the city and region of Moscow. During 1998 and
1997, Technocom leased telecommunications equipment and access rights with a net
book value of US$4,029,000 and US$4,700,000, respectively, to MTR-Sviaz under
finance leases. The Company recorded finance lease income of US$1,674,000 and
US$1,956,000 for the years ended December 31, 1998 and 1997. At December 31,
1998 and 1997, the investment in MTR-Sviaz comprises a finance lease receivable
of US$3,619,000 and US$4,492,000, offset by the Company's share of losses of
MTR-Sviaz of US$1,867,000 and US$1,364,000, respectively.

                                      F-96
<PAGE>   211
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Future minimum lease payments receivable from MTR-Sviaz, by year end and in
the aggregate, are as follows:

<TABLE>
<CAPTION>
                                                               US$
                                                              ------
<S>                                                           <C>
1999........................................................   2,530
2000........................................................   1,704
2001........................................................     547
2002........................................................     547
2003........................................................     547
Thereafter..................................................   1,411
                                                              ------
          Total minimum lease payments......................   7,286
Amounts representing interest...............................  (3,667)
                                                              ------
Present value of minimum lease payments.....................   3,619
                                                              ======
</TABLE>

  (c) Technopark

     On December 20, 1996 the Company acquired a total of 55.51% of the
outstanding shares of Technopark, a company incorporated in Russia which holds a
7.5% equity interest in Teleport and owns office space in Moscow, for cash
consideration of US$3.0 million. The sellers were the minority shareholders of
Technocom. The acquisition of Technopark has been accounted for using the
purchase method and therefore its operations have been included since January 1,
1997. The aggregate purchase price equalled fair market value as of the date of
the acquisition, therefore no goodwill was recognized on either purchase.

4  CASH AND TERM DEPOSITS, BANK INDEBTEDNESS

     The Company had no overdraft or demand bank loans at December 31, 1998 and
1997.

5  PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                 ACCUMULATED     NET BOOK
1998                                                    COST     DEPRECIATION     VALUE
----                                                   ------    ------------    --------
                                                        US$          US$           US$
                                                       ------    ------------    --------
<S>                                                    <C>       <C>             <C>
Telecommunications equipment.........................  53,499       (8,408)       45,091
Buildings............................................   3,354       (1,059)        2,295
Office furniture and equipment.......................   1,075         (514)          561
Leasehold improvements...............................     228          (77)          151
Motor vehicles.......................................     574         (264)          310
                                                       ------      -------        ------
          Total......................................  58,730      (10,322)       48,408
                                                       ======      =======        ======
</TABLE>

<TABLE>
<CAPTION>
1997                                                    US$          US$          US$
----                                                   ------    -----------    --------
<S>                                                    <C>       <C>            <C>
Telecommunications equipment.........................  51,886       (5,226)      46,660
Buildings............................................   3,100         (109)       2,991
Office furniture and equipment.......................   1,149         (318)         831
Leasehold improvements...............................     228          (54)         174
                                                       ------      -------       ------
          Total......................................  56,363       (5,707)      50,656
                                                       ======      =======       ======
</TABLE>

                                      F-97
<PAGE>   212
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6  TELECOMMUNICATIONS LICENSES

     Telecommunications licenses are amortized over a period of 7 to 9 years.
The balances were as follows for December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                 ACCUMULATED     NET BOOK
                                                        COST     AMORTIZATION     VALUE
                                                        US$          US$           US$
                                                       ------    ------------    --------
<S>                                                    <C>       <C>             <C>
As of December 31, 1998..............................  44,252      (12,348)       31,904
As of December 31, 1997..............................  43,569       (6,937)       36,632
</TABLE>

7  GOODWILL

     Goodwill is amortized over 20 years. The balances were as follows for
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                 ACCUMULATED     NET BOOK
                                                        COST     AMORTIZATION     VALUE
                                                       ------    ------------    --------
                                                        US$          US$           US$
<S>                                                    <C>       <C>             <C>
As of December 31, 1998..............................  11,129        (557)        10,572
As of December 31, 1997..............................  11,129          --         11,129
</TABLE>

8  OTHER INVESTMENTS AND ASSETS

     Other investments and assets consist of debt and equity instruments which
are not accounted for as equity investments. These investments, which do not
have a readily determinable market value, are stated at cost less provisions for
permanent diminutions in value.

9  SUPPLIER FINANCING

     Payments to be made under supplier financing arrangements outstanding as of
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                        US$
                                                       -----
<S>                                                    <C>
1999...............................................      926
2000...............................................      767
2001...............................................      723
2002...............................................      425
2003...............................................      324
                                                       -----
                                                       3,165
Amounts representing interest......................     (338)
                                                       -----
                                                       2,827
Current portion....................................      759
                                                       -----
Long-term portion..................................    2,068
                                                       =====
</TABLE>

     The terms of the agreements require instalment payments over the next 3-5
years at interest rates of between LIBOR plus 50 basis points and LIBOR plus 300
basis points. Amounts are calculated based on an 8.5% discount rate.

                                      F-98
<PAGE>   213
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10  SHAREHOLDERS' EQUITY

     The authorized capital stock of the Company consists of 1,000,000 ordinary
shares with a par value of one Irish pound and 1,000 preferred shares with a par
value of US$1. Issued shares consist of 199 ordinary shares and 1,000 preferred
shares. The par value of ordinary shares is translated at the historical rate of
IRL1 = US$1.60.

     During 1996, the Company allotted 500 preferred shares with a nominal value
of US$1 and a premium of US$39,999 per share in accordance with the terms of a
Subscription and Shareholder Agreement dated December 28, 1994.

     The preferred shares entitle the Parent to the first US$20,000,000 of the
Company's dividend distributions. After receipt of such preference dividends,
all the preferred shares will be converted into a single ordinary share in the
Company.

11  INCOME TAXES

     An income tax credit of US$356,000 for the year ended December 31, 1998,
and an expense of US$273,000 and of US$104,000 for the years ended December 31,
1997 and 1996, respectively differs from the amounts computed by applying the
U.S. federal income tax rate of 35% to pretax income from continuing operations
as a result of the following:

<TABLE>
<CAPTION>
                                                              1998      1997     1996
                                                             ------    ------    ----
                                                              US$       US$      US$
<S>                                                          <C>       <C>       <C>
Provision for income taxes at statutory rates..............  (5,747)   (1,691)   (53)
Increase/(reduction) in income taxes resulting from:
  Non-deductible depreciation and amortization.............   2,080        93     --
  Other non-deductible expenses............................   1,530     1,758    205
  Foreign exchange loss....................................     344        --     --
  Non-taxable credits......................................      --        --    (56)
  Change in valuation allowance............................     972      (372)    --
  Other....................................................     465       485      8
                                                             ------    ------    ---
                                                               (356)      273    104
                                                             ======    ======    ===
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1998 and
1997 are as follows:

<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
                                                               US$       US$
<S>                                                           <C>       <C>
DEFERRED TAX ASSETS:
  Tax on expenses not yet deducted for Russian tax
     purposes...............................................  29,093    16,998
  Less: valuation allowance.................................  (1,054)      (82)
                                                              ------    ------
NET DEFERRED TAX ASSETS.....................................  28,039    16,916
DEFERRED TAX LIABILITIES:
  Tax on revenues not yet realized for Russian tax
     purposes...............................................  28,039    17,465
                                                              ------    ------
NET DEFERRED TAX LIABILITIES................................      --       549
                                                              ======    ======
</TABLE>

                                      F-99
<PAGE>   214
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was US$1,054,000 and US$82,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1997 was an
increase of US$972,000 and a decrease of US$372,000, respectively. In assessing
the realizability of deferred tax assets, management determined that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.

12  RELATED PARTIES

     During the year, the Company paid a total of US$358,000 (1997: US$220,000
and 1996: US$208,000) pursuant to two management contracts with two shareholders
for the provision of the services of two directors of the Company. In addition,
a significant portion of the Company's general and administrative expenses were
incurred by its three shareholders on behalf of the Company.

     Significant amounts owed to/from related parties consisted of the
following:

<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
                                                               US$       US$
<S>                                                           <C>       <C>
AMOUNTS OWED TO:
  Current:
     PLD Telekom Inc........................................  16,056    17,918
     Lanstone Enterprises Limited...........................   3,185     3,174
     PLD Management Services Limited........................     727       482
     PLD loan interest account..............................     790        --
     Rosh Group of Companies................................     136        --
     MTR-Sviaz..............................................     184        --
     Other current..........................................     543       293
                                                              ------    ------
          Total current.....................................  21,621    21,867
                                                              ======    ======
  Non-current: other........................................   8,000       336
                                                              ======    ======
</TABLE>

     Non-current: other in 1998 relates to an intercompany loan payable to PLD.
Such loan is repayable on April 20, 2001.


<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
                                                               US$       US$
<S>                                                           <C>       <C>
AMOUNTS OWED FROM:
  Current:
     MTR-Sviaz..............................................   4,691     2,459
     Lanstone Enterprises Limited...........................   2,864     2,240
     ECI....................................................     204        --
     Finance lease receivable...............................      --       875
     Others.................................................     403        17
                                                              ------    ------
          Total.............................................   8,162     5,591
                                                              ======    ======
  Non-current: finance lease receivable.....................   1,752     2,253
                                                              ======    ======
</TABLE>


                                      F-100
<PAGE>   215
                       TECHNOCOM LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The finance lease receivable consists of a single agreement with MTR-Sviaz.
The lease was entered into in August of 1996 for US$5,197,000 and requires
payments until July 2006.

13  COMMITMENTS AND CONTINGENCIES

     Teleport-TP currently utilizes capacity on three Intelsat satellites for
the provision of its international and domestic long distance services, pursuant
to rolling fifteen year contracts with Intelsat. These agreements require
quarterly payments of US$1.3 million for the remainder of their terms.

     The Company and certain of its Russian subsidiaries have accrued profits
and other taxes based on interpretations of the law which may ultimately be
disputed by the Russian taxation authorities. The exposure to additional profits
and other taxes, fines and penalties, in the opinion of the Company's directors,
will not have a material adverse effect on the financial position or results of
operations of the Company.

     There are no material pending legal proceedings to which the Company or any
of its property is subject.

     As of December 31, 1998, the Company has a commitment to pay the Parent
US$8,000,000 on April 20, 2001, in accordance with the terms of an agreement
dated April 21, 1998. In addition, according to the terms of the agreement,
interest accrues at the rate of 14% per annum and will be payable annually in
arrears on the anniversary of the agreement date.

     PLD issued senior discount notes and convertible subordinated notes with an
aggregate principal amount of US$149.5 million in June of 1996. PLD registered
these notes with the SEC in 1998. The Company, along with other PLD
subsidiaries, is a collateralee of the debt securities under the terms of the
related indentures.

                                      F-101
<PAGE>   216

                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM                                                            PAGE
----                                                          --------
<S>                                                           <C>
Independent auditors' report................................     F-103
Consolidated balance sheets as of December 31, 1998 and
  1997......................................................     F-104
Consolidated statements of operations for the years ended
  December 31, 1998, 1997 and 1996..........................     F-105
Consolidated statements of accumulated deficit for the years
  ended December 31, 1998, 1997 and 1996....................     F-106
Consolidated statements of cash flows for the years ended
  December 31, 1998, 1997 and 1996..........................     F-107
Notes to consolidated financial statements..................     F-108
</TABLE>

                                      F-102
<PAGE>   217

                          INDEPENDENT AUDITORS' REPORT

Shareholder and Board of Directors of
Wireless Technology Corporations Limited:

     We have audited the accompanying consolidated balance sheets of Wireless
Technology Corporations Limited and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of operations, accumulated deficit, and
cash flows for each of the years in the three year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wireless
Technology Corporations Limited and subsidiary as of December 31, 1998 and 1997
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998 in conformity with generally
accepted accounting principles in the United States.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
9(d) to the consolidated financial statements, the Company's parent, PLD Telekom
Inc. (PLD) does not presently have sufficient funds on hand to meet its current
debt obligations. The Company is a guarantor of such obligations. PLD's failure
to make payment in full when required could result in a claim being made against
the Company under its guaranty and a cross-default under and acceleration of
other debt obligations for which the Company is also a guarantor. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                          KPMG

Almaty, Kazahkstan
February 17, 1999

                                      F-103
<PAGE>   218

                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                      (THOUSANDS OF UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
                                    ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 1,642     5,294
  Trade receivables, net of allowance of $1,143 and $1,139
     respectively...........................................    3,811     3,462
  Due from related parties (note 6).........................       20        --
  Inventory.................................................    1,495     1,640
  Prepaid expenses and other current assets.................      713       798
                                                              -------    ------
          Total current assets..............................    7,681    11,194
                                                              -------    ------
  Property and equipment, net (note 3)......................   29,746    23,362
  Telecommunications license, net (note 4)..................   21,581    23,693
                                                              -------    ------
          Total assets......................................  $59,008    58,249
                                                              =======    ======
                     LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................  $   939     1,197
  Due to related parties (note 6)...........................      602     1,875
  Customer deposits and advances (note 7)...................    4,244     3,070
  Income tax payable........................................       --        58
                                                              -------    ------
          Total current liabilities.........................    5,785     6,200
                                                              -------    ------
  Commitments and contingencies (note 9)
  Minority interest.........................................    6,102     4,489
  Shareholder's equity:
     Share capital (note 5).................................   20,000    20,000
     Contributed capital....................................   30,803    30,803
     Reserve capital (note 5)...............................      100        --
     Accumulated deficit....................................   (3,782)   (3,243)
                                                              -------    ------
          Total shareholder's equity........................   47,121    47,560
                                                              -------    ------
          Total liabilities and shareholder's equity........  $59,008    58,249
                                                              =======    ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-104
<PAGE>   219

                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)


<TABLE>
<CAPTION>
                                                                 1998       1997      1996
                                                                -------    ------    ------
<S>                                                             <C>        <C>       <C>
Telecommunications revenues.................................    $39,548    30,012    19,305
Operating expenses:
  Direct costs (excludes depreciation)(note 6)..............      8,076     6,873     5,376
  General and administrative (note 6).......................      9,709     7,501     4,387
  Management fees (note 6)..................................      1,649     1,155       885
  Depreciation and amortization.............................      6,267     5,325     4,133
  Taxes other than income tax...............................        533       379       354
                                                                -------    ------    ------
          Total operating expenses..........................     26,234    21,233    15,135
                                                                -------    ------    ------
Operating income............................................     13,314     8,779     4,170
Other income/(expense):
  Interest and other income.................................        151       249       203
  Foreign exchange loss.....................................       (375)     (242)     (341)
                                                                -------    ------    ------
     Net income before income
       taxes and minority interest..........................     13,090     8,786     4,032
Income taxes (note 8).......................................      5,916     3,648     1,547
                                                                -------    ------    ------
     Net income before minority interest....................      7,174     5,138     2,485
Minority interest...........................................      4,613     3,611     1,878
                                                                -------    ------    ------
Net income..................................................    $ 2,561     1,527       607
                                                                =======    ======    ======
</TABLE>


          See accompanying notes to consolidated financial statements.
                                      F-105
<PAGE>   220

                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

                 CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICIT
                 YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                                 1998       1997      1996
                                                                -------    ------    ------
<S>                                                             <C>        <C>       <C>
Accumulated deficit at beginning of year....................    $(3,243)   (3,770)   (4,377)
Net income..................................................      2,561     1,527       607
Reserve capital (note 5)....................................       (100)       --        --
Dividends...................................................     (3,000)   (1,000)       --
                                                                -------    ------    ------
Accumulated deficit at end of year..........................    $(3,782)   (3,243)   (3,770)
                                                                =======    ======    ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-106
<PAGE>   221

                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                               1998      1997     1996
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Cash flows from operating activities:
  Net income................................................  $ 2,561    1,527      607
  Adjustments to reconcile net income to net cash provided
     by operating activities:
       Depreciation and amortization........................    6,267    5,325    4,133
       Bad debt expense.....................................      247      449      415
       Minority interest....................................    4,613    3,611    1,878
       Changes in operating assets and liabilities:
          Increase in trade receivables.....................     (600)  (1,329)  (1,801)
          Decrease/(increase) in inventory..................      145     (727)    (255)
          Decrease/(increase) in prepaid expenses and other
            current assets..................................       85     (462)   1,071
          Decrease in prepaid income taxes..................       --       --      300
          Increase in accrued interest......................       --       --      316
          (Decrease)/increase in accounts payable and
            accrued liabilities.............................     (258)  (1,427)     957
          (Decrease)/increase in due to/due from related
            parties, net....................................   (1,293)     664      958
          Increase in customer deposits and advances........    1,174    1,275    1,034
          (Decrease)/increase in income taxes payable.......      (58)    (107)     165
                                                              -------   ------   ------
          Net cash provided by operating activities.........   12,883    8,799    9,778
                                                              -------   ------   ------
Cash flows from investing activities:
  Prepaid equipment purchases...............................       --       --       --
  Purchases of property and equipment.......................  (10,535)  (4,238)  (8,175)
                                                              -------   ------   ------
          Net cash used in investing activities.............  (10,535)  (4,238)  (8,175)
                                                              -------   ------   ------
Cash flows from financing activities:
  Dividends paid............................................   (6,000)  (2,000)      --
                                                              -------   ------   ------
          Net cash used in financing activities.............   (6,000)  (2,000)      --
                                                              -------   ------   ------
          (Decrease)/increase in cash and cash
            equivalents.....................................   (3,652)   2,561    1,603
Cash and cash equivalents at beginning of year..............    5,294    2,733    1,130
                                                              -------   ------   ------
Cash and cash equivalents at end of year....................  $ 1,642    5,294    2,733
                                                              =======   ======   ======
Supplementary disclosures:
Interest paid...............................................  $    --       --       --
                                                              =======   ======   ======
Income taxes paid...........................................  $ 6,249    3,755    1,082
                                                              =======   ======   ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-107
<PAGE>   222

                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997
            (TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)

(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES

     Wireless Technology Corporations Limited (the "Company") was incorporated
in the British Virgin Islands as an international business company on October
27, 1993. The Company is a wholly-owned indirect subsidiary of PLD Telekom Inc.
("PLD" or the "Parent"), a company incorporated in the United States. The
Company's only significant asset is a 50% controlling interest in CJSC ALTEL
("ALTEL") which was formed on January 14, 1994 as a joint stock company under
the laws of Kazakhstan. This subsidiary was formerly named CJSC BECET
International. In April 1998 its name was changed to CJSC ALTEL.

     ALTEL was formed for the purpose of planning, developing, operating and
servicing a cellular telecommunications system throughout Kazakhstan, and for
the sale of related equipment to subscribers. ALTEL commenced operations in
September 1994 and continues to develop its service network throughout
Kazakhstan.

     The ALTEL joint venture agreement required the Company to subscribe for
1,000 Class B shares in exchange for the contribution of working capital and
tangible equipment with a cost of $20,000,000. The Class B shares were fully
subscribed and paid as of December 31, 1995. Funding for the contribution was
provided by PLD. The Company is entitled to a priority return of its $20,000,000
contribution upon dissolution, liquidation or wind-up of ALTEL before the other
shareholder receives any proceeds.

     Kazakhtelecom ("KT"), the other shareholder of ALTEL, subscribed for 1,000
Class A shares in exchange for the contribution to ALTEL of a fifteen year
license for the use of certain cellular frequencies and the procurement of
access to the public telephone network. For accounting purposes, no value was
assigned to KT's contribution.

     The Company's results are dependent upon ALTEL's ability to retain existing
subscribers, to attract new subscribers, and to control operating expenses. The
ability to retain and attract subscribers is dependent upon the general economic
conditions of the marketplace, the demographic characteristics of its
subscribers, the activities of competitors, if any, and other factors which may
be outside the control of the Company.

     The Company's operations are also subject to the economic, political, and
social risks inherent in doing business in Kazakhstan. These include the
policies of the Kazakh government, economic conditions, imposition of or changes
to taxes or other similar changes by regulatory bodies, foreign exchange
fluctuations and controls, controlling of prices by the Anti-Monopoly
Commission, the potential for civil disturbance and the deprivation or
unenforceability of contractual rights.

     The Kazakh government has exercised and continues to exercise substantial
influence over many aspects of the private sector. The government has been
attempting to implement economic reform policies and encourage substantial
private economic activity. These reforms have been partially successful to date.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a) Basis of Presentation and Consolidation

     The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP") and are presented in United States' dollars ("U.S. dollars"). The
consolidated financial statements include the accounts of the Company and its
subsidiary, ALTEL, which the Company effectively controls. Significant
intercompany transactions and balances have been eliminated.

     The accompanying consolidated financial statements present the financial
position and results of operations of the Company and subsidiary (the "Company")
on a stand-alone basis. The Company incurs and

                                      F-108
<PAGE>   223
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

pays its own expenses. Management assistance is provided by the Parent under the
terms of negotiated management agreements and specific costs incurred by the
Parent on behalf of the Company are charged thereto. All intercompany
transactions and charges are disclosed in note 6, "Related Party Transactions".

     Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 8, "Income Taxes".

     Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or lease agreements and are not a result of
allocations of interest by the Parent or its subsidiaries.

     The Parent's investment in the Company has been pushed down into the
Company's consolidated financial statements and allocated to the cost of the
telecommunication license. The cost of the telecommunication license is
amortized on a straight-line basis over the term of the license.

     There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements. Refer to note 6, "Related Party Transactions".
Management of the Company believes that the accompanying consolidated financial
statements include all the costs incurred by the Company in its operations.

  (b) Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. As of December 31,
1998 and 1997, the Company's cash equivalents consist of cash on deposit and
term deposits. As of December 31, 1998 and 1997, the Company had $1,362,000 and
$4,625,000, respectively, in cash equivalents.

  (c) Revenue Recognition

     Telecommunications revenues include airtime revenues, terminal sales,
subscription fees, connection fees and other revenues. The Company records
airtime revenues, subscription fees, connection fees and other revenues as
earned, at the time the services are provided. Terminal sales are recognized
when the equipment is delivered and the supporting contract is signed.

  (d) Inventory

     Inventory includes cellular telephones and accessories held for sale and is
stated at the lower of average cost or net realizable value.

  (e) Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<S>                                                      <C>
Base station equipment.................................  10
Leasehold improvements and renovations.................  15
Office equipment, computers, and software..............  3-5
Other telecommunication equipment......................   3
Vehicles...............................................  3-5
Residential apartments.................................   5
</TABLE>

                                      F-109
<PAGE>   224
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  (f) Telecommunications License

     The telecommunications license is amortized on a straight-line basis over
15 years, the term of the license.

  (g) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

     Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

  (h) Reporting Currency and Foreign Currency Translation

     The statutory accounts of ALTEL are maintained in accordance with Kazakh
accounting rules and regulations and are stated in Kazakh tenge. The Kazakh
statements are translated into U.S. dollars and then adjusted to U.S. GAAP in
accordance with Statement of Financial Accounting Standards No. 52, "Accounting
for Foreign Currency Translation" ("SFAS 52"). ALTEL's functional currency is
the U.S. dollar as virtually all equipment expenditures are made in U.S. dollars
and revenues are collected in U.S. dollar equivalents.

     In accordance with SFAS 52, ALTEL has re-measured its financial statements
since the functional currency is also the reporting currency. Accordingly, U.S.
dollar transactions are re-measured at their historical value. Monetary assets
and liabilities denominated in local currencies are translated into U.S. dollars
at the prevailing period-end exchange rate. All other assets and liabilities are
translated at historical exchange rates. Results of operations have been
translated using the monthly average exchange rates. Translation differences
resulting from the use of these different rates are included in the accompanying
statements of operations. The tenge to U.S. dollar exchange rates used as of
December 31, 1998 and 1997 were 83.8 tenge to 1 U.S. dollar and 76.2 tenge to 1
U.S. dollar, respectively.

  (i) Income Tax

     Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.

  (j) Use of Estimates

     The preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the year. Actual results could
differ from those estimates.

  (k) Fair Value of Financial Instruments

     The carrying amounts reported in the balance sheets for cash, trade and
other receivables, amounts due to related parties and accounts payable
approximate fair value due to their short maturity.
                                      F-110
<PAGE>   225
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  (l) Comprehensive Income

     SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998 and 1997, comprehensive income was equal to
net income reported in the statement of operations. As SFAS 130 only requires
additional disclosures in the Company's financial statements, its adoption did
not have any impact on the Company's financial position or results of operation.

  (m) Reclassifications

     Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.

(3) PROPERTY AND EQUIPMENT

     Property and equipment, at cost, as of December 31, 1998 and 1997 consists
of the following:

<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Base station equipment......................................  $ 21,164    $16,998
Leasehold improvements and renovations......................     5,929      5,277
Office equipment, computers, and software...................     4,537      3,193
Other telecommunications equipment..........................     1,310      1,092
Vehicles....................................................       500        456
Residential apartments......................................       335        335
                                                              --------    -------
          Total property and equipment......................    33,775     27,351
Less: accumulated depreciation..............................   (10,430)    (6,423)
                                                              --------    -------
Net book value of assets subject to depreciation............    23,345     20,928
Uninstalled equipment.......................................     6,401      2,434
                                                              --------    -------
          Property and equipment, net.......................  $ 29,746    $23,362
                                                              ========    =======
</TABLE>

(4) TELECOMMUNICATIONS LICENSE

     The telecommunications license as of December 31, 1998 and 1997 consists of
the following:

<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Costs.......................................................  $ 31,595    $31,595
Less: accumulated amortization..............................   (10,014)    (7,902)
                                                              --------    -------
  Telecommunications license, net...........................  $ 21,581    $23,693
                                                              ========    =======
</TABLE>

     In March 1994, PLD acquired all of the outstanding shares of the Company
for consideration of $30,000,000 plus costs of acquisition of $800,000 and
$800,000 of ALTEL's organization costs. The acquisition was accounted for by the
purchase method of accounting. As of the date of acquisition, ALTEL had not
commenced operations and did not have any tangible assets or liabilities.
Therefore, the entire purchase price was allocated to ALTEL's cellular license
and has been "pushed down" into the Company's financial statements.

                                      F-111
<PAGE>   226
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) SHARE CAPITAL

     The authorized share capital of the Company as of December 31, 1998 and
1997 was 20,001,000 ordinary shares of $1 par value each. The shares may be
divided into such number of classes and series as determined by the directors.
The issued and outstanding share capital of the Company as of December 31, 1998
and 1997 consisted of 20,000,002 shares with aggregate par value of $20,000,002.
Two shares were issued on incorporation on October 27, 1993 and an additional
20,000,000 shares were issued on December 20, 1995 to PLD for the contribution
to purchase the Class B shares of ALTEL (see note 1). Total dividends declared
and paid were $3,000,000, $1,000,000 and $0 for the years ended December 31,
1998, 1997 and 1996, respectively.

     The balance of reserve capital was created in the current year by transfer
from current year profits of the subsidiary. Under the legislation of Kazakhstan
and charter documents of the subsidiary, the subsidiary is required to create
reserve capital equivalent to 25% of its share capital over an undetermined
period. The current reserve capital is equivalent to 0.5% of share capital and
the balance of the required reserve of 24.5% is to be created in future periods.

(6) RELATED PARTY TRANSACTIONS

     (a) Management fees of $1,649,000, $1,155,000 and $885,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, were charged to ALTEL by
PLD. In 1998 these amounts were paid direct to PLD; in 1997 and 1996 PLD
received the fees via the Company (see note 9). Balances outstanding of $140,000
and $129,000 as of December 31, 1998 and 1997, respectively, in relation to
these charges, are included in due to related parties.

     (b) Additional charges, related to management services, of $94,000,
$191,000, and $26,000 for the years ended December 31, 1998, 1997 and 1996,
respectively, were charged by PLD and another PLD subsidiary. These amounts are
included in general and administrative expenses. A prepayment of $20,000 as of
December 31, 1998 and a balance outstanding of $929,000 as of December 31, 1997,
respectively, in relation to these charges, are included in due from and due to
related parties, respectively.

     (c) Direct costs of $4,355,000, $4,163,000, and $3,291,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, were charged by KT to
ALTEL. Balances outstanding of $462,000 and $817,000 as of December 31, 1998 and
1997, respectively, in relation to these charges, are included in due to related
parties.

     (d) Consulting fees of $443,000, $88,000 and $81,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, were paid by ALTEL to KT (see
note 9). These amounts are included in general and administrative expenses.
There was no balance outstanding as of December 31, 1998 and 1997 in relation to
these charges.

     (e) Lease payments for the office premises in Almaty and other premises of
$263,000, $91,000 and $91,000 for each of the years ended December 31, 1998,
1997 and 1996 were paid by ALTEL to KT. There was no balance outstanding in
relation to these leases as of December 31, 1998 and 1997.

(7) CUSTOMER DEPOSITS AND ADVANCES

     (a) Deposits of $3,867,000 and $2,725,000 in the years ended December 31,
1998 and 1997, respectively, were received by ALTEL from customers as guarantee
deposits which should be paid back if contracts are annuled and if there are no
amounts payable to ALTEL. The size of deposits depends on the type of
subscription and access level.

     (b) Advances of $377,000 and $345,000 in the years ended December 31, 1998
and 1997, respectively, were received from customers as prepayments for future
services.

                                      F-112
<PAGE>   227
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) INCOME TAXES

     The provision for income tax expense for the years ended December 31, 1998,
1997, and 1996 consists solely of current tax due to the government of
Kazakhstan. The statutory Kazakh income tax rate for the years ended December
31, 1998, 1997, and 1996 was 30%. The effective tax rates on income as
calculated under U.S. GAAP differ from the statutory rates due to differences
between taxable income under the tax laws of Kazakhstan and net income before
income tax and minority interest for U.S. GAAP purposes. These differences are
as follows:

<TABLE>
<CAPTION>
                                                              1998     1997     1996
                                                             ------    -----    -----
<S>                                                          <C>       <C>      <C>
Provision for income tax at statutory rate.................  $4,582    3,075    1,400
Add/(deduct) the tax effect of:
  Difference in rates......................................    (655)    (439)    (200)
  Non-deductible amortization of license...................     634      633      626
  Foreign currency loss....................................      98       73      102
  Change in valuation allowance............................     556       55        0
  Other....................................................     701      251     (381)
                                                             ------    -----    -----
          Provision for income tax.........................  $5,916    3,648    1,547
                                                             ======    =====    =====
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the 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:
  Allowance for doubtful accounts...........................  $  343     342
  Accumulated depreciation and amortization.................   1,083     267
  Accounts payable and accrued liabilities..................      59      45
  Due to related parties....................................      --     278
  Other.....................................................      11       8
                                                              ------    ----
                                                               1,496     940
Less: valuation allowance...................................    (791)   (235)
                                                              ------    ----
  Net deferred tax asset....................................     705     705
Deferred tax liabilities:
  Other.....................................................    (705)   (705)
                                                              ------    ----
                                                              $   --      --
                                                              ======    ====
</TABLE>

     As a result of the rapid change in regulatory environment and uncertainty
surrounding the Kazakh tax regime, the Company has provided a valuation
allowance against deferred tax assets.

     The net change in the valuation allowance was an increase of $556,000 for
the year ended December 31, 1998, and a decrease of $51,000 for the year ended
December 31, 1997.

                                      F-113
<PAGE>   228
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES

  (a) Leases

     As of December 31, 1998, the Company had long-term operating leases
primarily involving business facilities and equipment. The leases have varying
terms and contain renewal options. Future minimum lease payments under
non-cancelable operating leases consist of the following as of December 31,
1998:

<TABLE>
<S>                                                             <C>
1999........................................................    $  630
2000........................................................       608
2001........................................................       265
2002........................................................        95
2003........................................................        65
Thereafter..................................................        47
                                                                ------
          Total future minimum lease payments...............    $1,710
                                                                ======
</TABLE>

     Rent expense for the years ending December 31, 1998, 1997 and 1996 was
$565,000, $541,000, and $422,000 respectively.

  (b) PLD

     On January 1, 1995, ALTEL entered into a 2 year agreement with the Company,
acting on behalf of PLD, under which PLD would provide certain consulting,
informational services, management support services, and personnel expertise to
ALTEL. Payments under this agreement were $25,000 per month plus 3% of monthly
gross revenues. This agreement was renewed for a further year on January 1, 1997
and was terminated as of December 31, 1997. On January 1, 1998, ALTEL entered
into an agreement directly with PLD covering the same range of services, with
payments of $25,000 per month plus 3.4% of monthly gross revenues. This
agreement was for a one year term, automatically renewable for successive one
year periods unless terminated by either party.

  (c) KT

     On January 1, 1995, ALTEL entered into a 2 year agreement with KT, under
which KT would provide certain consulting services, management support services,
and personnel expertise. Payments under this agreement were 300,000 tenge per
month ($3,580 at the December 31, 1998 exchange rate) plus 0.15% of monthly
gross revenues. This agreement was renewed for a further year on January 1, 1997
and was terminated as of December 31, 1997. On January 1, 1998, ALTEL entered
into a new agreement with KT, under which KT would provide certain consulting
services, management support services, and personnel expertise. Payments under
this agreement are 300,000 tenge per month ($3,580 at the December 31, 1998
exchange rate) plus 1% of monthly gross revenues. This agreement was for a one
year term, automatically renewable for successive one year periods unless
terminated by either party.

  (d) Guarantee

     In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company, along
with other PLD subsidiaries, is a guarantor of the debt under the terms of the
related indentures.

     As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. The Company is a
guarantor of such obligations. While management of PLD believe that, as long as
progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of April
30, 1999, there can be no assurance that

                                      F-114
<PAGE>   229
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


the holders will grant such deferrals or that they will not demand payment in
full of the obligations. PLD's failure to make payment in full could result in a
claim being made against the Company under its guarantee and a cross-default
under and acceleration of the senior discount notes and convertible subordinated
notes for which the Company also serves as a guarantor. These factors raise
substantial doubt about the Company's ability to continue as a going concern.


  (e) Motorola, USA

     Motorola, USA is the major supplier of ALTEL's network equipment. Under the
supply contract, ALTEL files preliminary purchase orders for the delivery of
equipment with a prepayment of 5% of the cost of the purchase order. Once a
purchase order is presented, ALTEL may be exposed to potential liabilities to
Motorola, USA in the amount of $1,159,000 as at December 31, 1998.

                                      F-115
<PAGE>   230

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 23.1     Consent of KPMG LLP.
 23.2     Consent of KPMG LLP.
 23.3     Consent of KPMG.
 23.4     Consent of KPMG.
 23.5     Consent of Moore Stephens.
 23.6     Consent of KPMG LLP.
 23.7     Consent of KPMG.
 23.8     Consent of KPMG.
</TABLE>