<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, 1997
      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
 
                         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)
 
           680 FIFTH AVENUE, 24TH FLOOR                                    10019
                   NEW YORK, NY                                         (ZIP CODE)
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (212) 262-6060
 
          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
                                (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 27, 1998, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $178,045,652. 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 27, 1998, there were 33,324,290 shares of the registrant's
Common Stock outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     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 ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 1997
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   67
Item 3.   Legal proceedings...........................................   67
Item 4.   Submission of matters to a vote of security holders.........   67
 
PART II
Item 5.   Market for registrant's common equity and related
          stockholder matters.........................................   68
Item 6.   Selected financial data.....................................   69
Item 7.   Management's discussion and analysis of financial condition
          and results of operations...................................   70
Item 8.   Financial statements and supplementary data.................   94
Item 9.   Changes in and disagreements with accountants on accounting
          and financial disclosures...................................   94
 
PART III
Item 10.  Directors and executive officers of the registrant..........   95
Item 11.  Executive compensation......................................   97
Item 12.  Security ownership of certain beneficial owners and
          management..................................................  104
Item 13.  Certain relationships and related transactions..............  105
 
PART IV
Item 14.  Exhibits, financial statement schedules and reports on forms
          8-K.........................................................  107
</TABLE>
<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 and Kazakhstan. The
Company's four 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; and (iv)
ALTEL (known until May 1998 as BECET International) ("ALTEL"), which currently
provides the only national cellular service in Kazakhstan.
 
     Since 1994, Cable and Wireless plc ("Cable & Wireless"), a leading global
communications company whose shares are listed on the London and New York Stock
Exchanges, has been the Company's principal shareholder, with a current stake of
approximately 30%. On April 19, 1998, Cable & Wireless entered into an agreement
with News America Incorporated ("News America") providing for the sale by Cable
& Wireless to News America of its complete stake in the Company. 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 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 long distance services in the
Russian Federation to complement the international long distance services it
currently provides to its business customers; (iii) providing additional
value-added services such as wireless communications, fax, data and Internet
service as a means of developing new traffic streams; and (iv) further
developing relationships with local and national strategic partners in the
Russian Federation and other countries of the former Soviet Union.
 
     The Company has several potential sources of cash flows, including fees
from management services, dividends, repayment of intercompany advances, lease
payments and payments under equipment sales contracts. The Company currently
generates fees from management services provided to certain of its operating
subsidiaries. Although its ability to generate dividend income in the near
future may be limited due to the cash flow requirements of its operating
businesses, the Company expects to receive dividends in the future. One of its
operating subsidiaries, ALTEL, paid two dividends in 1997 and a further one
early in 1998. The Company received payments in respect of intercompany advances
during the course of 1997 and expects this to continue in 1998. In relation to
leases and equipment sales contracts entered into with its operating
subsidiaries, the Company started to receive payments in 1998.
 
     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 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. The Company's operating subsidiaries invoice in U.S. Dollars, but
receive payment in local currency at the then-current rate of exchange for the
U.S. Dollar. The Company faces an exchange risk to the extent that payment is
delayed, or the operating subsidiary experiences any difficulty in converting
the local currency payment received into U.S. Dollars. The Company does not
attempt to hedge this exchange risk. To date, this exchange risk has not been
significant. However, there can be no assurance that delays or difficulties in
converting local currencies may not occur and that such developments, in
conjunction with volatility in the local currencies, may not have a material
adverse effect upon the Company.
<PAGE>   4
 
     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 and the holder of a 50% interest in ALTEL; and AO Rostelecom
("Rostelecom"), the primary long distance and international carrier in the
Russian Federation and 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
 
  TRANSACTIONS WITH CABLE & WIRELESS AND NEWS
 
   
     On April 19, 1998, the Company entered into separate agreements with News
America and Cable & Wireless regarding, among other things, the acquisition by
the Company of (i) an additional 11% interest in its subsidiary PeterStar from
News America (after its acquisition of such interest from Cable & Wireless) and
(ii) a 50% interest in Belcel, a mobile telephone business in Belarus, and
certain intercompany indebtedness from Cable & Wireless. In connection with
these acquisitions, the Company agreed to issue an aggregate of 4.2 million
shares of its Common Stock to News America and Cable & Wireless. In addition,
Cable & Wireless and News America entered into an agreement providing for the
sale by Cable & Wireless to News America of its complete stake in the Company
(including the Common Stock being 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). The transactions are conditioned on, among other things,
clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (which was received on May 4, 1998) and approval of the acquisition of
the additional PeterStar interest by the shareholders of the Company. The
Company currently expects the transactions to close in August 1998.
    
 
  RUSSIAN FINANCIAL MARKETS
 
     In recent weeks there has been considerable turmoil and uncertainty in the
Russian financial markets, prompted in large part by the crisis in the Asian
financial markets which began in late 1997 and is still continuing, and the
economic and political problems being experienced by a number of Asian
countries. The Russian Rouble has been under significant pressure, requiring the
Russian government to raise interest rates substantially, and to seek special
assistance from the International Monetary Fund in order to defend its currency.
These developments have been accompanied by a substantial decline in the Russian
stock market, the Moscow Times Index having dropped over 50% since January 1,
1998.
 
     At the present time it is not possible to predict whether the Russian
government will be successful in avoiding a devaluation of the Rouble, or when
stability will return to its financial markets. Any devaluation of the Rouble
could exacerbate existing economic problems in Russia. Such devaluation would
not immediately affect the Company's operating subsidiaries which, although they
receive payment in local currencies, invoice by reference to U.S. Dollars.
However, increased economic difficulties in Russia could have an impact on the
Company's operating subsidiaries in that country, the effect of which it is
impossible to assess at the present time. There can be no assurance that these
developments will not have a material adverse effect upon the Company in the
future.
 
  INCREASED INTEREST RATE ON INDEBTEDNESS
 
     Under the terms of the Company's Senior Notes due 2004 and its Revolving
Credit Notes due 1998, the interest rate payable increases if the Company has
not raised $20,000,000 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
 
                                        2
<PAGE>   5
 
levels once the equity offering has been completed. The accreted value of the
Senior Notes as of March 31, 1998 was $99.7 million. Interest due thereon
accretes until December 1, 1998, and thereafter is payable in cash,
semi-annually, on each June 1 and December 1 thereafter. The amount currently
outstanding in respect of the Revolving Credit Notes is $15,420,000, and
interest is payable thereon monthly in cash.
 
CORPORATE STRUCTURE
 
     The following chart shows the corporate structure of the Company and its
material interests (but excludes intermediate holding companies and leasing
companies such as NWE Capital (Cyprus) Ltd. ("NWE Cyprus") 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.
 
                          [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.
 
                                        3
<PAGE>   6
 
(2) The other shareholders of PeterStar are: PLD Holdings Ltd., a company
    registered in Bermuda (11%), which is indirectly wholly owned by Cable &
    Wireless; and Telecominvest (29%), which is owned 51% by an affiliate of
    Commerzbank AG, 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 arrangements with the Company. See "-- Acquisition of
    Additional Interests in Technocom;" "-- Risk Factors -- Risks Involving the
    Company -- Effect of Technocom Minority Shareholders' Put Options on
    Company's Ability to Transfer its Stake in Technocom."
 
    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.
 
(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. The report did not indicate
    whether Daewoo proposed to sell or retain the remainder of its stake in
    Kazakhtelekom.
 
(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.
 
THE PRIVATE PLACEMENT OF NOTES AND WARRANTS
 
     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 14% Senior Discount Notes
due 2004 (the "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 9%
Convertible Subordinated Notes due 2006 (the "Convertible Notes" and together
with the Senior Notes, the "Notes"). The Senior Notes and the Placement
 
                                        4
<PAGE>   7
 
Warrants were initially issued as units (the "Units") and the Placement Warrants
became separable from the Senior Notes on December 10, 1996.
 
     Pursuant to a consent solicitation dated March 4, 1998, the Company
proposed, and the required number of holders of the Senior and Convertible Notes
approved, certain amendments to the Senior Note and Convertible Note Indentures.
See "-- The Consent Solicitation."
 
     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, and references to the "Senior Note Indenture", the "Convertible Note
Indenture" and the "Indentures" shall refer to such indentures, as so amended.
 
CHANGE OF COMPANY NAME AND CONTINUANCE
 
     Effective August 1, 1996, the Company changed its name from Petersburg Long
Distance Inc. to PLD Telekom Inc. Prior to February 28, 1997, the Company was a
corporation organized under the laws of the Province of Ontario. On February 28,
1997, after having obtained the necessary authorizations from its shareholders
and Canadian authorities, the Company simultaneously discontinued its existence
in Ontario and continued as a corporation organized under the laws of the State
of Delaware (the "Continuance"). The Continuance effected a change in the legal
domicile of the Company as of February 28, 1997, but did not change the business
or operations of the Company or the directors or officers of the Company.
Following the Continuance, the Company has established its executive offices in
New York, New York.
 
ACQUISITION OF ADDITIONAL INTERESTS IN TECHNOCOM
 
     On November 26, 1997 the Company acquired a further 59 ordinary shares of
Technocom, thereby increasing its percentage interest in Technocom from 50.75%
to 80.4%. The Company acquired 30 of these shares from Plicom, one of the two
other shareholders of Technocom, for $18.5 million in cash. The remaining 29
shares were acquired from the other shareholder of Technocom, Elite, for $6.25
million in cash and 1,316,240 shares of 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 (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 $6,689,655.
 
     The Company financed these acquisitions by using $9 million from the
proceeds of the Senior Notes (and, pursuant to the terms of the Indenture
governing the Senior Notes, pledging 17 of the Technocom shares acquired), and
also by issuing $12.32 million in 12% Series A secured revolving credit notes
(the "Series A Notes") and $3.1 million 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
 
                                        5
<PAGE>   8
 
Note and Warrant Agreement dated November 26, 1997 between the Company and the
Travelers Parties (the "Revolving Credit Agreement"). Required amortization of
the Revolving Credit Notes at the rate of $1,000,000 per month commences on July
31, 1998. The Series B Notes come due on September 30, 1998, and the Series A
Notes come due on December 31, 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 B 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"). A value
of $423,000, which has been ascribed to the Travelers Warrants, has been
included in the Company's shareholders' equity.
 
     In addition, the Company will be obligated to issue additional warrants to
the holders of the Series A and B Notes should the Company not effect certain
"targeted reductions in commitment" as follows:
 
<TABLE>
<CAPTION>
COMMITMENT REDUCTION DATE   TARGETED REDUCTION AMOUNT
-------------------------   -------------------------
<S>                         <C>
  July 31, 1998                    $  500,000
  August 31, 1998                  $  500,000
  September 30, 1998               $1,000,000
  October 31, 1998                 $1,500,000
  November 30, 1998                $1,500,000
</TABLE>
 
     The holders of the Series A Notes will receive 30,000 additional warrants
to purchase shares of the Company on each date on which such reduction was not
made. In the event that the Company has not made the "targeted reductions"
scheduled for July 31, 1998 and August 31, 1998, the holders of the Series B
Notes will receive 16,000 additional warrants to purchase shares of such common
stock. The exercise price of the above warrants is $8.625 per share, except
that, if the Series B Notes are not repaid in full by September 30, 1998, the
exercise price of all warrants issued to the holders of the Series B Notes
becomes $0.01 per share, and, if the Series A Notes are not repaid in full by
December 31, 1998, the exercise price of all warrants issued to the holders of
the Series A Notes also becomes $0.01. The total number of warrants which could
be issued under these arrangements is 182,000. All of the warrants expire on
December 31, 2008.
 
     In addition, if the Series B Notes are not repaid in full on September 30,
1998, then, commencing September 30, 1998 and on the last day of each succeeding
month until the Series B Notes have been repaid in full, the holders of the
Series B Notes shall receive 32,000 additional warrants to purchase shares of
the Company's stock at a price of $0.01 per share. If the Series A Notes are not
repaid in full on December 31, 1998, then, commencing December 31, 1998 and on
the last day of each succeeding month until the Series A Notes have been repaid
in full, the holders of the Series A Notes shall receive 32,000 additional
warrants to purchase shares of the Company's stock at a price of $0.01 per
share. All such warrants, referred to as "Default Warrants" will have an
expiration date ten years after their respective dates of issue.
 
THE CONSENT SOLICITATION
 
     In 1997, 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, in both cases based upon the Company's experience in operating
under the terms of the Indentures since they were first executed in June 1996.
 
     In summary, the amendments were intended to achieve the following:
 
     - Broaden the range of transactions by which the Company can use escrowed
       funds in order to make telecommunications assets available to its
       operating companies
 
     - Permit the Company or its special purpose subsidiaries to use escrowed
       funds to secure letters of credit issued to suppliers of
       telecommunications assets
 
                                        6
<PAGE>   9
 
     - Clarify that the purchase price of telecommunications assets which is to
       be funded out of escrowed funds may include certain "soft costs" related
       to the acquisition of such assets
 
     - Eliminate certain provisions in the Indentures having relevance only when
       the Company was a Canadian corporation
 
     - Permit the use of U.S. as well as Cyprus special purpose subsidiaries
 
     - Authorize the conversion of a lease entered into by PLD Leasing, a
       special purpose subsidiary of the Company, into an installment sale
       accompanied by a pledge of the equipment being sold, and the transfer of
       PLD Leasing's interest to a new special purpose subsidiary incorporated
       in the U.S.
 
     - Revise certain covenants relating to incurrence and guaranteeing of
       indebtedness, to:
 
        - provide a more specific definition of the term "revolving credit
          facilities"
 
        - specify that the maximum amount of general indebtedness (i.e., other
          than certain specific forms of "permitted indebtedness", including
          so-called "international vendor indebtedness") that may be incurred at
          the subsidiary level, whether in the form of revolving credit
          facilities or otherwise, is $15 million
 
        - clarify that the Company may guarantee on an unsecured basis any
          general indebtedness and any so-called "international vendor
          indebtedness" which its subsidiaries are permitted to incur, without
          such guarantee being counted as "indebtedness" of the Company for
          purposes of a $25 million limitation on Company level indebtedness
 
        - specify that subsidiaries of the Company may no longer guarantee
          indebtedness of the Company, and that any guarantees of any other
          indebtedness will count as "indebtedness" for purposes of the $15
          million limitation on subsidiary level indebtedness
 
        - specify that, since these changes would mean that the Series A and
          Series B Notes issued to the Travelers Parties in November 1997 (see
          "-- Acquisition of Additional Interests in Technocom") would be in
          violation of the terms of the Indentures, the transaction pursuant to
          which such Notes were issued and certain guarantees given in
          connection therewith are specifically exempted from the applicable
          terms of the Indentures, although the amount of the Notes issued will
          be counted against the $25 million limit on Company level
          indebtedness.
 
     - Permit the advance by the Company to its subsidiary Technocom of $8
       million of the proceeds of the Senior Notes being held in escrow to fund
       the purchase of telecommunications assets
 
     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.
 
     Prior to soliciting the consent of the holders of the Senior and
Convertible Notes to the proposed amendments, the Company had various
discussions with Merrill Lynch as a result of which the Company entered into an
agreement with Merrill Lynch Global Allocation Fund, Inc. and Merrill Lynch
Equity/Convertible Series -- Global Allocation Portfolio (collectively, "ML
Global"), which together were the holders of approximately 62% in principal
amount at stated maturity of the Senior Notes and approximately 72.5% in
principal amount at stated maturity of the Convertible Notes, under which ML
Global agreed to direct the nominees through which they held their Senior and
Convertible Notes to consent to the amendment of the Indentures.
 
     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
 
                                        7
<PAGE>   10
 
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 85.66% 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, 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.
                            ------------------------
 
     The Company's executive offices are located at 680 Fifth Avenue, 24th
Floor, New York, New York, 10019 (telephone number (212) 262-6060).
 
     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 quoted on SEAQ International and traded on the Berlin and Frankfurt Stock
Exchanges. Prior to March 6, 1997, the Company's trading symbol on the Nasdaq
National Market was "PLDIF."
 
TELECOMMUNICATIONS IN THE FORMER SOVIET UNION
 
     In the Soviet era, telecommunications in the Russian Federation and other
republics of the former Soviet Union were 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 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
has increased significantly. However, the governments of the countries of the
former Soviet Union do not currently 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. As modern telecommunications capability is critical to the
successful transition to a market economy, it is expected that the next stage of
development will focus on basic telecommunications infrastructure.
 
  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
 
                                        8
<PAGE>   11
 
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 600 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 approximately 85 of these regional telephone companies. The government's
interests in 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. Rostelecom was originally charged by the Former
MOC with the task of developing a long distance "backbone" as the basis for a
new nationwide network, known as the "Russian Digital Overlay Network" or "50 X
50" (based on the fact that the "backbone" was to consist of fifty digital trunk
switches and 50,000 kilometers of fiber optic cables and microwave relays).
However, work on the "50 X 50" project ceased in June 1995, when the government
of the Russian Federation announced that Sviazinvest would become a second long
distance and international carrier in the Russian Federation, with the intention
that it would become a nationwide competitor to Rostelecom.
 
     Sviazinvest, which was originally 100% owned by the Russian State Property
Committee, is a holding company for the Russian government's interests in the 85
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
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 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 one share. The schedule for the auction of the second stake
has not been announced, but it is currently expected to occur by the end of the
third quarter of 1998. 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. At the same time, Sviazinvest has announced plans to raise $400 million
through a Eurobond offering later in 1998. In light of all of the foregoing, it
is unclear what impact the consolidation of the government's telecommunications
holdings and the auctions of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.
                                        9
<PAGE>   12
 
     The provision of telecommunication 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 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, although it is not yet clear whether the
RFCTI will in fact continue to operate in the same manner, and wield the same
influence as the Former MOC. See "-- Risk Factors -- Risks Involving the
Company -- Regulatory Uncertainties." 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 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. 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.
 
     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 regional governments, and the regional
governments may continue to seek to regulate tariffs in their regions. See
"-- Risk Factors -- Risks Involving Technocom Limited and Teleport-TP -- Capital
and Management Resources Required for Network Expansion; Management of Growth."
 
     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 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.
 
     MGTS has also announced a number of initiatives designed to develop the
Moscow public network. In 1996, it was reported that MGTS planned to invest
approximately $70 million in modernization programs. Two projects are to be
carried out jointly with AT&T and Rostelecom and are aimed at creating 400,000
new access lines using fiber optic cable and digital exchanges. MGTS will be
responsible for 75% to 80% of the total cost of the investments, with the
remainder being supplied by joint venture partners and through credits. To date,
MGTS has received a $50 million credit from Credit Suisse associated with
equipment supplied by AT&T. A second project involving Siemens contemplates the
installation of an additional 300,000 digital lines.
 
     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
 
                                       10
<PAGE>   13
 
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. 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.
 
     In August 1997, the Moscow city government (which holds a 33% voting stake
in MGTS) announced the planned consolidation of its telecommunications holdings,
through the formation of Mostelekom. It has been reported that Mostelekom will
act as a holding company for the city's shares in MGTS and other
telecommunications interests, including MGTS's 50% holding in Comstar, a joint
venture with GPT.
 
     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 operational, will significantly enhance its ability to deliver
traffic throughout its service area, and in addition has commenced efforts to
access the international capital markets in order to raise funds with which to
further modernize its system. PTN has 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 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 1996, 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, also 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 Neva Paging to Telecominvest, subject to final
agreement with their joint venture partners. Although as a result of this
activity Telecominvest will hold
 
                                       11
<PAGE>   14
 
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 13% 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 outdated condition of much of the
telecommunications infrastructure in Kazakhstan, basic telephone service is
characterized by poor transmission quality. Quality international lines are
available only to subscribers willing to pay premium rates for the services of
an overlay operator. As a result, wireless communications are becoming an
increasingly important aspect of telecommunications in Kazakhstan.
 
     The national network is served by trunk switches in 19 regional centers
throughout the country. New transit switches supplied by Alcatel and Lucent have
been installed in approximately one half of the regional centers, and there are
plans to complete the modernization of the remaining regional centers. The
existing inter-regional long distance transmission network is wholly analog,
based on high capacity coaxial cables running north to south and east to west
through the major cities. In addition, a balanced pair cable route passes
diagonally northwest from Almaty to the remaining regional centers in the middle
of Kazakhstan. All of these cables are equipped with outdated Soviet or East
German analog transmission equipment. These analog transmission routes are
expected to be replaced by modern fiber optic cable and digital transmission
systems. Kazakhtelekom, in a joint venture with Deutsche Telekom, has developed
a fiber optic network linking Alekseyevka (a city 30 kilometers from Almaty) to
the new capital city of Astana.
 
     All local exchange switching in Kazakhstan has been via electromechanical
exchanges using outdated equipment. The first modern digital exchange installed
in Almaty consists of an early generation digital switch with a capacity of
20,000 lines. Conversion of all local exchanges to modern digital equipment is
planned and some conversion has already begun. However, since modernization of
the local exchanges and associated networks will be extremely costly and likely
to produce a slow return on capital investment, it is estimated to be at least
two to three years before there is a significant increase in modern digital
local exchange capacity and growth in network capacity.
 
     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
has also announced plans to participate in projects to install fiber optic cable
links between China, the countries of Central Asia and Europe, which on current
forecasts will commence service in 2000.
 
     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 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 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
                                       12
<PAGE>   15
 
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
recently 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. The report did not indicate whether Daewoo proposed to sell or
retain the remainder of its stake in Kazakhtelekom. See "-- Risk
Factors -- Risks Involving ALTEL -- Effect of Sale of Stake in Kazakhtelekom on
ALTEL and the Telecommunications Market in Kazakhstan" and "-- Ownership and
Management of Operating Subsidiaries -- ALTEL -- Relationship with Other Equity
Holders."
 
PETERSTAR COMPANY LIMITED
 
  OVERVIEW
 
     PeterStar, in which the Company owns a 60% 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,
1997, PeterStar had a total of 114,774 lines, of which 85,948 were provided to
cellular operators.
 
     PeterStar, which started limited service in 1993, generated net income for
the year ended December 31, 1997 of $16.5 million on operating revenues of $54.5
million, as compared to net income of $5.9 million on operating revenues of
$32.5 million for the year ended December 31, 1996. Subscriber lines installed
increased from 52,005 at the end of 1996 to 114,774 at December 31, 1997,
reflecting increased penetration of the business community and cellular
operators. PeterStar accounted for 47.6% of the Company's operating revenues for
the year ended December 31, 1997, as compared to 52.4% for the year ended
December 31,1996.
 
  STRATEGY
 
     PeterStar's strategy is to meet the growing demands of business customers
and other network operators in St. Petersburg through the expansion of its
current numbering capacity of 100,000 lines allocated by the RFCTI to a total of
approximately 200,000 lines by 2001. 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. The business environment in St. Petersburg continues to
improve, with the ongoing growth of small to mid-sized Russian and foreign
businesses and the development of the banking and financial services industries.
PeterStar has placed increased emphasis on this market segment in order to
capitalize on what it considers to be a significant market opportunity.
 
     PeterStar has recently commenced several projects designed to expand its
direct dial services in St. Petersburg and Northwest Russia. PeterStar has
agreed with PTN to undertake a major infrastructure
 
                                       13
<PAGE>   16
 
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 will require the conversion of approximately 30,000
business and residential lines that are currently 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 which
targets mainly corporate accounts.
 
     PeterStar also provides, or plans to introduce, a number of value-added
voice and data services to complement the basic fixed network services it
currently provides. The Company believes that the ability to provide such
services on the PeterStar digital network is a key competitive advantage in the
St. Petersburg marketplace. Current and planned 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 emerging
financial sector, with the Russian Stock Market, Sberbank, Promstroibank, and
Bank St. Petersburg all currently using PeterStar's services. Other customers
for these high speed links, such as Reuters, utilize PeterStar to deliver
value-added services to their own customers.
 
     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 subscribers to dial directly through to the
PeterStar network if 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 recently expanded
this service offering through co-operation with Comstar, a network operator in
Moscow, providing PeterStar customers access in Moscow. The Company is currently
considering a further expansion of its calling card platform in conjunction with
the development of the Teleport-TP national network facilities.
 
     Audiotext.  PeterStar has recently launched audiotext (i.e., "1-900")
services, offering recorded information including information on cultural
events, weather, traffic and horoscopes.
 
     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, Merlin and Definity. PeterStar also offers a maintenance
service for the equipment.
 
     Frame Relay.  PeterStar has commenced the operation of 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 the existing service offering. Customers
include Coca-Cola and financial institutions such as
 
                                       14
<PAGE>   17
 
Promstroibank and Bank St. Petersburg, and it is anticipated that an expansion
of this service will take place once market demand has been confirmed.
 
     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, including those which generate large
amounts of outgoing long distance and international traffic.
 
     PeterStar has experienced 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, 1994, 1995, 1996 and
1997, 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,   1997     DEC. 31,   1996     DEC. 31,   1995     DEC. 31,   1994
TYPE OF CUSTOMER                    1997     TOTAL      1996     TOTAL      1995     TOTAL      1994     TOTAL
----------------                  --------   -----    --------   -----    --------   -----    --------   -----
<S>                               <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
Direct dial -- business.........   24,344      21%     12,482      24%      4,840      23%     1,500       36%
Direct dial -- residential......    4,482       4%      2,310       4%      2,029       9%       214        5%
Cellular operators..............   85,948      75%     37,213      72%     14,659      68%     2,386       59%
                                  -------     ---      ------     ---      ------     ---      -----      ---
          Total.................  114,774     100%     52,005     100%     21,528     100%     4,100      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 80% 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 $22.5 million, $12.8 million, $6.2
million and $4.4 million, and 126,220,000, 71,128,000, 19,995,000, and
6,153,000, in 1997, 1996, 1995 and 1994, respectively.
 
                                       15
<PAGE>   18
 
     Business Customers.  PeterStar's primary focus has been the provision of
telecommunications products and services to business customers, including those
which generate large amounts of outgoing 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, 1997, Russian businesses, such
as Baltika Brewery and LenEnergo, represented approximately 70% of PeterStar's
19,862 business subscriber lines and foreign businesses, such as ABB, Rothmans
Inc., Unilever N.V., Littlewoods, Coopers and Lybrand and Cadbury, represented
the balance. Total call revenues from PeterStar's directly connected business
customers were $19.6 million in 1997, 45% of which was accounted for by Russian
businesses.
 
     Residential Customers.  As of December 31, 1997, PeterStar had connected
4,482 residential customers to its network. Revenues from direct dial
residential customers (principally connection charges and line rentals) totaled
$171,000 in 1997. At present, PeterStar does not directly receive any call
revenues from its residential customers. See "-- Billing, Tariffs and
Interconnection Charges -- Tariffs -- Residential Customers." PeterStar has
commenced a project with PTN to upgrade telecommunications services on
Vassilievski Island, a project which will increase the number of residential
customers on the PeterStar network. See "-- Expansion of Voice and Data
Services."
 
  EXPANSION OF VOICE AND DATA SERVICES
 
     PeterStar has agreed with PTN to undertake 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 will require the conversion of a total of
approximately 30,000 business and residential lines that are currently operated
by PTN, over the 1997-98 period, after which such lines become part of the
PeterStar network and the users will become PeterStar customers. Approximately
2,800 lines were converted at the end of 1997; an additional 3,000 lines are
expected to be converted by the end of the second quarter of 1998, with the
balance completed by the end of the third quarter of 1998. While the business
customers will be charged PeterStar tariffs, the residential customers will only
pay PeterStar the equivalent PTN rate for the line rental. PeterStar anticipates
collecting the revenues on national and international calling from these
customers, although the level of such calling for residential customers, who are
expected to be the bulk of the new customers, is not expected to be substantial.
The total cost of the project is estimated at between $18-20 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.
 
     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 the proposed 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.
 
                                       16
<PAGE>   19
 
     The number of cellular customers in St. Petersburg has increased from
approximately 6,400 at December 31, 1994 to approximately 107,000 at December
31, 1997, as St. Petersburg has become one of the fastest growing cellular
markets in Russia. 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, was connected to the PeterStar
network in September 1995. Delta, a joint venture between PTN and an affiliate
of U.S. West Media Group, Inc., has over 30,000 active subscribers on its
network, of which 16,596 were connected as of December 31, 1997 to the PeterStar
network for local access and overflow long distance and international access,
with the balance connected via PTN. PeterStar recently reached an agreement with
Delta whereby Delta has connected the remainder of its cellular subscribers to
the PeterStar network.
 
     North West GSM.  NW GSM, the digital 900 MHZ operator for the city, has
been connected to the PeterStar system since September 1994. At December 31,
1997, all of NW GSM's subscribers (of which 52,681 are active) were connected to
the PeterStar network, which provides NW GSM with local, long distance and
international digital access.
 
     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. At
December 31, 1997, all of Fora's subscribers (of which 16,671 are active
subscribers) were connected to the PeterStar network, which provides Fora with
local, long distance and international digital access.
 
     The following table sets forth, for each cellular operator, the number of
active lines connected to PeterStar at December 31, 1994, 1995, 1996 and 1997:
 
<TABLE>
<CAPTION>
   CELLULAR OPERATOR     DECEMBER 31, 1997   DECEMBER 31, 1996   DECEMBER 31, 1995   DECEMBER 31, 1994
   -----------------     -----------------   -----------------   -----------------   -----------------
<S>                      <C>                 <C>                 <C>                 <C>
Fora Communications....       16,671               8,603               3,410               1,896
NorthWest GSM..........       52,681              22,210               7,049                 490
Delta Telecom..........       16,596               6,400               4,200                  --
</TABLE>
 
     Call revenues and total minutes in the cellular segment amounted to $9.0
million, $5.2 million, $2.2 million and $0.2 million, and 119,096,000,
57,729,000, 17,830,000, and 2,005,000 minutes, in 1997, 1996, 1995 and 1994,
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 at PTN. 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 three 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 540 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, undertook 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. Contracts
 
                                       17
<PAGE>   20
 
concluded in 1997 include those with the Central Bank of Russia, Pepsi, Pratt &
Whitney, AT&T (USA Direct) and IBM.
 
     PeterStar has signed a contract with Tadiran, an Israeli wireless equipment
manufacturer, to supply 1,500 lines of wireless local loop infrastructure.
PeterStar intends to deploy such equipment where: (i) local loop infrastructure
is non-existent or of poor quality; and (ii) the cost of installing cable would
be prohibitive. PeterStar may expand this service if the initial project proves
successful. It is anticipated that the equipment will be installed during the
first half of 1998.
 
     The PeterStar network currently consists of two 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 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 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 recently 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 "-- Risk Factors -- Risks Involving PeterStar Company
Limited and Baltic Communications Limited -- Dependence on PTN Facilities" and
"-- Products and Services -- Expansion of Voice and Data Services."
 
  BILLING, TARIFFS AND INTERCONNECTION CHARGES
 
     Billing
 
     PeterStar provides monthly itemized bills to its customers denominated in
U.S. Dollars. Installation and initiation charges, line rental and local and
long distance call charges must be paid in Roubles at the U.S. Dollar/Rouble
exchange rate on the date when the customer instructs its bank to make payment.
Currency regulations govern the currency in which international call charges may
be paid. Russian resident companies are required to pay in Roubles, while
non-resident companies may pay in Roubles or U.S. Dollars. Customers who are
permitted to pay in U.S. Dollars are also able to pay by U.S. Dollar-denominated
credit cards, as PeterStar is now registered to accept all major credit cards.
Late fees are assessed on all invoices after 30 days, at the rate of 7.25% per
month. By denominating its bills in U.S. Dollars (and exchanging Roubles at the
then current U.S. Dollar/Rouble exchange rate), PeterStar limits the exchange
rate risk otherwise associated with transacting business in a foreign currency.
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.
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 such
revenues from its residential customers, and the timing of the introduction of
such metering remains unclear.
 
     PeterStar's published tariff for local calls is $0.03 per minute peak (8 AM
to 8 PM) and $0.02 per minute at other times. For domestic long distance calls,
the tariffs range from $0.38 to $0.98 per minute, depending on the call's
destination and the time of the call. For international long distance calls,
tariffs are based on the
 
                                       18
<PAGE>   21
 
call's destination and the time of the call, with peak time tariffs ranging from
$0.98 to $2.98 per minute. The tariffs for peak time calls to Europe and North
America are $1.30 and $1.90 per minute, respectively. PeterStar offers
discounts, based on call volumes, for customers who make a large number of calls
per month.
 
     The installation charge for PeterStar telephone lines has been $500 per
line for the first 4 lines, $350 per line for the next five lines and $200 per
line for each line above nine lines. Commencing April 1998, the installation
charge will be $450 per line, regardless of the number of lines installed. For 2
Mb/s digital circuits, the installation charge is currently $4,500 for the first
circuit and $3,500 for each additional circuit. The monthly rental charge is $20
for a telephone line and $750 for a 2 Mb/s digital circuit.
 
     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.
 
     Residential Customers.  PeterStar currently only 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 to residential customers by SPMMTS and
PeterStar receives no part of these revenues. For residential customers
connected as part of the Vassilievski Island project, PeterStar collects all
revenues for long distance and international calling, with some of the charges
at PTN tariff levels.
 
     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 expire in December and November
1998, respectively. The agreements provide for automatic extensions at the end
of their term unless otherwise terminated by either party. The interconnection
fees and carrier charges payable under the interconnect agreements are subject
to renegotiation between the parties from time to time. PeterStar anticipates
that it will have to pay a local line rental charge to PTN commencing in 1998.
The exact fee, and the timing of the fee, has not yet been determined, but
PeterStar believes that a certain element of such fee can be exchanged for
transmission capacity provided by PeterStar to PTN. See "-- Risk Factors --
Risks Involving PeterStar Company Limited and Baltic Communications
Limited -- Dependence on Interconnect Parties" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
 
  SUPPLIERS
 
     Lucent is PeterStar's primary network equipment supplier. PeterStar has
entered into a series of equipment supply agreements with Lucent for the
purchase of telecommunications equipment, including transmission systems,
switching equipment and related software, for the PeterStar network. In
addition, Lucent has been the provider of the switching and other equipment for
the Vassilievski Island project. See "-- Description of Agreements -- PeterStar
Company Limited." PeterStar also has supplier relationships with ECI/Rosh
Telecom for SDH transmission equipment, GDC for the supply of certain elements
of its data network and Tadiran for the supply of wireless local loop
infrastructure.
 
BALTIC COMMUNICATIONS LIMITED
 
     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, commencing
during 1997, 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
 
                                       19
<PAGE>   22
 
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.
 
     See "-- Telecommunications Licenses -- Baltic Communications Limited" for a
description of the telecommunications licenses held by BCL.
 
     BCL had approximately 1,200 lines as of December 31, 1997 and generated
approximately 8.3 million minutes of traffic for the year ended December 31,
1997. 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, the acquisition 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 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, 1997 of $0.5
million on operating revenues of $7.6 million. The Company acquired BCL in April
1996 and it therefore accounted for only nine months of earnings to December 31,
1996. BCL generated net income for the nine months ended December 31, 1996 of
$0.7 million on operating revenues of $5.1 million. BCL accounted for 6.6% of
the Company's operating revenues for the year ended December 31, 1997, compared
to 8.2% for the year ended December 31, 1996.
 
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. Yellow Pages has 18 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 directory is printed in
Denmark because printing of the requisite quality is not currently available in
Russia. However, it is intended to switch printing operations to Russia once
this has been remedied. The Company is seeking to utilize the database of Yellow
Pages to the benefit of PeterStar and BCL, particularly in more effective target
marketing and in operator services.
 
     The Yellow Pages database is widely respected as the most comprehensive and
reliable data source for organizations operating within the city. Local
governmental bodies, including the local telephone company, cannot provide
accurate data information due to bureaucratic intricacies and a number of
peculiarities of operating within the city's developing economy.
 
TECHNOCOM LIMITED
 
  OVERVIEW
 
     Technocom, in which the Company owns a 80.4% interest, through its
subsidiaries, is the primary mechanism through which the Company provides high
quality long distance telecommunications infrastructure and services in the
Russian Federation. 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
 
                                       20
<PAGE>   23
 
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. Teleport-TP is required to supply switches to Gorizont-RT,
which Technocom is supplying to the venture through a lease arrangement. In
addition to realizing lease revenues from the equipment, Teleport-TP will be a
primary carrier for long distance traffic for both the cellular network and the
local telephone company, Sakhatelekom, which is the majority shareholder in
Gorizont-RT.
 
     Other interests of Technocom include: a 50% interest in Rosh Telecom
Limited, a telecommunications equipment distributor, and an effective 100%
interest in SCS, a marketing company responsible for selling and administering
television broadcasting services.
 
     Technocom recorded a net loss for the year ended December 31, 1997 of $4.7
million on operating revenues of $21.2 million, as compared with a net loss of
$0.2 million on operating revenues of $4.4 million for the year ended December
31, 1996. Technocom accounted for 18.5% of the Company's operating revenues for
the year ended December 31,1997 as compared to 7.1% for the year ended December
31, 1996.
 
     Teleport-TP recorded a net loss for the year ended December 31, 1997 of
$2.8 million on operating revenues of $16.9 million, as compared with a net loss
of $0.1 million on revenues of $11.1 million for the year ended December 31,
1996.
 
  STRATEGY
 
     Teleport-TP is expanding its existing operations from the provision of
international telecommunications services to the provision of domestic long
distance telecommunications services in the Russian Federation utilizing Western
satellite capacity and technology. 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 long distance lines in many areas. Installation of the first phase
of the long distance network commenced in the second half of 1996, with 29 sites
installed as of December 31, 1997. 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 the end of the first half of 1998. Technocom is currently
formulating its plans in connection with the installation of additional earth
stations and has held preliminary discussions with Scientific-Atlanta on this
subject.
 
     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, 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 1997, Teleport-TP continued the installation of a long distance
network 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.
 
                                       21
<PAGE>   24
 
     Dedicated International Network Services
 
     Products and 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, 1997,
Teleport-TP provided access to over 1,200 international digital circuits to 27
operators in 24 countries, making it one of the largest international carriers
in the Russian Federation. Teleport-TP has recently opened up direct routes to
Georgia and Turkmenistan in the CIS.
 
     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 who 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.
Revenues from the transmission of television signals totaled approximately
$413,000 for the year ended December 31, 1997, accounting for approximately 2.4%
of Teleport-TP's revenues for the period.
 
     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, 1997, Teleport-TP leased approximately 900
active circuits via Intelsat and Eutelsat to Rostelecom, pursuant, as to the
Intelsat circuits, to a five-year contract signed on December 1, 1992 and, as to
the Eutelsat circuits, a ten-year contract which commenced in September 1995.
Revenue from Rostelecom in 1997 totaled $4.7 million. The contract with respect
to the Intelsat circuits was renewed in December 1997 for an additional
three-year term, and is automatically renewable upon the expiration of its
initial term, unless terminated by either party. 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 principally with KDD of Japan, generates revenues from the
carriage of traffic to and from the Russian Federation. Teleport-TP carried
approximately 4.1 million minutes of incoming international traffic to its
private network during the year ended December 31, 1997.
 
     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 60 international circuits. Other customers include
MTR-Sviaz, Technopark, the Intourist Computer Center and the Oil House Business
Center.
 
                                       22
<PAGE>   25
 
     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 degrees) serves Western Europe and the United States and the other
of which (at 62 degrees) serves the Far East, and a 13 meter antenna linked to a
Eutelsat satellite (at 21.5 degrees) which provides additional connectivity to
European countries. See "-- Description of Agreements -- Technocom
Limited -- Teleport-TP -- International Network Facilities -- Intelsat" and
"-- Eutelsat."
 
     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 both 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 locate its Internet
gateway, from which links to Internet Service Providers 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,
1998. 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 degrees and 62 degrees pursuant to a
fifteen year contract with Intelsat signed in January 1993. In addition,
Teleport-TP has commenced using transponder capacity on a third Intelsat
satellite (at 66 degrees) in connection with the development of its long
distance network program. The agreement requires quarterly payments of $616,500
for the remainder of its term. 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. In December 1997 the government of the
Russian Federation also designated Teleport-TP as that country's sole private
investing entity, as a result of which, following the completion of certain
licensing requirements, Teleport-TP will become an equity participant in the
Intelsat organization. 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. See "-- Long Distance Network
Services -- Network and Facilities."
 
     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 six countries in Europe via a Eutelsat satellite at 21.5 degrees.
 
                                       23
<PAGE>   26
 
     Teleport-TP is the only private registered Eutelsat operator in the Russian
Federation and, during 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 benefitted 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.
 
     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 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 is developing satellite links
using PAMA/SCPC (Pre-Assigned Multiple Access/Single Channel Per Carrier)
technology between cities and regions in the Russian Federation. These links
will be provided by Teleport-TP, under the registered tradename "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 Tomsk, Sakha, Rostov
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 the end of the first
half of 1998. 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 tradename "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. Both services would utilize additional capacity on the Intelsat 66
degrees satellite.
 
     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.
 
                                       24
<PAGE>   27
 
     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, 1997, 22
contracts had been signed (covering a total of 39 cities). Of these, 9 are with
regional and local public telephone companies, 6 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 -- TP -- Capital and Management Resources Required for Network
Expansion; Management of Growth."
 
     Teleport-TP will act as a "carrier's carrier" to public telephone companies
and cellular, wireline and other operators. Teleport-TP will provide these
operators with long distance and, in many cases, international access so that
these operators can provide high quality access to their own subscribers.
 
     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.DDS(TM) Digital
PAMA/SCPC and IDR satellite telephony systems, a technology that is 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 72 MHZ of
transponder capacity on the Intelsat 704 satellite at 66 degrees. 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, initially
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, 1997, 29 medium (7 meter) and small (4.5 meter) antenna
terminals had been installed in major cities throughout the Russian Federation;
including Murmansk, Volgodonsk, Cheliabinsk, Ekaterinburg, Rezh, Yakutsk, Mirny
and Neriungry, providing digital voice and data services. It is anticipated that
a total of 45 antennas will be installed by the end of the first half of 1998.
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 will have 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.
 
     In order to satisfy the demands of the corporate market, Teleport-TP
intends to install antennas of 2.4 meter diameter for specific corporate
customer applications. These antennae will be supplied by the current
                                       25
<PAGE>   28
 
network provider, Scientific-Atlanta, and will be configured to offer the same
functionality as the larger antennae connected to the public network providers.
It is anticipated that Teleport-TP will either sell or lease these antennae to
the end-user customer.
 
     In addition, 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 700 lines connected as of December 31, 1997, 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
locate its Internet gateway, from which links to Internet service providers
(ISPs) are provided via leased and dial-up lines on the public network.
MTR-Sviaz also acts as a local provider to the Teleport-TP international and
long distance gateway.
 
     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 the Teleport-TP 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 includes 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 switch and lines
were purchased by Technocom and are leased to MTR-Sviaz. See "-- Description of
Agreements -- Technocom Limited -- 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.
 
  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 city of Yakutsk
and service is expected to commence in the first half of 1998 in the cities of
Mirny and Neriungry. In addition to taking an equity interest in the project,
Teleport-TP will provide 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 telecommunications network equipment for the two additional
network sites has been bought by Technocom from Italtel and is being leased to
Gorizont-RT. As of December 31, 1997, Gorizont-RT had approximately 1,000
subscribers generating approximately $180,000 in revenues per month.
 
     Teleport-TP paid an initial fee for its participation, and was required to
provide three antennae and two digital 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
 
                                       26
<PAGE>   29
 
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.
 
  SUPPLIERS
 
     The telecommunications equipment for the long distance network is being
supplied by Scientific-Atlanta. Under the initial supply agreement entered into
in November 1995, Teleport-TP was supplied with one master earth station and
seven medium and 23 small remote earth stations. An amendment to this agreement,
made in November 1996, provides for the supply of an additional 11 medium and
three small earth stations, in addition to upgrades to seven existing
facilities. Additional amendments to the agreement were made in 1997 to cover
the purchase of additional equipment and upgrades to existing facilities. The
master earth station is co-located, together with Teleport-TP's international
network facilities, on the grounds of the VVC. Technocom has commenced
preliminary discussions with Scientific Atlanta regarding expansion of the
network program in 1998. The equipment is owned by Technocom and leased to
Teleport-TP. See "-- Description of Agreements -- Technocom
Limited -- Teleport-TP -- Long Distance Network Facilities."
 
     Technocom has used a variety of major international suppliers to acquire
equipment for the building of the Teleport-TP network for dedicated
international telecommunications services.
 
     Lucent supplied the two initial Intelsat Standard-A earth stations and the
associated 5ESS international switch, along with a vendor financing package.
Hughes supplied the Eutelsat earth station, which is being financed 50% by
Hughes and 50% through a financing package arranged by Eutelsat.
 
     The third Intelsat antenna and all remote antennas, together with other
operating equipment and software for the Satelink network, have been supplied by
Scientific-Atlanta and Siemens.
 
     ECI Telecom of Israel has supplied the Digital Channel Multiplication
Equipment and modems for the Teleport-TP international and domestic long
distance service facilities.
 
     Teleport-TP has contracted with Siemens AG of Germany for the supply of the
converter technology to ensure that the Teleport-TP network can interface
correctly with the many switching protocols used in the Russian public network.
 
     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.
 
  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.  Teleport-TP's bills are predominantly denominated in
U.S. Dollars. Installation and initiation charges, line rental and local and
long distance call charges must be paid in Roubles at the U.S. Dollar/Rouble
exchange rate on the date when the customer instructs its bank to make payment.
Currency regulations govern the currency in which international call charges may
be paid. Russian resident
 
                                       27
<PAGE>   30
 
companies are required to pay in Roubles, while non-resident companies are
permitted to pay in Roubles or U.S. Dollars. By denominating its bills in U.S.
Dollars (and exchanging Roubles at the then current U.S. Dollar/Rouble exchange
rate), Teleport-TP limits the exchange rate risk otherwise associated with
transacting business in a foreign currency. 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 tariff schedule that Teleport-TP offers to its dedicated network
customers for international calls ranges from $1.35 to $2.60 per minute,
depending 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 commencing at $2,600 per month for point-to-point 64 kb/s
circuits, with prices determined by the amount of bandwidth and the destination
required by the customer.
 
     International Television Broadcasting Services.  The basic charge for use
of Teleport-TP facilities for television broadcasting is $803 for the first ten
minutes of broadcast time, and $25 for each additional minute. Due to the
administration required for each set-up, the customer is charged for a minimum
of ten minutes on each occasion.
 
     Domestic Long Distance Network Services.  Tariffs for the satellite-based
domestic long distance network services range between $0.20 and $1.50 per
minute, depending on the call's destination and the volume of traffic. The
tariffs for PAMA and IDR circuits will be determined by the distance to the
operator and will range between $10,000 and $40,000 per month. 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 between $3,000 and $5,000 per month for point-to-point 64 kb/s
circuits, with higher prices for higher bandwidth as required by the customer.
 
ALTEL
 
  OVERVIEW
 
     ALTEL, in which the Company owns a 50% interest, currently operates the
only national 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.
 
     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. The report did not indicate whether
Daewoo proposed to sell or retain the remainder of its stake in Kazakhtelekom.
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.
 
     The Company's primary objectives for ALTEL are to increase revenues and
cash flows through increased subscriber penetration, usage and network coverage.
Cellular service provides a rapid and relatively inexpen-
 
                                       28
<PAGE>   31
 
sive 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, 1997, ALTEL's cellular telecommunications network
covered a geographic area of approximately 4,200,000 people, or "POPS",
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, 1997, ALTEL had 11,102 subscribers, as
compared to 6,957 subscribers as of December 31, 1996. During the year ended
December 31, 1997, ALTEL's subscribers generated average monthly recurring
revenues of $220 per subscriber.
 
     See "-- Telecommunications Licenses -- ALTEL" for a description of the
telecommunications license held by ALTEL.
 
     ALTEL, which began operations in September 1994, generated net income for
the year ended December 31, 1997 of $7.2 million on operating revenues of $30.0
million, as compared to net income of $4.5 million on operating revenues of
$19.1 million for the year ended December 31, 1996. The subscriber base grew
from 2,882 at the end of 1995 to 11,102 at December 31, 1997. ALTEL accounted
for 26.2% of the Company's operating revenues for the year ended December 31,
1997.
 
  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 expected to be modernized
over time, 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.
 
  NETWORK AND FACILITIES
 
     As of December 31, 1997, 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, and it met the
second (and final) "coverage" condition of its license from the KMOC by having
11 systems in place by December 31, 1996. 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, 1997, investment
in ALTEL's cellular network infrastructure and support facilities totaled
approximately $28.9 million. ALTEL anticipates that its capital expenditure
program in 1998 will total approximately $8.2 million and will be used to
develop new installations, expand network capacity in the existing cities
(particularly in Almaty, Astana and Atyrau), introduce pre-paid cellular
services and technical safeguards against cloning fraud, and to upgrade
equipment. The Company believes that this funding will all 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. 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
                                       29
<PAGE>   32
 
building in Chimkent and a base station building in Karaganda. ALTEL is
considering the purchase of a central office building in Almaty, although
suitable premises have yet to be identified. Commencing March 1998, ALTEL is
leasing new premises in Almaty to combine its central retail store and provide a
larger customer service center.
 
     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 also
markets cellular telephones and related equipment manufactured by Motorola.
 
     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, 1997,
ALTEL had established roaming agreements with other cellular operators: (i)
Katel in Kyrgyzstan; (ii) Uzdunrobita in Uzbekistan, (iii) SCC in the Russian
city of Omsk, (iv) BEELINE in Moscow; and (v) Fora in St. Petersburg.
 
     ALTEL will introduce a pre-paid cellular system by mid-1998, thereby adding
to its existing service offerings. In addition to further reducing the potential
for bad debts, this system will also permit 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.
 
     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 subscribers to
ALTEL's services include individuals, ALTEL anticipates that for the foreseeable
future its services will appeal principally to businesses. While all market
segments are growing, ALTEL is experiencing the most significant growth in the
area of Kazakh businesses and individuals.
 
     ALTEL does business under the registered trade name "ALTEL" and features
this name 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" trade name with its
services, and its marketing activities, have been effective in stimulating
demand for its products and services.
 
  OPERATIONS
 
     Billing and Tariffs
 
     Subscribers are billed monthly in U.S. Dollars for access charges, airtime
charges, and toll charges and optional services. 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.
Historically, if the payment was made in Tenge, the subscriber was required to
convert the invoice amount to Tenge at the exchange rate effective on the date
of payment. 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, and the
customer then pays that Tenge amount. ALTEL is therefore now exposed to a
greater currency risk since the Tenge could weaken against the U.S. Dollar in
the time between the dates the bill is issued (and the exchange rate set) and
the bill is paid.
 
     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-
 
                                       30
<PAGE>   33
 
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 141 subscribers in this category and management does not
expect this number to increase significantly over time.
 
     A new subscriber currently pays a one-time activation fee of $474 or $336
and makes a security advance of $500, $250, or $100 to cover monthly fees and
usage charges depending on whether the subscriber has international, inter-city
or local access, respectively. Non-residents of Kazakhstan pay security advances
of $850, $350 or $250 depending on whether the subscriber has international,
inter-city or local access. Monthly access fees are $24 for local service alone,
$48 for inter-city service and $78 for full international service. Usage charges
are $0.30 off-peak and $0.48 per minute plus the applicable tariffs for
international and inter-city calls. In addition, there is a monthly fee of $6.00
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 is
currently developing a simplified range of tariff packages, effectively bundling
the service offering and linking call tariffs to the subscribers' calling
patterns. It is anticipated that these tariff packages will be available to the
market during the first half of 1998. All of the above tariffs include VAT at
the rate of 20%.
 
     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 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. See "Risk Factors -- Risks Involving ALTEL --
Dependence on Interconnect Parties" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Year
Ended December 31, 1997 Versus Year Ended December 31, 1996 -- ALTEL."
 
     Suppliers
 
     ALTEL has entered into a series of agreements with Motorola for the
purchase of the equipment required for its cellular network. See "-- Description
of Agreements -- ALTEL."
 
OTHER OPERATIONS
 
  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. As a result of the Continuance, 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.
 
                                       31
<PAGE>   34
 
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 (to
date) 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 operational, will significantly
enhance its ability to carry traffic and therefore to compete with PeterStar (in
particular for the carriage of cellular traffic). In addition, PTN has commenced
efforts to raise funds to further modernize its network by accessing the
international capital markets. Although PeterStar believes that PTN would
require substantial additional capital to completely modernize its network, PTN,
either alone or though 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. PeterStar reacted to the increased competition from GlobalOne and
Sovintel in 1997 through a combination of, among other things, tariff
reductions, volume discounts and dialing plans for large customers.
 
     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. See
"-- PeterStar Company Limited -- Products and Services -- Cellular Services."
 
  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 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.
 
                                       32
<PAGE>   35
 
     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 the 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. Nationally,
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 auctions of significant stakes
in Sviazinvest will have on the Russian telecommunications market in general and
the Company 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; (v) Romantis, a satellite
based provider of services targeted at the corporate user; and (vi)
Tass-Loutsch, a satellite-based venture formed by Trans-World Communications and
ITAR-TASS to offer access to network operators.
 
  ALTEL
 
     There is currently no other licensed cellular network operating in
Kazakhstan. A local "pirate" operator named Tolkyn at one time operated a
limited radio-based communications system, which was believed to have no more
than 200 subscribers in the city of Almaty. However, the government of
Kazakhstan appears desirous to establish a GSM network in Kazakhstan and to
license one or more parties to develop this. See "-- Telecommunications
Licenses -- ALTEL." Until more details of the network and licensing process are
known, ALTEL is currently unable to assess the impact of this potential
development upon its business.
 
TELECOMMUNICATIONS LICENSES
 
  PETERSTAR COMPANY LIMITED
 
     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
 
                                       33
<PAGE>   36
 
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 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, 1997,
PeterStar had 114,774 lines, of which 85,948 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. This license therefore enables PeterStar to offer its clients
the potential cost efficiencies and synergies which come from working with
affiliated companies, as well as allowing PeterStar and BCL to explore ways to
work together to provide integrated solutions to customer needs. 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 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."
 
  BALTIC COMMUNICATIONS LIMITED
 
     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
approximately 1,200 lines as of December 31, 1997. 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
 
                                       34
<PAGE>   37
 
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."
 
  TECHNOCOM LIMITED
 
     Teleport-TP
 
     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
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 the public
switched telephone network 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 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 the public network. 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.) 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 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
 
                                       35
<PAGE>   38
 
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.
 
  ALTEL
 
     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
"-- ALTEL -- 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. The
license also specifies that, if the KMOC determines that it will issue any other
license to create and operate a cellular network in accordance with GSM or
NMT-450 standards or any other technology, ALTEL will be given the right of
first refusal with respect to such license. Additionally, the license is
transferable upon approval by 75% of ALTEL's shareholders.
 
     The exclusivity provision of ALTEL's license has recently been the subject
of scrutiny by various governmental agencies in Kazakhstan, and questions have
been raised as to its validity. In order to put the matter to rest, ALTEL has
been discussing with the KMOC substituting a new license with revised terms for
its existing license. While those terms are not finally negotiated, they would
likely include a combination of:
 
     -  eliminating the exclusivity provision (which terminates in any event in
        February 1999);
 
     -  eliminating ALTEL's right of first refusal with respect to other
        licenses, in favor of giving it a guaranteed right to participate in any
        tenders or negotiations for a new license; and
 
     -  eliminating the ability to transfer the license,
 
     in return for a new 15 year license to be valid from the date of issue.
 
     Management of ALTEL believes that a resolution of the kind envisaged would
put to rest the issues that have been raised regarding ALTEL's existing license
and assure ALTEL a suitable environment in which to continue the development of
its business. Management also believes that, by virtue of its cost structure and
its market penetration to date, it is in a good position to compete with any
parties who are hereafter licensed to operate cellular networks in Kazakhstan,
even those which may enjoy the backing of the KMOC or other agencies of the
government of Kazakhstan. However, there can be no assurance that efforts to
limit the scope of its license or otherwise revise its terms in a way which
could be detrimental to ALTEL will not continue, or that ALTEL will in fact be
able to compete successfully with any new licensees. See "-- Risk Factors --
 
                                       36
<PAGE>   39
 
Country Risks -- Legal Risks" and "-- Risks Involving ALTEL -- Reliance on
Telecommunications License; Elimination of Exclusivity Provision."
 
DESCRIPTION OF AGREEMENTS
 
  PETERSTAR COMPANY LIMITED
 
     Equipment.  Lucent is PeterStar's primary network equipment supplier. In
recent years, both PeterStar and the Company have entered into equipment supply
agreements 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.
 
     During 1997, PeterStar signed contracts totaling approximately $16.7
million with Lucent for the supply of telecommunications switching equipment and
services for the development of its network and for the Vassilievski Island
project.
 
     In 1996, contracts totaling $6.6 million were signed with Lucent for the
supply of telecommunications switching and transmission equipment and services
to PeterStar. The equipment is owned by PLD Leasing and leased to PeterStar for
a five year term, with PeterStar having the right to purchase the equipment at
the end of the term. Following the execution of the Supplemental Indenture, the
Company intends to convert the equipment lease with PeterStar into an
installment sales contract.
 
     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.
 
  BALTIC COMMUNICATIONS LIMITED
 
     The Company acquired 100% of the outstanding share capital of BCL on April
1, 1996 for $3.0 million plus an additional capital commitment of up to $1.5
million to cover certain existing liabilities payable to Mercury Communications
(for carrier charges) and to Eutelsat (for satellite circuit charges). Long-term
debt of BCL owed to Cable & Wireless was transferred to (i.e., became payable
to) NWE Cyprus as part of the transaction. In addition, BCL has contracted with
Cable & Wireless Communications of the United Kingdom, Telia of Sweden, and
Comstar and Sovintel of Moscow, for the provision of transit traffic services
through the BCL gateway switch in St. Petersburg.
 
  TECHNOCOM LIMITED
 
     Acquisition of Additional Interests in Technocom Limited.  In November
1997, the Company increased its voting interest in Technocom to 80.4% through
the acquisition of additional interests from Plicom and Elite. See "-- Ownership
and Management of Operating Subsidiaries -- Technocom Limited."
 
     Acquisition of Additional Interests in Teleport-TP.  As a result of two
acquisitions in 1996, Technocom increased its economic interest in Teleport-TP
to 49.33%, its voting interest to 56%, and its control of the nomination of
directors on the five seat board of directors to three.
 
     First, in May 1996, Roscomm, an entity in which Technocom beneficially owns
a 66.67% interest, increased its ownership interest in Teleport-TP from 5% to
10%. Roscomm purchased the additional 5% interest from VVC for a cash payment of
$2.0 million.
 
     Second, in December 1996, Technocom acquired a 55.51% interest in
Technopark, which, in turn, holds a 7.5% interest in Teleport-TP and controls
the nomination of one director on the Teleport-TP board. The
 
                                       37
<PAGE>   40
 
Technopark interest was acquired in separate transactions from Elite (38%
interest in Technopark) and Plicom (17.5% interest in Technopark) for an
aggregate cash payment of $3.0 million, pursuant to separate Sale-Purchase
Agreements between Technocom and each of Elite and Plicom. Immediately prior to
transferring their interests to Technocom, Elite and Plicom had purchased their
interests from five shareholders of Technopark.
 
     Equipment Leases.  Equipment purchased by Technocom for the various
projects undertaken by Teleport-TP is leased to Teleport-TP pursuant to lease
agreements between Technocom and Teleport-TP. Equipment purchased by Technocom
for the various projects undertaken by MTR-Sviaz is leased to MTR-Sviaz pursuant
to lease agreements between Technocom and MTR-Sviaz.
 
     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 for a total cost of approximately $12.8
million (inclusive of all financing charges) payable under a supplier financing
arrangement with AT&T over 48 months. Rostelecom, Technocom and Technopark
guaranteed Teleport-TP's obligations to AT&T, and Teleport-TP provided a
security interest in its assets, including receivables, as security for its
obligations under the financing. 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 back to
Teleport-TP over a ten year lease period. In addition, Technocom has purchased
additional network telecommunications equipment valued at $0.5 million which was
also leased to Teleport-TP.
 
     Teleport-TP -- International Network Facilities -- Eutelsat.  The Eutelsat
antenna was supplied on a turnkey basis pursuant to an equipment purchase and
installation agreement, dated August 25, 1995, between Technocom and Hughes for
a total cost of approximately $2.8 million, including equipment and services.
Fifty percent of the purchase price was financed by the supplier pursuant to a
three-year supplier credit agreement between Technocom and Hughes, supported by
a guarantee drawn on the Bank of Austria as security for Technocom's obligations
to Hughes. The remaining fifty percent of the purchase price was financed by a
five-year loan agreement, dated September 12, 1995, between Eutelsat and
Teleport-TP, which provides for no principal payments during the first 18
months. Pursuant to the loan agreement, Eutelsat made disbursements under the
loan directly to Hughes. Teleport-TP's obligations to Eutelsat have been
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 under a lease agreement, dated September 1, 1995, pursuant to which
Teleport-TP, for a period of eight years, will make monthly payments of $103,000
to Technocom (which sum will cover the loan payments due to Eutelsat).
Teleport-TP has the right to purchase the equipment from Technocom at the end of
the lease period.
 
     Teleport-TP -- Long Distance Network Facilities.  The initial equipment for
the satellite-based network, consisting of a master 18-meter antenna in Moscow,
and seven 7-meter and twenty three 4.5-meter remote antennas, was supplied by
Scientific-Atlanta for a total cost of $12.0 million, pursuant to a purchase and
installation agreement between Technocom and Scientific-Atlanta, dated November
16, 1995.
 
     In November 1996, Technocom and Scientific-Atlanta extended this agreement
to provide for 11 new 7-meter and three new 4.5-meter remote antennas, IDR
equipment for seven of the existing 7-meter remote antennas, one IDR upgrade for
an 11-meter antenna in Kazan and an expansion of the 18-meter master antenna in
Moscow. The total cost of this new agreement is $14.0 million.
 
     Two further amendments were made to the basic Scientific-Atlanta agreement
during 1997, to cover additional equipment and upgrades to existing facilities,
with a total cost of approximately $1.85 million.
 
     All of the telecommunications equipment purchased under the
Scientific-Atlanta agreement is being leased to Teleport-TP by Technocom
pursuant to telecommunications asset leases.
 
     In August 1997, the Company entered into an agreement with Siemens for the
purchase of converters and other telecommunications equipment related to the
long distance network for an aggregate purchase price
 
                                       38
<PAGE>   41
 
of approximately three million Deutsche Marks. The equipment is being leased by
Technocom to Teleport-TP.
 
     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. To meet its
contribution commitment, Technocom arranged for the purchase of a HICOM 300
switch for MTR-Sviaz pursuant to a purchase agreement, dated June 2, 1995,
between Technocom and Siemens, for a total cost of approximately DM 4.9 million
(approximately $2.9 million). Seventy percent of the purchase price is being
financed by the supplier, pursuant to a five-year supplier loan agreement
between Technocom and Siemens, supported by a guarantee drawn on the Bank of
Austria as security for at least fifty percent of Technocom's obligations to the
supplier. The HICOM 300 switch is being leased by Technocom to MTR-Sviaz under
an eight-year lease agreement, dated June 1, 1995, pursuant to which MTR-Sviaz
will make monthly payments to Technocom of $253,000. MTR-Sviaz will have the
right to purchase the equipment from Technocom at the end of the lease period.
 
  ALTEL
 
     ALTEL has agreed pursuant to an agreement entered into in May 1994 (the
"Motorola Purchase Agreement") to purchase from Motorola the infrastructure
equipment required for the cellular systems to be installed in Almaty and
eighteen other regional centers throughout Kazakhstan. The Motorola Purchase
Agreement requires that ALTEL purchase the equipment required for Almaty in all
events for the sum of $7.8 million. Management believes that ALTEL has now met
this requirement. The agreement permits ALTEL to not proceed with the purchase
of equipment for any of the other sites by so notifying Motorola, subject to
incurring a penalty if this is done less than a specified number of days before
the applicable equipment is scheduled for shipment. Management also believes
that it has complied with these requirements in reducing the total number of
installations in Kazakhstan to 12, including Almaty. Finally, the agreement
prohibits ALTEL from purchasing cellular system equipment from other suppliers
during the five year term unless the delivery by Motorola of any equipment
ordered by ALTEL is unreasonably delayed.
 
     Pursuant to a separate agreement, Motorola has agreed to furnish services
with respect to the equipment, which will include system design, installation,
optimization, system engineering, program management, software maintenance and
on-site switch maintenance.
 
     The term of both agreements is five years. Thereafter, each agreement will
automatically renew for consecutive five-year terms unless either ALTEL or
Motorola notifies the other of its intent to terminate such agreement at least
30 days prior to the expiration of the then current five-year term.
 
EMPLOYEES
 
  PLD TELEKOM INC.
 
     As of December 31, 1997, the Company had ten employees, nine of whom were
full-time.
 
  PLD MANAGEMENT SERVICES LIMITED
 
     As of December 31, 1997, PLDMS had five employees, four of whom were
full-time.
 
  PETERSTAR COMPANY LIMITED
 
     As of December 31, 1997, PeterStar had 392 employees, of whom 306 were
full-time. Of these employees, 390 were Russian nationals and two were
expatriate managers. None of its employees is subject to a collective bargaining
agreement. PeterStar believes that its relations with its employees are good.
 
                                       39
<PAGE>   42
 
  TECHNOCOM LIMITED
 
     As of December 31, 1997, Technocom and Teleport-TP had 9 and 103 employees,
respectively, all of whom were fulltime. 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.
 
  ALTEL
 
     As of December 31, 1997, ALTEL had 428 employees, two of whom were
part-time. Of these employees, 426 were Kazakh nationals and two were expatriate
managers. The number of employees involved in branch operations was 181. None of
its employees is subject to a collective bargaining agreement. ALTEL believes
that its relations with its employees are good.
 
  BALTIC COMMUNICATIONS LIMITED
 
     As of December 31, 1997, BCL had 84 employees, all of whom were full-time.
Of these employees, 83 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.
 
OWNERSHIP AND MANAGEMENT OF OPERATING SUBSIDIARIES
 
  PETERSTAR COMPANY LIMITED
 
     Ownership Structure
 
     The Company holds its 60% interest in PeterStar through NWE Cyprus. It
acquired its interest at various times over the period 1992 - 96.
 
     Prior to 1997, the other shareholders of PeterStar were Telecominvest (20%)
and Complus Enterprises Holding S.A. ("Complus") (20%). Telecominvest was 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. Telecominvest acquired its interest in PeterStar from PTN as
part of PTN's contribution to this joint venture. Complus was a 55% owned
indirect subsidiary of Cable & Wireless.
 
     In 1996, a Commerzbank affiliate acquired a 51% interest in Telecominvest.
In May 1997, the holdings in PeterStar were restructured in connection with the
recapitalization of PeterStar, so that Telecominvest came to acquire an
additional 9% interest in PeterStar from Complus, while at the same time the
Commerzbank affiliate gave up its interest in Complus, which thereafter became
wholly owned by Cable & Wireless. Cable & Wireless then transferred its 11%
interest in PeterStar from Complus to PLD Holdings. Accordingly, as of December
31, 1997 PeterStar was owned 60% by NWE Cyprus, 11% by PLD Holdings, and 29% by
Telecominvest, which is owned 51% by the Commerzbank affiliate, 25% by PTN and
24% by SPMMTS.
 
     If the transactions with Cable & Wireless and News America are consummated,
the Company will acquire PLD Holdings and thereby increase its interest in
PeterStar to 71%. See "-- Recent Developments -- Transactions with Cable &
Wireless and News."
 
     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 60% 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
 
                                       40
<PAGE>   43
 
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. To date, PTN has permitted PeterStar to house its exchanges in PTN
buildings and use its other facilities without paying rent or call charges.
Although PTN is required to do this under the terms of PeterStar's foundation
documents, the presently unforeseen refusal by PTN to honor this commitment for
free access or to condition access on unfavorable terms, or to restrict or
condition completion of calls from the PeterStar network, could have a material
adverse effect upon PeterStar, and hence upon the Company. PTN has been pressing
PeterStar to commence making payments for the use of its local lines and
negotiations have been conducted between the parties for the introduction of
local line rental charges. At present it is not possible to predict the outcome
of these negotiations, nor their impact upon PeterStar's results of operations.
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
 
     At the beginning of 1997, the board of directors of PeterStar consisted of
seven directors, three of whom were appointed by the Company, two by
Telecominvest and one by Complus. The seventh director was the General Director,
who is required to be nominated by the Company but approved by the general
meeting of shareholders. During 1997, the size of the board was increased to
eight, with three each being appointed by the Company and Telecominvest, and one
being appointed by PLD Holdings, which is currently wholly owned by Cable &
Wireless. The eighth director remained the General Director, who is still
required to be nominated by the Company subject to final approval by the
shareholders.
 
     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 both the
director appointed by PLD Holdings, which is wholly-owned by Cable & Wireless,
the Company's principal shareholder and therefore presumed to be likely to
support the Company in respect of matters coming before the PeterStar board, and
the General Director, who is a Company appointee, will vote with the three
Company-appointed directors. Even if only the PLD Holdings director votes with
the three Company appointees, 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 the Company is entitled to appoint) also has a
casting vote in the event of a tie vote among the board of directors. If the
transactions with Cable & Wireless and News America are consummated, the Company
will be assured of the right to appoint four of the eight directors of
PeterStar. See "-- Recent Developments -- Transactions with Cable & Wireless and
News."
 
     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>
Vladimir A. Akulich..................    General Director
Stephen Gardner......................    Sales and Marketing Director (through April 1998)
Rick Macy............................    Commercial Director (commencing April 1998)
James Maude..........................    Finance Director
Alexander Belyakov...................    Technical and Operations Director
</TABLE>
 
                                       41
<PAGE>   44
 
     Vladimir Akulich became Acting General Director of PeterStar in March 1995
and was confirmed as General Director in May 1995. Previously, he had been its
Technical and Operations Director. After completing his education at the St.
Petersburg Institute of Communications in 1978, Mr. Akulich worked in the Radio
Communications Equipment Factory until 1982. In 1983, he began his professional
career in the telecommunications industry, holding positions of increasing
responsibility at PTN. His last position at PTN was as Chief Engineer of one of
five telephone nodes in the PTN network. Mr. Akulich is 39 years of age.
 
     Stephen Gardner became Sales, Marketing and Customer Service Director on
January 1, 1996. Effective April 1998, he will become Vice
President -- Commercial, Russia for PLD. Previously, he was Commercial Director
of BCL, on secondment from Cable & Wireless, in St. Petersburg from February
1994 to December 1995. Prior to that time, he had been an employee of Cable &
Wireless in San Francisco since 1989 as a District Manager and in Los Angeles as
a Senior Sales Executive. Mr. Gardner is a graduate of the University of
Southern California, with a degree in business. Mr. Gardner is 31 years of age.
 
     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 International Cellular, 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.
Mr. Macy is 33 years old.
 
     James Maude joined PeterStar as Finance Director in September 1996. Prior
to this he worked as an auditor for Deloitte and Touche, opening their office in
St. Petersburg in 1993. During this time he was responsible for world clients of
Deloitte and Touche such as RJR Nabisco. Before moving to Russia, Mr. Maude
worked for Deloitte and Touche in Malawi, Africa, and Binder Hamlyn in London.
Mr. Maude is 36 years old.
 
     Alexander Belyakov became Technical and Operations Director in May 1996.
His previous positions were Acting Technical and Operations Director (beginning
in March 1995) and Chief Engineer of the Technical Department. Mr. Belyakov
graduated from the St. Petersburg Institute of Communications in 1978. From 1978
until 1982, he worked in "Mezhgorsvjazstroy", where his responsibilities were
the installation of optical fiber links and switching equipment. From 1982
through 1992, he worked in PTN as a leading engineer in digital
telecommunication systems. In January 1993, Mr. Belyakov joined PeterStar and
became Transmission Systems Manager. Mr. Belyakov is 40 years old.
 
     Service Agreement
 
     PeterStar entered into a service agreement, dated January 1, 1998, 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
 
     Following approval by the Company's Board of Directors in April 1997, the
Company has 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
Nation Liaison team. Mr. Owen Edmunds underwent Russian language training in the
service and is a qualified Russian interpreter. Mr. Owen Edmunds is 39 years of
age.
 
                                       42
<PAGE>   45
 
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 14.8% 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 Common
Stock. See "-- Acquisition of Additional Interests in Technocom."
 
     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. See "-- Risk Factors -- Risks Involving
the Company -- Absence of Complete Control; Dependence on Local Partners."
 
     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. See "-- Technocom Limited -- MTR-Sviaz."
 
     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 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, whereby 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. In addition, the Company entered into a revised put and call option
agreement with Elite, whereby: (i) Elite has 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 $1.0 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) Elite has 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. See "-- Risk Factors -- Risks Involving the
Company -- Limitations on Ability to Transfer Interests."
 
     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.
 
                                       43
<PAGE>   46
 
     Currently, Rostelecom is Teleport-TP's largest customer for its
international network services, accounting for approximately 27% of total
Teleport-TP revenues in 1997, as compared to 41% in 1996. Teleport-TP leases
Intelsat circuits to Rostelecom pursuant to a five-year contract which commenced
in December 1992 and Eutelsat circuits pursuant to a ten year contract which
commenced in September 1995. The Intelsat contract was renewed in December 1997
for an additional three year term, and is automatically renewable upon the
expiration of its initial term, unless terminated by either party.
 
     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 (see "-- Telecommunications in the
Former Soviet Union -- Telecommunications in the Russian Federation"), and thus
in direct competition with Teleport-TP (see "-- Competition -- 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.
See "-- Technocom Limited -- Teleport-TP -- Dedicated International Network
Services -- Customers and Marketing."
 
     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 one share. The schedule for the auction of the second stake
has not been announced, but it is expected to be completed by the end of the
third quarter of 1998. 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. At the same time, Sviazinvest has announced plans to raise $400 million
through a Eurobond offering later in 1998. In light of all of the foregoing, it
is unclear what impact the consolidation of the government's telecommunications
holdings and the auctions of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular. See
"-- Telecommunications in the Former Soviet Union -- Telecommunications in the
Russian Federation."
 
     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. See "-- Risk Factors -- Risks Involving Technocom
Limited and Teleport-TP -- Dependence on Rostelecom as Customer; Necessity to
Further Develop Customer Base."
 
     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 the responsibility of Boris Antoniuk, who is the principal
executive officer of Technocom. The Company has identified a number of other
executives to work with Dr. Antoniuk, as a result of which efforts Mr. David
Castillo was appointed as Chief Operating Officer of Technocom in January 1998,
and Mr. Michael Maltby was appointed Finance Director of Technocom in February
1998. The Company has also provided, and will continue to provide, logistical,
engineering and project management
                                       44
<PAGE>   47
 
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, the Company entered into a amendment to its existing consulting
agreement with Plicom, 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. The Company also entered into an
amendment to its existing consulting agreement with Elite, 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. See "-- Risk Factors -- Risks
Involving the Company -- Dependence on Key Management."
 
     Boris Antoniuk has served as general manager of Technocom and Chairman and
Chief Executive Officer of Teleport-TP since 1992. Dr. Antoniuk has also 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. He also holds the post of
Deputy Chairman of Technopark, a subsidiary of Technocom.
 
     David Castillo became Chief Operating Officer of Technocom and Teleport-TP
in January 1998. Prior to joining the Company, he was Country Manager of Russia
and the CIS for Dow Jones. From 1994 to 1996, Mr. Castillo was Project and
Development Director for Reuters Russia and CIS, and prior to that he was
Operations Director for Reuters in England. Mr. Castillo is 53 years old.
 
     Michael Maltby became Finance Director of Technocom in February 1998. Prior
to joining the Company, he was the Financial Director of Belcel, a cellular
operator based in Minsk, Belarus. 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. Mr. Maltby is 33 years old.
 
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. The report did not indicate whether Daewoo proposed
to sell or retain the remainder of its stake in Kazakhtelekom. See "-- Risk
Factors -- Risks Involving ALTEL -- Effect of Sale of Stake in Kazakhtelekom on
ALTEL and the Telecommunications Market in Kazakhstan" and "-- Relationship with
Other Equity Holders."
 
                                       45
<PAGE>   48
 
     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.
 
     Prior to February 4, 1999, neither party may sell, assign, pledge or
otherwise transfer its equity interest in ALTEL without the written consent of
the other party. After February 4, 1999, either party may transfer its equity
interest provided that the transferee agrees to be bound by the terms of the
Joint Venture Agreement.
 
     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.
 
     The sale of a 40% stake in Kazakhtelekom to Daewoo in May 1997 may result
in changes in the relationship between ALTEL and WTC, on the one hand, and
Kazakhtelekom, on the other, but the effects are not possible to predict at the
present time. The March 1998 report regarding the sale by Daewoo of a portion of
its stake (reported to be approximately 10%) to an unnamed third party also
increases uncertainty, as to the government's attitude towards Kazakhtelekom and
Daewoo's intentions with respect to the remainder of their stake. Additionally,
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, or
the recent efforts by the KMOC to eliminate the exclusivity element of ALTEL's
license and to appoint new licensees, will have. All of these developments will
present new uncertainties and challenges for ALTEL. See "-- Risk Factors --
Risks Involving ALTEL -- Effect of Sale of Stake in Kazakhtelekom on ALTEL and
the Telecommunications Market in Kazakhstan" and "-- Reliance on
Telecommunications License; Elimination of Exclusivity Provision,"
"-- Telecommunications in the Former Soviet Union -- Telecommunications in
Kazakhstan" and "-- Telecommunications Licenses -- 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 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
 
                                       46
<PAGE>   49
 
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 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 million or any
disposition or transfer of the ALTEL license, other investments in excess of $1
million or incurring indebtedness in excess of $2 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 officers of ALTEL are as follows:
 
<TABLE>
<S>                                     <C>
Rex Power...........................    Co-Chief Executive Officer
Maxut Sauranbekov...................    Co-Chief Executive Officer
Tamara Darcy........................    Acting Chief Financial Officer (through April 1998)
Michael Leaver......................    Chief Financial Officer (commencing April 1998)
Natalia V. Sauranbekova.............    Chief Kazakh Financial Officer
</TABLE>
 
     Rex Power became Co-Chief Executive Officer of 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. Mr. Power is 50 years old.
 
     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. Mr. Sauranbekov is 35 years old.
 
     Tamara Darcy served as Acting Chief Financial Officer of ALTEL from January
1998 to April 1998, while ALTEL sought a new Chief Financial Officer. Ms. Darcy
has many years of accounting and financial consulting experience, including with
DHL Worldwide Express in Moscow and Glaxo Holdings in Moscow. She has also
worked as a financial consultant for BCL. Ms. Darcy, who graduated from the
Technical University in St. Petersburg with an engineering degree, is a
Chartered Management Accountant and is fluent in Russian and English. She
resigned from her position upon Michael Leaver becoming the Chief Financial
Officer in April 1998.
 
                                       47
<PAGE>   50
 
     Michael Leaver joined ALTEL as Chief Financial Officer in April 1998,
replacing Tamara Darcy. From 1995 until joining ALTEL, he was Deputy General
Director of Uralwestcom, a cellular telephony operator in Yekaterinburg.
Previously, Mr. Leaver was the Financial Director for Kiev Tetra Pak, a
Ukrainian joint venture, for three years during its start-up phase. Mr. Leaver
is 41 years old.
 
     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.
 
     ALTEL entered into a Consulting and Information Services Agreement with
WTC, dated January 30, 1995, pursuant to which WTC provided certain consulting,
information, management services and personnel expertise to ALTEL. In
consideration for these services, ALTEL paid WTC a fee of $25,000 per month plus
3% of ALTEL's monthly gross revenues. This agreement was terminated as of
December 31, 1997, and ALTEL is currently negotiating with the Company and
Kazakhtelekom for new consulting agreements. These contracts are anticipated to
provide for 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, and to be effective
as of January 1, 1998, with a one year term automatically renewable for
successive one year periods unless terminated by either party.
 
                                       48
<PAGE>   51
 
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,
Canada, Russia and Kazakhstan, 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.
 
COUNTRY RISKS
 
     General.  Foreign companies conducting operations through affiliates in the
Russian Federation and Kazakhstan 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 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 Russian 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 and Kazakhstan has been characterized by
uncertainty and instability.
 
     In the Russian Federation, the political situation has been characterized
by 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. 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.
 
     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
                                       49
<PAGE>   52
 
industry is introduced from time to time and, while not expected to become law,
is symptomatic of these increasingly nationalistic attitudes. Boris Yeltsin,
President of the Russian Federation, recently announced that he will not run for
re-election in 2000. The resulting change in leadership at that time could
result in political instability and substantial changes in government policies.
Any such matters could have a material adverse effect on the Company.
 
     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. In
addition, Russia has substantial political and economic influence in Kazakhstan
and may seek to use such influence to further its own goals, which may be
inconsistent with the national interests of Kazakhstan and create political
instability in that country, which could have a material adverse effect on the
Company.
 
     Economic Risks -- Uncertain Pace of, and Difficulties Experienced in,
Economic Reform; Reliance on Foreign Economic Aid.  Until recently, the
economies of both the Russia Federation and Kazakhstan 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.
 
     -- Limited Experience with Free Market Economy.  Russian 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 responding to changing market conditions and limited capital
resources with which to develop their operations. In addition, the Russian
Federation has 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, the Russian banking system has 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. A general Russian banking
crisis 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.
 
     -- Recent Financial Turmoil.  In the early part of 1998 there has been
considerable turmoil and uncertainty in the Russian financial markets, prompted
in large part by the crisis in the Asian financial markets which began in late
1997 and is still continuing, and the economic and political problems being
experienced by a number of Asian countries. The Russian Rouble has been under
significant pressure, requiring the Russian government to raise interest rates
substantially, and to seek special assistance from the International Monetary
Fund in order to defend its currency. These developments have been accompanied
by a substantial decline in the Russian stock market, the Moscow Times Index
having dropped over 50% since January 1, 1998.
 
                                       50
<PAGE>   53
 
     At the present time it is not possible to predict whether the Russian
government will be successful in avoiding a devaluation of the Rouble, or when
stability will return to its financial markets. Any devaluation of the Rouble
could exacerbate existing economic problems in Russia. Such devaluation would
not immediately affect the Company's operating subsidiaries which, although they
receive payment in local currencies, invoice by reference to U.S. Dollars.
However, increased economic difficulties in Russia could have an impact on the
Company's operating subsidiaries in that country, the effect of which it is
impossible to assess at the present time. There can be no assurance that these
developments will not have a material adverse effect upon the Company in the
future.
 
     Restrictions on Currency Conversion; Historical Volatility in Currency
Prices.  The Russian Rouble and the Kazakh Tenge are not convertible outside of
the Russian Federation and Kazakhstan, respectively. Within those countries, 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 and, in the case of the Kazakh Tenge, during the early part of
1998. During the early part of 1998 the Russian Rouble has been under
considerable pressure. See "-- Economic Risks -- Recent Financial Turmoil."
Historically, the Company has largely been able to limit its exposure to
declines in the value of the Rouble and the Tenge because its operating
businesses invoice their customers in U.S. Dollars which is permitted under
current Russian and Kazakh regulations. The Company's customers then pay in
local currency at the then-current exchange rate to the U.S. Dollar. The
Company's operating businesses have experienced certain costs in exchanging
local currencies for U.S. Dollars, but to date these have not been material.
Nonetheless, no assurance can be given that the Company's operating businesses
will continue to be able to bill customers in U.S. Dollars or in local
currencies in amounts determined by reference to the value of the U.S. Dollar,
or that they will continue to be able to exchange local currencies for U.S.
Dollars without significant difficulties, delays or costs. In particular, ALTEL
may face greater exchange risks as a result of new Kazakh regulations regarding
invoicing. See "-- ALTEL -- Operations -- Billing and Tariffs." The Company does
not hedge any of its exchange risks. Any of these developments, in conjunction
with further declines, or volatility, in the value of the Rouble 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.  Both the Russia Federation and
Kazakhstan lack fully developed legal systems. Russian and Kazakh 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 and Kazakh 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 and Kazakh 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; and (vi) 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 or Kazakhstan 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 or
Kazakhstan for the reciprocal enforcement of foreign court judgments.
 
                                       51
<PAGE>   54
 
     Furthermore, the relative infancy of business and legal cultures in the
Russia Federation and Kazakhstan 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 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.
 
     -- 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." Nevertheless, there
are signs that Russian securities regulators and courts have become more
sympathetic to the need to protect minority shareholders, and more willing to
set aside management decisions (such as sales below value to insiders or highly
dilutive share issues). At the same time 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.
 
     Social Risks.  The political and economic changes in both the Russian
Federation and Kazakhstan 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 or
Kazakh 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.
                                       52
<PAGE>   55
 
     Official Data Reliability.  The official data published by Russian federal,
regional and local governments and federal agencies, and by the Kazakh
government and its 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 or Kazakhstan 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."
 
     Capital Requirements.  The Company's capital requirements arise in three
main areas.
 
     -- Capital Expenditures and Working Capital for Operating Businesses.  The
Company may need 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, only ALTEL has achieved that position. The
Company has significant cash; however, the bulk of this (representing the
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 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. Currently, it is indebted
under the Series A and Series B Notes to the Travelers Parties in the amount of
$15,420,000, which bears interest at an annual rate of 12%, payable monthly in
cash. This interest rate increased to 15% on June 1, 1998 as a result of the
Company not raising $20,000,000 in additional equity by May 31, 1998. The Series
A and Series B Notes are required to be amortized at the rate of $1,000,000 per
month starting in July 1998. The Series B Notes, whose original principal amount
is $3,100,000, are due in full on September 30, 1998, and the Series A Notes, in
the original principal amount of $12,320,000, are due in full on December 31,
1998. In addition, the Company is obligated under the Senior Notes and the
Convertible Notes issued in June 1996. As of December 31, 1997, the value of the
Senior Notes on the Company's balance sheet was $95.7 million. These Notes
accrete until December 1, 1998, when interest on the full accreted value
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. The first semi-annual payment of interest in cash, due June
1, 1999, will be at least $8,610,000. The exact amount of the semi-annual
interest payment will depend of the accreted value of the Senior Notes as of
December 1, 1998 and 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.
 
     In addition, pursuant to the terms of the Travelers Warrants, under certain
circumstances additional warrants may be issued and/or the exercise price of the
Travelers Warrants may be reduced. In the event that the Company does not effect
any of the specified targeted reductions in commitment for the Series A Notes,
the holders of the Series A Notes will receive 30,000 additional warrants to
purchase shares of the Company's common stock on each date on which such
reduction was not made. In the event that the Company does not effect the
specified targeted reductions in commitment for the Series B Notes scheduled for
July 31, 1998 and
                                       53
<PAGE>   56
 
August 31, 1998, the holders of the Series B Notes (which otherwise come due on
September 30, 1998) shall receive 16,000 additional warrants to purchase shares
of such common stock. Any additional warrants are referred to as the "Additional
Warrants." The Company could be required to issue up to 182,000 additional
10-year warrants to purchase shares of Common Stock under these arrangements.
 
     The exercise price for the Travelers Warrants and Additional Warrants is
$8.625 per share, except that, if the Series B Notes are not repaid in full by
September 30, 1998, the exercise price of all warrants issued to the holders of
the Series B Notes becomes $0.01, and, if the Series A Notes are not repaid in
full by December 31, 1998, the exercise price of all warrants issued to the
holders of the Series A Notes also becomes $0.01. All of the warrants expire on
December 31, 2008. In addition, if the Series B Notes are not repaid in full on
September 30, 1998, then, commencing September 30, 1998 and on the last day of
each succeeding month until the Series B Notes have been repaid in full, the
holders of the Series B Notes shall receive 32,000 additional warrants to
purchase shares of the Company's common stock at a price of $0.01 per share. If
the Series A Notes are not repaid in full on December 31, 1998, then, commencing
December 31, 1998 and on the last day of each succeeding month until the Series
A Notes have been repaid in full, the holders of the Series A Notes shall
receive 70,000 additional warrants to purchase shares of such common stock at a
price of $0.01 per share. These default warrants (the "Default Warrants") have
an expiration date ten years after their respective dates of issue.
 
     The issuance of Additional Warrants and/or 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, the Additional Warrants and the Default 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 may face significant challenges in meeting its obligations to
pay cash interest on the indebtedness referred to above, and in effecting its
repayment upon its maturity. See "-- Holding Company Structure; Barriers to
Realizing Cash from Subsidiaries."
 
     -- Possible Effects of Insufficient Capital Resources.  Any or all of these
matters may require that the Company raise 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 these matters 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.
 
     Also, failure to generate the required funds 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 Series A and Series B 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
 
                                       54
<PAGE>   57
 
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 Series A and Series B 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, see
"Business -- Consent Solicitation," 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 "-- Risks Involving
the Company -- Capital Requirements."
 
     Effect of Substantial Leverage.  As of December 31, 1997, the Company had
approximately $133.5 million of consolidated long-term debt and shareholders'
equity of approximately $127.1 million.
 
     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 Convertible Notes and the Series A and Series B Notes (and, in
the case of the Senior Notes, after December 1, 1998, when cash interest on the
Senior Notes commences to accrue) or the principal amount of the Notes and the
Series A or Series B Notes at maturity, or to redeem or repurchase the Notes or
the Series A or Series B 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, see
"-- Taxation"; (iii) exchange controls and repatriation restrictions in effect
in the jurisdictions in which they operate, see "-- Currency Controls; and (iv)
the ownership interests of other investors in the Company's subsidiaries.
 
     Taxation.  Taxes payable by Russian and Kazakh 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 and Kazakhstan 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 and Kazakh
 
                                       55
<PAGE>   58
 
authorities and, in the case of Kazakhstan, the unfamiliarity of those
administering the tax system with the international tax treaty system. In
addition, 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 and Kazakhstan 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 have been given
retroactive effect.
 
     Technocom established a representative office in Moscow in October 1995 and
registered this office with the relevant Russian tax authorities. As a result of
this, Technocom became subject to profits and other 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 Russian taxes with respect to the period before
October 1995. See "-- Country Risks -- Legal Risks -- Underdeveloped Legal
System."
 
     Currency Controls -- Risks of Changing Regulatory and Administrative
Environment.  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 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.
 
     -- 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, specific licenses from both the Central Bank and the National Bank of
Kazakhstan are 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. Failure to obtain such currency licenses where required can result in the
imposition of fines and penalties. While the requirements for 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 proposed 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 have been amended to permit
the Company to make installment sales as well as leases of equipment to its
operating businesses. 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.
                                       56
<PAGE>   59
 
     -- 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 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 void. In particular, transactions (including rental or
lease transactions) which involve 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, including Technocom 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 60% 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. While the Company may
have the ability, in the case of PeterStar, ALTEL 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;
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
                                       57
<PAGE>   60
 
operating subsidiaries. In summary, the absence of complete legal control by the
Company over the operations of PeterStar, ALTEL and Teleport-TP, 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. PeterStar is dependent upon its general director, Vladimir Akulich, and
upon its expatriate managers, James Maude and Stephen Gardner. The Company also
relies heavily on the experience of Maxut Saurenbekov and Rex Power for the
technical guidance and operational and financial management of ALTEL. The
further expansion of the Technocom business depends upon the continued
involvement of Boris Antoniuk in the management of Technocom's affairs and those
of its subsidiaries. While Dr. Antoniuk is under contract to Technocom and the
Company, no assurance can be given that his 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, John Davies, Simon Edwards, Alan Brooks and Conor Carroll, 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.
 
   
     Historical Dependence on Cable and Wireless plc.  The Company is engaged in
developing various telecommunications businesses in challenging environments.
The scope of some of its projects, e.g. the development of a cellular network in
Kazakhstan and the development of a satellite-based long distance network across
the Russian Federation, requires both significant financial and human resources.
The Company has been able to draw, when necessary, on the worldwide expertise
(access to which is paid for on a case by case basis) of Cable & Wireless to
assist the Company's operating businesses in certain areas of their operations.
The Company and Cable & Wireless have entered into a support services agreement
which sets out the terms, on an arm's-length basis, under which the Company and
its subsidiaries have access to Cable & Wireless' resources. While this
agreement will be terminated following the disposition by Cable & Wireless of
its stake in the Company, the Company currently knows of no reason why it would
not be able to continue to draw upon the resources of Cable & Wireless on an
ad-hoc basis thereafter, but no assurances can be made that such resources will
continue to be made available to the Company. See "-- Recent Developments --
Transactions with Cable & Wireless and News."
    
 
     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 will
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<PAGE>   61
 
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. 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, nor what impact the recently announced sale of a
40% stake in Kazakhtelekom to Daewoo and the efforts by the KMOC to limit
ALTEL's exclusive license and permit more cellular operators in Kazakhstan will
have upon the Kazakh telecommunications market and the Company in particular.
See "-- Impact of Auction of Stakes in Sviazinvest on the Company and the
Telecommunications Market in Russia" and "-- Risks Involving ALTEL." Finally,
the increasing ability of Russian telecommunications companies to access Western
capital markets for their financing needs may reduce their reliance on the
Company for financing and improvement of their networks. Such reduced reliance
may affect the Company's ability to exert influence on its Russian partners in
the operating businesses. See "-- Impact of Auction of Stakes in Sviazinvest on
the Company and the Telecommunications Market in Russia," "-- Telecommunications
in the Former Soviet Union" and "-- Competition."
 
     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. See "-- Competition -- PeterStar Company Limited." 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, or if it should be awarded one of the new cellular
licenses the Kazakh government is considering issuing. See
"-- Competition -- ALTEL." 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. See
"-- Competition -- Teleport-TP." Finally, certain directors of the Company's
operating subsidiaries also act as directors or officers of its partners in the
Russian Federation and Kazakhstan. See "-- Dependence on Key Management."
 
     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 conflicting interests. Kazakh law currently provides
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
                                       59
<PAGE>   62
 
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 one share. The
schedule for the auction of the second stake has not been announced, but it is
expected to be completed by the end of the third quarter of 1998. 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. At the same time, Sviazinvest
has announced plans to raise $400 million through a Eurobond offering later in
1998. In light of all of the foregoing, it is unclear what impact the
consolidation of the government's telecommunications holdings and the auctions
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, and the Kazakh telecommunications system is
currently regulated by the KMOC, 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, 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 recently
announced sale of a 40% stake in Kazakhtelekom to Daewoo, may lead to
restructuring of the telecommunications sector in Kazakhstan, the effects of
which are difficult to predict at the present time. See "-- Risks Involving
ALTEL -- Effect of Sale of Stake in Kazakhtelekom on ALTEL and the
Telecommunications Market in Kazakhstan."
 
     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. The introduction of regulation of tariffs, or any other type of
regulation, could have far-reaching, and potentially materially adverse effects
on the Company.
 
     Limitations on Ability to Transfer Interests.  The terms of the PeterStar
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.
 
     Effect of Technocom Minority Shareholders' Put Options on Company's Ability
to Transfer its Stake in Technocom.  The Company has put and call agreements
with Plicom and Elite which, following the
 
                                       60
<PAGE>   63
 
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 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. In
the event the Company determined to sell its stake in Technocom, the existence
of these agreements could adversely affect the Company's ability to do so. The
Company has no present intention to dispose of its shares in Technocom.
 
     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, Technocom 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, 1996 and 1997, 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,
1997, PeterStar had 114,774 lines, of which 85,948 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,
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
 
                                       61
<PAGE>   64
 
as BCL) in St. Petersburg and the surrounding region for a term expiring in
September 2001. This license therefore enables PeterStar to offer its clients
the potential cost efficiencies and synergies which come from working with
affiliated companies, as well as allowing PeterStar and BCL to explore ways to
work together to provide integrated solutions to customer needs. 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 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
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, 1997,
BCL had 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.
See "-- Country Risks -- Legal Risks." 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 SPMMTS and PTN expire in November and December 1998,
respectively. The agreements provide for automatic extensions at the end of
their term unless otherwise terminated by either party. The interconnection fees
and carrier charges payable under the interconnect agreements are subject to
renegotiation between the parties from time to time. 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. To date, 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.
Although PTN is required to provide certain of these facilities under the terms
of PeterStar's foundation documents, the presently unforeseen loss of access to
these facilities or the availability of access only on unfavorable terms could
have a material adverse effect upon the Company. PeterStar anticipates that it
will have to pay a local
                                       62
<PAGE>   65
 
line rental charge to PTN commencing in 1998. The exact fee, and the timing of
the fee, has not yet been determined.
 
     Capital and Management Resources Required for Expansion of Direct Dial
Services; Management of Growth.  PeterStar has recently commenced several
projects designed to expand its direct dial services in St. Petersburg and
Northwest Russia. PeterStar has agreed with PTN to undertake an infrastructure
project centering on 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 will require the conversion of approximately 30,000
business and residential lines that are currently 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 will require substantial capital and special management efforts if they
are to be carried into effect successfully. See "-- Capital Requirements."
 
     Pressure to Provide Residential Service.  The Vassilievski Island project
also represents part of a continuing effort on the part of PTN to deal with
unanswered demand for improved residential service in St. Petersburg. 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, following long and detailed negotiations with PTN, 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, 1996 and 1997, 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; Elimination of Exclusivity
Provision.  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. The
exclusivity provision of ALTEL's license has recently been the subject of
scrutiny by various governmental agencies in Kazakhstan, and questions have been
raised as to its validity. In order to put the matter to rest, ALTEL has been
discussing with the KMOC substituting a new license with revised terms for its
existing license. While those terms are not finally negotiated, they would
likely include eliminating the exclusivity provision (which terminates in any
event in February 1999). See "-- Telecommunications Licenses -- ALTEL."
Management of ALTEL believes that a resolution of the kind envisaged would put
to rest the issues that have been raised regarding ALTEL's existing license and
assure ALTEL a suitable environment in which to continue the development of its
business. Management also believes that, by virtue of its cost structure and its
market penetration to date, it is in a good position to compete with any parties
who are hereafter licensed to operate cellular networks in Kazakhstan, even
those which may enjoy the backing of the KMOC or other agencies of the
government of Kazakhstan. However, there can be no assurance that efforts to
limit the scope of its license or otherwise revise its terms in a way which
could be detrimental to ALTEL will not continue, or that ALTEL will in fact be
able to compete
                                       63
<PAGE>   66
 
successfully with any new licensees. See "-- Country Risks -- Legal Risks" and
"-- Telecommunications Licenses -- ALTEL."
 
     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, 1997. 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 will 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. 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. The report did not indicate whether Daewoo proposed
to sell or retain the remainder of its stake in Kazakhtelekom. Both of these
transactions create considerable uncertainty as to the government's attitude
towards Kazakhtelekom. There is also a question as to Daewoo's intentions with
respect to the remainder of their stake. 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.
 
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 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 holds four licenses from the RFCTI with
respect to its operations. Two licenses expire in 2004, one in
 
                                       64
<PAGE>   67
 
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 28, 1997. 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 27% of Teleport-TP's total
revenues for the year ended December 31, 1997, as compared to 41% for the year
ended December 31, 1996. 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 dependance 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. See
"-- Network Expansion." Additionally, while Rostelecom currently utilizes
approximately 900 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.
 
     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
 
                                       65
<PAGE>   68
 
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, 1998. 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. Teleport-TP and MTR-Sviaz have developed a carrier
services agreement to formally set out the relationship between the operators.
 
     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 29 sites installed as of
December 31, 1997. The Company currently plans to install equipment in a total
of 45 sites by the end of the first half of 1998. This represents a major
expansion of Teleport-TP's operations which will 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) availability
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 regulations has
significantly delayed, and may continue to delay, the implementation of the
network program. See "-- Country Risks -- Political Risks" and "-- Legal
Risks -- Underdeveloped Legal System."
 
     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.
                                       66
<PAGE>   69
 
     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 auctions 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."
 
ITEM 2.  PROPERTIES
 
     Executive Offices and Representative Office.  As a result of the
Continuance, the Company has closed its executive offices in Toronto, where the
Company previously leased approximately 500 square feet of office space on a
month-to-month basis. The Company has established an executive office in New
York, New York, consisting of approximately 6,000 square feet of office space,
which it has leased through December 31, 1999.
 
     The Representative Office of PLD is co-located with 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 office in London, England
where it leases approximately 2,400 square feet of office space pursuant to a
long-term lease. In connection with the Continuance, the Company has moved many
of the functions performed by this office to the United States during 1997,
although the Company anticipates continuing to have an operational support
facility in England for the foreseeable future.
 
     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.  ALTEL leases space for its administrative offices in a
Kazakhtelekom exchange building located in Almaty. It also leases space from
Kazakhtelekom for its switches, cell sites and associated equipment in
Kazakhstan, and leases other space in cities in Kazakhstan where it has
operations for customer service centers, although ALTEL has purchased its
facilities in Taraz. ALTEL is considering the purchase of a building in Almaty
so as to permit the consolidation of a number of operations housed in different
locations throughout the city.
 
     The Company believes that its offices and the various facilities used by
PeterStar, ALTEL, 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 1997.
 
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<PAGE>   70
 
                                    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 quoted on SEAQ International
and traded on the Berlin and Frankfurt Stock Exchanges. Prior to the Continuance
of the Company in Delaware on February 28, 1997, 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>
1996
  1st Quarter.....................................  $6.375    $4.625
  2nd Quarter.....................................  $9.000    $4.500
  3rd Quarter.....................................  $8.500    $6.125
  4th Quarter.....................................  $8.125    $5.50
 
1997
  1st Quarter.....................................  $8.000    $5.625
  2nd Quarter.....................................  $5.875    $4.4375
  3rd Quarter.....................................  $9.250    $4.875
  4th Quarter.....................................  $9.750    $5.250
</TABLE>
 
     On March 25, 1998, the closing sale price for a share of Common Stock as
reported on the Nasdaq National Market was $8.00. As of March 27, 1998, there
were 314 holders of record of the Company's Common Stock.
 
     The Company did not declare dividends on its Common Stock in 1997 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, 1997, 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
 
                                       68
<PAGE>   71
 
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 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.
 
     (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.
See "Business -- Acquisition of Additional Interests in Technocom."
 
     The Series B Notes come due on September 30, 1998, and the Series A Notes
come due on December 31, 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 B 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, and may become obligated to issue
additional warrants to the Travelers Parties in the event that certain
amortization payments are not made, or if the Series A or Series B Notes are not
paid in full at their maturity.
 
     (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.
 
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
Continuance, the consolidated financial data presented below for the fiscal
years 1994 and 1993 have been restated in accordance with U.S. GAAP.
 
                                       69
<PAGE>   72
 
<TABLE>
<CAPTION>
                                                   FISCAL YEAR ENDED DECEMBER 31,
                                       -------------------------------------------------------
                                         1997        1996        1995       1994        1993
                                         ----        ----        ----       ----        ----
                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>         <C>         <C>         <C>        <C>
STATEMENT OF OPERATIONS DATA:
  Operating revenues.................  $114,424    $ 61,966    $ 29,120    $ 8,526    $  2,308
  Operating expenses.................   102,406      59,099      38,266     17,248       7,606
                                       --------    --------    --------    -------    --------
  Operating income/(loss)............    12,018       2,867      (9,146)    (8,722)     (5,298)
                                       --------    --------    --------    -------    --------
  Loss from continuing operations
     before income taxes and minority
     interest........................    (3,428)     (6,271)    (13,440)    (9,491)     (5,264)
  Income taxes.......................     7,739       3,669       1,490         --          --
  Loss from continuing operations
     before minority interest........   (11,167)     (9,940)    (14,930)    (9,491)     (5,264)
  Minority interest..................     9,399       2,521         551         --          --
                                       --------    --------    --------    -------    --------
  Loss from continuing operations....   (20,566)    (12,461)    (15,481)    (9,491)     (5,264)
  Discontinued operations............        --          --          --         --      (5,138)
                                       --------    --------    --------    -------    --------
  Loss for the year..................  $(20,566)   $(12,461)   $(15,481)   $(9,491)   $(10,402)
                                       ========    ========    ========    =======    ========
  Loss per common share(1)...........  $  (0.64)   $  (0.39)   $  (0.49)   $ (0.78)   $  (1.33)
                                       ========    ========    ========    =======    ========
  Weighted average number of shares
     outstanding.....................    32,061      31,579      31,315     12,663       8,155
</TABLE>
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                       -------------------------------------------------------
                                         1997        1996        1995        1994       1993
                                         ----        ----        ----        ----       ----
<S>                                    <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
  Cash and cash equivalents(2).......  $ 17,256    $ 40,674    $ 15,676    $ 56,710    $   948
  Non-cash working
     capital/(deficiency)............   (18,642)    (26,440)    (22,001)    (17,706)    (5,121)
  Escrow funds.......................    33,868      40,984          --          --         --
  Property and equipment, net........   134,998      93,039      45,357      21,718      6,306
  Telecommunications licenses........    78,837      72,310      49,583      54,099     18,337
  Investments and other assets.......    32,801      39,052      29,293      18,925      2,223
  Investment in Teleport-TP..........        --          --      23,564      15,699         --
  Total assets.......................   335,586     306,357     178,092     171,760     28,700
  Long-term debt.....................   133,516     107,954          --          --      4,297
  Shareholders' equity...............   127,231     137,954     135,832     147,470     11,448
</TABLE>
 
---------------
(1) In 1993, loss per common share includes a loss from discontinued operations
    of $(0.63).
 
(2) The December 31, 1996 and December 31, 1995 balances includes cash of $9.0
    million and $6.1 million, respectively, held on deposit as collateral to
    secure bank indebtedness of the same amount.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     Except as otherwise indicated, all references to 1995, 1996 and 1997 refer
to the fiscal year ended on December 31 of those years respectively.
 
INTRODUCTION
 
     Basis of Presentation.  Effective February 28, 1997 PLD Telekom Inc. was
continued as a Delaware corporation. As a result, the consolidated financial
statements for 1995, 1996 and 1997 have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP). Prior
to 1996, the audited consolidated financial statements were prepared in
accordance with Canadian GAAP, with a reconciliation to U.S. GAAP. EBITDA, which
is used as a measure of operating performance, is defined as
 
                                       70
<PAGE>   73
 
follows: earnings before taxes and minority interest plus interest (interest
expense less interest and other income) plus depreciation and amortization.
EBITDA is used as a supplementary measure of operating performance and is
commonly quoted in the telecommunications industry. It is particularly relevant
in comparing the Company's operating results with those of its peers based
outside the U.S., many of whom are not subject to amortizing license or goodwill
costs and who have the ability to write-off such costs on date of acquisition.
In the Company's case, such amortization costs make up a significant portion of
the Company's operating expenses. The Company has consistently disclosed EBITDA
figures on a consolidated basis and for its subsidiaries in its quarterly and
annual filings. EBITDA should not be construed as an alternative to operating
income (as determined in accordance with GAAP) as an indicator of an entity's
operating performance, or to cash flows from operating activities (as determined
in accordance with GAAP) as a measure of liquidity.
 
     Principal Operations and Future Activities.  The Company's key interests at
December 31, 1997 include a 60% equity interest in PeterStar, which provides
telecommunication services in St. Petersburg, Russia; a 50% equity interest in
ALTEL, which provides cellular services in Kazakhstan; and an 80.4% equity
interest in Technocom which, through its 49.33% 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. Cable &
Wireless is the Company's principal shareholder at December 31, 1997. The
consolidation of financial information in the 1997 financial statements differs
from 1996 by reflecting the Company's acquisition of an additional 29.65%
interest in Technocom effective December 31, 1997. The consolidation of
financial information in the 1996 financial statements differs from 1995 by
reflecting (i) the Company's acquisition of 100% of the outstanding shares of
BCL in April 1996; and (ii) the acquisition by Technocom of a controlling voting
interest in Teleport-TP effective December 31, 1996.
 
     The Company's telecommunications businesses are developing 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. In
addition, Teleport-TP's satellite-based long distance network is at an early
stage of its development and operations.
 
     Ultimate recoverability of the Company's investments in PeterStar, ALTEL
and Teleport-TP is dependent upon each of these subsidiaries achieving and
maintaining 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.
 
     Effect of change from Canadian GAAP to U.S. GAAP.  The effect of the
restatement of prior year comparatives from Canada to U.S. GAAP is explained in
Note 15 to the consolidated financial statements. However, the main differences
may be summarized as follows: (i) under Canadian GAAP, the Convertible Notes
issued in connection with the June 1996 Placement are a compound financial
instrument and the debt and equity elements are separately accounted for. Under
U.S. GAAP, the Convertible Notes are accounted for as a single debt instrument
under the "Long-term debt" caption; and (ii) U.S. GAAP does not permit the
capitalization of pre-operating costs. Therefore, in anticipation of the change
to U.S. GAAP, effective December 31, 1996 the Company changed its Canadian GAAP
policy with respect to pre-operating costs to be in accordance with U.S. GAAP.
As a result, all such costs were retroactively expensed.
 
     Accounting Standards.  Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," and Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of an
Enterprise and Related Information," were 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. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company has not determined the impact of SFAS 130 on its
financial statements. SFAS 131 establishes standards for the way public
companies report information about operating segments in annual financial
statements and requires that those companies
 
                                       71
<PAGE>   74
 
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 is required to adopt both new standards in the first quarter of
1998.
 
     Management Fees.  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 -- ie, 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, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
 
     PLD Telekom Inc. -- Consolidated
 
     In 1997, the Company reported a loss of $20.6 million, or $0.64 per share,
on total revenues of $118.0 million, including operating revenues of $114.4
million. This compares with a loss in 1996 of $12.5 million, or $0.39 per share,
on total revenues of $66.8 million (operating revenues of $62.0 million). EBITDA
of $30.3 million compared with $12.1 million in 1996. EBITDA should not be
construed as an alternative to operating income (as determined in accordance
with GAAP) as an indicator of an entity's operating performance, or to cash
flows from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. See "Liquidity and Capital Resources" for a discussion of
the Company's cash flows from operating activities, investing activities and
financing activities in 1997 and 1996.
 
     The loss of $20.6 million in 1997 incorporates a profit contribution from
PeterStar of $16.5 million (after income taxes of $3.2 million), a profit
contribution from ALTEL of $7.2 million (after income taxes of $3.6 million), a
profit contribution from BCL of $0.5 million (after income taxes of $0.4
million), corporate interest and other income of $3.1 million, a corporate
foreign exchange gain of $0.1 million and a corporate gain on the disposal of an
investment of $1.0 million, offset by a net loss of $4.7 million incurred in
Technocom, corporate general and administrative costs of $8.3 million, interest
on corporate bank indebtedness and long-term debt of $16.7 million, corporate
amortization and depreciation charges of $8.5 million, corporate taxes of $0.9
million and minority interest charges of $10.0 million relating to PeterStar,
ALTEL and Technocom.
 
     Operating revenues.  Consolidated operating revenues increased by 85% from
$62.0 million in 1996 to $114.4 million in 1997, principally as a result of
strong growth in PeterStar and ALTEL, and the consolidation of a full year's
revenues from BCL and Teleport-TP in 1997. Operating revenues from PeterStar
increased in 1997 to $54.5 million from $32.5 million in 1996 due mainly to a
continued rapid increase in line penetration from 52,005 at December 31, 1996 to
114,774 at December 31, 1997. ALTEL contributed operating revenues of $30.0
million, as compared to $19.1 million in 1996. This increase is attributable to
the growth in ALTEL's subscriber base from 6,957 at December 31, 1996 to 11,120
at December 31, 1997. Technocom contributed operating revenues of $21.2 million
in 1997, compared to $4.4 million in 1996, largely as a result of the
consolidation of Teleport-TP. BCL contributed operating revenues of $7.6 million
for the Company in its first full year as an operating subsidiary of the Company
compared with part year revenues of $5.1 million in 1996. Yellow Pages
contributed $1.0 million in operating revenues in 1997 compared to $0.8 million
in 1996.
 
     Direct costs.  Direct costs, including the direct costs of sales of all of
the Company's subsidiaries, increased 81% in 1997 to $39.2 million. As a
percentage of revenues, direct costs reduced marginally to 34% from 35% in 1996.
 
     General and administrative costs.  General and administrative costs include
the day-to-day expenses in all five subsidiary operations as well as corporate
expenses. Consolidated general and administrative expenses increased 56% from
$24.8 million in 1996 to $38.7 million in 1997, reflecting the continued growth
in the scale and extent of the operating businesses and the full year
consolidation of BCL and Teleport-TP. As a percentage of operating revenues,
these costs continued a downward trend, falling from 62% in 1995 to 40% in 1996
to 34% in 1997.
 
                                       72
<PAGE>   75
 
     Depreciation.  Depreciation increased 100% from $5.2 million in 1996 to
$10.4 million in 1997, reflecting 1997 capital expenditures within the operating
businesses of $43.0 million as the build-out of the PeterStar, ALTEL and
Teleport-TP networks progressed. In 1996, $43.2 million was invested in these
companies' networks.
 
     Amortization.  Upon the acquisition by the Company of its interests in
PeterStar, ALTEL and Technocom (incorporating Teleport-TP), the differential
between the purchase price and the fair value of the net assets acquired was
allocated to the telecommunications licenses held by these entities. These
licenses, which expire in 2004, 2009 and 2004 respectively, are being amortized
on a straight line basis over the appropriate terms. In this respect, in 1997,
the Company incurred total non-cash amortization charges of $7.4 million,
including $2.6 million relating to the telecommunications licenses of PeterStar,
$2.1 million relating to the telecommunications license of ALTEL and $2.7
million relating to the telecommunications licenses of Teleport-TP. The Company
also incurred amortization charges of $0.2 million relating to goodwill
associated with the acquisition of Yellow Pages and $1.2 million relating to
deferred financing costs associated with the senior discount and convertible
subordinated note financing undertaken in 1996. In 1996, the Company incurred
amortization charges of $4.7 million relating to the telecommunications licenses
of PeterStar and ALTEL, together with $0.2 million relating to goodwill
associated with Yellow Pages and $0.7 million relating to deferred financing
costs. In addition, included in Technocom's share of the 1996 results of its
equity investments were amortization charges of $2.5 million relating to the
telecommunications licenses of Teleport-TP.
 
     Taxes other than income taxes.  Taxes other than income taxes of $6.2
million in 1997 compared with $2.5 million in 1996 and included such taxes as
property taxes, road taxes, police taxes, transport taxes, advertising taxes,
housing taxes and education taxes, most of which are specific to doing business
in Russia and Kazakhstan. The increase of 148% in these taxes reflects the
significant increases in revenues and net earnings of the Company's operating
subsidiaries which form the bases for computing many of these taxes.
 
     Operating income.  Operating income of $12.0 million in 1997 compared to
$2.9 million in 1996.
 
     Share of loss from equity investments, after amortization of
licenses.  Share of loss from equity investments, after amortization of
licenses, in 1997 relate entirely to the equity investments held by Technocom,
primarily MTR Sviaz and Rosh Telecom. The 1997 loss of $0.5 million consisted of
Technocom's 49% share of MTR Sviaz's loss of $1.8 million partially offset by
its 50% share of Rosh Telecom's net earnings of $0.8 million. In 1996, the loss
related primarily to amortization charges in connection with licenses held by
Teleport-TP. Teleport-TP's financial statements were not consolidated with
Technocom until January 1, 1997.
 
     Interest expense.  Interest expense of $17.8 million consisted of interest
on bank indebtedness and short-term borrowings of $1.3 million and interest on
long-term debt of $16.5 million. Interest on the Senior Notes and the
Convertible Notes resulted in total interest charges on long-term debt of $16.5
million for the full year in 1997 compared to $8.7 million in 1996. Of this
amount, $2.4 million related to the Convertible Notes and was paid during the
year. The balance of $14.1 million was added to the accreted value of the Senior
Notes on the Company's balance sheet.
 
     Interest and other income.  Interest and other income in 1997 of $3.6
million compared with $4.9 million in 1996. Interest earned on the Company's
escrow account (funds from which may be used to acquire telecommunications
equipment or telecommunications companies in Russia and Kazakhstan) totaled $2.2
million in 1997 compared with $1.3 million earned for the partial year in 1996.
Escrowed funds are invested in short-term reverse repurchase agreements secured
by U.S. treasury bonds. Interest earned at the subsidiary level totaled $1.0
million for the year.
 
     Foreign exchange loss.  Foreign exchange losses in 1997 of $0.3 million
compared with losses of $0.6 million in 1996 and resulted from the unfavorable
movement of local currencies vis-a-vis the U.S. dollar applied to net monetary
assets held by a number of the Company's operating subsidiaries.
 
                                       73
<PAGE>   76
 
     Gain on disposal of investments and property and equipment.  Gain on
disposals of investments in 1997 related to the $1.0 million earned on the
Company's sale of its 10.4% interest in SPMMTS for gross proceeds of $17.2
million in June 1997, offset by a loss on disposal of equipment of $0.3 million
at BCL.
 
     Income taxes.  Income taxes of $7.7 million in 1997, compared with $3.7
million in 1996 and relate substantially to current income taxes in the
Company's Russian and Kazakh businesses. The higher charge in 1997 reflects the
improved profitability of these subsidiaries. The Company is currently
evaluating its overall tax structure in an effort to endeavor to better utilize
existing tax loss carry forwards at the corporate level while sheltering taxable
income at the subsidiary level.
 
     Minority interest.  Minority interest of $9.4 million in 1997 compared with
$2.5 million in 1996 and relates primarily to the minorities' share of the net
after-tax profit of PeterStar (40%), ALTEL (50%) and the net loss of Technocom
(49.25%). Effective January 1, 1998, the minorities' share of Technocom's
earnings or losses has been reduced to 19.6% as a result of the Company's
acquisition of an additional 29.65% interest in Technocom effective December 31,
1997. Minority interest charges for the above subsidiaries are calculated after
deducting any management fees payable to the Company. In 1997, the Company
charged PeterStar and ALTEL $2.0 million and $1.2 million, respectively, in
respect of such fees. Additionally in 1997, the Company agreed to write-off $5.3
million in historical inter-company advances made to PeterStar. Accordingly, the
minority interest charge for PeterStar was calculated after inclusion of this
write back in PeterStar statements.
 
     Net loss.  Net loss of $20.6 million in 1997 compared to a net loss of
$12.5 million in 1996.
 
  PeterStar Company Limited
 
     PeterStar reported net income of $16.5 million and an operating profit of
$20.5 million on operating revenues of $54.5 million for the year ended December
31, 1997, compared to net income of $5.9 million and an operating profit of $8.0
million on operating revenues of $32.5 million for the year ended December 31,
1996. EBITDA grew to $24.1 million for the year ended December 31, 1997,
representing 44% of revenues, compared to EBITDA of $10.3 million, representing
31% of revenues in 1996. EBITDA should not be construed as an alternative to
operating income (as determined in accordance with GAAP) as an indicator of an
entity's operating performance, or to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity.
 
     PeterStar's cash flows from operating activities in 1997 totaled $19.3
million (1996 -- $7.7 million). Major adjustments to PeterStar's $16.5 million
net income (1996 -- $5.9 million) to arrive at cash provided by operating
activities included the addback of depreciation and amortization of $4.0 million
(1996 -- $2.7 million), and deferred revenues of $2.0 million (1996 -- a
reduction of $0.9 million) offset by an increase in net operating assets and
liabilities of $3.8 million (1996 -- nil).
 
     Net cash used in investing activities of $16.6 million (1996 -- $6.3
million) related to the purchase of telecommunications switching and
transmission equipment in connection with the development of PeterStar's fiber
optic ring around central St. Petersburg, the construction of a new digital
exchange on Vassilievski Island and the improvement of access to the long
distance and international gateway between PeterStar and SPMMTS.
 
     Net cash used in financing activities totaled $3.6 million (1996 -- $0.9
million) consisting of the issuance of $13.5 million in common stock
(1996 -- nil), bank financing of $0.9 million (1996 -- nil) offset by the
repayment of related company advances of $18.0 million (1996 -- $0.9 million).
 
     Revenues.  Call revenues for the year ended December 31, 1997 ($31.5
million) were 47% higher than the call revenues in the year ended December 31,
1996 ($21.5 million), reflecting increases in subscriber lines installed and
transit traffic carried during the period. Total subscriber lines increased by
121%, to 114,774 at December 31, 1997 from 52,005 at December 31, 1996. Directly
connected customers (i.e. business and residential lines) increased to 28,826
from 14,792, or 95%, over the same period. Lines to cellular operators increased
by 131% to 85,948 lines at December 31, 1997 from 37,213 lines at December 31,
1996.
 
                                       74
<PAGE>   77
 
     Revenues from line rentals increased by 92%, reflecting the increase in
installed lines, both fixed and cellular. Similarly, installation fees grew at a
rate of 118% over the year ended December 31, 1996, reflecting the increased
number of lines put into service.
 
     Call revenues accounted for 58% of operating revenues for the year ended
December 31, 1997 compared to 66% in 1996, installation fees accounted for 22%
of total revenues for the year ended December 31, 1997 compared to 17% in 1996
and line rentals accounted for 20% of total revenues for the year ended December
31, 1997 compared to 17% in 1996.
 
     Of PeterStar's total network traffic in 1997, 87% was local compared with
89% in 1996 and 9% was long distance in 1997 compared with 7% in 1996.
International traffic was unchanged in 1997 at 4% of total network traffic.
These changing traffic patterns have reduced revenue per line to $654 in 1997
from $885 in 1996, while recurring revenue per line (calling charges and line
rentals) were $520 per line compared to $736 in 1996. By the end of 1997,
Russian businesses accounted for 70% of PeterStar's customers and 45% of its
revenues. These trends are expected to continue as Russian companies and
individuals increasingly constitute PeterStar's customer base.
 
     PeterStar expects line growth for both fixed and cellular services to
continue as the market expands for high quality digital telecommunications
services. PeterStar believes that its focus on the introduction of data services
such as frame relay and ATM services will increase revenues and improve its
competitive positioning.
 
     Gross Profit.  Gross profit increased 86% to $38.6 million for the year
ended December 31, 1997 from $20.7 million in 1996. The gross margin of 71% is
significantly higher than the margin of 64% in 1996 due to discounted outpayment
charges on higher traffic volumes, although continuing competition, plus the
possibility that PTN may start to levy access charges in 1998, is expected to
put pressure on margins in the future.
 
     Operating expenses.  Operating expenses increased 43% to $18.2 million for
the year ended December 31, 1997 from $12.7 million in 1996. Operating expenses
represented 33% of revenues in 1997 compared to 39% in 1996, as revenue
generation grew faster than costs. In particular, staff costs and depreciation
each accounted for 22% of total operating expenses for the year ended December
31, 1997, compared to 30% and 21%, respectively, for the same period in 1996.
Staff costs increases were directly related to the growth in PeterStar's
business during the year, with overall staff levels increasing from 220 in 1996
to 310 at the end of 1997. The biggest increases in staffing were in the sales
and marketing and technical departments. Staffing is expected to increase to
approximately 400 employees in 1998. Depreciation is expected to increase in
1998 as a result of $25 million in planned capital expenditures.
 
  ALTEL
 
     ALTEL recorded net income of $7.2 million and an operating profit of $10.9
million on operating revenues of $30.0 million for the year ended December 31,
1997, compared to net income of $4.5 million and operating income of $6.0
million on operating revenues of $19.1 million for the year ended December 31,
1996. EBITDA grew to $13.9 million for the year ended December 31, 1997,
compared to EBITDA of $7.8 million for the same period in 1996. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of an entity's operating performance, or
to cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity.
 
     ALTEL's cash flows from operating activities in 1997 totaled $8.8 million
(1996 -- $9.8 million). Major adjustments to ALTEL's $7.2 million net income
(1996 -- $4.5 million) to arrive at cash provided by operating activities
included the addback of depreciation and amortization of $3.3 million (1996 --
$2.1 million), offset by an increase in net operating assets and liabilities of
$2.1 million (1996 -- reduction of $2.8 million).
 
     Net cash used in investing activities totaled $4.3 million (1996 -- $8.2
million) related to the purchase of telecommunication equipment.
 
                                       75
<PAGE>   78
 
     Cash used in financing activities of $2.0 million (1996 -- nil) related to
the payment of common stock dividends during the year.
 
     Revenues.  Call revenues for the year ended December 31, 1997 ($18.9
million) were 60% higher than the call revenues for the same period in 1996
($11.8 million), reflecting a substantial increase in subscribers during the
period, from 6,957 at December 31, 1996 to 11,120 at December 31, 1997.
Subscription fees increased during the year by 53% to $3.8 million, connection
fees increased by 5% to $1.7 million and equipment sales increased by 45% to
$4.7 million. Other revenues of $1.0 million increased fivefold during the year.
 
     Call revenues accounted for 63% of operating revenues for the year ended
December 31, 1997, up marginally from 62% in 1996, subscription fees accounted
for 13% of total revenues for the year ended December 31, 1997 -- unchanged from
1996, connection fees accounted for 6% of total revenues for the year ended
December 31, 1997 compared with 8% in 1996, while equipment sales represented
16% of revenues, as against 17% in 1996.
 
     Local and incoming traffic during 1997 accounted for 75% of total traffic
compared with 76% during 1996, mobile to mobile traffic accounted for 11% of
total traffic compared with 9% in 1996, while long distance traffic in 1997
accounted for 7% of total traffic compared with 6% during 1996, and
international traffic accounted for only 7% of total traffic compared with 9%
during 1996. ALTEL's customer base increasingly consists of Kazak companies and
individuals, who tend not to use its higher priced long distance and
international services. This has had an effect upon per subscriber
revenues -- total revenue per subscriber for the year ended December 31, 1997
was $3,382 against $3,886 per subscriber for 1996, while recurring revenue per
subscriber also reduced from $2,900 in 1996 to $2,666 per subscriber in 1997.
The reductions in total per subscriber and recurring per line revenues also stem
from the different calling patterns of these classes of customers who generally
use as much as 38% less airtime as the foreign business customers. ALTEL expects
both of these trends to continue; however, ALTEL expects to offset the effects
of these factors by continuing to expand its overall customer base, through,
among other things, the introduction of pre-paid cellular service during 1998.
 
     Gross Profit.  Gross profit increased 69% to $23.1 million for the year
ended December 31, 1997 from $13.7 million in 1996. Gross margin showed
continued improvement at 77% of operating revenues compared to the 72% margin
realized in 1996, primarily due to the greater calling volumes and reduced
dependence on revenues from equipment sales.
 
     Operating Expenses.  Operating expenses increased 60% to $12.3 million for
the year ended December 31, 1997 from $7.7 million in 1996, reflecting the
opening of an additional 4 operating sites and the increase in staffing from 307
at the end of 1996 to 426 at December 31, 1997. Operating expenses were
relatively unchanged at 41% of revenues in 1997 compared to 40% in 1996.
Depreciation accounted for 11% of total revenues for the year ended December 31,
1997, compared to 10% for the same period in 1996, in each case reflecting the
considerable capital investment in ALTEL over the past two years. Depreciation
is expected to increase in 1998 as ALTEL deploys an additional $8.2 million of
capital investment.
 
  Technocom Limited
 
     Technocom recorded a net loss of $4.7 million and an operating loss of $4.3
million on operating revenues of $21.2 million for the year ended December 31,
1997, compared to a net loss of $0.2 million and an operating loss of $0.7
million on operating revenues of $4.4 million for the year ended December 31,
1996. EBITDA showed a loss of $1.6 million for the year ended December 31, 1997,
compared to an EBITDA loss of $0.6 million in 1996. In 1997, the results of
Technocom's principal asset, Teleport-TP, were consolidated with those of
Technocom as a result of its acquisition of an additional 7.5% voting interest
(12.5% voting interest) in Teleport-TP, late in 1996. In 1996, Technocom's
investment in Teleport-TP was accounted for using the equity method. EBITDA
should not be construed as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of an entity's operating performance, or
to cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity.
 
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<PAGE>   79
 
   
     Technocom's cash flows from operating activities in 1997 totaled $9.3
million (1996 -- $12.7 million). Major adjustments to Technocom's $4.4 million
net loss (1996 -- $0.2 million) to arrive at cash provided by operating
activities included the addback of depreciation and amortization of $2.8 million
(1996 -- $0.1 million) and a reduction in net operating assets and liabilities
of $10.8 million (1996 -- $12.4 million).
    
 
     Net cash used in investing activities of $16.8 million (1996 -- $25.3
million) related to the purchase of telecommunications switching and
transmission equipment.
 
     Cash used in financing activities of $15.8 million related to the repayment
of bank financing. Cash provided by financing activities of $28.0 million in
1996 related to bank financing of $8.0 million and an issuance of preferred
stock of $20.0 million.
 
     Technocom's 1997 revenues of $21.2 million consisted of $16.9 million in
telecommunications revenues generated by Teleport-TP, $2.0 million in finance
lease income from MTR-Sviaz and $2.3 million in other income.
 
     Technocom's consolidated net loss of $4.7 million consisted of a net loss
of $2.8 million within Teleport-TP (including finance lease interest expense), a
$1.2 million loss within Technocom's statutory accounts, a $0.2 million loss
within Technopark (55% owned by Technocom) and a $0.3 million loss within SCS
(100% owned by Technocom), amortization charges of $0.3 million, and share of
losses from equity investments of $0.5 million offset by a minority interest
credit of $0.6 million.
 
     The net loss of $2.8 million at Teleport-TP, which is 49.3% owned by
Technocom but consolidated with Technocom's results based on voting control of
56%, consisted of $16.9 million in revenues offset by direct costs of $11.8
million, operating expenses of $6.5 million and finance lease interest of $1.4
million.
 
     The $1.2 million loss within Technocom's statutory accounts relates to a
gross margin on revenues, including finance lease income, of $3.4 million and
interest and other income of $1.0 million offset by selling, general and
administrative expenses of $3.1 million, taxes of $1.2 million and interest
expense of $1.1 million.
 
     Share of losses from equity investments of $0.5 million consists of
Technocom's 49% share of losses from MTR-Sviaz of $0.9 million, offset by
Technocom's 50% share of net income from Rosh Telecom of $0.4 million.
 
     In 1996, Technocom's primary revenue stream was from the leasing of
telecommunications equipment to Teleport-TP and MTR-Sviaz, which generated lease
income of $1.4 million. Technocom also earned revenues from a number of other
telecommunications projects and the provision of marketing services to
Teleport-TP, in total amounting to $3.0 million.
 
     Direct costs of $2.1 million in 1996 related to the provision of these
marketing services to Teleport-TP. Operating expenses of $3.0 million included
$2.1 million of general and administrative expenses and $0.3 million relating to
an investment write-off.
 
     Interest income of $1.3 million was generated in 1996.
 
     Presented below is a comparison of Teleport-TP's result of operations in
1997 and 1996.
 
     Teleport-TP generated a 1997 net loss of $2.8 million, operating loss of
$1.4 million and EBITDA of $0.9 million on revenues of $16.9 million, compared
with a net loss of $0.1 million, an operating profit of $0.1 million and EBITDA
of $1.4 million on revenues of $11.1 million for the year ended December 31,
1996. EBITDA should not be construed as an alternative to operating income (as
determined in accordance with GAAP) as an indicator of an entity's operating
performance, or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity.
 
   
     Teleport-TP's cash flows from operating activities in 1997 totaled $0.2
million (1996 -- $3.1 million). Major adjustments to Teleport-TP's net loss of
$2.8 million (1996 -- $0.1 million) to arrive at cash provided by operating
activities included the addback of depreciation and amortization of $2.3 million
(1996 -- $1.2 million) offset by an increase in net operating assets and
liabilities of $0.6 million (1996 -- a reduction of $1.9 million).
    
 
                                       77
<PAGE>   80
 
     Net cash used in investing activities of $1.2 million (1996 -- $0.5
million) related to property and equipment and investments.
 
     Net cash provided by financing activities, primarily advances from related
parties, totaled $1.1 million in 1997. In 1996, net cash used in financing
activities totaled $3.9 million, and consisted primarily of lease principal
repayments.
 
     Revenues.  Teleport-TP generated revenues from three sources in 1997:
international leased circuits, occasional TV broadcasting, and direct dial
telephony services. Overall revenues for the year ended December 31, 1997
increased 52% to $16.9 million from $11.1 million for the year ended December
31, 1996, primarily reflecting the increase in international incoming traffic.
 
     Revenue from international circuits of $5.3 million amounted to 31.5% of
total revenue for the year ended December 31, 1997, as compared with 42% of
total revenue in 1996. Revenue from this source increased marginally as circuits
are leased for a fixed sum for a term of years, and revenue growth can generally
only be achieved by increasing the number of circuits leased. Revenues of $3.4
million from national circuits accounted for 20% of revenues in 1997, a
significant increase from 1996. Revenues from the provision of international
television broadcasting services and other income amounted to $3.3 million or
19.5% of total revenues, up from $0.8 million (6% of total revenues) in 1996.
Other international direct dial services generated $4.9 million or 28.8% of
total Teleport-TP revenues, compared to 52% of revenues in 1996. The Company had
anticipated that Teleport-TP's long distance services would be a more
significant contributor to revenues in 1997, but continued logistical delays in
installing remote earth stations delayed the start up of many sites until very
late in 1997. The Company continues to expect that these services will provide
steady revenue growth during 1998 and beyond as the various sites planned become
operational. Teleport-TP expects to complete the installation of the first 45
sites on the network by mid-1998.
 
     Gross profit.  Teleport-TP's gross profit increased 12.5% to $5.1 million
for the year ended December 31, 1997 from $4.6 million in 1996. The gross margin
decreased to 30.4% from 41% in 1996, primarily due to costs associated with the
build-out and operation of the satellite network and lower margins earned on the
network's national traffic which commenced in 1997.
 
     Operating expenses.  Operating expenses increased 48% to $6.6 million for
the year ended December 31, 1997 from $4.4 million in 1996. General and
administrative costs increased 35% to $3.5 million for the year ended December
31, 1997, compared with $2.6 million in 1996, reflective of increased personnel
and other costs relating to the development of the long distance network.
Depreciation of assets under capital lease was $2.2 million for the year ended
December 31, 1997, compared with $1.0 million in 1996, and is expected to
increase further in 1998 as Teleport-TP acquires an additional $10 million in
equipment related to the build-out of its long distance network. The Company
also expects Teleport-TP to increase its operating expenses in 1997 as it
further develops its long distance services.
 
     Interest.  Lease interest expense increased from $0.5 million in 1996 to
$1.4 million in 1997 resulting from an increase in rentals payable under
equipment leases between Technocom and Teleport-TP.
 
  Baltic Communications Limited
 
     The Company acquired BCL on April 1, 1996, and accordingly only the nine
months ended December 31, 1996 were consolidated in the Company's 1996 financial
statements. BCL recorded operating income of $1.1 million and net income of $0.5
million on revenues of $7.6 million for the full year in 1997 compared to
operating and net income of $0.7 million on revenues of $5.1 million for the
nine months ended December 31, 1996. EBITDA of $1.7 million in 1997 compared
with $1.2 million in the nine months ended December 31, 1996. EBITDA should not
be construed as an alternative to operating income (as determined in accordance
with GAAP) as an indicator of an entity's operating performance, or to cash
flows from operating activities (as determined in accordance with GAAP) as a
measure of liquidity.
 
     BCL's cash flows from operating activities in 1997 totaled $0.8 million
compared to $1.3 million in the nine month period ended December 31, 1996 (Note,
the Company acquired BCL effective April 1, 1996 -- all 1996 figures quoted
below related to the nine months ended December 31, 1996). Major adjustments to
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<PAGE>   81
 
BCL's $0.5 million net income (1996 -- $0.7 million) to arrive at cash provided
by operating activities included the addback of depreciation and amortization of
$0.8 million (1996 -- $0.5 million) offset by an increase in net operating
assets and liabilities of $0.7 million (1996 -- reduction of $0.1 million).
 
     Net cash used in investing activities of $0.8 million (1996 -- $1.8
million) related to the purchase of telecommunications equipment.
 
     No cash was provided by or used in financing activities within BCL in 1997
or 1996.
 
     Revenues.  Call revenues accounted for 79% of total revenues for the year
ended December 31, 1997, primarily driven by international call minutes. Call
revenues accounted for 81% of 1996 revenues. Line rentals accounted for 14% of
total revenue in 1997 compared to 12% in 1996. The balance of revenues,
consisting of installations and equipment sales, accounted for 7% of revenues in
1997 compared to 7% of revenues in 1996.
 
     Gross profit.  Gross profit of $4.7 million (61% of revenues) compared with
gross profit of $3.0 million (59% of revenues) generated in the nine months
ended December 31, 1996.
 
     Operating expenses.  Operating expenses totaled $3.9 million (51% of
revenues) in 1997 compared to $2.3 million (46% of revenues) incurred in the
nine months ended December 31, 1996. Staff costs and depreciation accounted for
49% and 21% of total operating costs in 1997 compared to 45% and 22%
respectively of total operating costs for the nine months ended December 31,
1996.
 
  St. Petersburg Yellow Pages
 
     Yellow Pages recorded a 25% increase in revenues to $1.0 million in 1997 as
a result of a 19% increase in the number of companies placing advertisements in
the directory during the year. Gross profits increased 40% to $0.7 million in
1997 (70% of sales), from $0.5 million in 1996 (63% of sales), reflecting both
revenue growth and increased operating leverage. A net loss of $3,000 in 1997
compared to a net profit of $33,000 in 1996.
 
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
 
     PLD Telekom Inc. -- Consolidated
 
     In 1996, the Company reported a net loss of $12.5 million, or $0.39 per
share, on total revenues of $66.8 million, including operating revenues of $62.0
million. This compared to a net loss in 1995 of $15.5 million, or $0.49 per
share, on total revenues of $31.2 million (operating revenues of $29.1 million).
 
     The loss of $12.5 million in 1996 incorporated a profit contribution from
PeterStar of $5.9 million (after profits tax of $1.8 million), a profit
contribution from ALTEL of $4.5 million (after profits tax of $1.5 million), a
profit contribution from BCL of $0.7 million (after profits tax of $0.2
million), and corporate interest and other income of $2.8 million, offset by
corporate general and administrative costs of $6.3 million, interest on
corporate bank indebtedness and long-term debt of $9.5 million, amortization
charges of $5.6 million, a share of the loss from equity investments of $2.7
million (including amortization of licenses of $2.5 million) and minority
interest charges of $2.5 million relating primarily to PeterStar and ALTEL.
 
     Operating revenues.  Consolidated operating revenues increased by 113% from
$29.1 million in 1995 to $62.0 million in 1996, principally as a result of
strong growth in PeterStar and ALTEL and the addition of BCL to the portfolio
with effect from April 1, 1996. Operating revenues from PeterStar grew 118% in
1996, to $32.5 million from $14.9 million in 1995, due mainly to a continued
rapid increase in line penetration from 21,528 at December 31, 1995 to 52,005 at
December 31, 1996. ALTEL contributed operating revenues of $19.1 million, as
compared to $9.3 million in 1995. This increase was attributable to the growth
in ALTEL's subscriber base from 2,882 at December 31, 1995 to 6,957 at December
31, 1996. Technocom contributed operating revenues of $4.4 million in both 1996
and 1995 from its leasing of telecommunications equipment and from
telecommunications projects. BCL contributed operating revenues of $5.1 million
for the Company, and Yellow Pages contributed $0.8 million for the full year.
 
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<PAGE>   82
 
     Direct costs.  Direct costs were 35% of operating revenues in 1996 compared
to 36% of operating revenues in 1995, and include the direct costs of sales of
PeterStar, ALTEL, Technocom, BCL and Yellow Pages.
 
     General and administrative costs.  Consolidated general and administrative
expenses increased 36% from $18.2 million in 1995 to $24.8 million in 1996,
reflecting the continued growth in the scale and extent of the operating
businesses and the acquisition of BCL. As a percentage of operating revenues
these costs exhibited a downward trend, falling from 62% in 1995 to 40% in 1996.
At the corporate level, general and administrative overhead increased to $6.3
million in 1996 from $5.1 million in 1995.
 
     Depreciation.  Depreciation increased 36% from $3.8 million in 1995 to $5.2
million in 1996, reflecting 1996 capital expenditures within the operating
businesses of $43.2 million as the build-out of the PeterStar and ALTEL networks
progressed.
 
     Amortization.  In 1996, the Company incurred total non-cash amortization
charges of $5.6 million, including $2.6 million relating to the
telecommunications licenses of PeterStar, and $2.1 million relating to the
telecommunications license of ALTEL. In addition, it incurred charges of $0.2
million relating to goodwill associated with the acquisition of Yellow Pages and
$0.7 million relating to deferred financing costs. As well as the $5.6 million
of amortization noted above, the Company's share of the results of its equity
investments -- Teleport-TP, MTR-Sviaz and Rosh Telecom -- which were accounted
for on an equity basis, included amortization of $2.5 million relating to the
telecommunications licenses of Teleport-TP. Total amortization charges in 1995
were $6.2 million principally relating to the PeterStar, ALTEL and Teleport-TP
telecommunications licenses.
 
     Taxes other than income taxes.  Taxes other than income taxes of $2.5
million in 1996 compared with $1.2 million in 1995 and included such taxes as
property taxes, road taxes, police taxes, transport taxes, advertising taxes,
housing taxes and education taxes, most of which are specific to doing business
in Russia and Kazakhstan. The increase of 108% in these taxes reflects the
significant increases in revenues and net earnings, of the Company's operating
subsidiaries, which form the bases for computing many of these taxes.
 
     Operating income.  Operating income of $2.9 million in 1996 compared to an
operating loss of $9.1 million in 1995.
 
     Share of loss from equity investments, after amortization of
licenses.  Share of loss from equity investments, after amortization of
licenses, in 1996 of $2.7 million compared with $1.6 million in 1995 and
resulted from the equity investments held by Technocom. Both the 1996 and 1995
losses related primarily to amortization of licenses held by Teleport-TP.
Teleport-TP did not become a subsidiary of Technocom until January 1, 1997.
 
     Interest expense.  On June 12, 1996, the Company completed a $149.5 million
private placement consisting of (i) 123,000 units consisting of $123 million
aggregate principal amount at stated maturity of Senior Notes together with
Placement Warrants to purchase a total of 4,182,000 shares of Common Stock; and
(ii) $26.5 million aggregate principal amount of 9% convertible notes. The
purchase/conversion prices respectively on the Warrants and the convertible
notes are $6.60 and $6.90 per share of Common Stock.
 
     These debt instruments represented entirely new indebtedness of the Company
and resulted in an interest charge on long-term debt in 1996 of $8.7 million as
against zero expense in 1995. Prior to the completion of this offering the
Company had a $22.5 million bank facility with a Canadian chartered bank (CIBC),
guaranteed by Cable & Wireless, which resulted in corporate interest charges of
$0.7 million in 1996, as compared with $0.5 million in 1995, and which together
with interest expenses relating to certain indebtedness of Technocom yields
total interest expense on bank indebtedness of $1.2 million in 1996 ($1.0
million in 1995).
 
     Interest and other income.  Under the terms of the debt offering, $46.0
million was deposited into an escrow account, for subsequent disbursement into
telecommunications equipment or telecommunications companies in Russia and
Kazakhstan. All funds which had yet to be disbursed were invested throughout the
period in short-term reverse repurchase agreements secured by U.S. treasury
bonds. These investments,
 
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<PAGE>   83
 
together with interest earned on other cash deposits and miscellaneous other
income, produced total interest and other income at the corporate level of $2.8
million, compared with $0.4 million in 1995. The bulk of the remainder of the
$4.9 million accrued in Technocom.
 
     Foreign exchange loss.  Foreign exchange losses in 1996 of $0.6 million
compared with losses of $0.4 million in 1995 and resulted from the unfavorable
movement of local currencies vis-a-vis the U.S. dollar applied to net monetary
assets held by a number of the Company's operating subsidiaries.
 
     Loss on disposal of investments and property and equipment.  The $0.9
million loss on disposal of investments and property and equipment in 1995
related primarily to a write-off of the Company's remaining interest in North
West Estates (Holdings) Limited, a discontinued real estate development company
based in the United Kingdom.
 
     Income taxes.  Income taxes of $3.7 million in 1996, compared with $1.5
million in 1995 and relate substantially to current income taxes in the
Company's Russian and Kazakh businesses. The higher charge in 1996 reflects the
improved profitability of these subsidiaries.
 
     Minority interest.  Minority interest of $2.5 million in 1996 compared with
$0.6 million in 1995 and relates to the minorities' share of net after-tax
profit of PeterStar (40%) and ALTEL (50%) and Technocom (49.25%). Minority
interest charges for the above subsidiaries are calculated after deducting any
management fees payable to the Company. In 1996, the Company charged PeterStar
and ALTEL $1.2 million and $0.9 million, respectively, in respect of such fees.
 
     Net loss.  Net loss of $12.5 million in 1996 compared to a net loss of
$15.5 million in 1995.
 
  PeterStar Company Limited
 
     PeterStar had net income of $5.9 million and an operating profit of $8.0
million on operating revenues of $32.5 million for the year ended December 31,
1996, compared to a net loss of $1.0 million and an operating profit of $0.1
million on operating revenues of $14.9 million for the year ended December 31,
1995. EBITDA grew to $10.3 million for the year ended December 31, 1996,
representing 31% of revenues, compared to EBITDA of $2.4 million, representing
16% of revenues, for the same period in 1995. EBITDA should not be construed as
an alternative to operating income (as determined in accordance with GAAP) as an
indicator of an entity's operating performance, or to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of liquidity.
 
   
     PeterStar's cash flows from operating activities in 1996 totaled $7.7
million (1995 -- cash used in operating activities of $1.2 million). Major
adjustments to PeterStar's $5.9 million net income (1995 -- $1.0 million loss)
to arrive at cash provided by operating activities included the addback of
depreciation and amortization of $2.7 million (1995 -- $2.7 million), offset by
a reduction in deferred revenues of $0.9 million (1996 -- an increase of $1.8
million). In 1995, cash flows from operating activities were also reduced by an
increase in net operating assets and liabilities of $4.7 million.
    
 
     Net cash used in investing activities of $6.3 million (1995 -- nil) related
to the purchase of telecommunications switching and transmission equipment.
 
     Cash used in financing activities of $0.9 million related to the repayment
of related company advances. In 1995, cash provided by financing of $2.4 million
related to inter-company advances.
 
     Revenues.  Call revenues for the year ended December 31, 1996 ($21.5
million) were 149% higher than the call revenues in the year ended December 31,
1995 ($8.6 million), reflecting increases in subscriber lines installed and
transit traffic carried during the period. Total subscriber lines increased by
142%, to 52,005 at December 31, 1996 from 21,528 at December 31, 1995. Directly
connected customers (i.e. business and residential lines) increased to 14,792
from 6,869, or 115%, over the same period. Lines to cellular operators increased
by 153%, to 37,213 lines at December 31, 1996 from 14,659 lines at December 31,
1995.
 
     Revenues from line rentals increased by 298%, reflecting the increase in
installed lines, both fixed and cellular. Conversely, installation fees grew
only at a rate of 29% over the year ended December 31, 1995,
 
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<PAGE>   84
 
reflecting a reduction in the level of fees implemented by PeterStar during 1996
and the fact that installation fees on cellular lines are substantially lower
than on fixed lines.
 
     Call revenues accounted for 66% of operating revenues for the year ended
December 31, 1996 compared to 58% in 1995, installation fees accounted for 17%
of operating revenues for the year ended December 31, 1996 compared to 28% in
1995 and line rentals accounted for 17% of operating revenues for the year ended
December 31, 1996 compared to 9% in 1995. (In addition, in 1995 other income
represented a further 5% of operating revenues.)
 
     PeterStar experienced in 1996 a shift in its customer base, from foreign
companies which used the higher priced international and long distance services
to a predominantly Russian business and residential market for which local
calling is the principal usage. Thus, 89% of PeterStar's total network traffic
in 1996 was local compared with 84% in 1995, 7% of traffic was long distance in
1996 compared with 9% in 1995, and only 4% of traffic was international in 1996
compared with 7% in 1995. Accordingly, total revenue per line for the year ended
December 31, 1996 was $885 as against $1,163 per line for 1995, while recurring
revenue per line (calling charges and line rentals) were $736 per line as
against $783 in 1995.
 
     Gross profit.  Gross profit increased 115% to $20.7 million for the year
ended December 31, 1996 from $9.6 million in 1995. The gross margin of 64% was
slightly lower than the margin of 65% in 1995, with lower tariffs on
international traffic being offset by a reduction in the level of payments due
to the carriers of this traffic and an increase in local traffic where
PeterStar, under the terms of its arrangements with PTN, does not pay carrier
charges.
 
     Tariffs.  During 1996 there was continuing pressure on international rates
(part of a global trend in the telecommunications industry). PeterStar also
reduced tariffs on certain other routes, in response to competition.
 
     Operating expenses.  Operating expenses increased 32% to $12.7 million for
the year ended December 31, 1996 from $9.6 million in 1995. Operating expenses
represented 39% of revenues in 1996 compared to 64% in 1995, as revenue
generation grew faster than costs. In particular, staff costs and depreciation
accounted for 30% and 21%, respectively , of total operating expenses for the
year ended December 31, 1996, compared to 45% and 28%, respectively, for the
same period in 1995. The slower growth in staff costs reflected the fact that
personnel during 1996 only increased to 232 from 226 at the end of 1995, while
depreciation was lower because all capital investments in PeterStar were made in
the latter half of the year.
 
  ALTEL
 
     ALTEL recorded net income of $4.5 million and an operating profit of $6.0
million on operating revenues of $19.1 million for the year ended December 31,
1996, compared to a net loss of $0.2 million and an operating loss of $0.5
million on revenues of $9.3 million for the year ended December 31, 1995. EBITDA
grew to $7.8 million for the year ended December 31, 1996, compared to EBITDA of
$0.6 million for the same period in 1995. EBITDA should not be construed as an
alternative to operating income (as determined in accordance with GAAP) as an
indicator of an entity's operating performance, or to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of liquidity.
 
   
     ALTEL's cash flows from operating activities in 1996 totaled $9.8 million
(1995 -- cash used in operating activities of $0.7 million). Major adjustments
to ALTEL's $4.5 million net income (1995  -- net loss of $0.2 million) to arrive
at cash provided by operating activities included the addback of depreciation
and amortization of $2.1 million (1995 -- $1.1 million), offset by an increase
in net operating assets and liabilities of $2.0 million (1995 -- $2.1 million).
    
 
     Net cash used in investing activities of $8.2 million (1995 -- $12.3
million) related to the purchase of telecommunications equipment.
 
     No cash was provided by or used in financing activities in 1996 compared to
$13.9 million raised through the issuance of common stock by ALTEL in its share
capital increase in 1995.
 
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     Revenues.  Call revenues for the year ended December 31, 1996 ($11.8
million) were 137% higher than the call revenues for the same period in 1995
($5.0 million), reflecting a substantial increase in subscribers during the
period. Total subscribers increased from 2,882 at December 31, 1995 to 6,957 at
December 31, 1996. Subscription fees increased by 166%, connection fees
increased by 35% and equipment sales increased by 57% over 1995.
 
     Call revenues accounted for 62% of operating revenue for the year ended
December 31, 1996 compared to 53% in 1995, subscription fees accounted for 13%
of total revenues for the year ended December 31, 1996 compared to 11% in 1995,
connection fees accounted for 8% of total revenues for the year ended December
31, 1996 compared with 13% in 1995, while equipment sales represented 17% of
revenues, as against 23% in 1995.
 
     Local and incoming traffic during 1996 accounted for 76% of total traffic
compared with 75% during 1995, mobile to mobile traffic accounted for 9% of
total traffic compared with 6% in 1995, while long distance traffic in 1996
accounted for 6% of total traffic compared with 7% during 1995, and
international traffic accounted for only 9% of total traffic compared with 12%
during 1995. Total revenue per subscriber for the year ended December 31, 1996
was $3,886 against $5,513 per subscriber for 1995, while recurring revenue per
subscriber also reduced from $3,490 in 1995 to $2,900 per subscriber in 1996
reflective of ALTEL's customer base shifting to Kazakh companies and
individuals, who tended not to use its higher priced long distance and
international services. The reductions in total per subscriber and recurring per
line revenues also stemmed from the different calling patterns of these classes
of customers who generally used as much as 40% less airtime than the foreign
business customers.
 
     Gross Profit.  Gross profit increased 123% to $13.7 million for the year
ended December 31, 1996 from $6.2 million in 1995. The gross margin of 72% was
an improvement from the 66% margin realized in 1995, primarily due to the
greater calling volumes and reduced dependence on revenues from equipment sales.
 
     Operating Expenses.  Operating expenses increased 15% to $7.7 million for
the year ended December 31, 1996 from $6.7 million in 1995, reflecting the
opening of an additional eight operating sites and the increase in staffing from
220 at the end of 1995 to 307 at December 31, 1996. Operating expenses
represented 40% of revenues in 1996 compared to 72% in 1995, the difference
representing both ALTEL's increasing realization of economies of scale and
substantial growth in revenue generation. Depreciation accounted for 10% of
total revenues for the year ended December 31, 1996, compared to 12% for the
same period in 1995, in each case reflecting the considerable capital investment
in the ALTEL network.
 
  Technocom Limited
 
     Technocom recorded a net loss of $0.2 million and an operating loss of $0.7
million on operating revenues of $4.4 million for the year ended December 31,
1996, compared to net income of $1.1 million and an operating profit $1.1
million on operating revenues of $4.4 million for the year ended December 31,
1995. EBITDA showed a loss of $0.6 million for the year ended December 31, 1996,
compared to EBITDA of $1.1 million, for the same period in 1995. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of an entity's operating performance, or
to cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity.
 
   
     Technocom's cash flows from operating activities in 1996 totaled $12.7
million (1995 -- $10.3 million). Major adjustments to Technocom's $0.2 million
net loss (1995 -- net income of $0.8 million) to arrive at cash provided by
operating activities included a reduction in net operating assets and
liabilities of $12.4 million (1995 -- $9.4 million).
    
 
     Net cash used in investing activities totaled $25.3 million (1995 -- $5.5
million) related to the purchase of telecommunications switching and
transmission equipment ($20.8 million), a $2.9 million investment in Technopark
and an incremental investment in Teleport-TP of $2.1 million.
 
     Cash provided by financing activities of $28.0 million (1995 -- $7.7
million) related to bank financing of $8.0 million and an issuance of preferred
stock of $20.0 million. In 1995, financing was provided entirely by bank debt.
 
                                       83
<PAGE>   86
 
     Interest income of $1.3 million was generated in 1996, compared with $0.9
million in 1995.
 
     Effective December 31, 1996, Technocom acquired an additional interest in
Teleport-TP which gave Technocom effective control over Teleport-TP. The
following is a discussion of Teleport-TP's results of operations in 1996 when
Teleport-TP was accounted for using the equity method.
 
     Technocom's principal asset, Teleport-TP, in which it has a 49.3% interest
as at December 31, 1996, recorded a net loss of $0.1 million and an operating
profit of $0.1 million on revenues of $11.1 million for the year ended December
31, 1996, compared to a net loss of $0.1 million and an operating profit of $2.9
million on revenues of $7.1 million for the year ended December 31, 1995. EBITDA
decreased to $1.4 million for the twelve months ended December 31, 1996,
compared to EBITDA of $3.4 million for the same period in 1995. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of an entity's operating performance, or
to cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity.
 
     Teleport-TP's cash flows from operating activities in 1996 totaled $3.1
million (1995 -- $2.3 million). Major adjustments to Teleport-TP's net loss of
$0.1 million (1995 -- $0.1 million) to arrive at cash provided by operating
activities included the addback of depreciation and amortization of $1.2 million
(1995 -- $1.3 million) and a reduction in net operating assets and liabilities
of $1.9 million (1995 -- $1.0 million).
 
     Net cash used in investing activities totaled $0.5 million (1995 -- $1.3
million) relating to property and equipment and other asset additions.
 
     Net cash used in financing activities, principally lease repayments,
totaled $3.9 million in 1996 (1995 -- $0.8 million).
 
     Revenues.  In 1996, Teleport-TP generated revenues from three sources:
international leased circuits, occasional TV broadcasting, and direct dial
telephony services. Revenues for the year ended December 31, 1996 increased 56%
to $11.1 million from $7.1 million for the year ended December 31, 1995,
primarily reflecting the increase in international incoming traffic. Revenues
from international circuits amounted to 42% of total revenue for the year ended
December 31, 1996, as compared with 58% of total revenue in 1995. Revenues
remained relatively stable because circuits are leased for a fixed sum for a
term of years, and revenue growth can generally only be achieved by increasing
the number of circuits leased. Revenues from the provision of international
television broadcasting services amounted to $0.75 million or 6% of total
revenues, down from $1.1 million (15% of total revenues) in 1995. Other
international direct dial services generated $5.7 million or 52% of total
Teleport-TP revenues.
 
     Gross Profit.  Teleport-TP gross profit decreased 8% to $4.6 million for
the year ended December 31, 1996 from $5.0 million in 1995. The gross margin
declined to 41% from 71% in 1995, primarily due to the greater dependence on
calling revenues rather than the higher margin leased circuit revenues.
 
     Operating Expenses.  Operating expenses increased 52% to $4.4 million for
the year ended December 31, 1996 from $2.9 million in 1995. General and
administrative costs increased 63% to $2.6 million for the year ended December
31, 1996, compared with $1.6 million in 1995 reflective of increased personnel
and other costs relating to the development of the long distance network.
Depreciation of assets under capital lease was $1.0 million for the year ended
December 31, 1996, compared with $0.6 million in 1995.
 
     Interest.  Lease interest expense decreased from $1.4 million in 1995 to
$0.5 million in 1996 resulting from a reduction in rentals payable under the of
equipment leases between Technocom and Teleport-TP.
 
  Baltic Communications Limited
 
     The Company acquired BCL on April 1, 1996, and therefore it has only been
consolidated for the nine months ended December 31, 1996. There is no comparable
information available for prior years. BCL recorded net income of $0.7 million
and an operating profit of $0.7 million on revenues of $5.1 million for the nine
months ended December 31, 1996. EBITDA of $1.2 million was also recorded for
this period.
 
                                       84
<PAGE>   87
 
     Revenues.  Call revenues accounted for 81% of total revenues for the year
ended December 31, 1996, primarily driven by international call minutes.
Installation fees accounted for 7% of total revenues with line rentals
accounting for the balance. The Company expects that BCL will continue to derive
most of its revenues from directly connected business customers and acting as a
transit gateway for other international operators.
 
     Gross Profit.  A gross profit of $3.0 million was generated for the nine
months ended December 31, 1996, a gross margin of 59%. The Company expects this
margin to reduce over time as a result of continuing pressure on international
rates.
 
     Operating Expenses.  Operating expenses of $2.3 million were incurred for
the nine months ended December 31, 1996, representing 46% of revenues. Staff
costs and depreciation account for 45% and 22% respectively of total operating
costs for the year ended December 31, 1996. The Company does not expect to see
any significant change to the operating costs in BCL in 1997.
 
  Yellow Pages
 
     Yellow Pages recorded an operating profit of $33,000 on revenues of $0.8
million for the year ended December 31, 1996, compared to an operating loss of
$29,000 on revenues of $0.5 million for the year ended December 31, 1995. Gross
profit increased 70% to $0.5 million in 1996, from $0.3 million in 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cash flows from operating activities in 1997 totaled $10.8 million
(1996 -- $15.6 million). Major adjustments to the Company's net loss of $20.6
million (1996 -- $12.5 million) to arrive at cash provided by operating
activities included the addback of depreciation and amortization charges of
$19.5 million (1996 -- $10.8 million), accrued interest on the Company's Senior
Notes of $14.3 million (1996 -- $7.3 million), minority interest of $9.4 million
(1996 -- $2.5 million), deferred revenue of $2.1 million (1996 -- a reduction in
deferred revenue of $0.9 million), share of loss of equity investments of $0.5
million (1996 -- $2.7 million), and a $1.0 million gain resulting from the sale
of the Company's 10.4% interest in SPMMTS, offset by an increase in net
operating assets and liabilities of $13.3 million (1996 -- a decrease in net
operating assets and liabilities of $5.3 million).
 
     Cash flows from investing activities in 1997 totaled $40.9 million
(1996 -- $88.2 million). Major components included capital expenditures on
telecommunications equipment within the Company's operating subsidiaries of
$39.0 million and cash consideration of $25.6 million paid on the Company's
acquisition of an additional 29.65% interest in Technocom offset by $17.2
million in proceeds on the SPMMTS sale and a $7.1 million escrow draw. In 1996,
cash used in investing activities of $88.2 million consisted primarily of $43.2
million in capital expenditures on telecommunications equipment within the
Company's operating subsidiaries, $41.0 million invested in escrow, and $7.5
million invested in additional ownership interests in Technopark and
Teleport-TP, offset by a $3.9 million reduction in finance leases and advances.
 
     Net cash provided by financing activities in 1997 totaled $6.7 million
(1996 -- $97.6 million) which included $15.4 million raised from the issuance of
the Company's Revolving Credit Notes issued in November 1997 in connection with
the acquisition of an additional 29.65% interest in Technocom, and $1.7 million
in proceeds from the issuance of common stock pursuant to the exercise of
employee stock options, offset by the repayment of $10.9 million in short-term
borrowings. In 1996, net cash provided by financing activities of $97.6 million
consisted primarily of proceeds from the issuance of the Company's Senior Notes
of $87.7 million, proceeds from the issuance of the Company's Convertible Notes
of $26.5 million, offset by the repayment of $6.6 million in short-term
borrowings and $9.2 million in deferred finance costs associated with the Senior
and Convertible Note offerings.
 
     As at December 31, 1997, the Company's consolidated cash position was $17.3
million compared to $40.7 million at the end of 1996.
 
     The Company's emergence as a key player in the telecommunications markets
of the C.I.S. has involved significant investment in telecommunications assets,
licenses and property and equipment, which have been
                                       85
<PAGE>   88
 
financed through public and private placements of equity stock, a private
placement of long-term debt instruments, shareholder loans, bank lines of credit
and trade financing.
 
     From time to time, the Company has had discussions with other
telecommunications entities concerning the establishment of possible
relationships or other transactions, including the taking of equity positions in
the Company or its subsidiaries. While no agreement has materialized to date
from any such discussions, the Company will continue to consider appropriate
opportunities.
 
     Effective February 28, 1997, the Company continued from Ontario into
Delaware and, in connection therewith, moved its executive offices to the United
States. The benefits of this continuance are anticipated to include improved
access to the U.S. capital markets, reduced costs of financing and streamlining
of management and operations. No material adverse tax charges resulted from this
continuance.
 
PETERSTAR COMPANY LIMITED
 
     By December 31, 1996, PeterStar had invested a total of $43.0 million in
property and equipment, related primarily to the construction of its fiber optic
ring around central St. Petersburg and the construction of a new digital
exchange on Vassilievski Island. In 1997, PeterStar invested a further $26.2
million on new switching equipment increasing transmission capacity, and
improving access to the long distance and international gateway between
PeterStar and SPMMTS. PeterStar expects to fund its 1998 capital expenditures,
estimated at approximately $25 million, from a combination of the Company's
escrow funds, bank and supplier financing and its own internal cashflows.
 
ALTEL
 
     Total investment in the cellular telecommunications network and related
support infrastructure, such as customer service centers and administration
facilities, totaled $28.9 million by December 1996.
 
     ALTEL had capital expenditures of approximately $4.3 million in 1997 and
anticipates an additional $8.2 million in 1998 in connection with further
investment in cities where the network currently operates. This continued
expansion in 1998 is expected to be entirely financed through ALTEL's own
internally generated cashflows.
 
TECHNOCOM LIMITED
 
     Technocom is pursuing a number of new telecommunications opportunities
throughout the Russian Federation including its joint venture with Mosenergo,
the Moscow city power utility, called MTR-Sviaz. Technocom has thus far invested
approximately $5.2 million in MTR-Sviaz, principally through the acquisition of
telecommunications equipment and numbering capacity which it then leased to
MTR-Sviaz.
 
     Technocom is also significantly involved in supporting the development by
Teleport-TP of a satellite-based long distance network. During 1997, Technocom
had capital expenditures of approximately $11.0 million related to the
Teleport-TP project. Funding was provided, in part, from the $20.0 million
contributed to Technocom by the Company out of the proceeds of the debt
placement in June 1996. Additional funding of approximately $10 million will be
required in 1998 and will be provided from a combination of sources including
supplier financing, Technocom's own internally generated cashflows, and proceeds
from the Company's escrow account.
 
PLD TELEKOM INC. -- CORPORATE
 
     In connection with the continuance of the Company from Ontario to Delaware,
the Company closed its executive offices in Toronto, Canada on February 27, 1997
and subsequently established executive offices in New York, USA in the second
quarter of 1997. At the same time the Company reduced substantially the
activities carried out by its wholly owned subsidiary, PLDMS, from its offices
in London, England. The Company estimates that its total corporate overhead
costs, including management salaries, professional costs, investor relations
costs, regulatory fees and general office costs, will be $8.5 million in 1998
and expects to
 
                                       86
<PAGE>   89
 
fund these by a combination of cash on hand, and management fees and dividends
to be paid by the Company's operating subsidiaries.
 
WORKING CAPITAL AND OTHER BALANCE SHEET ITEMS
 
     At December 31, 1997, the Company had a working capital deficit (not
including funds held in escrow) of $1.4 million compared to a working capital
surplus of $14.2 million at December 31, 1996. The reduction in working capital
was primarily the result of the Company's acquisition of the additional 29.65%
interest in Technocom for gross consideration of $32.1 million. The acquisition,
which increased the Company's ownership in Technocom to 80.4%, was financed with
$12.32 million 12% Series A Senior Secured Revolving Credit Notes, $3.1 million
12% Series B Senior Revolving Credit Notes, both due in 1998, a $9.0 million
draw from escrow of the proceeds of the Senior Notes originally issued in June
1996 and the issuance of 1,316,240 shares of Common Stock from treasury.
 
     The Company placed privately a total of $149.5 million in Senior and
Convertible Notes in June 1996. The proceeds, which amounted to $105.0 million
(net of discounts, commissions and expenses), were used to pay off the Company's
$22.5 million bank facility and to meet the Company's then outstanding $20.0
million commitment to Technocom, with the remainder being targeted for capital
investments in the existing operating units, the development of additional
products and services to be delivered over the Company's networks, and general
corporate purposes. Funds targeted for capital investment or new products and
services were required to be held in escrow.
 
     The Senior Notes mature on June 1, 2004 with interest accreted at a rate of
14% per annum, compounding semi-annually, to an aggregate principal amount of
$123 million by December 31, 1998. Cash interest does not accrue on the Senior
Notes prior to December 31, 1998. Thereafter, interest will accrue at the rate
of 14% per annum and will be payable in cash, semi-annually, on June 1 and
December 1 of each year, commencing June 1, 1999.
 
     The Convertible Notes, with a face value of $26.5 million, mature on June
1, 2006 with interest accruing at the rate of 9% per annum, payable in cash,
semi-annually, on June 1 and December 1 of each year.
 
     At December 31, 1997, the funds being held in escrow, which are not
included in current assets, totaled $33.9 million compared to $41.0 million at
the end of 1996. The Company's ability to access these funds freely is
restricted since the funds in escrow can only be accessed after compliance with
a number of conditions, including ensuring that the funds are only used for
certain designated purposes and that certain other safeguards are in place. The
Company believes that the funds in escrow should be sufficient to implement the
business plans of its operating subsidiaries at least through 1998.
 
     The indentures governing the release of the escrow funds have recently been
amended to broaden the range of transactions for which the Company may use the
escrow funds to make telecommunications assets available to its operating
subsidiaries. In connection with this, $8 million was released from escrow in
April 1998. The indentures have also been amended to revise certain covenants
relating to corporate indebtedness, the guarantee of subsidiary debt, and the
establishment of U.S. special purpose subsidiaries.
 
     Under the terms of the Company's Senior Notes, the Company is required to
raise $20 million in a common share financing by May 31, 1998. The Company did
not complete such an offering by May 31, 1998, and as a result the rate at which
the Senior Notes accrete increased to 14.5% until such time as an offering in
completed. See "Business -- Recent Development."
 
     The obligation to raise $20 million in equity is also a requirement under
the terms of the Series A and B Senior Revolving Credit Notes issued in November
1997. Since the Company did not raise $20 million in equity prior to May 31,
1998, the interest rate on the 12% Series A and B Notes increased to 15% per
annum for the period commencing on June 1, 1998 until maturity. Interest on both
the Series A and B Notes is payable monthly in arrears. The Series A Notes
mature on December 30, 1998 and the Series B Notes mature on September 30, 1998.
The Company is also required, under the terms of the Revolving Credit Notes, to
reduce the aggregate commitments of the Notes by $1 million on July 31, 1998 and
on the last day of each succeeding month.
                                       87
<PAGE>   90
 
     In connection with the issuance of the Series A and B Notes, the Company
issued warrants to purchase a total of 423,000 shares of its Common Stock. In
addition, the Company will be obligated to issue additional warrants to the
holders of the Series A and B Notes should the Company not effect certain
"targeted reductions in commitment" as follows:
 
<TABLE>
<CAPTION>
COMMITMENT REDUCTION DATE   TARGETED REDUCTION AMOUNT
-------------------------   -------------------------
<S>                         <C>
  July 31, 1998                    $  500,000
  August 31, 1998                  $  500,000
  September 30, 1998               $1,000,000
  October 31, 1998                 $1,500,000
  November 30, 1998                $1,500,000
</TABLE>
 
     The holders of the Series A Notes will receive 30,000 additional warrants
to purchase shares of the Company on each date on which such reduction was not
made. In the event that the Company has not made the "targeted reductions"
scheduled for July 31, 1998 and August 31, 1998, the holders of the Series B
Notes will receive 16,000 additional warrants to purchase shares of such common
stock. The exercise price of the above warrants is $8.625 per share, except
that, if the Series B Notes are not repaid in full by September 30, 1998, the
exercise price of all warrants issued to the holders of the Series B Notes
becomes $0.01 per share, and, if the Series A Notes are not repaid in full by
December 31, 1998, the exercise price of all warrants issued to the holders of
the Series A Notes also becomes $0.01. The total number of warrants which could
be issued under these arrangements is 182,000. All of the warrants expire on
December 31, 2008.
 
     In addition, if the Series B Notes are not repaid in full on September 30,
1998, then, commencing September 30, 1998 and on the last day of each succeeding
month until the Series B Notes have been repaid in full, the holders of the
Series B Notes shall receive 32,000 additional warrants to purchase shares of
the Company's stock at a price of $0.01 per share. If the Series A Notes are not
repaid in full on December 31, 1998, then, commencing December 31, 1998 and on
the last day of each succeeding month until the Series A Notes have been repaid
in full, the holders of the Series A Notes shall receive 32,000 additional
warrants to purchase shares of the Company's stock at a price of $0.01 per
share. All such warrants, referred to as "Default Warrants" will have an
expiration date ten years after their respective dates of issue.
 
     The Company's consolidated balance sheet at December 31, 1997 reflects
total assets of $335.6 million, as compared to $306.4 million at December 31,
1996. Total assets at December 31, 1997 were comprised of $52.1 million in
current assets (including $17.3 million of cash and term deposits), $135.0
million in property and equipment, $78.8 million in telecommunications licenses
related to PeterStar, ALTEL and Teleport-TP, escrow funds of $33.9 million, and
other assets and the investments of $32.8 million including $11.1 million in
goodwill relating to the Company's acquisition of an additional 29.65% interest
in Technocom effective December 31, 1997. Long-term indebtedness of $133.5
million, as a percentage of total assets, was 39.8% at December 31, 1997. The
corresponding figures at December 31, 1996 were $108.0 million and 35.2%.
 
   
     Shareholders' equity of $127.1 million at December 31, 1997 compared with
$138.0 million at the end of 1996 and consisted of $204.3 million in common
stock and additional paid-in capital, offset by the Company's deficit of $77.1
million. Capital stock increased during the year as a result of the issuance of
1,316,240 common shares, at an effective price of $5.85 per share, as part
consideration in respect of the Company's acquisition of the additional interest
in Technocom and the exercise throughout the year of 312,166 share options and
warrants at prices ranging between C$3.50 and US$6.50. The Company's ratio of
long-term indebtedness to equity at December 31, 1997 was 104.9% compared with
78.3% at December 31, 1996.
    
 
     Corporate overhead, estimated at $8.5 million for 1998, is expected to be
funded by a combination of management fees earned at PeterStar and ALTEL,
dividends to be declared at ALTEL over the course of 1998 and corporate cash on
hand which totaled $5.5 million as of December 31, 1997. The Company's short-
term funding requirements also include the $20.0 million equity required to be
raised pursuant to the Senior and Revolving Credit Notes discussed above. It is
expected that such a financing will be completed later this year with proceeds
used to pay off the $15.4 million Revolving Credit Notes with the balance added
to corporate working capital.
 
                                       88
<PAGE>   91
 
     With the exception of certain planned capital expenditures in 1998, all of
the Company's operating subsidiaries are expected to be self-financing. The
Company anticipates its operating subsidiaries will spend approximately $44.2
million by the end of 1998 on telecommunications equipment to expand their
networks including $10.0 million within Teleport-TP, $25.0 million within
PeterStar, $8.2 million within ALTEL and $1.0 million within BCL. Funding for
this capital expenditure program will come primarily from the Company's escrow
funds which at year end totaled $33.9 million. The balance will be funded from
internally generated funds at the subsidiary level.
 
     In the long-term, all funding for capital expenditures within the Company's
operating subsidiaries is expected to be provided by internally generated funds
at the subsidiary level.
 
     The Company is constantly assessing acquisition opportunities throughout
the C.I.S. which would complement and add value to the Company's existing
businesses. Should the Company enter into any agreements to acquire or invest in
any additional companies operating in the C.I.S., additional debt and equity
financing may be required.
 
     In addition, to the extent that: (i) actual cash flows from operations are
below the Company's estimates as a result of lower than expected revenues per
line or higher operating costs; or (ii) development costs of the build-out of
the PeterStar, ALTEL and Technocom/Teleport-TP networks exceed current
estimates, the Company may be required to seek additional debt or equity
financing beyond that required above.
 
     The Company's future cash flows may be adversely affected by the continued
volatility in the Russian currency, which may adversely affect the Russian
economy. See "Business -- Country Risks -- Economic Risks -- Recent Financial
Turmoil." To date, this volatility has not had a material impact on the
Company's ability to generate revenues and profits given the fundamental need
for quality telecommunications products and services in those markets. However,
the Company is unable to assess to what extent the problems affecting the
Russian currency, and the effects this may have on the Russian economy, will
affect the Company's operating businesses.
 
     Accordingly, there can be no assurance that the Company's operating
businesses may not be adversely affected by these recent developments.
Management of the Company believes that, should additional external financing be
required for any of the above reasons, such financing will generally be
available to the Company from both the private and public equity and debt
markets. It is further believed that such financing would be available at a
lower cost than historically experienced by the Company, in part, if the
proposed transaction whereby News America, a Company with assets in excess of
$32.7 billion as of December 31, 1997, would acquire a 38% interest in the
Company, is concluded. See "Business -- Recent Developments -- Transactions with
Cable & Wireless and News."
 
     At present, it is not unknown how the proposed investment by News America,
if concluded, will affect the Company's current expansion and investment plans.
However, the Company does not believe that News America's objectives concerning
the development of PLD's businesses will differ materially from those of current
management.
 
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, with 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 addressed the Year 2000 issue in the following ways.
 
                                       89
<PAGE>   92
 
     First, the Company has contacted, and has required all of its operating
businesses to contact the manufacturers of equipment and producers of software
which they use in their businesses (or review "websites" or other materials
published by such parties relating to such equipment or software). Such survey
has indicated that, except in a few instances, all such equipment and software
is Year 2000 compliant. Where possible, steps are being taken to upgrade or
replace equipment which is not Year 2000 compliant. While there can be no
assurance that disruptions will not occur, the Company believes, based on this
survey and the fact that much of the equipment and software on which its
businesses are for the most part of recent vintage, that it should not encounter
material problems in this particular area.
 
     While it does not appear that any of the parties from whom the Company or
any of its operating businesses have obtained goods or services in the past have
provided specific undertakings regarding Year 2000 compliance, and there is some
doubt whether existing warranties or other undertakings will in fact be
construed to cover Year 2000 compliance, starting in January 1998, all operating
businesses are also being 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.
 
     Additionally, such 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.
 
     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.
 
     Based on all of the foregoing, the Company believes that it does not have
any material exposure to claims that the products or services it supplies are
not Year 2000 compliant, that the cost of ensuring that equipment and software
used in its operations and the operations of its operating businesses is likely
to be immaterial, and that the possible disruptions to all such operations
arising from Year 2000 problems is likely to be relatively minimal.
 
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 and Kazakhstan (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 and Kazakhstan and to distributions by intermediate level
companies in jurisdictions outside Russia, Kazakhstan, Canada and the United
States. The Company has attempted to mitigate the potential for withholding tax
liabilities 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 that an
exemption application be submitted in respect of every payment made, 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.
 
                                       90
<PAGE>   93
 
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 general, the Company's Russian and Kazakh 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 and Kazakhstan 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 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, 1997, the Company had operating loss carryforwards for U.S.
federal income tax purposes of approximately $26.3 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 do not carryover
for U.S. tax purposes.
 
CURRENCY CONTROLS
 
  THE RUSSIAN FEDERATION
 
     Exchange Controls.  The Russian Federation currently has in place
relatively liberal policies regarding hard currency transfers by Russian
residents to non-residents. Payments in U.S. Dollars may generally be made
freely 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 180 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 180 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.
 
     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 50% 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
 
                                       91
<PAGE>   94
 
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, the development of this market is uncertain.
 
     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 Rouble
proceeds from the sale of Rouble denominated securities. In recent years, the
Rouble has experienced a significant depreciation relative to the U.S. Dollar
and other hard currencies, although during 1996 and 1997 it achieved relative
stability vis-a-vis the U.S. Dollar and other hard currencies.
 
     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
 
                                       92
<PAGE>   95
 
Tenge proceeds for the sale of Tenge-denominated securities. Since January 1995,
the Tenge has experienced relative stability against the U.S. Dollar and other
hard currencies.
 
     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 1997. 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, both the Russian and Kazakh
economies have been characterized by high rates of inflation. Although in 1996
and 1997, inflation in both countries decreased substantially, there is no
assurance that these trends will continue. In recent years, the devaluation of
the Rouble and Tenge has not kept pace with inflation. To the extent that the
Company's costs are denominated in the Rouble or the Tenge and devaluation of
these currencies does not fully offset inflation, the Company's local currency
costs will increase in hard currency terms. 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 1994 in the case of the Rouble and since October
1994 in the case of the Tenge:
 
                      ROUBLE/U.S. DOLLAR EXCHANGE RATES(1)
 
<TABLE>
<CAPTION>
MONTH                                                         1994     1995     1996     1997
-----                                                         -----    -----    -----    -----
<S>                                                           <C>      <C>      <C>      <C>
January.....................................................  1,247    3,550    4,640    5,636
February....................................................  1,560    4,059    4,736    5,676
March.......................................................  1,688    4,400    4,830    5,726
April.......................................................  1,761    4,008    4,940    5,760
May.........................................................  1,841    5,130    5,031    5,773
June........................................................  1,918    4,958    5,105    5,771
July........................................................  1,988    4,539    5,189    5,798
August......................................................  2,060    4,405    5,352    5,824
September...................................................  2,204    4,445    5,396    5,861
October.....................................................  2,643    4,495    5,455    5,887
November....................................................  3,085    4,509    5,511    5,917
December....................................................  3,249    4,578    5,550    5,997
</TABLE>
 
---------------
(1) Spot rate on the last business day of each month.
 
                                       93
<PAGE>   96
 
                      TENGE/U.S. DOLLAR EXCHANGE RATES(1)
 
<TABLE>
<CAPTION>
MONTH                                                         1994    1995    1996    1997
-----                                                         ----    ----    ----    -----
<S>                                                           <C>     <C>     <C>     <C>
January.....................................................          55.6    65.5     75.8
February....................................................          60.1    65.3     75.5
March.......................................................          60.8    66.0     75.3
April.......................................................          63.5    67.1     75.4
May.........................................................          64.3    66.9     75.5
June........................................................          64.3    67.2     75.6
July........................................................          63.2    67.5     75.5
August......................................................          59.0    68.1     75.6
September...................................................          60.9    68.8     75.6
October.....................................................  50.0    61.7    69.5     75.6
November....................................................  50.0    63.9    70.4     75.6
December....................................................  50.0    59.6    73.1     76.2
</TABLE>
 
---------------
(1) Spot rate on the last business day of each month.
 
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 NWE Capital
(Cyprus) Ltd., Technocom Limited and Wireless Technology Corporations Limited,
as pledgees under the terms of the Senior Notes and the Convertible Notes, are
attached to this report beginning on page F-38.
    
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES
 
     None.
 
                                       94
<PAGE>   97
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table sets forth certain information with respect to the
executive officers and directors of the Company:
 
<TABLE>
<CAPTION>
    NAME OF DIRECTOR      AGE                               POSITION
    ----------------      ---                               --------
<S>                       <C>   <C>
James R.S. Hatt.........  38    Chairman, President and Chief Executive Officer
Dr. Boris Antoniuk......  49    Director and Group Director -- CIS and Russia
Edward Charles Dilley...  59    Director
Simon Edwards...........  35    Director, Senior Vice President and Chief Financial Officer
Gordon Humphrey.........  57    Director
Gennady Kudriavtsev.....  57    Director
Dr. Vladimir Kvint......  48    Director
Julian Rawle............  36    Director
Robert Smith............  60    Director
David M. Stovel.........  49    Director
John Davies.............  51    Deputy Chief Executive Officer and Chief Operating Officer
Alan G. Brooks(1).......  56    Special Projects Director
Conor Carroll...........  31    Vice President, Operations
</TABLE>
 
---------------
 
(1) Mr. Brooks was an executive officer of the Company, in his role as Chief
    Operating Officer, through January 31, 1998. It is not expected that he will
    be considered an executive officer for the remainder of the 1998 fiscal
    year.
 
     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 companies around the world. Prior to joining the Company,
Mr. Hatt worked in a number of senior positions at C&W, 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 June
1997. Since January 1996, Mr. Dilley has been Director of Corporate Finance 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.
 
                                       95
<PAGE>   98
 
     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.
 
     Julian Rawle has served as a Director of the Company since March 1998. He
joined Cable & Wireless in April 1995 and is currently the Representative
Director of the Cable & Wireless CIS office in Moscow. Prior to joining C&W, Mr.
Rawle worked for several international petroleum companies in Russia and
Kazakhstan. From 1990 to 1993, he was Business Development Manager -- BP
International Lubricants Marketing in Moscow, where he was responsible for
setting up BP's first sales office in the former Soviet Union. From 1993 to
1995, he was a Business Development Consultant for Chevron involved in business
planning and other projects in Russia and Kazakhstan.
 
     Robert Smith has served as a Director of the Company since September 1993.
He has been President of Newmark Capital Limited ("Newmark"), a private
investment and consulting company since 1992. From 1990 to 1992, he was Chief
Executive Officer of the First Hungarian Investment Advisory RT. He also serves
as Chairman of ALTEL ("ALTEL"), an operating subsidiary of the Company and sits
on the boards of other companies including Rogers Cantel Mobile Communications
Inc.
 
     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.
 
     John Davies has served as Deputy Chief Executive Officer of the Company
since June 1997 and as Chief Operating Officer of the Company since February 1,
1998. Previously, from 1995 to 1997, he was a director and partner in Beldi &
Cie SA providing services to multinational companies and entrepreneurs. 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 that, Mr. Davies served as a
business consultant and a vice president for international finance of a
privately-owned shipping and commodity trading group.
 
     Alan Brooks has served as Special Projects Director of the Company since
February 1, 1998. He served as Chief Operating Officer of the Company from
January 1996 through January 1998 and Senior Vice President from February 1997
through January 1998. Previously, he served in a number of senior management
positions with Cable & Wireless for over 30 years, most recently in Sweden,
Japan, Papua New Guinea and the Middle East. Mr. Brooks was on secondment to the
Company from Cable & Wireless from March 1995 until December 1995.
 
                                       96
<PAGE>   99
 
     Conor Carroll has served as Vice President, Operations of the Company since
February 1997. From January 1995 until February 1997 he was Vice President,
Business Development of the Company. From 1991 to December 1994, Mr. Carroll was
Business Development Manager for Cable & Wireless Europe.
 
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
 
     Section 16(a) of the Securities Exchange Act of 1934, as amended (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 Securities and Exchange Commission (the "SEC") 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, 1997
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 Messrs. Antoniuk, Kvint and Kudriavtsev,
current directors of the Company. Each such director was elected as a director
of the Company in June 1997 and was obligated to file Initial Statements of
Beneficial Ownership within 10 days of their election. Due to an administrative
oversight, these filings were not timely made, but were filed in February 1998
as soon as the oversight was discovered.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The following table sets forth for the years ended December 31, 1997, 1996
and 1995 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
                                                                                         COMPENSATION
                                                         ANNUAL COMPENSATION             ------------
                                               ---------------------------------------    SECURITIES
                                                                        OTHER ANNUAL      UNDERLYING
NAME AND PRINCIPAL POSITION            YEAR    SALARY(1)     BONUS     COMPENSATION(2)     OPTIONS
---------------------------            ----    ---------    --------   ---------------   ------------
<S>                                    <C>     <C>          <C>        <C>               <C>
James R.S. Hatt                        1997    $390,000     $117,000       $78,000             -0-
Chairman, President and Chief          1996    $290,000     $191,000       $58,000         250,000
Executive Officer                      1995    $220,000     $ 75,000       $44,000         200,000
John Davies                            1997    $175,000(3)  $ 52,500       $17,500         500,000
Deputy Chief Executive Officer and     1996          --           --            --              --
Chief Operating Officer                1995          --           --            --              --
Simon Edwards                          1997    $325,000     $ 97,500       $65,000             -0-
Senior Vice President, Chief           1996    $225,000     $165,000       $45,000         200,000
Financial Officer and Treasurer        1995    $ 43,750     $ 15,000       $ 8,750         150,000
Conor Carroll                          1997    $150,700     $ 45,210       $30,140             -0-
Vice President, Operations             1996    $150,700     $ 90,280       $30,140         150,000
                                       1995    $110,000     $ 14,300       $22,000          50,000
Robert Smith                           1997    $100,000(4)       -0-           -0-             -0-
Chairman of ALTEL                      1996    $145,833(4)       -0-           -0-         100,000
                                       1995    $200,000(4)       -0-           -0-             -0-
Alan G. Brooks                         1997    $200,000     $ 60,000           -0-         150,000
Special Projects Director              1996    $149,500     $ 40,000           -0-             -0-
                                       1995         -0-          -0-           -0-             -0-
</TABLE>
 
---------------
 
(1) All amounts are stated in U.S. Dollars. Certain amounts were paid to Messrs.
    Hatt, Edwards, Carroll and Brooks in British Pounds and have been converted
    to U.S. Dollars at a conversion rate of $1.50/pound sterling 1.00.
 
(2) Other Annual Compensation consists of amounts paid in lieu of certain
    benefits.
 
                                       97
<PAGE>   100
 
(3) Mr. Davies' employment with the Company commenced on June 1, 1997 and this
    amount is the amount paid to him in salary during the period June 1 to
    December 31, 1997. His current base salary is $300,000 per annum.
 
(4) Amounts classified as "salary" were paid as a consulting fee to Newmark for
    the provision of Mr. Smith's services to ALTEL and the Company. See "Item
    13 -- Certain Relationships and Related Transactions."
 
     The following table summarizes stock options granted during 1997 to the
persons named in the Summary Compensation Table.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
   
<TABLE>
<CAPTION>
                                           PERCENT OF                               POTENTIAL REALIZABLE VALUE
                                              TOTAL                                 AT ASSUMED ANNUAL RATES OF
                                             OPTIONS                               STOCK PRICE APPRECIATION FOR
                                             GRANTED                                      OPTION TERM(1)
                               OPTIONS   TO EMPLOYEES IN   EXERCISE   EXPIRATION   -----------------------------
NAME                           GRANTED        1997          PRICE        DATE           5%              10%
----                           -------   ---------------   --------   ----------   -------------   -------------
<S>                            <C>       <C>               <C>        <C>          <C>             <C>
James R. S. Hatt.............      -0-           --            --           --              --              --
John Davies..................  500,000        37.0%         $5.25      6/23/07      $1,650,848      $4,183,574
Simon Edwards................      -0-           --            --           --              --              --
Conor Carroll................      -0-           --            --           --              --              --
Robert Smith.................      -0-           --            --           --              --              --
Alan G. Brooks...............  150,000        11.1%         $6.00      4/27/02      $  248,653      $  549,459
</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.
 
     The following table summarizes option exercises during 1997 and the value
of vested and unvested options for the persons named in the Summary Compensation
Table at December 31, 1997. Year-end values are based upon a price of $5.375 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, 1997.
 
      AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                        NUMBER OF UNEXERCISED         VALUE OF UNEXERCISED
                                                               OPTIONS               IN-THE-MONEY OPTIONS AT
                                                        AT DECEMBER 31, 1997            DECEMBER 31, 1997
                        SHARES ACQUIRED    VALUE     ---------------------------   ---------------------------
NAME                      ON EXERCISE     REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                    ---------------   --------   -----------   -------------   -----------   -------------
<S>                     <C>               <C>        <C>           <C>             <C>           <C>
James R. S. Hatt......      90,000        $222,150     153,333        166,667             0               0
John Davies...........         -0-              --     166,666        333,334        31,250         104,167
Simon Edwards.........      90,000        $250,950     126,666        133,334             0               0
Conor Carroll.........         -0-              --      83,333        116,667             0               0
Robert Smith..........      10,000        $ 21,886     115,833         66,666             0               0
Alan G. Brooks........         -0-              --     150,000            -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.
 
                                       98
<PAGE>   101
 
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 annual salary
was $390,000 for 1997. 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 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 in control of the Company, as
defined in the Company's Equity Compensation Plan (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.
 
     John Davies is employed as Deputy Chief Executive Officer pursuant to a
letter agreement intended to be effective as June 1, 1997, at an initial annual
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'
annual salary for 1997 was $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.
 
     Pursuant to an employment agreement, dated August 6, 1996, with PLDMS, Mr.
Brooks was employed as Chief Operating Officer as of July 1, 1996 at an initial
annual salary of $200,000 and for an initial term of 18 months. During 1997, Mr.
Brooks' annual salary under this agreement was $200,000. Effective July 28,
1997, the termination date for the agreement was extended to September 30, 1997,
and that termination date has been extended orally. Since February 1, 1998, Mr.
Brooks has been Special Projects Director of the Company.
                                       99
<PAGE>   102
 
     Pursuant to employment agreements, dated as of January 1, 1995, with the
Company and PLDMS, Mr. Carroll was employed (i) as Vice President, Business
Development of the Company at an initial annual salary of $55,000 and (ii) as an
Executive of PLDMS at an initial annual salary of pound sterling 36,000. During
1996, Mr. Carroll's annual salaries under these agreements were $75,000 and
pound sterling 50,000, respectively. As of February 1997, Mr. Carroll became
Vice President, Operations of the Company. The agreement with the Company was
amended and restated effective as of August 1, 1997 to incorporate various
changes made in the agreements with Messrs. Hatt and Edwards, but without
changing the overall compensation arrangements. 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. Carroll 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. Carroll may also terminate his employment with the Company upon
three months prior written notice upon a Change in Control of the Company. The
agreement with PLDMS may be terminated without cause by either party upon thirty
days prior written notice or for cause as specified. Upon termination without
cause by the Company or upon termination by Mr. Carroll upon a Change of
Control, Mr. Carroll is to receive as a termination fee a specific multiple of
his then annual current salary from the Company, as determined from time to time
by the board of directors. As of December 31, 1997, the applicable multiple for
Mr. Carroll is 4.000. In addition to his salary from the Company and PLDMS, an
amount equal to twenty percent of his then current salary amount is payable by
the Company to Mr. Carroll annually in lieu of all pension and other benefits.
No termination payment is payable to Mr. Carroll by PLDMS.
 
COMPENSATION OF DIRECTORS
 
     Non-employee directors are paid an 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. Messrs. Dilley and
Timothy Lowry (the other representative of Navona during 1997) declined all fees
during 1997. All directors are eligible to participate in the Company's 1997
Equity Compensation Plan (the "Plan"). However, non-employee directors are only
permitted to receive non-qualified stock options under the Plan, pursuant to
arrangements under which, subject to approval by the Board of Directors, such
individuals are automatically awarded 10,000 options upon becoming a director
and a further 5,000 options annually, thereafter. Messrs. Dilley and Lowry
declined all such options during 1997.
 
     See "Item 13 -- Certain Relationships and Related Transactions" for a
description of (i) the Company's consulting agreement with Newmark for the
provision of services by Robert Smith during 1997, (ii) a description of certain
arrangements between the Company and Cable & Wireless and (iii) a description of
certain arrangements between the Company, Technocom and Dr. Antoniuk.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Mr. Hatt was on the board of directors of ALTEL during 1997. Until February
1997, Robert Smith, the Chairman of ALTEL, was a member of the Compensation
Committee.
 
     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.
 
                                       100
<PAGE>   103
 
     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.
Robert Smith served on the Compensation Committee during 1996, but ceased to be
a member of the committee in February 1997. David L. Heavenridge served on the
Committee during his tenure as a director of the Company during 1997 and, upon
his resignation as a director in October 1997, was replaced by Vladimir Kvint.
 
  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 bonus program in 1997 was based on the performance of the Company's
principal operating subsidiaries during 1997. Bonuses earned for 1997 consisted
of 30% of base salary for each of Messrs. Hatt, Edwards, Davies, Brooks and
Carroll.
 
  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.
 
                                       101
<PAGE>   104
 
  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.
 
     Presented by the Compensation Committee:
 
                    David M. Stovel
               Edward Charles Dilley
               Dr. Vladimir Kvint
 
                                       102
<PAGE>   105
 
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 February 18, 1993
(the date the Company's Common Shares were first traded in the United States on
the Nasdaq Stock Market) 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.
 
<TABLE>
<CAPTION>
                                                                      Nasdaq Stock
                                                                         Market             Nasdaq
               Measurement Period                       PLD            Composite      Telecommunications
             (Fiscal Year Covered)                  Telekom Inc.         Index              Index
<S>                                               <C>               <C>               <C>
02/18/93                                                     100.0             100.0              100.0
12/31/93                                                     121.1             117.3              142.0
12/31/94                                                      67.1             113.5              119.2
12/31/95                                                      50.0             158.8              159.9
12/31/96                                                      64.5             194.9              165.7
12/31/97                                                      56.6             237.1              235.2
</TABLE>
 
                                       103
<PAGE>   106
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information (as of March 31, 1998,
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 proxy
statement and by all current directors and executive officers of the Company as
a group.
 
<TABLE>
<CAPTION>
                                                                 NUMBER
                                                               OF SHARES      PERCENT
                                                              BENEFICIALLY       OF
BENEFICIAL OWNER                                                OWNED(1)      CLASS(2)
----------------                                              ------------    --------
<S>                                                           <C>             <C>
Navona Communications Corporation Ltd.(3)...................   10,305,739       30.7%
Princeton Services, Inc.(4).................................    7,013,856       18.2%
BEA Associates(5)...........................................    2,165,000        6.5%
Citibank, N.A.(6)...........................................    1,928,525        5.8%
James R.S. Hatt(7)..........................................      184,333          *
John G. Davies(8)...........................................      166,667          *
Simon Edwards(9)............................................      128,666          *
Alan G. Brooks(10)..........................................      151,500          *
Conor Carroll(11)...........................................       85,833          *
Robert Smith(12)............................................      106,333          *
Dr. Boris Antoniuk(13)......................................    1,326,240
Edward Charles Dilley.......................................           --         --
Gordon Humphrey(8)..........................................       10,000          *
Gennady Kudriavtsev(8)......................................       10,000          *
Dr. Vladimir Kvint(8).......................................       10,000          *
Julian Rawle................................................           --         --
David M. Stovel(8)..........................................       22,500          *
All current directors and executive officers of the Company
  as a group (13 persons)...................................    2,202,072        6.4%
</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, 1998 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 33,324,290 shares of Common Stock outstanding at March 31,
     1998 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, 1998. Percentages of less
     than 1% have not been indicated.
 
 (3) This information based upon Amendment No. 6 to Schedule 13D, filed April
     20, 1998, with the Securities and Exchange Commission by Cable and Wireless
     plc. The amount shown includes currently exercisable warrants to purchase
     250,000 shares of Common Stock held by Cable and Wireless plc, a
     corporation organized under the laws of England ("Cable & Wireless")
     located at 124 Theobalds Road, London WC1X 8RX. The remaining shares are
     held by Navona Communications Corporation Ltd., a Bermuda corporation
     ("Navona") and a wholly owned subsidiary of Cable & Wireless. Navona is
     located at Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda.
 
 (4) This information is based upon Amendment No. 2 to Schedule 13G, filed
     February 2, 1998, with the Securities and Exchange Commission by Princeton
     Services, Inc. ("PSI"), Merrill Lynch Asset Management, L.P. ("Merrill
     Lynch Asset Management") and Merrill Lynch Global Allocation Fund, Inc.,
     each of 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
 
                                       104
<PAGE>   107
 
     Notes of the Company (CUSIP 71623PAC) (the "Convertible Notes") and upon
     exercise of warrants to purchase shares of Common Stock (CUSIP 71623PAA)
     (the "Warrants"). In the aggregate, PSI may be deemed to beneficially own
     1,698,200 shares of Common Stock, $19,200,000 aggregate principal amount of
     Convertible Notes and 74,500 warrants. Each such warrant may be exercised
     for 34 shares of Common Stock at an exercise price of $6.60 per share. 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. PSI disclaims
     beneficial ownership of the securities of the Company.
 
 (5) This information is as of December 31, 1997 and is based upon Schedule 13F,
     filed with the Securities and Exchange Commission by BEA Associates, Inc.,
     which is located at 153 East 53rd Street, New York, New York 10022.
 
 (6) This information is as of December 31, 1997 and is based upon Schedule 13G,
     filed February 13, 1998, with the Securities and Exchange Commission by
     Citicorp and Citibank, N.A., which are located at 399 Park Avenue, New
     York, New York 10043.
 
 (7) The amount shown includes currently exercisable options to purchase 153,333
     shares of Common Stock.
 
 (8) The amount shown consists entirely of currently exercisable options to
     purchase shares of Common Stock.
 
 (9) The amount shown includes currently exercisable options to purchase 126,666
     shares of Common Stock.
 
(10) The amount shown includes currently exercisable options to purchase 150,000
     shares of Common Stock.
 
(11) The amount shown includes currently exercisable options to purchase 83,333
     shares of Common Stock.
 
(12) The amount shown includes currently exercisable options to purchase 105,833
     shares of Common Stock.
 
(13) The amount shown includes 1,316,240 shares held by P.S. Marketing &
     Consultancy Services Limited "P.S. Marketing"), which were issued to P.S.
     Marketing, at the direction of Elite International Limited ("Elite"), in
     connection with the November 1997 acquisition by the Company from Elite of
     additional interests in Technocom. Elite is an Irish company owned by a
     trust advised by Dr. Antoniuk and the shares of Common Stock are deemed to
     be beneficially owned by Dr. Antoniuk The amount shown also includes
     currently exercisable options to purchase 10,000 shares of Common Stock.
     Elite is the beneficial owner of 10 ordinary shares, par value IRpound
     sterling 1.00, of Technocom Limited, an Irish corporation and subsidiary of
     the Company ("Technocom"), representing 5.03% of the outstanding ordinary
     shares of Technocom. The Company understands that Dr. Antoniuk has the
     power to exercise the voting rights of the shares of Technocom owned by
     Elite. None of the other current directors and executive officers of the
     Company own any ordinary shares of Technocom, in which the Company owns a
     80.4% equity interest.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     During 1994 and 1995, Cable & Wireless provided services to and met certain
liabilities of the Company. At December 31, 1995, the aggregate amount owed to
Cable & Wireless under these arrangements was $1,843,000. These amounts were
repaid in 1996.
 
     The Company entered into an agreement as of January 1, 1995 with Newmark
with respect to the provision of the services of Robert Smith as a consultant to
the Company and to act as Chairman of ALTEL. The agreement provides for the
payment of $100,000 per annum (plus additional amounts depending on the amount
of time devoted by Mr. Smith to the affairs of the Company or ALTEL) and is
terminable for cause or by either party upon two years notice of termination. In
addition, Newmark has the option of terminating the agreement in the event of a
change of control of the Company (defined as control of more than 30% of all
outstanding voting shares being acquired by any person or persons acting in
concert other than Cable & Wireless and its affiliates) and shall be terminated
if Mr. Smith shall be removed from the office of Chairman of ALTEL, in which
events Newmark shall be entitled to the payment of two years remuneration. In
1997, Newmark received $100,000 with respect to the provision of Mr. Smith's
services. Mr. Smith is President of Newmark. In May 1998, the Company and
Newmark agreed to terminate the agreement, in exchange for a
 
                                       105
<PAGE>   108
 
cash payment of $200,000 from the Company to Newmark. At such time, Mr. Smith
resigned as a director of the Company, Chairman of ALTEL and ceased providing
consulting services to the Company.
 
     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. 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 that 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.
 
     Since June 16 1997, Dorothea Hatt, the wife of James Hatt, the Company's
President and Chief Executive Officer, has been employed as Legal Assistant of
the Company at an annual salary of $75,000.
 
                                       106
<PAGE>   109
 
                                    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 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
 
     On December 16, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission regarding the Company's acquisition of
additional interests in Technocom and the related financing transaction with the
Travelers Parties.
 
     (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)
  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.
  4.4     Global Note representing 14% Senior Discounted Notes due
          2004. (Exhibit 4.3)(10)
  4.5     Global Note representing 9% Convertible Subordinated Notes
          due 2006. (Exhibit 4.4)(10)
  4.6     Warrant Agreement dated as of May 31, 1996 between the
          Registrant and The Bank of New York as Warrant Agent.
          (Exhibit 4.9)(10)
  4.7     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)
  4.8     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)
  4.9     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)
</TABLE>
 
                                       107
<PAGE>   110
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  4.10    Registration Rights Agreement dated as of May 31, 1996
          between the Registrant and Smith Barney Inc. (Exhibit
          4.7)(10)
  4.11    Purchase Agreement dated May 24, 1996 between the Registrant
          and Smith Barney Inc. (without exhibits). (Exhibit 4.8)(10)
  4.12    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)
  4.13    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)
  4.14    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)
  4.15    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)
  4.16    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)
  4.17    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)
  4.18    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)
  4.19    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)
  4.20    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)
  4.21*   Revolving Credit Agreement, dated as of November 26, 1997,
          between the Registrant, The Travelers Insurance Company and
          The Travelers Indemnity Company.
  4.22*   Form of 12% Series A Senior Secured Revolving Credit Note.
  4.23*   Form of 12% Series B Senior Secured Revolving Credit Note.
  4.24*   Warrant Agreement, dated as of November 26, 1997, between
          the Registrant and The Bank of New York, as Warrant Agent.
  4.25*   Form of Series A Warrant Certificate.
  4.26*   Form of Series B Warrant Certificate.
  4.27*   Registration Rights Agreement, dated as of November 26,
          1997, between the Registrant, The Travelers Insurance
          Company and The Travelers Indemnity Company.
</TABLE>
 
                                       108
<PAGE>   111
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  4.28*   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.
  4.29*   Trust Agreement, dated as of November 26, 1997, between the
          Registrant and The Bank of New York, as Trustee.
  4.30*   Security Agreement (Inventory and Receivables), dated as of
          November 26, 1997, between the Registrant and The Bank of
          New York, as Trustee.
  4.31*   Pledge Agreement, dated as of November 26, 1997, between the
          Registrant and The Bank of New York, as Trustee.
 10.1*    PLD Telekom Inc. 1997 Equity Compensation Plan.
 10.2*    Service Agreement, dated August 1, 1997, between the
          Registrant and James R.S. Hatt.
 10.3*    Employment Letter, effective June 1, 1997, between the
          Registrant and John G. Davies.
 10.4*    Amendment, dated July 30, 1997, to Employment Letter between
          the Registrant and John G. Davies.
 10.5*    Service Agreement, dated July 1, 1997, between the
          Registrant and Simon Edwards.
 10.6     Service Agreement, dated January 1, 1995, between PLD
          Management Services Limited and Conor Carroll. (Exhibit
          2(l))(8)
 10.7*    Amended and Restated Service Agreement, dated August 1,
          1997, between the Registrant and Conor Carroll.
 10.8*    Service Agreement, dated November 26, 1997, between the
          Registrant and Boris Antoniuk.
 10.9*    Consultancy Agreement, dated December 28, 1994, between
          Technocom Limited and Elite International Limited.
 10.10*   Amendment, dated November 26, 1997, to the Consultancy
          Agreement between Technocom Limited and Elite International
          Limited.
 10.11    Service Agreement between the Registrant and Newmark Capital
          Limited dated as of January 1, 1995. (Exhibit 2(o))(8)
 10.12    Purchase Agreement dated August 12, 1992, as amended,
          between the Registrant and Dominion Capital. (Exhibit
          2(o))(2)
 10.13    Warrant to Purchase Common Shares dated October 2, 1992
          between the Company and Dominion Capital Inc. (Exhibit
          2(l))(2)
 10.14    Warrant to Purchase Common Shares dated June 8, 1994 between
          the Company and Dominion Capital Inc. (Exhibit 10.27)(4)
 10.15    Warrant to Purchase Common Shares dated July 28, 1994
          between the Company and Dominion Capital Inc. (Exhibit
          10.28)(4)
 10.16    Purchase Agreement dated November 17, 1992 between the
          Registrant, The Emerging Markets Telecommunications Fund,
          Inc., The Universal Global Fund and The Universal Emerging
          Markets Fund. (Exhibit 2(r))(2)
 10.17    Share Purchase Agreement dated as of November 5, 1993
          between the Registrant and Navona Communications Corporation
          Ltd. (Exhibit 3(a))(3)
 10.18    Subscription Agreement dated as of March 3, 1994 between the
          Registrant and Navona Communications Corporation Ltd.
          (Exhibit 3(e))(3)
 10.19    Variation Agreement dated as of March 25, 1994 between the
          Registrant and Navona Communications Corporation Ltd.
          (Exhibit 3(f))(3)
 10.20    Variation Agreement dated as of March 29, 1994 between the
          Registrant and Navona Communications Corporation Ltd.
          (Exhibit 3(g))(3)
</TABLE>
 
                                       109
<PAGE>   112
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.21    Further Variation Agreement dated as of June 3, 1994 between
          the Registrant and Navona Communications Corporation Ltd.
          (Exhibit 3(h))(3)
 10.22    Agreement to Purchase Warrants dated July 28, 1994 between
          the Registrant and Cable & Wireless. (Exhibit 10.25)(4)
 10.23    Option Agreement between Cable and Wireless plc and the
          Registrant dated January 27, 1996. (Exhibit 2(b))(8)
 10.24    Assignment of Receivables between Cable and Wireless plc and
          NWE Capital (Cyprus) Limited dated February 2, 1996.
          (Exhibit 2(d))(8)
 10.25    Agreement dated May 31, 1992 between Tiller International
          Limited and the Registrant. (Exhibit 2(m))(1)
 10.26    Joint Venture Agreement dated as of December 31, 1993
          between Wireless Technology Corporations Limited and
          Kompania Besprovodnye Seti Sviazi. (Exhibit 3(b))(3)
 10.27    Interconnection Agreement dated as of February 4, 1994
          between the Ministry of Communications of the Republic of
          Kazakhstan and ALTEL. (Exhibit 3(d))(3)
 10.28*   Amendment, dated February 28, 1996, to the Interconnection
          Agreement between Kazakhtelekom and ALTEL.
 10.29    Cellular System Equipment Purchase Agreement dated as of May
          4, 1994 between ALTEL and Motorola Inc. (Exhibit 3(k))(3)
 10.30    Cellular System Installation & Optimization Agreement dated
          as of May 4, 1994 between ALTEL and Motorola Inc. (Exhibit
          3(l))(3)
 10.31    Put and Call Letter Agreement dated as of June 3, 1994
          between the Company and Monogram Telecommunications Limited.
          (Exhibit 3(i))(3)
 10.32    Subscription Agreement dated February 21, 1995 for
          $3,000,000 convertible note issued to the Registrant by
          Monogram. (Exhibit 2(a))(7)
 10.33    Agreement for the Acquisition of Ninety Percent of the
          Issued Share Capital of St. Petersburg Mayorality & Tiller
          dated as of March 7, 1994 among the Registrant, Tiller
          International Limited and Dian A/O. (Exhibit 3(j))(3)
 10.34    Shareholders and Subscription Agreement dated as of November
          3, 1994 between the Registrant, Bradenham Holdings Limited
          and Strikeland Limited. (Exhibit 2.6)(5)
 10.35    Purchase Agreement between Baltic Communications Limited and
          the Registrant dated January 27, 1996. (Exhibit 2(a))(8)
 10.36    Share Purchase Agreement dated April 26, 1995 between Lant
          Investments Limited and the Registrant. (Exhibit 2(b))(7)
 10.37    Escrow Agreement among the Registrant, Lant Investments
          Limited and Montreal Trust Company of Canada. (Exhibit
          2(c))(7)
 10.38    Registration Rights Agreement dated as of April 26, 1995
          between the Registrant and Lant Investments Limited.
          (Exhibit 2(d))(7)
 10.39    Side letter between the Registrant and Baltic Communications
          Limited dated January 27, 1996. (Exhibit 2(c))(8)
 10.40    Share Sale and Purchase Agreement dated November 2, 1994
          between the Registrant and Plicom Limited. (Exhibit 2.3)(4)
 10.41    Form of Subscription and Shareholder Agreement between the
          Registrant, Plicom Limited, Elite International Limited and
          Technocom Limited. (Exhibit 2.4)(6)
 10.42*   Amendment, dated November 26, 1997, to Subscription and
          Shareholder Agreement between the Registrant, Plicom
          Limited, Elite International Limited and Plicom Limited.
</TABLE>
 
                                       110
<PAGE>   113
 
   
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.43    Form of Deed of Covenant between the Registrant and Plicom
          Limited. (Exhibit 2.5)(4)
 10.44    Form of Put and Call Option Agreement dated November 4, 1994
          between the Company and Plicom Limited. (Exhibit 10.20)(4)
 10.45    Form of Put and Call Option Agreement dated November 4, 1994
          between the Registrant and Elite International Limited.
          (Exhibit 10.21)(4)
 10.46*   Amendment, dated November 26, 1997, to Put and Call Option
          Agreement between the Registrant and Plicom Limited.
 10.47*   Amended and Restated Put and Call Option Agreement, dated
          November 26, 1997, between the Registrant and Elite
          International Limited.
 10.48*   Share Purchase Agreement, dated November 26, 1997, among the
          Registrant, Technocom Limited, Plicom Limited and Mark
          Klabin.
 10.49*   Share Purchase Agreement, dated November 26, 1997, among the
          Registrant, Technocom Limited and Elite International
          Limited.
 10.50*   Securities Sale and Purchase Agreement between the
          Registrant and Redford Limited relating to SPMMTS.
 10.51    Agreement for Lease dated as of April 27, 1994 between the
          Registrant and The Scottish Life Assurance Company. (Exhibit
          3(o))(3)
 10.52*   Sublease, dated June 4, 1997, between the Registrant and The
          Seiko Corporation of America.
 10.53    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)
 10.54    License No. 2463 issued to MTR-Sviaz dated September 21,
          1995 (Russian). (Exhibit 2(f))(8)
 10.55    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)
 10.56    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)
 10.57    License No. N4199 issued by the RSCC to Teleport-TP for the
          provision of local and international telephone
          communications. (Exhibit 10.5)(10)
 10.58    License No. N4207 issued by the RSCC to Teleport-TP for the
          provision of international telecommunication services via
          dedicated network. (Exhibit 10.6)(10)
 10.59    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)
 10.60    License No. 3654 issued to Teleport-TP for providing data
          transmission services. (Exhibit (2(e))(8)
 21*      List of Subsidiaries.
 23.1**   Consent of KPMG Peat Marwick LLP.
 23.2**   Consent of KPMG.
 23.3**   Consent of KPMG.
 23.4**   Consent of KPMG.
 23.5**   Consent of KPMG.
</TABLE>
    
 
---------------
   * 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.
 
  ** Filed herewith.
 
 (1) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
     year ended December 31, 1991.
 
                                       111
<PAGE>   114
 
 (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.
 
                                       112
<PAGE>   115
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in New York, New York
on July 22, 1998.
    
 
                                          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, 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                              July 22, 1998
---------------------------------------------------
                  Boris Antoniuk
 
             /s/ EDWARD CHARLES DILLEY               Director                              July 22, 1998
---------------------------------------------------
               Edward Charles Dilley
 
                 /s/ SIMON EDWARDS                   Director and Chief Financial Officer  July 22, 1998
---------------------------------------------------    (Principal Financial Officer)
                   Simon Edwards
 
                /s/ JAMES R.S. HATT                  Director, President and Chief         July 22, 1998
---------------------------------------------------    Executive Officer (Principal
                  James R.S. Hatt                      Executive Officer)
 
                /s/ GORDON HUMPHREY                  Director                              July 22, 1998
---------------------------------------------------
                  Gordon Humphrey
 
              /s/ GENNADY KUDRIATSEV                 Director                              July 22, 1998
---------------------------------------------------
                Gennady Kudriatsev
 
                /s/ VLADIMIR KVINT                   Director                              July 22, 1998
---------------------------------------------------
                  Vladimir Kvint
 
              /s/ I. MARTIN POMPADUR                 Director                              July 22, 1998
---------------------------------------------------
                I. Martin Pompadur
 
                 /s/ JULIAN RAWLE                    Director                              July 22, 1998
---------------------------------------------------
                   Julian Rawle
 
                 /s/ DAVID STOVEL                    Director                              July 22, 1998
---------------------------------------------------
                   David Stovel
</TABLE>
    
 
                                       113
<PAGE>   116
 
                                PLD TELEKOM INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                            ITEM                              PAGE
                            ----                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Consolidated balance sheets as of December 31, 1997 and
  1996......................................................  F-4
Consolidated statements of operations for the years ended
  December 31, 1997, 1996 and 1995..........................  F-5
Consolidated statements of shareholders' equity for the
  years ended December 31, 1997, 1996 and 1995..............  F-6
Consolidated statements of cash flows for the years ended
  December 31, 1997, 1996 and 1995..........................  F-7
Notes to consolidated financial statements..................  F-8
</TABLE>
 
                                       F-1
<PAGE>   117
 
                          INDEPENDENT AUDITORS' REPORT
 
Shareholders and Board of Directors
PLD Telekom Inc.:
 
     We have audited the accompanying consolidated balance sheet of PLD Telekom
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year 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, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
    
 
                                          KPMG PEAT MARWICK LLP
 
New York, NY
March 23, 1998
 
                                       F-2
<PAGE>   118
 
                                AUDITORS' REPORT
 
Shareholders and Board of Directors
PLD Telekom Inc.:
 
     We have audited the accompanying consolidated balance sheet of PLD Telekom
Inc. as of December 31, 1996 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the two-year period
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 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.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and the results of its operations and the changes in its
financial position for each of the years in the two-year period ended December
31, 1996 in accordance with United States generally accepted accounting
principles.
 
   
KPMG
 
Chartered Accountants
    
Toronto, Canada
March 21, 1997
 
                                       F-3
<PAGE>   119
 
                                PLD TELEKOM INC.
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents (note 7)........................  $ 17,256    $ 40,674
  Trade receivables, net of allowance of $3,226 and $1,986,
     respectively...........................................    17,078      10,528
  Other receivables and prepaids............................     8,615       3,522
  Inventory.................................................     2,802       1,840
  Due from related parties (note 13(c)).....................     6,320       4,408
                                                              --------    --------
          Total current assets..............................    52,071      60,972
Escrow funds (note 9).......................................    33,868      40,984
Property and equipment, net (note 4)........................   134,998      93,039
Telecommunications licenses (note 3), net of amortization of
  $26,294 and $18,640, respectively.........................    78,837      72,310
Due from related parties (note 13(c)).......................     3,011          --
Other investments (note 5)..................................     7,036      24,094
Other assets (note 6).......................................    25,765      14,958
                                                              --------    --------
          Total assets......................................  $335,586    $306,357
                                                              ========    ========
 
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Bank indebtedness (note 7)................................        --      15,829
  Short-term borrowings (note 8)............................    20,320          --
  Accounts payable..........................................    13,597      17,781
  Accrued liabilities.......................................     5,750       3,126
  Due to related parties (note 13(d)).......................     5,336       4,039
  Deferred revenues.........................................     3,128       1,078
  Customer deposits.........................................     3,070       1,644
  Other current liabilities.................................     2,256       3,241
                                                              --------    --------
          Total current liabilities.........................    53,457      46,738
                                                              --------    --------
Long-term debt (note 9).....................................   133,516     107,954
Minority interest...........................................    21,382      13,711
Commitments and contingencies (note 14)
Shareholders' equity (notes 9 and 10):
  Preferred stock, par value $.01 per share in 1997 and no
     par value in 1996. Authorized 100,000,000 shares in
     1997 and unlimited number of shares in 1996; issued and
     outstanding 446,884 shares.............................         4          31
  Common stock, par value $.01 per share in 1997 and no par
     value in 1996. Authorized 100,000,000 shares in 1997
     and unlimited number of shares in 1996; issued and
     outstanding 33,324,290 shares in 1997 and 31,696,034
     shares in 1996.........................................       333     180,878
  Additional paid-in capital................................   204,007      13,592
  Accumulated deficit.......................................   (77,113)    (56,547)
                                                              --------    --------
          Total shareholders' equity........................   127,231     137,954
                                                              --------    --------
          Total liabilities and shareholders' equity........  $335,586    $306,357
                                                              ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   120
 
                                PLD TELEKOM INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
              (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                         1997           1996           1995
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Revenues:
  Telecommunications (note 13(a))...................  $   112,468    $    60,562    $    27,686
  Finance lease income..............................        1,956          1,404          1,434
                                                      -----------    -----------    -----------
                                                          114,424         61,966         29,120
Direct costs........................................       39,186         21,709         10,382
                                                      -----------    -----------    -----------
          Gross profit..............................       75,238         40,257         18,738
                                                      -----------    -----------    -----------
Operating expenses:
  General and administrative........................       38,716         24,791         18,168
  Depreciation......................................       10,433          5,226          3,837
  Amortization......................................        7,867          4,883          4,659
  Taxes other than income taxes.....................        6,204          2,490          1,220
                                                      -----------    -----------    -----------
          Total operating expenses..................       63,220         37,390         27,884
                                                      -----------    -----------    -----------
          Operating income/(loss)...................       12,018          2,867         (9,146)
Other income/(expense):
  Share of loss from equity investments, after
     amortization of licenses of $2,477 and $1,528
     in 1996 and 1995, respectively.................         (537)        (2,692)        (1,555)
  Interest and other income.........................        3,614          4,859          2,066
  Interest expense..................................      (17,846)        (9,973)          (957)
  Amortization of deferred financing costs..........       (1,152)          (684)            --
  Foreign exchange loss.............................         (274)          (648)          (443)
  Gain/(loss) on disposal of investments and
     property and equipment.........................          749             --           (915)
  Provision for amounts due from a shareholder of
     PeterStar (note 13(e)).........................           --             --         (2,490)
                                                      -----------    -----------    -----------
          Loss before income taxes and minority
            interest................................       (3,428)        (6,271)       (13,440)
Income taxes (note 11)..............................        7,739          3,669          1,490
                                                      -----------    -----------    -----------
       Loss before minority interest................      (11,167)        (9,940)       (14,930)
Minority interest...................................        9,399          2,521            551
                                                      -----------    -----------    -----------
          Net loss..................................  $   (20,566)   $   (12,461)       (15,481)
                                                      ===========    ===========    ===========
Net loss per common share:
  Basic.............................................  $     (0.64)   $     (0.39)   $     (0.49)
                                                      ===========    ===========    ===========
  Diluted...........................................  $     (0.64)   $     (0.39)   $     (0.49)
                                                      ===========    ===========    ===========
Weighted average common shares outstanding..........   32,061,070     31,579,201     31,314,662
                                                      ===========    ===========    ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   121
 
                                PLD TELEKOM INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                      (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 January 1, 1995..............  446,884    $ 31    30,012,214   $ 173,034         --       (28,605)    144,460
Conversion of Series VIII preferred
  shares................................       --      --     1,110,000       4,886         --            --       4,886
Issuance of shares for CPY Yellow Pages
  Limited (note 3(f))...................       --      --       368,820       1,900         --            --       1,900
Exercise of warrants and options........       --      --        16,000          67         --            --          67
Net loss for the year...................       --      --            --          --         --       (15,481)    (15,481)
                                          -------    ----    ----------   ---------    -------       -------     -------
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
                                          =======    ====    ==========   =========    =======       =======     =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-6
<PAGE>   122
 
                                PLD TELEKOM INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1997       1996       1995
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(20,566)   (12,461)   (15,481)
  Adjustments to reconcile net loss to net cash provided
    by/(used in) operating activities:
    Depreciation and amortization...........................    19,452     10,793      8,496
    Accrued interest on senior discount notes...............    14,260      7,349         --
    Minority interest.......................................     9,399      2,521        551
    Gain on sale of SPMMTS..................................    (1,001)        --         --
    Deferred revenue........................................     2,050       (898)     1,958
    Share of loss of equity investments.....................       537      2,692      1,555
    Other...................................................        --        300      1,543
    Changes in operating assets and liabilities, net of
      effects of acquisitions:
      Increase in trade receivables.........................    (6,550)    (2,478)    (1,681)
      (Increase)/decrease in other receivables and
         prepaids...........................................    (5,093)     1,827     (1,909)
      Increase in inventory.................................      (962)      (392)      (608)
      Change in amounts due from or to related parties......       386     (4,743)    (2,499)
      Increase/(decrease) in accounts payable, accrued
         liabilities, customer deposits, and other current
         liabilities........................................    (1,119)    11,108      1,351
                                                              --------    -------    -------
         Net cash provided by/(used in) operating
           activities.......................................    10,793     15,618     (6,724)
                                                              --------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................   (38,990)   (43,201)   (31,538)
  Proceeds from sale of SPMMTS..............................    17,180         --         --
  Escrow funds..............................................     7,116    (40,984)        --
  Purchase of 30% investment in Technocom...................   (25,608)        --         --
  Teleport-TP finance lease and advances....................        --      3,916     (7,733)
  Investments in Baltic Communications Limited, J.V.
    Technopark Limited and Teleport-TP, net of cash
    acquired................................................        --     (7,515)        --
  Other investments.........................................       181       (140)    (3,000)
  Other assets..............................................      (747)      (267)    (6,822)
                                                              --------    -------    -------
         Net cash used in investing activities..............   (40,868)   (88,191)   (49,093)
                                                              --------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term debt borrowings/(repayments)...................   (10,929)    (6,550)    22,379
  Proceeds from issuance of 12% Revolving Credit Notes......    15,420         --         --
  Proceeds from issuance of 14% Senior Discount Notes.......        --     87,697         --
  Proceeds from issuance of 9% Convertible Subordinated
    Notes...................................................        --     26,500         --
  Deferred financing costs..................................        --     (9,224)        --
  Proceeds from issuance of common stock....................     1,739        991         67
  Cash dividends paid to minority shareholders..............    (1,000)        --         --
  Loans from shareholders...................................        --     (1,843)       405
  Related company advances..................................        --         --       (815)
  Due to equipment supplier.................................        --         --     (4,384)
  Recapitalization of PeterStar.............................     1,427         --         --
  Other financing...........................................        --         --     (2,869)
                                                              --------    -------    -------
         Net cash provided by financing activities..........     6,657     97,571     14,783
                                                              --------    -------    -------
         (Decrease)/increase in cash and cash equivalents...   (23,418)    24,998    (41,034)
Cash and cash equivalents at beginning of year..............    40,674     15,676     56,710
                                                              --------    -------    -------
Cash and cash equivalents at end of year....................  $ 17,256     40,674     15,676
                                                              ========    =======    =======
Supplementary disclosures:
  Non-cash investing and financing activities:
    Supplier financing......................................  $ 11,302         --         --
                                                              ========    =======    =======
    Issuance of common stock for a portion of purchase price
      of Technocom..........................................  $  7,681         --         --
                                                              ========    =======    =======
  Interest paid.............................................  $  3,381      2,425        380
                                                              ========    =======    =======
  Income taxes paid.........................................  $  7,424      3,678        809
                                                              ========    =======    =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-7
<PAGE>   123
 
                                PLD TELEKOM INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
 
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
 
     The Company was previously incorporated under the laws of Ontario, Canada
and on August 1, 1996 changed its name from Petersburg Long Distance Inc. to PLD
Telekom Inc. (PLD). Effective February 28, 1997, PLD 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.
 
(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, 1997
and 1996, the Company's cash equivalents consist of term deposits of
approximately $7.2 million and $4.2 million, respectively.
 
  (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, 1997 and 1996, the Company's
investments which are held in escrow consist of U.S. Treasury Bonds with a
carrying value of $33.9 million and $41.0 million, respectively, and have been
classified as available-for-sale. In accordance with SFAS 115, the Company
carries their 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 (1997 -- maturing on January 7, 1998 and 1996 --
maturing on January 5, 1997), the carrying value of these investments
approximates its fair market value at December 31, 1997 and 1996.
 
                                       F-8
<PAGE>   124
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (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
</TABLE>
 
     Interest cost incurred during the period of construction of property and
equipment is capitalized. The interest cost capitalized in 1997 amounted to
$927,791.
 
  (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.
 
  (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-9
<PAGE>   125
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (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
 
     The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," on December 31, 1997. SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS") and supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share." SFAS No. 128 also requires dual presentation of basic and
diluted EPS for complex capital structures on the face of the consolidated
statements of operations. Basic 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. Per share amounts for 1996 and 1995 have been
retroactively restated to give effect to SFAS 128 and were not different from
EPS measured under APB No. 15.
 
     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, 1995, 1996 and 1997.
 
     The Company had potentially dilutive common stock equivalents of 1,293,000,
135,000 and 150,000 for the years ended December 31, 1997, 1996 and 1995,
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
 
     Prior to January 1, 1996, the Company accounted for its equity compensation
plan in accordance with the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense was recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of 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 method, as defined in SFAS 123, had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure required by SFAS 123.
 
                                      F-10
<PAGE>   126
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (n) 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 recognized 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.
 
  (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, 1997 include a 60% equity
interest in PeterStar Company Limited ("PeterStar"); a 50% equity interest in
BECET International ("BECET"); and an approximate 80% equity interest in
Technocom Limited ("Technocom"), which holds an approximate 49% equity interest
in Teleport-TP ("Teleport-TP"). 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 granted a new
license to provide these services for a further ten years. The license was
reissued in June 1996 and sets the maximum number of lines which PeterStar may
have at 106,000 and requires that 74,200 lines be introduced by June 1999. At
December 31, 1997, PeterStar had 114,774 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 considerations have 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.
 
  (b) BECET
 
     BECET 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 BECET 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 BECET, 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. In 1995, the Company provided such financing in the form of a
convertible note (see note 5(b)).
 
                                      F-11
<PAGE>   127
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (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 $6.0 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).
 
     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 million or, at the holder'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 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).
 
     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
                                      F-12
<PAGE>   128
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
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 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 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. The consolidation of Teleport-TP's balance sheet at December
31, 1996 is summarized as follows:
 
<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Cash.................................................       $    70
Other current assets.................................         4,386
Current liabilities..................................        (1,526)
Equipment under capital lease, net...................         7,415
Other property, plant and equipment, net.............           622
Other assets.........................................           655
Capital lease obligation to Technocom................        (4,153)
Due to Technocom.....................................        (3,468)
Due to related parties...............................        (3,405)
Minority interest....................................          (411)
Telecommunications licenses, net of accumulated
  amortization of $4,005.............................        25,595
                                                            -------
          Carrying value of investment in Teleport-TP
            prior to consolidation...................       $25,780
                                                            =======
</TABLE>
 
                                      F-13
<PAGE>   129
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Condensed financial information of Teleport-TP for the years ended December
31, 1996 and 1995 is as follows:
 
<TABLE>
<CAPTION>
                                                            1996       1995
                                                           -------    -------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Telecommunications revenues..............................  $11,104    $ 7,070
Cost of sales............................................    6,534      2,083
                                                           -------    -------
          Gross profit...................................    4,570      4,987
                                                           -------    -------
Operating expenses:
  General and administrative.............................    2,617      1,606
  Other taxes............................................      592         --
  Depreciation of assets under capital lease.............    1,016        570
  Other depreciation and amortization....................      200        762
                                                           -------    -------
                                                             4,425      2,938
                                                           -------    -------
          Operating income...............................      145      2,049
Interest on capital lease................................     (531)    (1,434)
Other interest and financing charges, net................      251       (343)
                                                           -------    -------
          Earnings/(loss) before income taxes............     (135)       272
Income taxes.............................................       --       (335)
                                                           -------    -------
          Net loss.......................................  $  (135)   $   (63)
Technocom's interest therein.............................      (75)       (27)
Amortization of excess purchase price....................   (2,477)    (1,528)
                                                           -------    -------
          Share of Teleport-TP loss......................  $(2,552)   $(1,555)
                                                           =======    =======
</TABLE>
 
     Teleport-TP's revenues for the years ended December 31, 1996 and 1995,
include sales to its minority shareholder of $4.6 million and $5.0 million,
respectively, 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) Yellow Pages
 
     On April 26, 1995 the Company, through NWE Cyprus, acquired all the
outstanding shares of Yellow Pages, a company incorporated in the Republic of
Cyprus, for consideration of 368,820 common shares of the Company valued at $1.9
million, plus acquisition costs of $244,000. Yellow Pages publishes a Yellow
Pages
 
                                      F-14
<PAGE>   130
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
directory and owns a database of Russian and foreign businesses in St.
Petersburg. Yellow Pages' results of operations are included in the consolidated
financial statements from the date of acquisition.
 
     The acquisition has been accounted for by the purchase method and
substantially all of the consideration was allocated to goodwill.
 
(4) PROPERTY AND EQUIPMENT
 
     Property and equipment at December 31, 1997 and 1996 consist of the
following:
 
<TABLE>
<CAPTION>
                                                           1997        1996
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Telecommunications equipment:
  Installed............................................  $123,902    $ 80,291
  Uninstalled..........................................    10,396       3,677
Buildings..............................................     5,434       3,194
Office furniture and equipment (including computer
  equipment)...........................................     8,054       6,538
Leasehold improvements.................................     6,082       4,443
Advances to equipment suppliers........................     4,252       7,999
                                                         --------    --------
          Total property and equipment.................   158,120     106,142
Less: accumulated depreciation.........................   (23,122)    (13,103)
                                                         --------    --------
          Property and equipment, net..................  $134,998    $ 93,039
                                                         ========    ========
</TABLE>
 
     Property and equipment includes telecommunications equipment with a cost of
$16.5 million which has been pledged under the terms of the long-term
installment agreements (see note 9).
 
(5) OTHER INVESTMENTS
 
     Other investments at December 31, 1997 and 1996 consist of the following:
 
<TABLE>
<CAPTION>
                                                             1997      1996
                                                            ------    -------
                                                             (IN THOUSANDS)
<S>                                                         <C>       <C>
Investment in St. Petersburg Intercity & International
  Telephone, at cost......................................  $   --    $16,179
Investment in Monogram Finance Group Limited..............   3,000      3,000
Equity investment in MTR-Sviaz............................   3,128      4,588
Equity investment in Rosh Telecom.........................     542        327
Investment in Gorizont-RT, at cost........................     224         --
Other investments, at cost................................     142         --
                                                            ------    -------
          Total...........................................  $7,036    $24,094
                                                            ======    =======
</TABLE>
 
  (a) 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. The gain of $1.0 million is included in gain on disposal of
investments and property and equipment on the consolidated statement of
operations.
 
                                      F-15
<PAGE>   131
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (b) Investment in Monogram Finance Group Limited
 
     During the year ended December 31, 1995, the Company advanced $3.0 million
to Monogram Finance Group Limited ("Monogram") in exchange for a convertible
promissory note due on February 20, 2000. The note is convertible into common
shares of Monogram at any time prior to February 20, 2000 at the then current
fair market price of the shares.
 
  (c) 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 1997 and
1996, Technocom leased telecommunications equipment and access rights with a net
book value of $4.7 million and $5.2 million, respectively, to MTR-Sviaz under
finance leases. For the years ended December 31, 1997 and 1996, the Company
recorded finance lease income of $2.0 million and $872,000, respectively,
related to these leases. At December 31, 1997 and 1996, the investment in
MTR-Sviaz is composed of a finance lease receivable of $4.5 million and $5.0
million, offset by the Company's share of losses of MTR-Sviaz of $1.4 million
and $427,000, respectively.
 
     Future minimum lease payments receivable from MTR-Sviaz, by year and in the
aggregate, are as follows:
 
<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                             --------------
<S>                                                          <C>
1998.......................................................      $2,530
1999.......................................................       2,530
2000.......................................................       1,704
2001.......................................................         547
2002.......................................................         547
Thereafter.................................................       1,958
                                                                 ------
          Total minimum lease payments.....................       9,816
Amounts representing interest..............................       5,324
                                                                 ------
  Present value of minimum lease payments..................      $4,492
                                                                 ======
</TABLE>
 
(6) OTHER ASSETS
 
     Other assets at December 31, 1997 and 1996 consist of the following:
 
<TABLE>
<CAPTION>
                                                            1997       1996
                                                           -------    -------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Goodwill, net of accumulated amortization of $574 and
  $359...................................................  $12,709      1,796
Deferred financing costs, net of accumulated amortization
  of $1,836 and $684.....................................    7,811      8,540
Deferred charges.........................................      861        700
Other....................................................    4,384      3,922
                                                           -------    -------
                                                           $25,765    $14,958
                                                           =======    =======
</TABLE>
 
                                      F-16
<PAGE>   132
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(7) CASH AND CASH EQUIVALENTS AND BANK INDEBTEDNESS
 
     The Company's cash and cash equivalents at December 31, 1997 and 1996
consist of the following:
 
<TABLE>
<CAPTION>
                                                            1997       1996
                                                           -------    -------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Cash and cash equivalents on deposit:
  In Russia and Kazakhstan...............................  $ 7,611    $ 5,210
  Outside Russia and Kazakhstan..........................    9,645     10,935
Term deposits (interest bearing), restricted to secure
  bank loan of Technocom.................................       --      9,000
Term deposits (interest bearing), restricted to secure
  overdraft balances and accounts payable of Technocom...       --     15,529
                                                           -------    -------
                                                           $17,256    $40,674
                                                           =======    =======
</TABLE>
 
     As at December 31, 1997 and 1996, Technocom has overdraft balances of $-0-
and $6.8 million and demand bank loans of $-0- and $9.0 million (bearing
interest at 5.8125%). The demand bank loans were secured by term deposits in the
same amount held at the same bank.
 
     Technocom has entered into bank guarantees in connection with certain of
its telecommunications equipment supplier financing agreements. The amount of
the guarantees reduces automatically in accordance with installments paid. The
amounts outstanding as of December 31, 1997 under these supplier financing
agreements secured by bank guarantees are approximately $3.6 million (see note
9).
 
(8) SHORT-TERM BORROWINGS
 
     The Company's short-term borrowings at December 31, 1997 and 1996 consist
of the following:
 
<TABLE>
<CAPTION>
                                                           1997        1996
                                                          -------    --------
                                                            (IN THOUSANDS)
<S>                                                       <C>        <C>
12% Revolving Credit Notes..............................  $15,420          --
Note payable............................................    4,000          --
Bank loan facility......................................      900          --
                                                          -------    --------
                                                          $20,320          --
                                                          =======    ========
</TABLE>
 
  (a) 12% Revolving Credit Notes
 
     In November 1997, the Company issued $12.4 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 B Notes are
secured by 28 of the 59 Technocom ordinary shares acquired (see note 3(c)).
 
     Both the Series A and B Notes bear interest at an annual rate of 12%,
payable monthly in cash. This interest rate increases to 15% if the Company has
not raised $20 million in additional equity by May 31, 1998. The Series A and
Series B Notes are required to be amortized starting in July 1998. The Series B
Notes, whose original principal amount is $3.1 million, are due in full on
September 30, 1998, and the Series A Notes, in the original principal amount of
$12.3 million, are due in full on December 31, 1998. 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"). These warrants have been valued at
$423,000 and will be amortized over the term of the revolving credit notes.
                                      F-17
<PAGE>   133
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company may become obligated to issue additional warrants to the
holders in the event that certain amortization payments are not made in
accordance with the agreement or if the Notes are not paid in full at maturity.
Additionally, in the event that the Notes are not paid in full at maturity, all
warrants issued and issuable carry an exercise price of $.01 per share.
 
  (b) Note Payable
 
     Note payable at December 31, 1997 consists of a promissory note issued to
Scientific Atlanta, Inc. ("Scientific Atlanta") on June 10, 1997. The promissory
note, in settlement of equipment and services, is due on June 10, 1998. This
note was discounted to West Merchant Bank at a rate of approximately 7.84%. The
Company's weighted average interest rate for the note payable is approximately
8.45%.
 
  (c) 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 is charged on borrowed amounts at three-month LIBOR plus
2.5% per annum.
 
     The amount borrowed on the loan facility at December 31, 1997 was $900,000.
 
(9) LONG-TERM DEBT
 
     The Company's long-term debt at December 31, 1997 and 1996 consists of the
following:
 
<TABLE>
<CAPTION>
                                                           1997        1996
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
14% Senior Discount Notes..............................  $ 95,714    $ 81,454
9% Convertible Subordinated Notes......................    26,500      26,500
Supplier financing.....................................    11,302          --
                                                         --------    --------
          Total........................................  $133,516    $107,954
                                                         ========    ========
</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 Warrants to purchase a
total of 4,182,000 shares of common stock 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 123,000 Units were issued at a discount for gross proceeds of $87.7
million, of which $13.6 million was allocated to the Warrants and $74.1 million
was allocated to the Senior Notes for accounting purposes. The Senior Notes have
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 require the Company to raise additional
equity of at least $20.0 million by May 31, 1998. Failure to raise additional
equity will cause the interest rate on the Senior Notes to increase to 14.5%.
 
                                      F-18
<PAGE>   134
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     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 results 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 are not registered. Additional interest ceases
to accrue when the required registration statements become effective.
 
     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
PeterStar, WTC, and Yellow Pages), WTC (which holds the Company's interest in
BECET), BCL, a wholly-owned special purpose leasing subsidiary incorporated in
Cyprus, 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, 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, in both cases based upon the Company's experience in operating
under the terms of the Indentures since they were first executed in June 1996.
 
     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.
                                      F-19
<PAGE>   135
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     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.
 
     At December 31, 1997 and 1996, the fair value of the Convertible Notes and
Senior Notes approximates their carrying value.
 
  (b) Supplier Financing
 
     Amounts payable under the terms of the long-term installment purchase
agreements are as follows (see notes 4 and 7):
 
<TABLE>
<CAPTION>
YEAR                                                 AMOUNT
----                                             --------------
                                                 (IN THOUSANDS)
<S>                                              <C>
1999...........................................     $ 4,616
2000...........................................       3,864
2001...........................................       2,795
2002...........................................       2,361
Thereafter.....................................          --
                                                    -------
                                                    $13,636
Less: amounts representing interest............       2,334
                                                    -------
                                                    $11,302
                                                    =======
</TABLE>
 
     The above amounts have been calculated using interest rates of 8.0% 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, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                    NUMBER OF
                                                     SHARES      1997      1996
                                                    ---------    ----      ----
                                                                 (IN THOUSANDS)
<S>                                                 <C>          <C>       <C>
Series II.........................................   405,217     $ 4       $--
Series III........................................    41,667      --        31
                                                                 ---       ---
                                                                 $ 4       $31
                                                                 ===       ===
</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
consolidated financial statements.
 
                                      F-20
<PAGE>   136
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     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.
 
  (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 outstanding
Warrants and 3,840,580 common shares on conversion of outstanding Convertible
Notes (see note 9). In addition, at December 31, 1997, the Company has 500,000
Warrants outstanding to purchase common shares of the Company at a
weighted-average exercise price of $8.11, of which 250,000 Warrants at an
exercise price of Cdn.$11.31 were granted to Cable & Wireless in 1994 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. Warrants expire
five years after the date of grant.
 
     In connection with the issuance of the Series A and Series B Notes (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
and may become obligated to issue additional warrants to the Travelers Parties
in the event that certain amortization payments are not made, or if the Series A
or Series B Notes are not paid in full at their maturity.
 
     At the end of March of 1998, in connection with the Consent Solicitation
(see note 9(a)), the Company will issue 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.
 
(11) INCOME TAXES
 
     The geographic components of loss before income taxes and minority interest
are as follows:
 
<TABLE>
<CAPTION>
                                               1997        1996        1995
                                             --------    --------    --------
                                                      (IN THOUSANDS)
<S>                                          <C>         <C>         <C>
United States..............................  $(35,163)   $     --    $     --
Canada.....................................        --     (20,829)    (16,747)
Russia and Kazakhstan......................    31,735      14,558       3,307
                                             --------    --------    --------
                                             $ (3,428)   $ (6,271)   $(13,440)
                                             ========    ========    ========
</TABLE>
 
     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 onwards) and
 
                                      F-21
<PAGE>   137
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Canadian (44% -- January 1, 1995 to February 27, 1997) Federal and
state/provincial statutory tax rates as follows:
 
<TABLE>
<CAPTION>
                                                 1997       1996       1995
                                                -------    -------    -------
                                                       (IN THOUSANDS)
<S>                                             <C>        <C>        <C>
Provision for income taxes at statutory
  rates.......................................  $(1,166)   $(2,760)   $(5,913)
Add/(deduct) the tax effect of:
  Non-deductible amortization of licenses and
     goodwill.................................    2,561      3,238      2,720
  Other non-deductible expenses...............    2,273      1,753      1,010
  Concessions on capital expenditures.........   (3,854)    (1,000)        --
  Differences in Russian and Kazakh statutory
     tax rates................................     (210)    (1,696)      (350)
  Change in valuation allowance related to
     deferred tax assets......................    8,135      4,134      4,023
                                                -------    -------    -------
       Provision for income tax...............  $ 7,739    $ 3,669    $ 1,490
                                                =======    =======    =======
</TABLE>
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
 
<TABLE>
<CAPTION>
                                                           1997        1996
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Deferred tax assets:
  Share issue costs....................................  $     --    $  2,150
  Operating loss carryforwards.........................     8,929      16,200
  Capital loss carryforwards...........................        --       8,400
  Expenses not yet deducted for Russian and Kazakh tax
     purposes..........................................    18,646       3,760
                                                         --------    --------
                                                           27,575      30,510
Less: valuation allowance..............................    (8,246)    (29,350)
                                                         --------    --------
       Net deferred tax assets.........................    19,329       1,160
Deferred tax liabilities:
       Debt issue costs................................    (1,160)     (1,160)
       Expenses not currently deducted for book
          purposes.....................................      (705)         --
       Tax on revenues not yet realized for Russian tax
          purposes.....................................   (17,464)         --
                                                         --------    --------
Deferred tax liabilities...............................   (19,329)     (1,160)
                                                         --------    --------
                                                         $     --    $     --
                                                         ========    ========
</TABLE>
 
     At December 31, 1997, the Company had operating loss carryforwards for
United States (U.S.) federal income tax purposes of approximately $26.3 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 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
 
                                      F-22
<PAGE>   138
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
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.
 
     The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $2.51, $2.11 and $2.31, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 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%;
1995 -- risk-free interest rate of 6.3%, expected life of five years and
expected volatility of 30%.
 
     The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. 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 $22.9 million ($0.71 per share),
$13.6 million ($0.43 per share) and $16.0 million ($0.51 per share) for the
years ended December 31, 1997, 1996 and 1995, respectively. The pro forma loss
for the year reflects only options granted in 1997, 1996 and 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.
 
                                      F-23
<PAGE>   139
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Changes in stock options outstanding are as follows:
 
<TABLE>
<CAPTION>
                                                                   WEIGHTED AVERAGE
                                               NUMBER OF SHARES    EXERCISE PRICES
                                               ----------------    ----------------
<S>                                            <C>                 <C>
Outstanding at December 31, 1994.............       774,500             $7.83
Granted......................................       610,000             $5.96
Exercised....................................       (16,000)            $4.07
Canceled.....................................      (387,000)            $8.57
                                                  ---------             -----
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
                                                  =========             =====
</TABLE>
 
     At December 31, 1996 and 1995, the number of options exercisable was
382,500 and 371,500 and the weighted-average exercise price of those options was
$7.92 and $7.55, respectively.
 
     The following table summarizes information about the stock options
outstanding at December 31, 1997:
 
<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                  ---------------------------------------    ------------------------
                                  WEIGHTED-
                    NUMBER         AVERAGE      WEIGHTED       NUMBER       WEIGHTED-
   RANGE OF       OUTSTANDING     REMAINING      AVERAGE     EXERCISABLE     AVERAGE
   EXERCISE           AT         CONTRACTUAL    EXERCISE         AT         EXERCISE
    PRICES         12/31/97         LIFE          PRICE       12/31/97        PRICE
   --------       -----------    -----------    ---------    -----------    ---------
<C>               <C>            <S>            <C>          <C>            <C>
$ 5.06 -  6.00     1,453,334      8.4 years      $ 5.30         688,332      $ 5.45
 6.10 -  6.69..      526,500     3.3               6.28         308,499        6.27
 7.77 -  8.02..      643,000     3.3               7.99         251,000        7.99
10.12 - 11.38..      147,500     1.0              10.92         147,500       10.92
                   ---------                                  ---------
                   2,770,334                                  1,395,331
                   =========                                  =========
</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 $3.4
million and $3.0 million during 1997 and 1996, respectively. The amounts are
recorded in the consolidated statements of operations as telecommunications
revenues and direct costs.
 
     (b) Direct costs for the years ended December 31, 1997, 1996 and 1995
include $4.2 million, $3.3 million and $1.8 million, respectively, paid to the
other shareholder of BECET in relation to the carriage of traffic over the
public telephone network.
 
     (c) 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(c)), $1.6 million and $3.0 million due from a minority shareholder
of PeterStar under short-term and long-term loans, respectively, and $2.2
million due from a company controlled by a minority shareholder of Technocom for
telecommunications services.
 
                                      F-24
<PAGE>   140
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Amounts due from related parties at December 31, 1996 include $1.1 million
principal and interest due from MTR-Sviaz in relation to a finance lease (see
note 5(c)), $600,000 due from a minority shareholder of PeterStar under a
short-term loan and $2.5 million due from a company controlled by a minority
shareholder of Technocom for telecommunications services.
 
     (d) Amounts due to related parties at December 31, 1997 include a loan due
to the minority shareholder of Teleport-TP in the amount of $477,000, 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, carrier charges of
$817,000 due to the other shareholder of BECET, a loan due to a company
controlled by a minority shareholder of Technocom in the amount of $336,000,
payments due to MTR-Sviaz for telephone services and connection charges in the
amount of $292,000, 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 $204,000.
 
     Amounts due to related parties at December 31, 1996 include a loan due to
the minority shareholder of Teleport-TP in the amount of $477,000, trade
payables of Teleport-TP in the amount of $2.9 million due to a company
controlled by one of the minority shareholders of Technocom, carrier charges of
$234,000 due to the other shareholder of BECET and a loan due to a company
controlled by a minority shareholder of Technocom in the amount of $336,000.
 
     In 1997, Technocom paid a total of $220,833 pursuant to two management
contracts with its two minority shareholders for provision of the services of
two directors of Technocom.
 
     (e) The Company has guaranteed telephone billing system lease payments of a
shareholder of PeterStar totaling $2.5 million. Lease payments of $124,000 are
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 $373,000 and $871,000 remaining under the lease as of December 31,
1997 and 1996 are included in other current liabilities.
 
     (f) General and administrative expenses for the years ended December 31,
1997 and 1996 include consulting fees of $1.7 million and $300,000,
respectively, charged by a minority shareholder of PeterStar.
 
     (g) See also notes 3(c), (d), (e) and 5(c).
 
(14) COMMITMENTS AND CONTINGENCIES
 
  (a) Intercompany
 
     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.
 
  (b) 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 and BCL have or have applied for all the necessary
licenses, failure to receive the remaining licenses could result in fines and
penalties, which the Company does not believe will be material.
 
                                      F-25
<PAGE>   141
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (c) Russian Taxation
 
     Certain of the Company's 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 is not determinable. However, the Company does
not believe this would have a material adverse effect on the financial position
or results of operations of the Company.
 
  (d) Purchase Commitments
 
     At December 31, 1997, Technocom and PeterStar have commitments of
approximately $943,000 and $11.4 million, respectively, related to the
acquisition of telecommunications equipment. The PeterStar supply contract
provides for financing of the entire amount over approximately five years.
 
  (e) Line Rental
 
     While it has not had to do so historically, PeterStar anticipates that it
will have to begin paying local line rental charges to the Petersburg Telephone
System in 1998. The exact fee, and the date from which charges will be levied,
have yet to be determined, but the Company does not believe that such payments
will have a material adverse effect on the Company's financial position or
results of operations.
 
  (f) Transponder Capacity
 
     Teleport-TP currently utilizes capacity on three Intelsat satellites for
the provision of its international and domestic long distance services, pursuant
to a fifteen year contract signed with Intelsat in January 1993. The agreement
requires quarterly payments of $616,500 for the remainder of its term.
 
(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>
                                               1997        1996        1995
                                             --------    --------    --------
                                                      (IN THOUSANDS)
<S>                                          <C>         <C>         <C>
Net loss for the year, as reported.........  $(20,566)   $(12,461)   $(15,481)
Non-cash interest on Convertible Notes.....      (508)       (252)         --
                                             --------    --------    --------
Net loss for the year under Canadian
  GAAP.....................................  $(21,074)   $(12,713)   $(15,481)
                                             ========    ========    ========
</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, 1997 and
1996 would amount to $120.3 million and $94.3 million, respectively, and
shareholders' equity would amount to $140.4 million and $151.6 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.
 
                                      F-26
<PAGE>   142
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     (b) The following non-cash investing and financing activities would be
included in the consolidated statements of cash flows under Canadian GAAP.
 
<TABLE>
<CAPTION>
                                                1997        1996       1995
                                              --------    --------    -------
                                                      (IN THOUSANDS)
<S>                                           <C>         <C>         <C>
Investing:
  Investment in Yellow Pages................  $     --    $     --    $(1,900)
  Investment in BECET.......................        --          --         --
  Capital expenditures......................   (11,302)         --         --
  Investments in Technocom..................    (7,681)         --         --
Financing:
  Issue of common shares....................     7,681          --      6,786
  Conversion of preferred shares............        --          --     (4,886)
  Supplier financing........................    11,302          --         --
  Recapitalization of PeterStar.............     4,012          --         --
  Due from related party....................    (4,012)         --         --
</TABLE>
 
(16) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     The following is a summary of selected quarterly financial data for the
years ended December 31, 1997 and 1996:
 
<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 14(a)).
 
<TABLE>
<CAPTION>
                                               1996 QUARTERS ENDED
                                --------------------------------------------------
                                MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                --------    -------    ------------    -----------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                             <C>         <C>        <C>             <C>
Operating revenues............  $10,184     $13,478      $17,011         $21,293
Operating income/(loss).......     (987)      1,897        1,782             175
Interest and other income.....      855       1,075        1,263           1,666
Interest expense..............     (296)     (1,683)      (3,861)         (4,133)
Income taxes..................      828         526        1,764             551
Minority interest.............       97         434        1,118             872
Net loss for the period.......   (1,623)       (808)      (4,758)         (5,272)
                                =======     =======      =======         =======
Net loss per common share.....  $ (0.05)    $ (0.03)     $ (0.15)        $ (0.16)
                                =======     =======      =======         =======
</TABLE>
 
                                      F-27
<PAGE>   143
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Operating revenues and direct costs in the fourth quarter of 1996 include
$3.0 million in connection with a barter agreement with an indirect minority
shareholder of PeterStar (see note 13(a)).
 
(17) OPERATIONS BY GEOGRAPHIC AREA
 
     A summary of the Company's operations by geographic region is as follows:
 
   
<TABLE>
<CAPTION>
                                                                1997      1996      1995
                                                              --------   -------   -------
                                                                     (IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Revenues:
  Russia....................................................  $ 84,412    42,661    19,780
  Kazakhstan................................................    30,012    19,305     9,340
  North America.............................................        --        --        --
                                                              --------   -------   -------
          Total.............................................  $114,424    61,966    29,120
                                                              ========   =======   =======
Income/(loss) before income taxes and minority interest
  Russia....................................................  $ 21,603     9,615     3,943
  Kazakhstan................................................    10,132     4,943      (636)
  North America.............................................   (35,163)  (20,829)  (16,747)
                                                              --------   -------   -------
          Total.............................................  $ (3,428)   (6,271)  (13,440)
                                                              ========   =======   =======
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                1997      1996
                                                              --------   -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>       
Identifiable assets:
  Russia....................................................  $216,107   170,139
  Kazakhstan................................................    58,249    54,784
  North America.............................................    61,230    81,434
                                                              --------   -------
          Total.............................................  $335,586   306,357
                                                              ========   =======
</TABLE>
    
 
(18) CONSOLIDATING FINANCIAL INFORMATION
 
     NWE Cyprus, WTC, BCL, PLD Asset Leasing Limited ("PLD Asset Leasing") and
PLD Capital Limited ("PLD Capital") (collectively, the "Subsidiary Guarantors")
have guaranteed the Senior Notes and the Convertible Notes described in note 9.
The following consolidating balance sheets as of December 31, 1997 and 1996 and
consolidating statements of operations and cash flows for each of the years in
the three-year period ended December 31, 1997, depict the financial position and
results of operations and cash flows for the Company, presented using the equity
method of accounting for its subsidiaries, the combined Subsidiary Guarantors,
presented using the equity method of accounting, and the combined non-guarantor
subsidiaries together with consolidating eliminations to arrive at the
consolidated balance sheets, statements of operations and cash flows of the
Company and its subsidiaries. Each of the Subsidiary Guarantors are wholly owned
and their guarantees are full, unconditional and joint and several. Ownership of
all other significant subsidiaries and their holdings are more fully described
in note 3.
 
     NWE Cyprus and WTC are holding companies and have no operations independent
of their subsidiaries. PLD Asset Leasing and PLD Capital are special purpose
holding companies incorporated in Cyprus which lease equipment to non-guarantor
subsidiaries. Separate financial statements for the Subsidiary Guarantors are
not presented because they are not material to investors.
 
     There can be no assurance that guarantees by the Subsidiary Guarantors can
be enforced easily, if at all. Each of such companies are incorporated in
jurisdictions which are outside the United States. Persons seeking to enforce
those guarantees may therefore need to do so outside the United States. The need
to bring enforcement actions in such other jurisdictions, and to comply with the
laws of those jurisdictions in relation thereto, may significantly complicate,
delay or limit enforcement of such guarantees.
 
                                      F-28
<PAGE>   144
                                PLD TELEKOM INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     In addition, the ability to enforce an "upstream" guarantee (or guarantee
by a subsidiary of a parent's obligations) is subject to some uncertainty not
only in the United States but also other applicable jurisdictions such as Cyprus
and Russia, and may well be subject to similar uncertainty in other
jurisdictions where such guarantee may be sought to be enforced against any
Subsidiary Guarantor. Efforts have been made to minimize the effect of any
possible invalidity of the guarantees by limiting the extent to which they may
be enforced against a Subsidiary Guarantor to such amounts which will not render
the guarantees void, voidable or unenforceable, and, in the case of PLD Asset
Leasing and PLD Capital Limited, by limiting the activities of each such
subsidiary to its leasing, selling or investing operations and in the case of
PLD Asset Leasing, PLD Capital and NWE Cyprus by limiting the activities of each
such subsidiary to incur indebtedness. However, there can be no assurance that
such efforts have been successful.
 
     Payments under the guarantee given by BCL may require a license from the
Russian Central Bank and may also (to the extent such payments are considered to
be interest) be subject to Russian withholding tax. While under current law
payments under the guarantees by PLD Asset Leasing, PLD Capital, WTC and NWE
Cyprus currently in existence may be made without the need for licenses or
withholding of tax, there can be no assurance that PLD Asset Leasing, PLD
Capital, WTC or NWE Cyprus will not encounter such problems hereafter.
 
     Finally, the ability of a foreign claimant to enforce a judgment or
arbitral award obtained in respect of a guarantee outside those jurisdictions in
which the Subsidiary Guarantors are incorporated may be limited. For example,
some jurisdictions (i.e., Russia) generally only recognize foreign judgments or
arbitral awards pursuant to bilateral or multilateral treaty arrangements. In
addition, the local courts may have limited experience in the enforcement of
foreign judgments. The possible need to re-litigate in the jurisdiction in which
a Subsidiary Guarantor is located a judgment or arbitral award obtained
elsewhere in respect of its guarantee may significantly delay the enforcement of
such judgment or award.
 
     There are no restrictions in the charter or other foundation documents of
the Subsidiary Guarantors which restrict their ability to pay dividends, and
each of such companies is a wholly owned, direct or indirect, subsidiary of the
Company. However, each such company's ability to pay dividends may be affected,
from time to time, 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 and (iii) exchange
controls and currency repatriation restrictions in effect in the jurisdictions
in which they operate.
 
                                      F-29
<PAGE>   145
 
                            CONSOLIDATING SCHEDULES
 
                          CONSOLIDATING BALANCE SHEET
                            AS OF DECEMBER 31, 1997
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
<TABLE>
<CAPTION>
                                                                      NON-
                                                     SUBSIDIARY    GUARANTOR
                                                     GUARANTORS   SUBSIDIARIES
                                           PARENT    (COMBINED)    (COMBINED)    ELIMINATIONS   CONSOLIDATED
                                           -------   ----------   ------------   ------------   ------------
<S>                                        <C>       <C>          <C>            <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents..............    5,513        241         11,502             --        17,256
  Trade receivables, net of allowance....       --      1,239         15,839             --        17,078
  Other receivables and prepaids.........    1,220        168          7,227             --         8,615
  Inventory..............................       --        214          2,588             --         2,802
  Due from related parties...............    1,600         --          4,720             --         6,320
                                           -------    -------        -------       --------       -------
          Total current assets...........    8,333      1,862         41,876             --        52,071
                                           -------    -------        -------       --------       -------
Escrow funds.............................   33,868         --             --             --        33,868
Intercompany investments and advances....  210,844    148,295            610       (359,749)           --
Property and equipment, net..............      191      6,181        129,780         (1,154)      134,998
Telecommunications licenses, net of
  amortization...........................       --         --          2,627         76,210        78,837
Due from related parties.................    3,011         --             --             --         3,011
Other investments........................    3,000      7,384          4,036         (7,384)        7,036
Other assets.............................   11,971      2,846            803         10,145        25,765
                                           -------    -------        -------       --------       -------
          Total assets...................  271,218    166,568        179,732       (281,932)      335,586
                                           -------    -------        -------       --------       -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank indebtedness......................       --         --             --                           --
  Short-term borrowings..................   19,420         --            900             --        20,320
  Accounts payable.......................    1,224      1,861         10,512             --        13,597
  Accrued liabilities....................      371         34          5,495           (150)        5,750
  Due to related parties.................       --         --          6,394         (1,058)        5,336
  Deferred revenues......................       --         --          3,128             --         3,128
  Customer deposits......................       --         --          3,070             --         3,070
  Other current liabilities..............      758        283          1,258            (43)        2,256
                                           -------    -------        -------       --------       -------
          Total current liabilities......   21,773      2,178         30,757         (1,251)       53,457
                                           -------    -------        -------       --------       -------
Long-term debt...........................  122,214         --         11,302             --       133,516
Intercompany payables....................       --     45,949         36,250        (82,199)           --
Minority interest........................       --         --             --         21,382        21,382
Commitments and contingencies
Shareholders' equity
  Preferred stock........................        4         --         40,000        (40,000)            4
  Common stock...........................      333    125,640         33,908       (159,548)          333
  Additional paid-in capital.............  204,007         --             --             --       204,007
  Accumulated deficit....................  (77,113)    (7,199)        27,515        (20,316)      (77,113)
                                           -------    -------        -------       --------       -------
          Total shareholders' equity.....  127,231    118,441        101,423       (219,864)      127,231
                                           -------    -------        -------       --------       -------
          Total liabilities and
            shareholders' equity.........  271,218    166,568        179,732       (281,932)      335,586
                                           =======    =======        =======       ========       =======
</TABLE>
    
 
                                      F-30
<PAGE>   146
 
                            CONSOLIDATING SCHEDULES
 
                          CONSOLIDATING BALANCE SHEET
                            AS OF DECEMBER 31, 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                    NON-
                                                  SUBSIDIARY     GUARANTOR
                                                  GUARANTORS    SUBSIDIARIES
                                        PARENT    (COMBINED)     (COMBINED)    ELIMINATIONS   CONSOLIDATED
                                       --------   -----------   ------------   ------------   ------------
<S>                                    <C>        <C>           <C>            <C>            <C>
                                                  ASSETS
Current assets:
  Cash and cash equivalents..........     7,271         331        33,072              --        40,674
  Trade receivables, net of
     allowance.......................        --         880         9,648              --        10,528
  Other receivables and prepaids.....       126         155         3,241              --         3,522
  Inventory..........................        --          70         1,770              --         1,840
  Due from related parties...........       600          --         3,808              --         4,408
                                       --------    --------        ------        --------       -------
          Total current assets.......     7,997       1,436        51,539              --        60,972
  Escrow funds.......................    40,984          --            --              --        40,984
  Intercompany investments and
     advances........................   170,813     116,606            82        (287,501)           --
  Property and equipment, net........       334       6,494        87,976          (1,765)       93,039
  Telecommunications licenses, net of
     amortization....................                               4,964          67,346        72,310
  Other investments..................    19,179       3,910         4,915          (3,910)       24,094
  Other assets.......................     8,561       1,814           895           3,688        14,958
                                       --------    --------        ------        --------       -------
          Total assets...............   247,868     130,260       150,371        (222,142)      306,357
                                       --------    --------        ------        --------       -------
 
                                   LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank indebtedness..................        --          --        15,829              --        15,829
  Short-term borrowings..............        --          --                            --            --
  Accounts payable...................       322       1,929        15,530              --        17,781
  Accrued liabilities................       523           7         2,596              --         3,126
  Due to related parties.............        --          --         4,039              --         4,039
  Deferred revenues..................        --          --         1,078              --         1,078
  Customer deposits..................        --          --         1,644              --         1,644
  Intercompany and other current
     liabilities.....................     1,115      12,658         2,183         (12,715)        3,241
                                       --------    --------        ------        --------       -------
          Total current
            liabilities..............     1,960      14,594        42,899         (12,715)       46,738
Long-term debt.......................   107,954          --            --              --       107,954
Intercompany payables................        --      10,745        39,953         (50,698)           --
Minority interest....................        --          --           638          13,073        13,711
Commitments and contingencies
Shareholders' equity
  Preferred stock....................        31          --        40,000         (40,000)           31
  Common stock.......................   180,878     125,640        20,392        (146,032)      180,878
  Additional paid-in capital.........    13,592          --            --                        13,592
  Accumulated deficit................   (56,547)    (20,719)        6,489          14,230       (56,547)
                                       --------    --------        ------        --------       -------
          Total shareholders'
            equity...................   137,954     104,921        66,881        (171,802)      137,954
                                       --------    --------        ------        --------       -------
          Total liabilities and
            shareholders' equity.....   247,868     130,260       150,371        (222,142)      306,357
                                       ========    ========        ======        ========       =======
</TABLE>
 
                                      F-31
<PAGE>   147
 
                     CONSOLIDATING STATEMENT OF OPERATIONS
 
                          YEAR ENDED DECEMBER 31, 1997
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                 NON-
                                              SUBSIDIARY     GUARANTOR
                                              GUARANTORS    SUBSIDIARIES
                                   PARENT     (COMBINED)     (COMBINED)     ELIMINATIONS    CONSOLIDATED
                                  --------    ----------    ------------    ------------    ------------
<S>                               <C>         <C>           <C>             <C>             <C>
Revenues:
  Telecommunications............  $     --       7,648        104,820              --         112,468
  Finance lease income..........        --         783          1,956            (783)          1,956
  Management fees...............     3,155          --          3,507          (6,662)             --
                                  --------      ------        -------         -------         -------
                                     3,155       8,431        110,283          (7,445)        114,424
Direct costs....................        --       2,623         36,563              --          39,186
                                  --------      ------        -------         -------         -------
          Gross profit..........     3,155       5,808         73,720          (7,445)         75,238
Operating expenses:
  General and administrative....     7,401       5,679         29,186          (3,550)         38,716
  Depreciation..................      (246)        812          9,867              --          10,433
  Amortization..................     2,973       4,914            334            (354)          7,867
  Management fees...............     8,845      (3,155)        (5,690)             --              --
  Taxes other than income
     taxes......................       618         602          4,984              --           6,204
                                  --------      ------        -------         -------         -------
          Total operating
            expenses............    19,591       8,852         38,681          (3,904)         63,220
          Operating
            income/(loss).......   (16,436)     (3,044)        35,039          (3,541)         12,018
Other income/(expense):
  Share of income/(loss) from
     equity investments, after
     amortization of licenses...     9,283      18,222           (537)        (27,505)           (537)
  Interest and other income.....     2,639          48            939             (12)          3,614
  Interest expense..............   (16,142)         (5)        (1,704)              5         (17,846)
  Amortization of deferred
     financing costs............    (1,152)         --             --              --          (1,152)
  Other.........................     1,242        (276)          (491)             --             475
          Loss before income
            taxes and minority
            interest............   (20,566)     14,945         33,246         (31,053)         (3,428)
Income taxes....................        --         426          7,356             (43)          7,739
                                  --------      ------        -------         -------         -------
          Loss before minority
            interest............   (20,566)     14,519         25,890         (31,010)        (11,167)
Minority interest...............        --          --           (639)         10,038           9,399
                                  --------      ------        -------         -------         -------
          Net loss..............  $(20,566)     14,519         26,529         (41,048)        (20,566)
                                  ========      ======        =======         =======         =======
</TABLE>
 
                                      F-32
<PAGE>   148
 
                     CONSOLIDATING STATEMENT OF OPERATIONS
 
                          YEAR ENDED DECEMBER 31, 1996
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 NON-
                                               SUBSIDIARY     GUARANTOR
                                               GUARANTORS    SUBSIDIARIES
                                    PARENT     (COMBINED)     (COMBINED)     ELIMINATIONS    CONSOLIDATED
                                   --------    ----------    ------------    ------------    ------------
<S>                                <C>         <C>           <C>             <C>             <C>
Revenues:
  Telecommunications.............  $     --       5,101         55,461              --          60,562
  Finance lease income...........        --          --          1,404              --           1,404
  Management fees................     2,085          --          4,230          (6,315)             --
                                   --------      ------         ------         -------         -------
                                      2,085       5,101         61,095          (6,315)         61,966
Direct costs.....................        --       2,103         19,606              --          21,709
                                   --------      ------         ------         -------         -------
       Gross profit..............     2,085       2,998         41,489          (6,315)         40,257
Operating expenses:
  General and administrative.....     3,575       1,588         18,756             872          24,791
  Depreciation...................        --         502          4,925            (201)          5,226
  Amortization...................        --       4,832             59              (8)          4,883
  Management fees................     4,230          --          2,085          (6,315)             --
  Taxes other than income
     taxes.......................        11         323          2,156              --           2,490
                                   --------      ------         ------         -------         -------
          Total operating
            expenses.............     7,816       7,245         27,981          (5,652)         37,390
       Operating income/(loss)...    (5,731)     (4,247)        13,508            (663)          2,867
Other income/(expense):
  Share of income/(loss) from
     equity investments, after
     amortization of licenses....       861       8,443           (215)        (11,781)         (2,692)
  Interest and other income......     2,810         173          1,910             (34)          4,859
  Interest expense...............    (9,463)         --           (510)             --          (9,973)
  Amortization of deferred
     financing costs.............      (684)         --             --              --            (684)
  Other..........................      (254)         45           (429)            (10)           (648)
                                   --------      ------         ------         -------         -------
       Loss before income taxes
          and minority
          interest...............   (12,461)      4,414         14,264         (12,488)         (6,271)
Income taxes.....................        --         194          3,475              --           3,669
                                   --------      ------         ------         -------         -------
       Loss before minority
          interest...............   (12,461)      4,220         10,789         (12,488)         (9,940)
Minority interest................        --          --             19           2,502           2,521
                                   --------      ------         ------         -------         -------
       Net loss..................  $(12,461)      4,220         10,770         (14,990)        (12,461)
                                   ========      ======         ======         =======         =======
</TABLE>
 
                                      F-33
<PAGE>   149
 
                     CONSOLIDATING STATEMENT OF OPERATIONS
 
                          YEAR ENDED DECEMBER 31, 1995
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 NON-
                                               SUBSIDIARY     GUARANTOR
                                               GUARANTORS    SUBSIDIARIES
                                    PARENT     (COMBINED)     (COMBINED)     ELIMINATIONS    CONSOLIDATED
                                   --------    ----------    ------------    ------------    ------------
<S>                                <C>         <C>           <C>             <C>             <C>
Revenues:
  Telecommunications.............  $     --          --         27,686              --          27,686
  Finance lease income...........        --          --          1,434              --           1,434
  Management fees................     1,200          --          1,233          (2,433)             --
                                   --------      ------         ------          ------         -------
                                      1,200          --         30,353          (2,433)         29,120
Direct costs.....................        --          --         10,382              --          10,382
                                   --------      ------         ------          ------         -------
       Gross profit..............     1,200          --         19,971          (2,433)         18,738
Operating expenses:
  General and administrative.....     5,300          67         14,865          (2,064)         18,168
  Depreciation...................        --          --          3,837              --           3,837
  Amortization...................        --       4,606             53                           4,659
  Management fees................     3,003          --         (1,370)         (1,633)             --
  Taxes other than income
     taxes.......................        --          --          1,120             100           1,220
                                   --------      ------         ------          ------         -------
          Total operating
            expenses.............     8,303       4,673         18,505          (3,597)         27,884
       Operating income/(loss)...    (7,103)     (4,673)         1,466           1,164          (9,146)
Other income/(expense):
  Share of income/(loss) from
     equity investments, after
     amortization of licenses....    (4,563)     (1,691)           (27)          4,726          (1,555)
  Interest and other income......       435          --          1,631              --           2,066
  Interest expense...............      (526)         --           (431)             --            (957)
  Amortization of deferred
     financing costs.............        --          --             --              --              --
  Other..........................    (1,197)         --           (393)            232          (1,358)
  Provision for amounts due from
     a shareholder of
     PeterStar...................    (2,490)         --             --              --          (2,490)
                                   --------      ------         ------          ------         -------
       Loss before income taxes
          and minority
          interest...............   (15,444)     (6,364)         2,246           6,122         (13,440)
Income taxes.....................        37          --          1,453              --           1,490
                                   --------      ------         ------          ------         -------
       Loss before minority
          interest...............   (15,481)     (6,364)           793           6,122         (14,930)
Minority interest................        --          --             58             493             551
                                   --------      ------         ------          ------         -------
       Net loss..................  $(15,481)     (6,364)           735           5,629         (15,481)
                                   ========      ======         ======          ======         =======
</TABLE>
 
                                      F-34
<PAGE>   150
 
                     CONSOLIDATING STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                      NON-
                                                     SUBSIDIARY    GUARANTOR
                                                     GUARANTORS   SUBSIDIARIES
                                           PARENT    (COMBINED)    (COMBINED)    ELIMINATIONS   CONSOLIDATED
                                           -------   ----------   ------------   ------------   ------------
<S>                                        <C>       <C>          <C>            <C>            <C>
Net cash provided by/(used in) operating
  activities.............................  (11,731)   (11,468)       40,519         (6,527)        10,793
                                           -------    -------       -------        -------        -------
Cash flows from investing activities
  Escrow funds...........................    7,116         --            --             --          7,116
  Capital expenditures...................       --       (750)      (40,896)         2,656        (38,990)
  Proceeds on disposal of SPMMTS.........   17,180         --            --             --         17,180
  Investments in subsidiaries............  (33,211)    (7,111)           --         14,714        (25,608)
  Other..................................      302         --          (246)          (622)          (566)
                                           -------    -------       -------        -------        -------
     Net cash used in investing
       activities........................   (8,613)    (7,861)      (41,142)        16,748        (40,868)
                                           -------    -------       -------        -------        -------
Cash flows from financing activities
  Short term debt
     borrowings/(repayments).............       --         --       (14,929)         4,000        (10,929)
  Proceeds from notes....................   15,420         --            --             --         15,420
  Issuance of stock......................    1,739         --            --             --          1,739
  Recapitalization of Peterstar..........    1,427         --            --             --          1,427
  Related party advances and other.......       --     19,239        (6,018)       (14,221)        (1,000)
                                           -------    -------       -------        -------        -------
     Net cash provided by financing
       activities........................   18,586     19,239       (20,947)       (10,221)         6,657
                                           -------    -------       -------        -------        -------
     (Decrease)/increase in cash and cash
       equivalents.......................   (1,758)       (90)      (21,570)            --        (23,418)
Cash and cash equivalents at beginning of
  year...................................    7,271        331        33,072             --         40,674
                                           -------    -------       -------        -------        -------
Cash and cash equivalents at end of
  year...................................    5,513        241        11,502             --         17,256
                                           =======    =======       =======        =======        =======
</TABLE>
 
                                      F-35
<PAGE>   151
 
                     CONSOLIDATING STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                    SUBSIDIARY   NON-GUARANTOR
                                                    GUARANTORS   SUBSIDIARIES
                                          PARENT    (COMBINED)    (COMBINED)     ELIMINATIONS   CONSOLIDATED
                                          -------   ----------   -------------   ------------   ------------
<S>                                       <C>       <C>          <C>             <C>            <C>
Net cash provided by/(used in) operating
  activities............................   (9,906)    13,322         29,802        (17,600)        15,618
                                          -------    -------        -------        -------        -------
Cash flows from investing activities
  Escrow funds..........................  (40,984)        --             --             --        (40,984)
  Capital expenditures..................   (1,214)    (1,835)       (40,152)            --        (43,201)
  Investments in subsidiaries...........  (25,536)   (11,901)        (4,999)        34,921         (7,515)
  Other.................................   (4,457)        --            455          7,511          3,509
                                          -------    -------        -------        -------        -------
     Net cash used in investing
       activities.......................  (72,191)   (13,736)       (44,696)        42,432        (88,191)
                                          -------    -------        -------        -------        -------
Cash flows from financing activities
  Short term debt
     borrowings/(repayments)............  (14,500)        --          7,950             --         (6,550)
  Debt issuance, net of offering
     costs..............................  104,973         --             --             --        104,973
  Issuance of stock.....................      991         --         20,000        (20,000)           991
  Loans from shareholders...............   (1,604)        --             --           (239)        (1,843)
  Related party advances and other......       --        745          3,848         (4,593)            --
                                          -------    -------        -------        -------        -------
     Net cash provided by financing
       activities.......................   89,860        745         31,798        (24,832)        97,571
                                          -------    -------        -------        -------        -------
     Increase in cash and cash
       equivalents......................    7,763        331         16,904             --         24,998
Cash and cash equivalents at beginning
  of year...............................     (492)        --         16,168             --         15,676
                                          -------    -------        -------        -------        -------
Cash and cash equivalents at end of
  year..................................    7,271        331         33,072             --         40,674
                                          =======    =======        =======        =======        =======
</TABLE>
 
                                      F-36
<PAGE>   152
 
                     CONSOLIDATING STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1995
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                      NON-
                                                     SUBSIDIARY    GUARANTOR
                                                     GUARANTORS   SUBSIDIARIES
                                           PARENT    (COMBINED)    (COMBINED)    ELIMINATIONS   CONSOLIDATED
                                           -------   ----------   ------------   ------------   ------------
<S>                                        <C>       <C>          <C>            <C>            <C>
Net cash provided by/(used in) operating
  activities.............................  (33,422)       (90)      (10,671)        37,459         (6,724)
                                           -------    -------       -------        -------        -------
Cash flows from investing activities
  Capital expenditures...................  (13,496)        --       (18,042)            --        (31,538)
  Teleport finance leases................       --         --            --         (7,733)        (7,733)
  Proceeds on disposal of
     assets/investments..................       --         --         2,403         (2,403)            --
  Investments in subsidiaries............       --    (13,881)       (2,403)        16,284             --
  Other..................................   (8,905)        --           (17)          (900)        (9,822)
                                           -------    -------       -------        -------        -------
     Net cash used in investing
       activities........................  (22,401)   (13,881)      (18,059)         5,248        (49,093)
                                           -------    -------       -------        -------        -------
Cash flows from financing activities
  Short term debt
     borrowings/(repayments).............   14,170         --         7,880            329         22,379
  Issuance of stock......................       67         --            --             --             67
  Loans from shareholders................      502         --            --            (97)           405
  Related party advances and other.......    4,819     13,971        16,081        (42,939)        (8,068)
                                           -------    -------       -------        -------        -------
     Net cash provided by financing
       activities........................   19,558     13,971        23,961        (42,707)        14,783
                                           -------    -------       -------        -------        -------
     Decrease in cash and cash
       equivalents.......................  (36,265)        --        (4,769)            --        (41,034)
Cash and cash equivalents at beginning of
  year...................................   35,773         --        20,937             --         56,710
                                           -------    -------       -------        -------        -------
Cash and cash equivalents at end of
  year...................................     (492)        --        16,168             --         15,676
                                           =======    =======       =======        =======        =======
</TABLE>
 
                                      F-37
<PAGE>   153
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)
 
                                      F-38
<PAGE>   154
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                         INDEX TO FINANCIAL STATEMENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-40
Consolidated balance sheets as of December 31, 1997 and
  1996......................................................  F-41
Consolidated statements of operations for the years ended
  December 31, 1997, 1996 and 1995..........................  F-42
Consolidated statements of shareholders's equity for the
  years ended December 31, 1997, 1996 and 1995..............  F-43
Consolidated statements of cash flows for the years ended
  December 31, 1997, 1996 and 1995..........................  F-44
Notes to consolidated financial statements..................  F-45
</TABLE>
    
 
                                      F-39
<PAGE>   155
 
                          INDEPENDENT AUDITORS' REPORT
 
Shareholder and Board of Directors
NWE Capital (Cyprus) Ltd.:
 
   
     We have audited the accompanying consolidated balance sheets of NWE Capital
(Cyprus) Ltd. and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
    
 
                                          KPMG
 
St. Petersburg, Russia
March 3, 1998
 
                                      F-40
<PAGE>   156
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
                         (IN THOUSANDS OF U.S. DOLLARS)
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
<S>                                                           <C>         <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents (note 7)........................  $  7,849      5,185
  Trade receivables, net of allowance of $3,002 and $1,913,
     respectively...........................................    12,725      5,893
  Other receivables and prepaids............................     3,266      1,178
  VAT receivable............................................     2,154        626
  Due from related parties..................................       468         96
  Inventory.................................................     2,566      1,698
                                                              --------    -------
          Total current assets..............................    29,028     14,676
Property and equipment, net (note 6)........................    79,002     56,613
Telecommunications licenses (note 3), net of amortization of
  $19,356 and $14,635, respectively.........................    42,286     46,715
Other receivables (note 4)..................................     3,012         --
Goodwill (note 5), net of amortization of $574 and $359,
  respectively..............................................     1,580      1,795
Other assets................................................       280        369
                                                              --------    -------
          Total assets......................................  $155,188    120,168
                                                              ========    =======
                      LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Bank indebtedness (note 8)................................       900         --
  Accounts payable..........................................     3,064      4,502
  Accrued liabilities.......................................     3,044      1,545
  Advances from other group companies (note 10).............    32,810     41,304
  Due to related parties....................................       818        233
  Customer deposits and advances............................     5,978      2,694
  Current portion of long term debt.........................     3,988      1,021
                                                              --------    -------
          Total current liabilities.........................    50,602     51,299
                                                              --------    -------
Long term debt (note 9).....................................    12,458      5,226
Due to related parties......................................     2,144      2,144
Minority interest...........................................    19,391      2,615
Commitments and contingencies (note 16).....................
Shareholder's equity (note 12):
  Common stock, par value CY (pound)1 per share. Authorized
     3,246,174 shares in 1997 and 1996; issued and
     outstanding 1,000 shares in 1997 and 1996..............     7,082      7,082
  Contributed surplus.......................................    63,723     63,723
  Accumulated deficit.......................................      (212)   (11,921)
                                                              --------    -------
          Total shareholder's equity........................    70,593     58,884
                                                              --------    -------
          Total liabilities and shareholder's equity........  $155,188    120,168
                                                              ========    =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-41
<PAGE>   157
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                         (IN THOUSANDS OF U.S. DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997       1996      1995
                                                              -------    ------    ------
<S>                                                           <C>        <C>       <C>
Telecommunications revenue..................................  $85,588    52,651    24,747
Direct costs................................................   23,120    17,527     8,636
                                                              -------    ------    ------
          Gross profit......................................   62,468    35,124    16,111
Operating expenses:
  General and administrative................................   15,742    12,396    10,378
  Management fees...........................................    4,817     2,085     1,730
  Depreciation..............................................    7,194     4,758     3,798
  Amortization..............................................    4,936     4,884     4,659
  Taxes other than income taxes.............................    3,257     1,667       657
                                                              -------    ------    ------
          Total operating expenses..........................   35,946    25,790    21,222
          Operating income (loss)...........................   26,522     9,334    (5,111)
Other income (expense):
  Interest and other income.................................      337       370       684
  Interest on long term debt................................     (584)       --        --
  Foreign exchange loss.....................................     (676)     (740)     (233)
  Loss on disposal of property and equipment................       --        (9)     (123)
  Settlement with minority shareholders (note 11)...........    5,339        --     1,711
                                                              -------    ------    ------
          Income (loss) before income taxes and minority
            interest........................................   30,938     8,955    (3,072)
Income taxes (note 13)......................................    6,893     3,356     1,038
                                                              -------    ------    ------
          Income (loss) before minority interest............   24,045     5,599    (4,110)
Minority interest...........................................   12,336     2,615        --
                                                              -------    ------    ------
          Net income (loss).................................  $11,709     2,984    (4,110)
                                                              =======    ======    ======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-42
<PAGE>   158
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
            (IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES)
 
<TABLE>
<CAPTION>
                                                              COMMON STOCK
                                      -------------------------------------------------------------
                                       NUMBER
                                         OF                  CONTRIBUTED    ACCUMULATED
                                       SHARES      AMOUNT      SURPLUS        DEFICIT       TOTAL
                                      ---------    ------    -----------    -----------    --------
<S>                                   <C>          <C>       <C>            <C>            <C>
Balance at January 1, 1995..........      1,000    $    2      $    --       $(10,795)     $(10,793)
Net loss for the year...............         --        --           --         (4,110)       (4,110)
                                      ---------    ------      -------       --------      --------
Balance at December 31, 1995........      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
                                      =========    ======      =======       ========      ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-43
<PAGE>   159
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                         (IN THOUSANDS OF U.S. DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
  Net income (loss)........................................  $ 11,709    $  2,984    $ (4,110)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization.........................    12,130       9,642       8,457
     Minority interest.....................................    12,336       2,615          --
     Settlement with minority shareholders (note 11).......    (5,339)         --      (1,711)
     Other.................................................       133           9          --
     Customer deposits and advances........................     3,284         103       2,585
     Changes in working capital (note 14)..................   (10,047)       (331)     (9,167)
                                                             --------    --------    --------
          Net cash provided by (used in) operating
            activities.....................................    24,206      15,022      (3,946)
                                                             --------    --------    --------
Cash flows from investing activities:
  Capital expenditures.....................................   (19,367)    (20,652)    (12,339)
  Other assets.............................................        89         (58)        110
                                                             --------    --------    --------
          Net cash used in investing activities............   (19,278)    (20,710)    (12,229)
                                                             --------    --------    --------
Cash flows from financing activities:
  Bank indebtedness........................................       900          --          --
  Long term debt...........................................        --       6,247      (4,384)
  Advances from other group companies......................    (3,591)      1,729       8,891
  Recapitalisation of PeterStar............................     1,427          --          --
  Capital contributions by PLD.............................        --          --      13,881
  Dividends paid...........................................    (1,000)         --          --
                                                             --------    --------    --------
          Net cash provided by financing activities........    (2,264)      7,976      18,388
                                                             --------    --------    --------
          Increase in cash and cash equivalents............     2,664       2,288       2,213
Cash and cash equivalents at beginning of year.............     5,185       2,897         684
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $  7,849    $  5,185    $  2,897
                                                             ========    ========    ========
Supplementary disclosures:
  Non-cash investing and financing activities:
     Purchase of equipment with PLD advances and under long
       term contracts......................................  $ 10,641    $  1,597    $  9,532
                                                             ========    ========    ========
     Recapitalisation of PeterStar (note 4)................  $  4,012    $     --    $     --
                                                             ========    ========    ========
  Interest paid............................................  $    728    $     --    $     --
                                                             ========    ========    ========
  Income taxes paid........................................  $  6,924    $  3,999    $  1,688
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-44
<PAGE>   160
 
                           NWE CAPITAL (CYPRUS) LTD.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
 
(1) BUSINESS AND OPERATIONS
 
   
     The Company is incorporated under the laws of Cyprus. The Company is a
wholly-owned subsidiary of PLD Telekom Inc. ("PLD" or the "Parent"). PLD was
previously incorporated under the laws of Ontario, Canada. Effective February
28, 1997, PLD 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.
 
     The Company is in a net current liability position and will require the
continued support of PLD in order to meet it's obligations as they fall due.
 
(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) 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.
    
 
   
     Telecommunication 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 telecommunication 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.
    
 
                                      F-45
<PAGE>   161
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (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.
 
  (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, 1997
and 1996, the Company's cash equivalents consist of term deposits, of $4.6
million and $1.4 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 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.......................................    10 years
Office furniture and equipment..................    3-5 years
Leasehold improvements..........................    15 years
</TABLE>
 
     Interest costs incurred during the period of installment of
telecommunications equipment is capitalised. The interest cost capitalised in
1997 amounted to $927,791.
 
  (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-46
<PAGE>   162
                           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 monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations.
 
  (k) 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 as income or expense in the period it occurs.
 
  (l) 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 recognized 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.
 
  (m) 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.
 
(3) BUSINESSES AND ACQUISITIONS
 
     The Company's key interests at December 31, 1997 include a 60% equity
interest in PeterStar Company Limited ("PeterStar") and a 50% indirect equity
interest in BECET International ("BECET").
 
  (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 maximum number of lines which PeterStar may
have and requires that 74,200 lines be introduced by June 1999. At December 31,
1997, PeterStar had 114,774 lines in place.
 
     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.
 
                                      F-47
<PAGE>   163
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     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 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) BECET
 
     BECET 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 BECET is held by its wholly-owned subsidiary, Wireless
Technology Corporations Limited ("WTC"), a company incorporated in the territory
of the British Virgin Islands.
 
     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, BECET 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. BECET 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 BECET 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 BECET 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 amortization 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 the
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 year end. $1.0 million is considered
current and the remainder is classified as long term although payment terms have
not been finalised.
 
(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-48
<PAGE>   164
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(6) PROPERTY AND EQUIPMENT
 
     Property and equipment at December 31, 1997 and 1996 consist of the
following:
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    ------
                                                                (IN THOUSANDS
                                                               OF U.S. DOLLARS)
<S>                                                           <C>         <C>
Telecommunications equipment:
  Installed.................................................  $ 68,492    49,934
  Uninstalled...............................................    11,473     3,343
Buildings...................................................     2,333       335
Office furniture and equipment..............................     4,156     4,795
Leasehold improvements......................................     5,277     5,705
Advances to equipment suppliers.............................     3,917     2,117
                                                              --------    ------
          Total property and equipment......................    95,648    66,229
Less accumulated depreciation...............................   (16,646)   (9,616)
                                                              --------    ------
  Net book value............................................  $ 79,002    56,613
                                                              ========    ======
</TABLE>
 
     Property and equipment includes telecommunications equipment with a cost of
$16.5 million which has been pledged under the terms of the long term
installment agreements and $6.6 million which has been acquired under capital
lease (note 9).
 
(7) CASH AND CASH EQUIVALENTS
 
     The Company's cash and cash equivalents at December 31, 1997 and 1996
consist of the following:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    ------
                                                                (IN THOUSANDS
                                                              OF U.S. DOLLARS)
<S>                                                           <C>        <C>
Cash on deposit:
  In Russia and Kazakstan...................................  $6,621     5,032
  Outside Russia and Kazakstan..............................   1,228       153
                                                              ------     -----
                                                              $7,849     5,185
                                                              ======     =====
</TABLE>
 
(8) 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 is charged on borrowed amounts at three-month LIBOR plus
2.5% per annum. The amount borrowed on the loan facility at December 31, 1997
was $900,000. The bank indebtedness is guaranteed by PLD.
 
                                      F-49
<PAGE>   165
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(9) LONG TERM DEBT
 
     The Company's long term debt at December 31, 1997 and 1996 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              1997      1996
                                                             -------    -----
                                                              (IN THOUSANDS
                                                             OF U.S. DOLLARS)
<S>                                                          <C>        <C>
Obligations under capital lease............................  $ 4,483    5,226
Supplier financing.........................................    7,975       --
                                                             -------    -----
                                                             $12,458    5,226
                                                             =======    =====
</TABLE>
 
  Obligations under Capital Lease
 
     In September 1996, PeterStar entered into a five year capital lease for
switching equipment. The lessor of the equipment, PLD Asset Leasing Limited, is
a wholly-owned subsidiary of PLD.
 
     Future minimum payments are as follows (in thousands of U.S. dollars):
 
<TABLE>
<S>                                                             <C>
1998........................................................    $3,520
1999........................................................     1,760
2000........................................................     1,760
2001........................................................     1,760
                                                                ------
Total minimum lease payments................................     8,800
Amounts representing interest...............................     2,199
                                                                ------
Present value of net minimum payments.......................     6,601
Interest accrued to December 31, 1997.......................       783
                                                                ------
                                                                 7,384
Current portion.............................................     2,901
                                                                ------
Non-current portion.........................................    $4,483
                                                                ======
</TABLE>
 
     The net book value of the related assets at December 31, 1997 and 1996 was
$6.2 million.
 
  Supplier Financing
 
     Amounts payable under the terms of long term installment purchase
agreements are as follows (in thousands of U.S. dollars):
 
<TABLE>
<S>                                                             <C>
1999........................................................    $3,214
2000........................................................     2,595
2001........................................................     1,927
2002........................................................     1,792
                                                                ------
                                                                 9,528
Amounts representing interest...............................    (1,553)
                                                                ------
                                                                $7,975
                                                                ======
</TABLE>
 
     The above amounts have been calculated using an interest rate of 8.0%.
 
                                      F-50
<PAGE>   166
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(10) ADVANCES FROM OTHER GROUP COMPANIES
 
<TABLE>
<CAPTION>
                                                             1997       1996
                                                            -------    ------
                                                              (IN THOUSANDS
                                                            OF U.S. DOLLARS)
<S>                                                         <C>        <C>
Current:
  PLD Telekom Inc.........................................  $32,221    39,580
  PLD Management Services Limited.........................      589     1,724
                                                            -------    ------
                                                            $32,810    41,304
                                                            -------    ------
Non-Current:
  PLD Telekom Inc.........................................  $ 2,144     2,144
                                                            =======    ======
</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 and 1995, PLD and the minority shareholders of PeterStar
reached settlements regarding management fees and other costs previously charged
by PLD and expensed by PeterStar. As a result of the settlements, charges to
PeterStar of $5.3 million and $1.7 million for 1997 and 1995, respectively, were
disallowed. Such amounts were reflected by PeterStar as a reduction of expense
in these periods.
 
(12) COMMON STOCK
 
     At December 31, 1997 and 1996 the authorized capital stock of the Company
consists of 3,246,174 common shares with par value of CY(pound)1 per share.
1,000 shares are issued at December 31, 1997 and 1996. The balance of the
unissued shares have been fully subscribed for by PLD, are in the process of
being issued and are reflected as outstanding in the accompanying financial
statements.
 
(13) INCOME TAXES
 
     BECET and PeterStar are subject to income tax at statutory rates of 30% and
33%, respectively. The provision for income taxes, which relates substantially
to current income taxes in BECET and PeterStar, differs from the U.S. federal
and state statutory tax rates as follows:
 
<TABLE>
<CAPTION>
                                                            1997       1996       1995
                                                          --------    -------    -------
                                                          (IN THOUSANDS OF U.S. DOLLARS)
<S>                                                       <C>         <C>        <C>
Provision for income taxes at statutory rates.........    $10,886      3,826        (85)
Add (deduct) the tax effect of:
  Non-deductible amortization of licenses and
     goodwill.........................................        633        626        616
  Other nondeductible expenses........................      1,045      1,348      1,906
  Concessions on capital expenditures.................     (3,775)    (2,292)    (1,399)
  Change in valuation allowance related to deferred
     tax assets.......................................     (1,896)      (152)        --
                                                          -------     ------     ------
          Provision for income tax....................    $ 6,893      3,356      1,038
                                                          =======     ======     ======
</TABLE>
 
                                      F-51
<PAGE>   167
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
 
<TABLE>
<CAPTION>
                                                              1997      1996
                                                             ------    ------
                                                             (IN THOUSANDS OF
                                                              U.S. DOLLARS)
<S>                                                          <C>       <C>
Deferred tax assets:
  Expenses not yet deducted for Russian and Kazak tax
     purposes............................................    $2,190     4,086
Less valuation allowance.................................    (2,190)   (4,086)
                                                             ------    ------
                                                             $   --        --
                                                             ======    ======
</TABLE>
 
     As a result of the rapid change in the regulatory environment and
uncertainty surrounding the Russian tax regime, the Company has provided a
valuation allowance against deferred tax assets.
 
(14) CHANGES IN WORKING CAPITAL
 
<TABLE>
<CAPTION>
                                                           1997        1996       1995
                                                         ---------    -------    -------
                                                         (IN THOUSANDS OF U.S. DOLLARS)
<S>                                                      <C>          <C>        <C>
Increase in trade receivables..........................  $ (6,832)    (2,465)      (521)
(Increase) decrease in VAT receivable..................    (1,528)       281       (427)
(Increase) decrease in other receivables and prepaid...    (1,088)     1,592     (3,126)
Increase in inventory..................................      (868)      (409)      (608)
Change in amounts due from or to related parties.......       213         --         --
Increase (decrease) in amounts payable and accrued
  liabilities..........................................        56        670     (4,485)
                                                         --------     ------     ------
Changes in working capital.............................  $(10,047)      (331)    (9,167)
                                                         ========     ======     ======
</TABLE>
 
(15) 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 $3.4
million and $3.0 million during 1997 and 1996, respectively. The amounts are
recorded in the consolidated statements of operations as telecommunications
revenue and direct costs.
 
     (b) Direct costs for the years ended December 31, 1997, 1996 and 1995
include $4.2 million, $3.3 million and $1.8 million, respectively, paid to the
other shareholder of BECET in relation to carriage of traffic over the public
telephone network. Balances outstanding of $0.8 million and $0.2 million as of
December 31, 1997 and 1996, respectively, in relation to these charges, are
included in due to related parties.
 
     (c) PLD charged management fees of $2.0 million related to PeterStar and
$1.2 million related to BECET during the year ended December 31, 1997
(1996 -- $1.2 million and $0.9 million, respectively; 1995 -- $1.2 million and
$0.5 million, respectively). These amounts are recorded in the consolidated
statements of operations as management fee expense.
 
     (d) Additional charges, related to management services of $0.2 million,
$26,000 and $0.8 million for the years ended December 31, 1997, 1996 and 1995
respectively, were charged to BECET by PLD and another PLD subsidiary. These
amounts are recorded in the consolidated statements of operations as general and
administrative expenses.
 
     (e) PeterStar was charged $3.6 million in service fees by PLD relating to
recharged expenses and capital equipment in 1997 (1996: $2.1 million, 1995: $3.9
million). These amounts have been recorded in general and
 
                                      F-52
<PAGE>   168
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
administrative expenses in the consolidated statements of operations or property
and equipment in the consolidated balance sheets as appropriate.
 
     (f) PeterStar entered into a capital lease with a wholly-owned subsidiary
of PLD (see note 9).
 
     (g) During 1996 PeterStar entered into a five year installment purchase
agreement with Petersburg Telephone Network, an indirect minority shareholder,
for telecommunications equipment. Total contract value was $13.7 million (note
9).
 
     (h) PeterStar was charged management fees of $1.7 million during 1997 (1996
and 1995: nil) by OAO Telecominvest, a minority shareholder. This amount is
included in management fees in the consolidated statement of operations.
 
     (i) During 1997 PeterStar entered into five year installment purchase
agreements with PLD Telekom Inc. for telecommunication equipment. Total contract
value was $2.3 million.
 
(16) COMMITMENTS AND CONTINGENCIES
 
  (a) Russian Taxation
 
     PeterStar and BECET subsidiaries have accrued profits and other taxes based
on interpretations of the law which may ultimately be disputed by the local
taxation authorities. Management believes that the exposure to additional
profits and other taxes, fines and penalties will not have a material adverse
effect on the financial position or results of operations of the Company.
 
  (b) Purchase Commitments
 
     At December 31, 1997, PeterStar has commitments of approximately $11.4
million related to the acquisition of telecommunications equipment. The
PeterStar supply contract provides for financing of the entire amount over
approximately five years.
 
  (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. The agreement was automatically
renewed for 1998 and the minimum commitment for the Company in 1998 is $25,000
per month plus 3% of monthly gross revenues.
 
     On January 1, 1995, BECET entered into a two year agreement with its other
shareholder, by which the shareholder would provide certain consulting services,
management support services and personnel expertise. Payments under this
agreement were 300,000 tenge per month ($3,975 at the December 31, 1997 exchange
rate) plus 0.15% of monthly gross revenues. This agreement was terminated as of
December 31, 1997 and BECET is currently negotiating a new contract. This is
anticipated to provide for fees of 300,000 tenge per month plus 1.0% of monthly
gross revenues, and to be effective as of January 1, 1998, with 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 is a
guarantor of the debt under the terms of the related indentures.
 
                                      F-53
<PAGE>   169
                           NWE CAPITAL (CYPRUS) LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (e) Line Rental
 
     While it has not had to do so historically, PeterStar anticipates that it
will have to begin paying local line rental charges to the Petersburg Telephone
System in 1998. The exact fee, and the date from which charges will be levied,
have yet to be determined, but the Company does not believe that such payments
will have a material adverse effect on the Company's financial position or
results of operations.
 
                                      F-54
<PAGE>   170
 
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)
 
                                      F-55
<PAGE>   171
 
   
                               TECHNOCOM LIMITED
    
 
                         INDEX TO FINANCIAL STATEMENTS
 
   
<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Independent Chartered Accountants.................    F-57
Consolidated balance sheets as of December 31, 1997 and
  1996......................................................    F-58
Consolidated statements of operations for the years ended
  December 31, 1997, 1996 and 1995..........................    F-59
Consolidated statements of shareholders' equity for the
  years ended December 31, 1997, 1996 and 1995..............    F-60
Consolidated statements of cash flows for the years ended
  December 31, 1997, 1996 and 1995..........................    F-61
Notes to consolidated financial statements..................    F-62
</TABLE>
    
 
                                      F-56
<PAGE>   172
 
                  REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
 
The Board of Directors and Shareholders
Technocom Limited:
 
   
     We have audited the accompanying consolidated balance sheets of Technocom
Limited and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with accounting principles
generally accepted in the United States.
    
 
                                          KPMG
                                          Chartered Accountants
 
Dublin, Ireland
April 2, 1998
 
                                      F-57
<PAGE>   173
 
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                               AS AT DECEMBER 31
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997      1996
                                                               US$       US$
                                                              ------    ------
<S>                                                           <C>       <C>
                                    ASSETS
CURRENT ASSETS:
  Cash and term deposits (note 4)...........................   4,671    27,997
  Trade receivables, net of allowance of $220
     (1996 -- $40)..........................................   2,942     3,961
  Other receivables.........................................   2,806     1,479
  Due from related parties (note 10)........................   5,591     4,347
                                                              ------    ------
          TOTAL CURRENT ASSETS..............................  16,010    37,784
Property and equipment, net (note 5)........................  50,656    33,322
Telecommunications licenses, net (note 3)...................   2,005     2,286
Due from related parties (note 10)..........................   2,253     4,005
Other investments and assets, net (note 6)..................   1,307       772
                                                              ------    ------
          TOTAL ASSETS......................................  72,231    78,169
                                                              ======    ======
                     LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Bank indebtedness (note 4)................................      --    15,829
  Accounts payable (note 10)................................  11,410     8,306
  Accrued liabilities.......................................   1,590     3,575
  Due to related parties (note 10)..........................  18,693     8,754
  Deferred taxes (note 9)...................................     549       276
                                                              ------    ------
          TOTAL CURRENT LIABILITIES.........................  32,242    36,740
Other liabilities...........................................     337        --
Due to related parties (note 10)............................     336       336
Supplier financing (note 7).................................   3,327        --
Commitments and contingencies (note 11)
Minority interest...........................................      --       638
SHAREHOLDERS' EQUITY (note 8)
  Share capital.............................................       1         1
  Share premium.............................................  40,390    40,390
  Retained (deficit)/earnings...............................  (4,402)       64
                                                              ------    ------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........  72,231    78,169
                                                              ======    ======
</TABLE>
 
        See accompanying notes to the consolidated financial statements
                                      F-58
<PAGE>   174
 
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                            YEARS ENDED DECEMBER 31
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997     1996     1995
                                                              ------    -----    -----
                                                               US$       US$      US$
<S>                                                           <C>       <C>      <C>
REVENUES:
     Telecommunications.....................................  19,024    3,302    4,372
     Finance lease income...................................   1,956    1,404       --
                                                              ------    -----    -----
          TOTAL REVENUES....................................  20,980    4,706    4,372
DIRECT COSTS................................................  13,034    2,487    1,745
                                                              ------    -----    -----
GROSS PROFIT................................................   7,946    2,219    2,627
OPERATING EXPENSES:
     General and administrative.............................   8,739    2,383      916
     Depreciation...........................................   2,561      138       30
     Amortization...........................................     281       10       --
     Other expenses and taxes...............................      --      125      622
                                                              ------    -----    -----
          TOTAL OPERATING EXPENSES..........................  11,581    2,656    1,568
OPERATING (LOSS)/INCOME FROM CONTINUING OPERATIONS..........  (3,635)    (437)   1,059
OTHER INCOME/(EXPENSES):
     Share of losses of equity investments (note 3).........    (677)    (359)     (27)
     Interest income........................................     607    1,233      511
     Interest expenses......................................  (1,126)    (589)      --
     Other expenses.........................................      --       --     (300)
                                                              ------    -----    -----
OPERATING (LOSS)/INCOME BEFORE TAXATION AND
  MINORITY INTEREST.........................................  (4,831)    (152)   1,243
Income taxes (note 9).......................................    (273)    (104)    (410)
                                                              ------    -----    -----
Income (loss) before minority interest......................  (5,104)    (256)     833
Minority interest...........................................     638      (19)     (58)
                                                              ------    -----    -----
NET (LOSS)/INCOME...........................................  (4,466)    (275)     775
                                                              ======    =====    =====
</TABLE>
 
        See accompanying notes to the consolidated financial statements
                                      F-59
<PAGE>   175
 
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                            YEARS ENDED DECEMBER 31
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997      1996      1995
                                                              ------    ------    ------
                                                               US$       US$       US$
<S>                                                           <C>       <C>       <C>
BALANCE BEGINNING OF YEAR...................................  40,455    20,730    20,159
Premium on shares issued....................................      --    20,000        --
Share issue cost............................................      --        --      (204)
Net (loss)/profit...........................................  (4,466)     (275)      775
                                                              ------    ------    ------
BALANCE END OF YEAR.........................................  35,989    40,455    20,730
                                                              ======    ======    ======
</TABLE>
 
        See accompanying notes to the consolidated financial statements
                                      F-60
<PAGE>   176
 
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            YEARS ENDED DECEMBER 31
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997       1996       1995
                                                              -------    -------    ------
                                                                US$        US$       US$
<S>                                                           <C>        <C>        <C>
CASH PROVIDED BY CONTINUING OPERATIONS
Net (loss)/income...........................................   (4,466)      (275)      775
Adjustments to reconcile net (loss)/income to net cash
  provided by operating activities:
  Depreciation and amortization.............................    2,842        148        30
  Share of loss of equity investments.......................      677        359        27
  Minority interest.........................................     (638)        19        58
  Other.....................................................      337         --        --
Changes in operating assets and liabilities:
  Decrease/(increase) in trade receivables..................    1,019       (270)      (25)
  (Increase)/decrease in other receivables..................   (2,263)     2,455    (1,813)
  Changes in due from/to related parties....................   10,446      6,809    10,881
  Increase/(decrease) in accounts payable...................    3,104        (29)    1,450
  (Decrease)/increase in accrued liabilities................   (1,713)     3,440    (1,098)
                                                              -------    -------    ------
CASH PROVIDED BY CONTINUING OPERATIONS......................    9,345     12,656    10,285
CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
(Decrease)/increase in bank indebtedness....................  (15,829)     7,951     7,879
Share issuance costs........................................       --         --      (204)
Issue of preferred shares...................................       --     20,000        --
                                                              -------    -------    ------
CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES.............  (15,829)    27,951     7,675
CASH USED IN INVESTMENT ACTIVITIES
Property and equipment......................................  (16,567)   (20,766)   (3,146)
Telecommunication licenses..................................       --         --    (2,403)
Investment in Technopark, net of cash acquired..............       --     (2,866)       --
Investment in Teleport, net of cash acquired................       --     (2,133)       --
Other investments and assets................................     (275)       491        --
                                                              -------    -------    ------
CASH USED IN INVESTMENT ACTIVITIES..........................  (16,842)   (25,274)   (5,549)
(Decrease)/increase in cash.................................  (23,326)    15,333    12,411
Cash, beginning of year.....................................   27,997     12,664       253
                                                              -------    -------    ------
Cash, end of year...........................................    4,671     27,997    12,664
                                                              =======    =======    ======
SUPPLEMENTAL DISCLOSURE
  Non-cash financing activities:
  Supplier financing........................................    3,327         --        --
                                                              =======    =======    ======
  Cash paid for taxes.......................................       --        238        --
                                                              =======    =======    ======
  Cash paid for interest....................................    1,126        589        --
                                                              =======    =======    ======
</TABLE>
 
        See accompanying notes to the consolidated financial statements
                                      F-61
<PAGE>   177
 
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
            (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
publicly listed company. The parent company has agreed to provide continued
financial support to finance the operations of the Company. The Company is
dependent on this support for continued operations.
    
 
     The Company operates 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 possibilities of
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations. In addition, the satellite-based long distance
network is at an early stage of its development and operation.
 
     Ultimate recoverability of the Company's investments is dependent upon each
of the subsidiaries achieving and maintaining profitability, which is dependent
to a certain extent on a 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.
 
     It is the intention of the directors of the Company to continue to develop
the current activities of the Company. The financial statements have been
prepared on a going concern basis as the directors do not believe, at the
current time, that any of the risk factors set out above will have a material
adverse impact on the Company in the foreseeable future.
 
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
(US GAAP).
 
   
     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 10, "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 9, "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.
    
 
   
     Telecommunication 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.
    
 
   
     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.
    
 
                                      F-62
<PAGE>   178
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (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 Term Deposits
 
     The Company's term deposits consist of term deposits with an initial term
of less than three months, and accordingly, they are considered cash equivalents
for purposes of the consolidated statements of cash flows.
 
  (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) Telecommunications Licenses
 
   
     Telecommunications licenses represent the cost of the Company's investment
in Teleport-TP. The Company's consolidated financial statements do not include
the costs of its Parent's investment in the Company. Telecommunications licenses
are amortized on a straight-line basis over the terms of the related licenses.
    
 
  (g) Equity Investments
 
     Equity investments are those investments in which the group has a
participating interest in the equity capital and over which it is able to
exercise significant influence.
 
     The Company's share of the profits and losses of equity investments is
included in the consolidated profit and loss account. The Company's interest in
their net assets is included as an investment in the consolidated balance sheets
at its share of the net assets at acquisition plus its share of retained profits
or losses subsequent to that date. The amounts included in the financial
statements in respect of equity investments are taken from their latest
financial statements made up to the balance sheet date.
 
  (h) Net Investment in Finance Leases
 
     The total net investment in finance leases included in the balance sheet
represents total lease payments receivable, net of finance charges relating to
future accounting periods. Finance charges are allocated to accounting periods
so as to give a constant rate of return on the net cash investment in the lease.
 
                                      F-63
<PAGE>   179
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (i) 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.
 
  (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."
 
     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.
 
  (k) 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.
 
  (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 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.
 
                                      F-64
<PAGE>   180
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (n) Reclassification
 
     Certain reclassifications have made been made to the financial statements
for conformity purposes.
 
3  TELECOMMUNICATIONS LICENSES AND SIGNIFICANT INVESTMENTS
 
     The Company's key interests at December 31, 1997 include approximately 49%
equity interests in: (a) Teleport-TP ("Teleport") (56% voting interest), and (b)
MTR-Sviaz; and (c) an approximate 56% interest in J.V. Technopark Limited
("Technopark").
 
  (a) Teleport
 
     Teleport is a Russian joint stock company which holds four 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 $2 million, substantially all of which has been allocated
to Teleport's telecommunication 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-65
<PAGE>   181
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Condensed financial information of Teleport for the years ended December
31, 1996 and 1995 is as follows:
 
   
<TABLE>
<CAPTION>
                                                               1996       1995
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Telecommunications revenues.................................  $11,104    $ 7,070
Cost of sales...............................................    6,534      2,083
                                                              -------    -------
  Gross profit..............................................    4,570      4.987
                                                              -------    -------
Operating expenses:
  General and administrative................................    2,617      1,606
  Other taxes...............................................      592         --
  Depreciation of assets under capital lease................    1,016        570
  Other depreciation and amortization.......................      200        762
                                                              -------    -------
                                                                4,425      2,938
                                                              -------    -------
  Operating income..........................................      145      2,049
Interest on capital lease...................................     (531)    (1,434)
Other interest and financing charges, net...................      251       (343)
                                                              -------    -------
  Earnings/(loss) before income taxes.......................     (135)       272
Income taxes................................................       --       (335)
                                                              -------    -------
  Net loss..................................................  $  (135)   $   (63)
                                                              =======    =======
</TABLE>
    
 
     Teleport's revenues for the years ended December 31, 1996 and 1995, include
sales to its minority shareholder of $4.6 million and $5.0 million,
respectively, 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 $2.9 million charged by a company controlled by one of the minority
shareholders of Technocom.
 
     Telecommunications Licenses
 
     Telecommunications licenses are amortized over a period of 7 to 9 years.
The balances were as follows for December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                 ACCUMULATED     NET BOOK
                                                        COST     AMORTIZATION     VALUE
                                                        -----    ------------    --------
<S>                                                     <C>      <C>             <C>
As of December 31, 1997...............................  2,296        (291)        2,005
As of December 31, 1996...............................  2,296         (10)        2,286
</TABLE>
 
  (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 1997 and
1996, Technocom leased telecommunications equipment and access rights with a net
book value of $4,700,000 and $5,205,000, respectively, to MTR-Sviaz under
finance leases. The Company recorded finance lease income of $1,956,000
                                      F-66
<PAGE>   182
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
and $872,000 for the years ended December 31, 1997 and 1996. As of those dates,
the investment in MTR-Sviaz comprises a finance lease receivable of $4,492,000
and $5,015,000, offset by the Company's share of losses of MTR-Sviaz of
$1,364,000 and $427,000, respectively.
 
     Future minimum lease payments receivable from MTR-Sviaz, by year and in the
aggregate, are as follows:
 
<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
<S>                                                             <C>
1998........................................................        $2,530
1999........................................................         2,530
2000........................................................         1,704
2001........................................................           547
2002........................................................           547
Thereafter..................................................         1,958
                                                                    ------
          Total minimum lease payments......................         9,816
Amounts representing interest...............................         5,324
                                                                    ------
          Present value of minimum lease payments...........        $4,492
                                                                    ======
</TABLE>
 
  (c) Technopark
 
     On December 20, 1996 the Company acquired 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
$3 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 equaled fair market value as of the date of
the acquisition, therefore no goodwill was recognized.
 
4  CASH AND TERM DEPOSITS, BANK INDEBTEDNESS
 
     At December 31, 1996, Technocom had an overdraft balance of $6.8 million
and demand bank loans of $9.0 million bearing interest at 5.8125%. The demand
bank loans were secured by term deposits in the same amount held at the same
bank. The Company had no overdraft or demand bank loans at December 31, 1997.
 
5  PROPERTY AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                 ACCUMULATED     NET BOOK
1997                                                    COST     DEPRECIATION     VALUE
----                                                   ------    ------------    --------
<S>                                                    <C>       <C>             <C>
Telecommunications equipment.........................  51,886       (5,005)       46,881
Buildings............................................   3,100         (109)        2,991
Office furniture and equipment.......................   1,149         (539)          610
Leasehold improvements...............................     228          (54)          174
                                                       ------       ------        ------
          Total......................................  56,363..     (5,707)       50,656
                                                       ======       ======        ======
</TABLE>
 
                                      F-67
<PAGE>   183
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
<TABLE>
<CAPTION>
1996
----
<S>                                                    <C>       <C>             <C>
Telecommunications equipment.........................  32,512       (2,917)       29,595
Buildings............................................   3,100           --         3,100
Office furniture and equipment.......................     630         (199)          431
Leasehold improvements...............................     227          (31)          196
                                                       ------       ------        ------
          Total......................................  36,469       (3,147)       33,322
                                                       ======       ======        ======
</TABLE>
 
6  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.
 
7  SUPPLIER FINANCING
 
     Payments to be made under supplier financing arrangements outstanding as of
December 31, 1997 are as follows:
 
<TABLE>
<S>                                                    <C>
1999...............................................    1,402
2000...............................................    1,269
2001...............................................      868
2002...............................................      569
                                                       -----
                                                       4,108
Amounts representing interest......................      781
                                                       -----
                                                       3,327
                                                       =====
</TABLE>
 
     The terms of the agreements generally require installment payments over the
next 3-5 years at interest rates of either 8.5% or LIBOR plus 250 points.
Amounts are calculated based on an 8.5% discount rate.
 
   
     The Company has entered into bank guarantees under the terms of the
agreements. The guaranteed amount reduces as installments are paid. The amounts
outstanding under the agreements secured by bank guarantees amounted to
$3,600,000 at December 31, 1997.
    
 
8  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
IR(pound)1=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 28 December 1994.
 
     PLD, the parent, committed to subscribe for preferred shares in the Company
in the amount of $40,000,000, of which $20,000,000 was subscribed for on 28
December 1994 and the remaining $20,000,000 was subscribed for in June 1996. The
preferred shares entitle the parent to the first $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.
 
                                      F-68
<PAGE>   184
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
9  INCOME TAXES
 
     Income tax expense of $273,000, $104,000 and $410,000 for the years ended
December 31, 1997, 1996 and 1995, 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>
                                                               1997     1996    1995
                                                              ------    ----    ----
                                                               US$      US$     US$
<S>                                                           <C>       <C>     <C>
Provision for income tax at statutory rates.................  (1,468)   (47)    435
Increase/(reduction) in income taxes resulting from:
  Non-deductible expenses...................................     489    205      --
  Non-taxable credits.......................................    (115)   (56)    (25)
  Valuation allowance.......................................     882     --      --
  Other.....................................................     485      2      --
                                                              ------    ---     ---
                                                                 273    104     410
                                                              ======    ===     ===
</TABLE>
 
     The tax effects of temporary differences that give rise to significant
portion of the deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:
 
   
<TABLE>
<CAPTION>
                                                               1997     1996
                                                              ------    -----
<S>                                                           <C>       <C>
DEFERRED TAX ASSETS:
  Tax on expenses not yet deducted for Russian tax
     purposes...............................................  16,998    8,282
  Less: valuation allowance.................................      82      454
                                                              ------    -----
NET DEFERRED TAX ASSETS.....................................  16,916    7,828
DEFERRED TAX LIABILITIES:
  Tax on revenues not yet realized for Russian tax
     purposes...............................................  17,465    8,104
                                                              ------    -----
NET DEFERRED TAX LIABILITIES................................     549      276
                                                              ======    =====
</TABLE>
    
 
     The valuation allowance for deferred tax assets as of January 1, 1997 and
1996 was $454,000 and $Nil, respectively. The net change in the total valuation
allowance for the years ended December 31, 1997 and 1996 was an increase of
$454,000 and a decrease of $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.
 
10  RELATED PARTIES
 
     During the year, the Company paid a total of $220,833 (1996: $208,333)
pursuant to two management contracts with two shareholders for provision of the
services of two directors of the Company. In addition, a significant proportion
of the Company's general and administrative expenses were incurred by its three
shareholders on behalf of the Company.
 
     Included in accounts payable for 1997 is approximately $3,891,000 of
amounts due to companies which are not directly related to Technocom Limited and
subsidiaries, but which share common directors.
 
                                      F-69
<PAGE>   185
                       TECHNOCOM LIMITED AND SUBSIDIARIES
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Significant amounts owed to/from related parties consisted of the
following:
 
<TABLE>
<CAPTION>
                                                               1997     1996
                                                              ------    -----
                                                               US$       US$
<S>                                                           <C>       <C>
AMOUNTS OWED TO:
  Current:
     PLD Telekom Inc........................................  17,918    5,032
     PLD Management Services Limited........................     482      252
     Other current..........................................     293    3,470
                                                              ------    -----
          Total current.....................................  18,693    8,754
                                                              ======    =====
  Non-current:
     Other non-current......................................     336      336
                                                              ======    =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                              1997     1996
                                                              -----    -----
                                                               US$      US$
<S>                                                           <C>      <C>
AMOUNTS OWED FROM:
  Current:
     Lanstone Enterprises Limited...........................  2,240    2,477
     MTR-Sviaz..............................................  2,459    1,096
     Finance lease receivable...............................    872      616
     Others.................................................     20      158
                                                              -----    -----
          Total current.....................................  5,591    4,347
                                                              =====    =====
  Non-current:
     Finance lease receivable...............................  2,253    4,005
                                                              =====    =====
</TABLE>
 
     The finance lease receivable consists of a single agreement with MTR-Sviaz.
The lease was entered into in August of 1996 for $5,197,000 and requires
payments until July 2006.
 
11  COMMITMENTS AND CONTINGENCIES
 
     Teleport currently utilizes capacity on three Intelsat satellites for the
provision of its international and domestic long distance services, pursuant to
a fifteen year contract signed with Intelsat in January 1993. The agreement
requires quarterly payments of $616,500 for the remainder of its term.
 
     As of December 31, 1997, the Company has commitments of approximately $0.9
million (1996: $11.3 million) related to the acquisition of telecommunications
equipment.
 
     During 1996, the Company provided guarantees to telecommunications
suppliers in the form of letters of credit totalling $3,483,000 as of December
31, 1996. No similar guarantees were outstanding as of December 31, 1997.
 
     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.
 
                                      F-70
<PAGE>   186
 
                    WIRELESS TECHNOLOGY CORPORATION LIMITED
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)
 
                                      F-71
<PAGE>   187
 
   
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
    
 
                         INDEX TO FINANCIAL STATEMENTS
 
   
<TABLE>
<S>                                                             <C>
Independent Auditors' Report................................    F-73
Consolidated balance sheets as of December 31, 1997 and
  1996......................................................    F-74
Consolidated statements of operations for the years ended
  December 31, 1997, 1996 and 1995..........................    F-75
Consolidated statements of accumulated deficit for the years
  ended December 31, 1997, 1996 and 1995....................    F-76
Consolidated statements of cash flows for the years ended
  December 31, 1997, 1996 and 1995..........................    F-77
Notes to consolidated financial statements..................    F-78
</TABLE>
    
 
                                      F-72
<PAGE>   188
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Shareholders
Wireless Technology Corporations Limited:
 
     We have audited the accompanying consolidated balance sheets of Wireless
Technology Corporations Limited and subsidiary as of December 31, 1997 and 1996,
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,
1997. 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
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 Wireless
Technology Corporations Limited and subsidiary as of December 31, 1997 and 1996
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1997 in conformity with generally
accepted accounting principles in the United States.
    
 
                                          KPMG
 
Moscow, Russia
February 18, 1998
 
                                      F-73
<PAGE>   189
 
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    ------
<S>                                                           <C>        <C>
                                    ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 5,294     2,733
  Trade receivables, net of allowance of $1,139 and $850,
     respectively...........................................    3,462     2,582
  Due from related parties (note 6).........................       --        78
  Inventory.................................................    1,640       913
  Prepaid expenses and other current assets.................      798       336
                                                              -------    ------
          Total current assets..............................   11,194     6,642
Property and equipment, net (note 3)........................   23,362    22,342
Telecommunications license, net (note 4)....................   23,693    25,800
                                                              -------    ------
          Total assets......................................  $58,249    54,784
                                                              =======    ======
                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................  $ 1,197     2,624
  Due to related parties (note 6)...........................    1,875     1,289
  Customer deposits and advances............................    3,070     1,795
  Income tax payable........................................       58       165
                                                              -------    ------
          Total current liabilities.........................    6,200     5,873
                                                              -------    ------
Commitments and contingencies (note 8)
Minority interest...........................................    4,489     1,878
Shareholders' equity:
  Share capital (note 5)....................................   20,000    20,000
  Contributed capital.......................................   30,803    30,803
  Accumulated deficit.......................................   (3,243)   (3,770)
                                                              -------    ------
          Total shareholders' equity........................   47,560    47,033
                                                              -------    ------
          Total liabilities and shareholders' equity........  $58,249    54,784
                                                              =======    ======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-74
<PAGE>   190
 
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997       1996      1995
                                                              -------    ------    ------
<S>                                                           <C>        <C>       <C>
Telecommunications revenues.................................  $30,012    19,305     9,340
Direct costs (note 6).......................................    6,873     5,376     3,176
                                                              -------    ------    ------
Gross profit................................................   23,139    13,929     6,164
Operating expenses:
  General and administrative (note 6).......................    7,501     4,387     4,918
  Management fees (note 6)..................................    1,155       885       530
  Depreciation and amortization.............................    5,325     4,133     3,188
  Taxes other than income tax...............................      379       354       150
                                                              -------    ------    ------
          Total operating expenses..........................   14,360     9,759     8,786
                                                              -------    ------    ------
Operating income (loss).....................................    8,779     4,170    (2,622)
Other income (expense):
  Interest and other income.................................      249       203       621
  Foreign exchange loss.....................................     (242)     (341)       (6)
                                                              -------    ------    ------
     Net income (loss) before income tax and minority
       interest.............................................    8,786     4,032    (2,007)
Income tax (note 7).........................................    3,648     1,547       247
                                                              -------    ------    ------
     Net income (loss) before minority interest.............    5,138     2,485    (2,254)
Minority interest...........................................    3,611     1,878        --
                                                              -------    ------    ------
Net income (loss)...........................................  $ 1,527       607    (2,254)
                                                              =======    ======    ======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-75
<PAGE>   191
 
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
                 CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICIT
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997       1996      1995
                                                              -------    ------    ------
<S>                                                           <C>        <C>       <C>
Accumulated deficit at beginning of year....................  $(3,770)   (4,377)   (2,123)
Net income (loss)...........................................    1,527       607    (2,254)
Dividends...................................................   (1,000)       --        --
                                                              -------    ------    ------
Accumulated deficit at end of year..........................  $(3,243)   (3,770)   (4,377)
                                                              =======    ======    ======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-76
<PAGE>   192
 
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                      (THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                               1997       1996      1995
                                                              -------    ------    -------
<S>                                                           <C>        <C>       <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ 1,527       607     (2,254)
  Adjustments to reconcile net income to net cash provided
     (used in) operating activities:
       Depreciation and amortization........................    5,325     4,133      3,188
       Bad debt expense.....................................      449       415        435
       Minority interest....................................    3,611     1,878         --
       Changes in operating assets and liabilities:
          Increase in trade receivables.....................   (1,329)   (1,801)    (1,365)
          Increase in inventory.............................     (727)     (255)      (651)
          (Increase) decrease in prepaid expenses and other
            current assets..................................     (462)    1,071     (1,389)
          (Increase) decrease in prepaid income taxes.......       --       300       (300)
          Increase (decrease) in accrued interest...........       --       316       (316)
          (Decrease) increase in accounts payable and
            accrued liabilities.............................   (1,427)      957      1,475
          Increase (decrease) in due to/due from related
            parties, net....................................      664       958        (42)
          Increase in customer deposits and advances........    1,275     1,034        544
          (Decrease) increase in income taxes payable.......     (107)      165         --
                                                              -------    ------    -------
          Net cash provided by (used in) operating
            activities......................................    8,799     9,778       (675)
                                                              -------    ------    -------
Cash flows from investing activities:
  Prepaid equipment purchases...............................       --        --     (9,000)
  Purchases of property and equipment.......................   (4,238)   (8,175)    (3,329)
                                                              -------    ------    -------
          Net cash used in investing activities.............   (4,238)   (8,175)   (12,329)
                                                              -------    ------    -------
Cash flows from financing activities:
  Shareholder contributions.................................       --        --     13,880
  Dividends paid............................................   (2,000)       --         --
                                                              -------    ------    -------
          Net cash (used in) provided by financing
            activities......................................   (2,000)       --     13,880
                                                              -------    ------    -------
          Increase in cash and cash equivalents.............    2,561     1,603        876
Cash and cash equivalents at beginning of year..............    2,733     1,130        254
                                                              -------    ------    -------
Cash and cash equivalents at end of year....................  $ 5,294     2,733      1,130
                                                              =======    ======    =======
Supplementary disclosures:
  Interest paid.............................................  $    --        --         --
                                                              =======    ======    =======
  Income taxes paid.........................................  $ 3,755     1,082        546
                                                              =======    ======    =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                      F-77
<PAGE>   193
 
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
            (TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
 
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
 
   
     Wireless Technology Corporations Limited 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 Canada as of December 31, 1996 and
incorporated in the United States as of December 31, 1997. The Company's only
significant asset is a 50% controlling interest in BECET International JSC
("BECET"), which was formed on January 14, 1994 as a joint stock company under
the laws of Kazakhstan.
    
 
     BECET conducts business under the name "ALTEL" and 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. BECET commenced operations in September 1994 and
continues to develop its service network throughout Kazakhstan.
 
     The BECET 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 $20.0 million. 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 $20.0
million contribution upon dissolution, liquidation or wind-up of BECET before
the other shareholder receives any proceeds.
 
     Kazaktelecom ("KT"), the other shareholder of BECET, subscribed for 1,000
Class A shares in exchange for the contribution to BECET 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 BECET'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 unique 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 charges by regulatory bodies, foreign
exchange fluctuations and controls, controlling of prices by the Anti-Monopoly
Commission, the potential for civil disturbance, deprivation or unenforceability
of contractual rights, and the appropriation of property without fair
compensation.
 
     The Kazakh government has exercised and continues to exercise substantial
influence over many aspects of the private sector. Confronted with the collapse
of the planned economy, the government has been attempting to implement economic
reform policies and encourage substantial private economic activity. However,
these reforms have been only partially successful to date. The economy in
Kazakhstan is still characterized by growing unemployment, high inflation,
increasing foreign debt, a weak currency, and the possibility of widespread
bankruptcies.
 
(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,
 
                                      F-78
<PAGE>   194
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
BECET, 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 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 7, "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 licenses. The cost of the telecommunication licenses is
amortized on a straight-line basis over the term of the licenses.
    
 
   
     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,
1997 and 1996, the Company's cash equivalents consist of cash on deposit and
term deposits. As of December 31, 1997 and 1996, the Company had $4,625,000 and
$1,421,000, 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-79
<PAGE>   195
                    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
 
     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 recognized 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 BECET 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"). BECET'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, BECET has re-measured its financial statements
since the functional currency is also the reporting currency and because BECET
is subject to highly inflationary accounting. 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, 1997 and 1996 were 75.5 tenge to 1 U.S. dollar and 73.3 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) Reclassifications
 
     Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the current year's presentation.
                                      F-80
<PAGE>   196
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(3) PROPERTY AND EQUIPMENT
 
     Property and equipment, at cost, as of December 31, 1997 and 1996 consists
of the following:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Base station equipment......................................  $16,998    $14,040
Leasehold improvements and renovations......................    5,277      3,847
Office equipment, computers, and software...................    3,193      2,652
Other telecommunications equipment..........................    1,092        932
Vehicles....................................................      456        398
Residential apartments......................................      335        335
                                                              -------    -------
          Total property and equipment......................   27,351     22,204
Less accumulated depreciation...............................   (6,423)    (3,205)
                                                              -------    -------
Net book value of assets subject to depreciation............   20,928     18,999
Uninstalled equipment.......................................    2,434      3,343
                                                              -------    -------
          Property and equipment, net.......................  $23,362    $22,342
                                                              =======    =======
</TABLE>
 
(4) TELECOMMUNICATIONS LICENSE
 
     The telecommunications license as of December 31, 1997 and 1996 consists of
the following:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Costs.......................................................  $31,595    $31,595
Less accumulated amortization...............................   (7,902)    (5,795)
                                                              -------    -------
  Telecommunications licenses net...........................  $23,693    $25,800
                                                              =======    =======
</TABLE>
 
     In March 1994, PLD acquired all of the outstanding shares of the Company
for consideration of $30.0 million plus costs of acquisition of $0.8 million and
$0.8 million of BECET's organization costs. The acquisition was accounted for by
the purchase method of accounting. As of the date of acquisition, BECET had not
commenced operations and did not have any tangible assets or liabilities.
Therefore, the entire purchase price was allocated to BECET's cellular license.
This purchase accounting has been "pushed down" into the Company's financial
statements.
 
(5) SHARE CAPITAL
 
     The authorized share capital of the Company as of December 31, 1997 and
1996 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, 1997
and 1996 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 BECET (see note 1). Total dividends declared
and paid were $1,000,000, $0, and $0 for the years ended December 31, 1997,
1996, and 1995, respectively.
 
(6) RELATED PARTY TRANSACTIONS
 
     (a) Management fees of $1,155,000, $885,000, and $530,000 for the years
ended December 31, 1997, 1996, and 1995, respectively, were charged by PLD for
management services (see note 8). Balances outstanding of $129,000 and $265,000
as of December 31, 1997 and 1996, respectively, in relation to these charges,
are included in due to related parties.
 
                                      F-81
<PAGE>   197
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     (b) Additional charges, related to management services, of $191,000,
$26,000, and $841,000 for the years ended December 31, 1997, 1996, and 1995,
respectively, were charged to BECET by PLD and another PLD subsidiary. These
amounts are included in general and administrative expenses. Balances
outstanding of $929,000 and $791,000 as of December 31, 1997 and 1996,
respectively, in relation to these charges, are included in due to related
parties.
 
     (c) Direct costs included costs of $4,163,000, $3,291,000, and $1,788,000
for the years ended December 31, 1997, 1996, and 1995, respectively, were
charged by KT to BECET. Balances outstanding of $817,000 and $233,000 as of
December 31, 1997 and 1996, respectively, in relation to these charges, are
included in due to related parties.
 
   
     (d) Consulting fees of $88,000, $81,000 and $107,000 for the years ended
December 31, 1997, 1996, and 1995, respectively, were paid to KT by BECET (see
note 8). These amounts are included in general and administrative expenses.
There was no balance outstanding as of December 31, 1997 and 1996 in relation to
these charges.
    
 
   
     (e) The unpaid balance of a non-interest bearing advance from BECET to KT
in the amount of $78,000, as of December 31, 1996, is included in due from
related parties.
    
 
     (f) Lease payments for the office premises in Almaty and other premises of
$91,000 for each of the years ended December 31, 1997, 1996, and 1995 were paid
by BECET to KT. There was no balance outstanding in relation to these leases as
of December 31, 1997 and 1996.
 
(7) INCOME TAX
 
     The provision for income tax expense for the years ended December 31, 1997,
1996, and 1995 consists solely of current tax due to the government of
Kazakhstan. The statutory Kazakh income tax rate for the years ended December
31, 1997, 1996, and 1995 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>
                                                               1997     1996     1995
                                                              ------    -----    ----
<S>                                                           <C>       <C>      <C>
Provision (benefit) for income taxes at statutory rate....    $2,636    1,200    (603)
Add (deduct) the tax effect of:
  Non-deductible amortization of license..................       633      626     617
  Depreciation expense from Kazakh revaluation of property
     and equipment........................................      (149)     (45)    (24)
  Amortization of intangible asset not recorded in U.S.
     GAAP financial statements............................       (46)     (48)    (49)
  Foreign currency loss...................................        73      102       2
  Other...................................................       501     (288)    304
                                                              ------    -----    ----
     Provision for income tax.............................    $3,648    1,547     247
                                                              ======    =====    ====
</TABLE>
 
                                      F-82
<PAGE>   198
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows:
 
<TABLE>
<CAPTION>
                                                                1997    1996
                                                                ----    ----
<S>                                                             <C>     <C>
Deferred tax assets:
  Allowance for doubtful accounts...........................    $342     255
  Accumulated depreciation and amortization.................     267     205
  Accounts payable and accrued liabilities..................      45       2
  Due to related parties....................................     278     260
  Other.....................................................       8      --
                                                                ----    ----
                                                                 940     722
Less valuation allowance....................................    (235)   (286)
                                                                ----    ----
  Net deferred tax asset....................................     705     436
Deferred tax liabilities:
  Inventory.................................................      --    (225)
  Other.....................................................    (705)   (211)
                                                                ----    ----
                                                                $ --      --
                                                                ====    ====
</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 for the years ended December 31,
1997 and 1996, was a decrease of $51,000 and $692,000, respectively.
 
(8) COMMITMENTS AND CONTINGENCIES
 
  (a) Leases
 
     As of December 31, 1997, BECET 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, 1997:
 
<TABLE>
<S>                                                   <C>
1998..............................................    $  414
1999..............................................       383
2000..............................................       275
2001..............................................        60
2002..............................................        20
Thereafter........................................        63
                                                      ------
          Total future minimum lease payments.....    $1,215
                                                      ======
</TABLE>
 
     Rent expense for the years ending December 31, 1997, 1996, and 1995 was
$541,000, $422,000, and $375,000, respectively.
 
  (b) PLD
 
     On January 1, 1995, the Company entered into a 2 year agreement with PLD,
under which PLD would provide certain consulting, informational services,
management support services, and personnel expertise. The agreement can be
automatically renewed for successive 12 month periods unless terminated by
either party with at least 3 months written notice. Payments under this
agreement are $25,000 per month plus 3% of
 
                                      F-83
<PAGE>   199
                    WIRELESS TECHNOLOGY CORPORATIONS LIMITED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
monthly gross revenues. The agreement was automatically renewed for 1998 and the
minimum commitment for the Company in 1998 is $300,000 plus 3% of gross
revenues.
 
  (c) KT
 
     On January 1, 1995, BECET 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 ($3,975 at the December 31, 1997 exchange rate) plus 0.15% of monthly
gross revenues. This agreement was terminated as of December 31, 1997 and BECET
is currently negotiating a new consulting agreement with KT. The new agreement
is anticipated to provide for fees of 300,000 tenge per month plus 1.0% of
monthly gross revenues, and to be effective as of January 1, 1998, with 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.
 
                                      F-84
<PAGE>   200
 
                                 EXHIBIT INDEX
 
   
<TABLE>
<S>     <C>
23.1    Consent of KPMG Peat Marwick LLP.
23.2    Consent of KPMG.
23.3    Consent of KPMG.
23.4    Consent of KPMG.
23.5    Consent of KPMG.
</TABLE>