<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                  FORM 10-KSB
(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 March 31, 1998

OR

| |  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ____________ to __________


Commission file number                       333-8305

                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                (Name of small business issuer in its charter)

                Delaware                                13-3895294
                --------                                ----------      
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

         18 Cattano Avenue, Morristown, New Jersey     07960
         -----------------------------------------     -----
                              ------------
     (Address of principal executive offices)        (Zip Code)

           Issuer's telephone number:           (973) 644-3161

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

                                     None

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

                                     None

Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yes X   No __
    -                                                                       

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. | x |

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The issuer's revenues for its most recent fiscal year (year ended March 31,
1998) were $2,319,631.

The aggregate market value on July 8, 1998 of the voting stock held by non-
affiliates computed by reference to the last sale price on that date was
approximately $13,993,784.  For purposes of this calculation only, all directors
and officers of the registrant and all holders of 5% or more of the Company's
Common Stock have been deemed to be affiliates of the Company.  As of July 7,
1998, 1,303,190 shares of Common Stock, par value $.00001 per share, were
outstanding.

Transitional Small Business Disclosure Format (check one):

YES  __  NO  X
             _  

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<PAGE>
 
PART I 

ITEM 1.  DESCRIPTION OF BUSINESS 

GENERAL 

UTG Communications International, Inc. (the "Company" or "UTG") is a provider of
quality private voice, fax and data management telecommunication ("telecom")
services in Switzerland and other European countries, primarily to businesses
and business groups at prices which are generally below those of major telecom
carriers. In addition, the Company has entered into agreements with various
international telecom carriers for the exchange of traffic. Pursuant to these
agreements, the Company resells telecom minutes at a profit. As of May 30, 1998,
the Company has entered into contracts with 552 direct dial corporate customers
to provide customized telecom service packages. These customized packages
include telecom minutes plus other services selected by customers. The Company
provides local support, round-the-clock customer service and full network
redundancy to its customers. Available services include system design and
installation as well as digital compression, fax transmission compression,
digital data services and wideband digital data services.

In the first quarter of the fiscal year ended March 31, 1998, the Company
purchased for approximately $317,000 Multicom N.V., an Antwerp, Belgium based
company which offers direct and indirect dial services.  The Company intends to
continue to expand its operations through local subsidiaries and joint ventures
in other European countries as business, market and regulatory conditions
permit. The Company is presently exploring opportunities in Germany, the United
Kingdom, and other European countries.  During the fiscal year ended March 31,
1998, the Company disposed of certain of its subsidiaries and investments which
were no longer material to the business of the Company to third parties.  See 
"--Organization" and "Item 6. Management Discussion and Analysis of Financial
Condition and Results of Operation."

Both the competitive environment and the economic framework in which
international telecom companies operate are changing at a rapid pace. Due to the
liberalization of telecom markets and technical improvements, the Company
utilizes the infrastructure provided by international telecom carriers in
connection with the services it offers. This allows the Company to offer its
customers access to the largest meshed fiber optic networks in Europe, which
include more than 130 international points of presence ("POPs").  In providing
its services, the Company connects a customer's telephone installation to the
nearest Company-accessed POP by means of dedicated lines. The customer's
outgoing voice, fax and data transmissions are then transported directly to the
Company's switch facilities in the various countries. The communications are
then transferred directly from the Company's switches into the international
networks. All of this is achieved with speech quality or connection speed
comparable to that offered by the Company's competitors, and with the customer
dialing the international destination directly, as it had done prior to becoming
a customer.  The Company is able to provide its services at attractive prices to
its customers due, among other things, to volume discounts the Company has
negotiated with carriers.

On January 3, 1998, Ronald Kuzon resigned from the Board of Directors of the
Company and Messrs. Ueli Ernst and Klaus Brenner were elected to the Board of
Directors of the Company and appointed Chairman of the Board & Chief Executive
Officer and Treasurer & Secretary, respectively. On January

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12, 1998, Keith Rhea resigned from all positions with the Company (including as
a director) and on February 12, 1998, David Schlecht resigned as a director of
the Company. All other previous officers and directors of the Company have
either resigned or been dismissed. During the third and fourth quarter of the
fiscal year ended March 31, 1998, the new management of the Company commenced a
revised management program under which it has implemented a system of controls
and assessments to more closely monitor gross profits, expenses and costs. In
addition, the new management of the Company is applying principles of lean
management. Pursuant to these management changes, the Company expects to realize
significant savings and further expects that its operations can be profitable
within a reasonable period of time, however there can be no assurance in this
regard.

On March 20, 1998, the Company effected a 1:13 reverse split of its Common
Stock.

The Company's operations are, to a large extent, dependent on the Company's
ability to obtain additional financing.  There can be no assurance that the
Company will obtain the financing necessary to support its plan of operation.
See "Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations."

ORGANIZATION

UTG was incorporated in the State of Delaware on April 17, 1996. UTG owns all of
the equity of UTG Telecom AG ("UTG Telecom") (previously UTG Communications
Holding AG), a Swiss company with operations in Switzerland and wholly-owned
subsidiaries in Switzerland and Belgium. On May 26, 1998, UTG Telecom's name was
changed, for marketing reasons, to Starfon Telecom Services AG. Effective as of
December 1, 1997, and November 30, 1997, respectively, the Company sold its
subsidiaries, UTG (Network) Ltd. a company organized under the laws of the
United Kingdom ("UTG Network"), and UTG Communications (Europe) AG, a
corporation incorporated under the laws of Switzerland ("UTG Europe"), to
Portmann Trading SA, a corporation incorporated under the laws of Panama with
interests in the telecommunications and energy industries for a purchase price
equal to CHF1,000 (approximately $700) in cash for each of UTG Network and UTG
Europe and the assumption of the liabilities of these companies. Effective as of
December 1, 1997 the Company acquired certain assets valued at $4,020,300 of UTG
Europe, including certain accounts receivables, loans, equipment, cash, deposits
and UTG Europe's customer base for a purchase price equal to $4,020,300, which
the Company paid by offsetting in part an outstanding loan to UTG Europe in the
aggregate amount of $4,538,899.

On April 2, 1997, UTG Telecom founded UTG Communications Hungary, Kft., a
company incorporated under the laws of Hungary, and on April 8, 1997, UTG
Holding consummated the purchase of its 49% interest in Tibesta Ltd. ("Tibesta")
for a purchase price of $10,551.  On June 9, 1997, Metatel, a company wholly
owned by Tibesta, founded UTG Communications France S.A. ("UTG France"), a 94%
owned company with an office located in Paris.  Metatel's initial investment in
UTG France was 750,000 FRF or approximately $129,500 of which 49% was paid by
the Company.  On October 7, 1997, the Company transferred its interests in UTG
Hungary and another subsidiary of the Company, which in management's opinion was
immaterial to the Company's operations, to Mr. Fritz Wolff, a former Chief
Executive Officer and director of the Company in connection with Mr. Wolff's
resignation from his functions with the Company in return for the assumption of
all liabilities of such companies by Mr. Wolff.  As of September 30, 1997, the
French companies had ceased their operations.

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<PAGE>
 
Unless the context otherwise requires, all references herein to the "Company"
shall include UTG and its subsidiaries. UTG's principal executive offices are
located at 18 Cattano Avenue, Morristown, New Jersey 07960, and its telephone
number is (973) 644-3161. 

INDUSTRY 

Growth and change in the telecom industry have been fueled by a number of
factors, including greater consumer demand, globalization of industry, increases
in international business travel, privatization of incumbent telephone
operators, and growth of computerized transmission of voice and data
information. These trends have sharply increased the use of, and reliance upon,
telecom services throughout the world. The Company believes that at the same
time, businesses and residential customers have encountered higher prices with
poorer quality and service which were, and in some cases still are,
characteristic of many incumbent telephone operators. Demand for improved
service has created opportunities for private industry to compete in the
international telecom market. Increased competition, in turn, has spurred a
broadening of products and services, and new technologies have contributed to
improved quality and increased transmission capacity and speed.

Consumer demand and competitive initiatives have also acted as a catalyst for
government deregulation, especially in developed countries. Deregulation began
in the United States in 1984 with the divestiture of AT&T and the spin-off of
the regional Bell operating companies. Equal access to customers followed
thereafter for all United States carriers.  In Europe, deregulation began in the
United Kingdom with the privatization of British Telecom, also in 1984.
Deregulation spread to the rest of Europe with the adoption of the European
Union ("EU") "Directive on Competition in the Markets for Telecommunication
Services" in 1990. A series of subsequent EU directives, reports and actions
have resulted in substantial deregulation of the telecom industries in most EU
countries.  Other governments have begun to allow competition for value-added
and selected other telecommunications services and features, including data and
facsimile services and certain restricted voice services. In February 1997, 69
countries, including the United States, Japan, Switzerland, South Africa and all
of the member states of the EU, entered into the World Trade Organization
Agreement with the goal of increasing competition among telecom providers in
such markets beginning in 1998. In many countries, however, the rate of change
and emergence of competition remains slow and the timing and extent of future
deregulation is uncertain. 

Long distance telecom carriers can be differentiated by several defining
operational characteristics. One such defining characteristic is between
transmission facilities-based companies and non-transmission facilities-based
companies (resellers). Transmission facilities-based carriers, such as AT&T and
British Telecom, own their own long distance interexchange or transmission
facilities and originate and terminate calls through local exchange systems.
Profitability for transmission facilities-based carriers is dependent not only
upon their ability to generate revenues but also upon their ability to manage
complex networking and transmission costs. All of the first- and most of the
second-tier long distance companies are transmission facilities-based carriers
and generally offer service over broad geographic areas. Most transmission
facilities-based carriers in the third tier of the market offer their service
only in a limited geographic area. Some transmission facilities-based carriers
contract with other transmission facilities-based carriers to provide
transmission where they have geographic gaps in their facilities.

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<PAGE>
 
Resellers, such as the Company, carry their long distance traffic over
transmission lines leased from transmission facilities-based carriers, originate
and terminate calls through local exchange systems or "competitive access
providers" ("CAPs") and contract with transmission facilities-based carriers to
provide transmission of long distance traffic either on a fixed rate lease basis
or a call volume basis. Profitability for resellers is dependent largely on
their ability to generate on a continuing basis revenue volume which is
sufficient in size to permit them to negotiate attractive pricing with one or
more transmission facilities-based carriers.

A second operating characteristic differentiating telecom companies is between
switch-based and switchless telecom companies. Switch-based telecom companies,
such as the Company, own or lease one or more switches, which are computers that
direct telecom traffic to form a transmission path between a caller and the
recipient of a call. All transmission facilities-based carriers are switch-
based, as are many resellers, including the Company. Switchless resellers depend
on one or more transmission facilities-based carriers or switch-based resellers
for transmission and switching facilities. The Company believes that owning its
switches reduces its reliance on other carriers and enables it to efficiently
route telecom traffic over leased cost routes and to control costs and record
data and customer information.

SERVICES 

The Company offers voice, fax and data transmission services in customized
packages designed to suit customers' needs. The Company's use of digital
compression techniques allows the Company to lease fewer lines and offer reduced
calling tariffs. It is the Company's policy to provide all of its customers with
high quality service, local support, round-the-clock customer service and full
network redundancy. Additionally, the Company's customers receive comprehensive
billing packages. The Company's standard monthly statement includes a management
summary report, a call detail report recording every long distance call.
Optional reports include call summaries by account code, area or city code,
international destination and time-of-day. This information is available to
customers in the form of hard copy, magnetic tape or disk.

BUSINESS STRATEGY 

The Company's objective is to build a broad and profitable European market
presence and to further develop its switch-based European infrastructure. The
Company is well positioned to take advantage of telecom deregulation in
Switzerland and countries in the EU. The Company has positioned itself between
major full service high-priced telecom carriers and no service cut rate telecom
minutes resellers. The Company believes that it will retain and add customers
who wish to save on their telecom expenses and who demand a high level of
service.

The Company believes it enjoys certain competitive advantages over global
telecom carriers and incumbent telephone operators: (1) the Company believes
that its target customers make decisions primarily based on price, and the
Company's prices are generally lower than those charged by global telecoms and
incumbent telephone operators; (2) the small and medium sized business market
has traditionally been ignored by the global telecoms and incumbent telephone
operators; (3) the Company believes it can continue to attract seasoned telecom
managers who seek the advantages offered by smaller companies; and (4) the
Company is able to move quickly into new markets with new telecom services, as
compared to larger organizations which are slower to respond to changing market

                                       6
<PAGE>
 
conditions. 

SALES AND MARKETING 

The Company markets its services through the Company's internal sales force,
independent sales agents and strategic arrangements. The Company currently has a
total of 7 internal sales personnel and approximately 12 independent sales
agents. Additional Telemarketers are used to generate leads for the Company's
internal sales force and independent sales agents. The Company's principal sales
offices are located in Switzerland, the United Kingdom and Belgium.

The Company's sales and marketing activities to retail corporate customers were
initially limited to Switzerland and the United Kingdom. In Switzerland, the
Company is currently exploring the provision of telecom services for credit
cards, debit cards and customer cards. The Company has begun to expand its
activities into other European countries and Canada. In June 1997, the Company
consummated the purchase, for approximately $317,000, of Multicom NV, a long
distance reseller headquartered in Antwerp, Belgium with a base of currently
more than 400 small and medium sized business customers. In Germany, the Company
is exploring opportunities to offer voice and data telecom services, as well as
telecom services for credit cards, debit cards and customer cards. There can be
no assurance that the Company's efforts in Germany will result in formal
arrangements or that any of the Company's current or future arrangements will be
successful. The Company's goal is to continue to expand its operations into
other European countries as and when business, market and regulatory conditions
permit. 1998.

The Company primarily targets customers with between $1,000 and $25,000 of
monthly usage. The Company believes that, in addition to being price sensitive,
these customers tend to be focused on customer service and are more likely to
rely on one or two carriers for their telecom needs. The Company strives to be
more cost effective and responsive to the needs of its customers than its major
competitors.

No customer accounted for 10% or more of the Company's total revenue in the
fiscal year ended March 31, 1998. 

NETWORK 

The Company's network consists of 11 owned POPs located in Switzerland, two
switches located in each of the United Kingdom and Belgium and leased-access to
major international telecom carriers' networks with over 100 POPs throughout
Europe. The largest of the Company's switches became operational in November
1996. The Company's switches route calls over networks owned by international
telecom carriers with whom the Company has entered into volume discount
contracts. The Company's switches include least cost routing software designed
to route calls in the most efficient available manner. Direct dial customers
access the Company's network via direct access lines. Indirect dial customers
access the Company's network via local incumbent telephone operators. Least cost
routing software integrated in the customer's telephone equipment determines the
most efficient routing of calls.

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During the fiscal year ended March 31, 1998, one of the Company's carriers, UTG
Europe, accounted for approximately 40% of the Company's traffic.

The Company generally utilizes network redundant, highly automated advanced
telecom equipment in its network and has diverse alternate routes available in
case of component or facility failure. Automatic traffic rerouting enables the
Company to provide a high level of reliability for its customers. Computerized
network monitoring equipment facilitates fast and accurate analysis and
resolution of network problems. The Company provides customer service and
support, 24-hour network monitoring, trouble reporting and response, service
implementation, coordination, billing assistance and problem resolution. The
Company controls all of its billing services through its switches in the places
of activity.

Substantially all of the lines linking the Company's POPs to its switches are
leased from various providers and carriers. The Company believes that its
network has adequate switching capacity to serve the Company's present volume of
traffic. The Company believes, however, that its network may not have adequate
switching capacity to serve the Company's projected volume of traffic beyond the
remainder of calendar 1998. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

INFORMATION SYSTEMS

The Company has invested substantial resources to implement sophisticated
information systems, which the Company believes are integral to being
competitive and to effectively managing its business. The Company plans to
continue to invest substantial capital and resources to enhance its information
systems. The Company's information systems enable it to provide high quality
customer service, provide customized billing information, track sales, provide
network security, provide network trouble shooting, and generate administrative
and marketing reports.

The Company is in the process of reviewing its computer systems to insure it
will not suffer catastrophic failures in connection with the change in the
calendar on January 1, 2000, but has not expended material amounts in this
respect.  The Company currently believes that the cost of year 2000-related
corrections will not have a material effect on the Company's business, operation
or financial condition.  The Company may also be exposed in the event any of the
carriers with whom the Company currently (or in the future) is contracting for
network access experiences a catastrophic failure in connection with the change
of calendar on January 1, 2000.  While the Company attempts to obtain
contractual assurances from its carriers in this respect, there can be no
assurance that it is successful in its attempts or that such assurances, if
obtained, provide the Company with sufficient protection in the event one of its
carriers experienced a catastrophic year 2000 problem.  See "Item 6 --
Management Discussion and Analysis -- Results of Operations." 

INTELLECTUAL PROPERTY

The Company has filed trademark applications for certain of the Company's trade
names.  In its business, the Company relies on proprietary know-how and employs
various methods to protect its concepts and ideas.  However, such methods may
not afford complete protection and there can be no assurance that others will
not independently develop such know-how, concepts or ideas or obtain access to
the Company's know-how or ideas.

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REGULATORY MATTERS

The Company's provision of telecommunications services is subject to extensive
and rigorous government regulation by the European Union ("EU") and the national
regulatory authorities of Switzerland, Belgium, the United Kingdom, Germany and
other countries in which the Company may operate in the future.  Each country in
which the Company conducts its business has a different regulatory scheme and
requirements.  The Company believes that it is in substantial compliance with
applicable laws and regulations.  To the extent that such laws and regulations
are changed or new laws or regulations are adopted by the EU or any country in
which the Company operates, the Company may be required to obtain additional
licenses or renew, modify or replace existing licenses.  The Company has been
granted an International Simple Resale ("ISR") license in the United Kingdom.
The ISR license permits the Company to engage in the international resale of
telecom services. The Company has filed an application to the United Kingdom
Department of Trade and Industry for the issuance of an International Facility
License ("IFL").  The IFL would permit the Company to own international
facilities such as circuits, thereby enabling the Company to gain a cost
advantage by eliminating leased line charges.

Failure to comply with applicable regulatory requirements can result in, among
other things, fines, suspensions of approvals, operating restrictions and
criminal prosecutions.  Furthermore, changes in existing regulations or adoption
of new regulations could affect current regulatory approvals and affect the
timing of, or prevent the Company from obtaining, future regulatory approvals.
The effect of changes in governmental regulation may be to delay for a
considerable period of time, or to prevent, the marketing and commercialization
of products or services of the Company and/or to impose costly requirements on
the Company.  There can be no assurance that additional regulations will not be
adopted or current regulations amended in such a manner as will materially
adversely affect the Company.

COMPETITION 

The telecom industry is highly competitive and is significantly
influenced by the marketing and pricing decisions of competitors. In each of its
markets, the Company will compete primarily on the basis of price and service,
as well as breadth of services offered. The industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The industry has experienced and will continue to
experience rapid regulatory and technological change. Many competitors in each
of the Company's current and proposed markets are significantly larger than the
Company, have substantially greater resources than the Company, control
transmission lines and larger networks than the Company and may have long-
standing relationships with the Company's target customers. 

The success of a non-transmission facilities-based carrier, such as the Company,
depends largely upon the amount of traffic that it can commit to the
transmission facilities-based carrier and the resulting volume discount it can
obtain. Subject to contract restrictions and customer brand loyalty, resellers
like the Company may competitively bid their traffic among other national long
distance carriers to gain improvement in the cost of service. The relationship
between resellers and the larger transmission

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facilities-based carriers is twofold. First, a reseller is a customer of the
services provided by the transmission facilities-based carriers, and that
customer relationship is predicated primarily upon the pricing strategies of the
first tier companies. The reseller and the transmission facilities-based
carriers are also competitors. The reseller will attract customers to the extent
that its pricing for customers is generally more favorable than the pricing
offered the same size customers by larger transmission facilities-based
carriers. Transmission facilities-based carriers have been aggressive in
developing discount plans which have had the effect of reducing the rates they
charge to customers whose business is sought by the reseller. Thus the business
success of a reseller is significantly tied to the pricing policies established
by the larger transmission facilities-based carriers.

Currently, the Company's main competitors in Switzerland are Swisscom, which
controls almost all of the Swiss telecom market, Sunrise and Diax. In addition,
there are a number of smaller companies providing telecom services in
Switzerland. Additional competitors in the European market include Viatel,
Esprit and MFS WorldCom. In the future, additional competitors may include,
among others, Deutsche Telekom, AT&T, MCI, Sprint, British Telecom and Mercury.
As the Company expands into other European countries there will be additional
competition.

In addition to these competitive factors, recent and pending telecom
deregulation in Switzerland and EU markets may encourage new entrants. As the
Company expands its geographic coverage, it will encounter increased
competition. Moreover, the Company believes that competition in Europe is likely
to increase and become more similar to competition in the United States markets
over time as the European markets continue to experience deregulatory
influences. Prices in the long distance industry have declined from time to time
in recent years and, as competition increases in Europe, prices are likely to
continue to decrease. The Company's competitors may reduce rates or offer
incentives to existing and potential customers of the Company. To maintain its
competitive position, the Company believes that it must be able to reduce its
prices in order to meet reductions in rates, if any, by others.  

INVESTMENTS AND STRATEGIC ALLIANCES

As the Company expands its service offerings, geographic focus and its network,
the Company anticipates that it will seek to make investments in or enter into
strategic alliances with, companies providing services complementary to the
Company's existing business. The Company's ability to effect strategic alliances
and make investments will, to a large extent, be dependent upon its ability to
obtain additional financing. See "Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations." In connection with
investments or strategic alliances, the Company could incur substantial
expenses, including the fees of financial advisors, attorneys and accountants,
and any expenses associated with registering shares of the Company's capital
stock, if such shares are issued. The financial impact of such investments or
strategic alliances could have a material adverse effect on the Company's
business, financial condition and results of operations and could cause
substantial fluctuations in the Company's quarterly and yearly operating
results.

RESEARCH AND DEVELOPMENT

During the fiscal year ended March 31, 1998 the Company has not expended
material amounts for research and development.

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ENVIRONMENTAL MATTERS

The Company is subject to various environmental laws and regulations in the
jurisdictions in which it operates, including those related to air emissions,
wastewater discharges, the handling and disposal of solid and hazardous wastes
and the remediation of contamination associated with the disposal of hazardous
substances. The Company leases properties in Switzerland and Belgium and may
have potential liability related to the remediation of past contamination at
sites where the Company presently is operating, or in the past has operated, its
business or the disposal of hazardous wastes to sites owned by third parties.
The Company has not incurred any material expenses related to environmental
matters. However, there can be no assurance that the Company may not incur such
expenses in the future. Accordingly, although the Company believes that it is in
substantial compliance with applicable environmental requirements, it is
possible that the Company could become subject to environmental liabilities in
the future that could result in an adverse effect on the Company's financial
condition or results of operation.

EMPLOYEES 

As of June 13, 1998, the Company had 8 full-time employees in Switzerland and 2
full-time employees in each of the United Kingdom and Belgium. The Company has
never experienced a work stoppage and its employees are not represented by a
labor union or covered by a collective bargaining agreement. The Company
considers its employee relations to be good.

CAUTIONARY STATEMENTS

This report has been prepared by the new management of the Company based on its
knowledge and access to the Company's records to the extent such records have
been kept at the Company's premises in Switzerland, the United Kingdom and
Belgium, as well as records made available to the new management by the
Company's former secretary.  Because the Company's new management was previously
not actively involved in the management of the Company, it is not in a position
to ascertain whether or not such records are complete or whether or not such
records disclose all material facts required to be disclosed in this report.
Accordingly, material facts with respect to the period covered by this report
may exist which are not disclosed herein because of management's current lack of
affirmative knowledge of such facts.

Investment in the Company's securities involves a high degree of risk.  In
evaluating an investment in the Company's securities, Company stockholders and
prospective investors should carefully consider the risk factors discussed in
the Company's Registration Statement on Form SB-2, Registration No. 333-8305 and
the information detailed in this Form 10-K under Item 1 Business and Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as information contained in the Company's other filings with
the Securities and Exchange Commission.

Certain statements in this Report under Item 1 and Item 6 regarding the
Company's estimates, present view of future circumstances or events and
statements containing words such as "estimates," "anticipates," "intends" and
"expects" or words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements regarding the Company's ability to
meet future working capital

                                       11
<PAGE>
 
requirements and future cash requirements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Forward-
looking statements speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information future events or otherwise. Risk factors include,
among others, delays in expanding the Company's network; need for additional
financing; failure to receive or delays in receiving regulatory approval;
general economic and business conditions; industry capacity; industry trends;
demographic changes; competition; material costs and availability; the loss of
any significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgment of personnel; availability of qualified personnel;
changes in, or the failure to comply with, government regulations including
changes in industry regulations; and other factors referenced in this Report.
For a more detailed description of these and other factors, see the section
entitled "Risk Factors" in the Company's Registration Statement on Form SB-2,
Registration No. 333-8305, which was declared effective on September 6, 1996.

ITEM 2. PROPERTIES 

The Company currently leases approximately 4,500 square feet in Zurich,
Switzerland for approximately CHF 7,000 (approximately $4,800) per month. The
lease expires on March 31, 1999. The Company's principal executive offices are
located in Morristown, New Jersey. There, the Company utilizes space for which
the Company pays approximately $1,000 per month. The Company leases
approximately 1,400 square feet in Antwerp, Belgium at a monthly rental of
approximately $814. The lease expires on February 20, 1999. As a consequence of
the sale of UTG Network, the Company no longer leases any office space in the
United Kingdom.

ITEM 3. LEGAL PROCEEDINGS 

On or about April 24, 1997, litigation against UTG Holding AG and other
individual defendants was commenced in labor court in Paris, France by Mr. James
Taylor. On May 25, 1998, the court rendered a judgment against the Company in
the amount of 488,187 French Francs (approximately $64,670) for breach of an
alleged employment arrangement. The Company has filed an appeal against this
judgment.

On January 5, 1998, the Company's former Chief Operating Officer, Keith Rhea,
without authorization of the Company's Board of Directors, confessed a judgment
against the Company in favor of the Company's former part-time Chief Financial
Officer, Robert Finn, in the amount of $111,710. The alleged basis for this
amount is outstanding compensation and termination fees for various alleged
consulting arrangements between the Company, Mr. Finn and Telepath, Ltd, a
company which the Company believes to be affiliated with Mr. Rhea. The Company
believes that such judgment was fraudulently obtained, and that all or part of
such claims are without merit. The Company is presently evaluating several
strategies, including the commencement of legal proceedings against one or more
of the persons involved in this matter.

On August 22, 1997, Discont-o-fon, a company which provided Multicom with
bandwidth prior to the Company's acquisition of Multicom, filed a claim with the
main court in Brussels, Belgium to collect

                                       12
<PAGE>
 
BEF 8.409.393 (approximately $233.500) claimed to be owing for traffic services
provided by Multicom. A settlement became effective on May 25, 1998 and an
amount of BEF 4,935,000 ($129,510) has been paid by the Company during the first
quarter of the fiscal year ending March 31, 1999 in full settlement of all
outstanding matters.

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

On January 27, 1998, the holders of 7,043,400 shares of Common Stock (on a pre-
reverse stock split basis), representing a majority of the shares of Common
Stock outstanding on such date, consented in writing pursuant to Sections 228
and 242 of the General Corporation Law of the State of Delaware to (i) the
increase of the number of authorized shares of capital stock of the Company from
20,000,000 to 70,000,000 shares of which 60,000,000 were to be designated shares
of Common Stock and 10,000,000 shares were to be designated shares of preferred
stock and (ii) the reverse split of each of the Company's outstanding shares of
Common stock into one-thirteenth (1/13) of a share.

                                       13
<PAGE>
 
PART II 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Since October 7, 1996, shares of the Common Stock have traded on the NASD
Bulletin Board under the symbol "UTGC". The following table sets forth, for the
periods indicated and as reported by the NASD Bulletin Board, the high and low
bid prices for shares of the Common Stock. The quotations listed below reflect
inter dealer prices, without retail mark-up, mark-down or commission , and may
not represent actual transactions. The closing price of the Common Stock on July
8, 1998 was $14.00.

<TABLE>
<CAPTION>
                   FISCAL YEAR ENDED MARCH 31, 1997         QUARTERLY COMMON STOCK PRICE RANGE
                   BY QUARTER

Quarter            Date                                     High                     Low      
-------            ----                                     ----                     ---      
<S>                <C>                                      <C>                      <C>      
1st                June 30, 1996                            (1)                      (1)      
2nd                September 30, 1996                       (1)                      (1)      
3rd                December 31, 1996                        $81.25 (2)               $ 45.50  
4th                March 31, 1997                           $60.125                  $11.375   
</TABLE>

<TABLE>
<CAPTION>
                   FISCAL YEAR ENDED MARCH 31, 1998         QUARTERLY COMMON STOCK PRICE RANGE
                   BY QUARTER

Quarter            Date                                     High                 Low        
-------            ----                                     ----                 ---                            
<S>                <C>                                      <C>                  <C>        
1st                June 30, 1997                            $ 45.50              $27.725                     
2nd                September 30, 1997                       $37.375              $17.062                     
3rd                December 31, 1997                        $ 19.50              $ 4.875                     
4th                March 31, 1998                           $14.625              $ 4.875                     
</TABLE>

(1)  Prior to the quotation of the Company's Common Stock on the NASDAQ Bulletin
     Board on October, 7, 1996, there was no public market in the Common Stock
     and, accordingly, no market data is available.

(2)  All stock prices are adjusted by the 13:1 reverse split of the Common Stock
     on March 20, 1998.

HOLDERS OF COMMON STOCK 

Based upon information supplied to the Company by its transfer agent, the number
of stockholders of record of the Common Stock on July 7, 1998 was approximately
50.

DIVIDENDS 

The Company has never paid cash dividends with respect to the Common Stock. The
Company intends to retain future earnings, if any, that may be generated from
the Company's operations to help finance

                                       14
<PAGE>
 
the operations and expansion of the Company and accordingly does not plan, for
the foreseeable future, to pay dividends to holders of the Common Stock. Any
decision as to the future payment of dividends on the Common Stock will depend
on the results of operations and financial position of the Company and such
other factors as the Company's Board of Directors, in its discretion, deems
relevant. In addition, arrangements with present or future lenders may prohibit
the payment of dividends.

SALES OF UNREGISTERED SECURITIES 

As of April 30, 1996, the Company issued 211,538 shares of Common Stock (as
adjusted for the Company's 1:13 reverse stock split) to Interfinance Inv. Co.
Ltd., a Panamanian company ("Interfinance"), 183,333 of which shares were issued
in exchange for $200,000 in cash and 197,435 of which shares were issued in
exchange for $26 in cash and a 7% promissory note. The promissory note was
repaid as of June 28, 1996 from proceeds received from purchasers of a portion
of the shares resold by Interfinance. On August 15, 1996, the Company sold an
additional 30,769 shares of Common Stock to Interfinance for $1,000,000
consisting of $10,000 in cash and a 7% promissory note for $990,000. The note
was repaid in full in November 1996. Pursuant to a subscription agreement
entered into in November 1996, Interfinance subscribed for and the Company sold
an additional 9,615 shares of Common Stock at $52.00 per share. In addition, the
Company granted Interfinance an option to purchase up to an additional 92,308
shares of Common Stock at $26.00 per share for a two year period commencing on
completion of purchase of the full 153,846 shares. In connection with that
agreement, Mr. Combrinck transferred 5,769 shares to Interfinance for no
additional consideration. In January 1997, the Company entered into a
subscription agreement with Interfinance Inv. Co., Ltd. ("Interfinance"),
pursuant to which Interfinance subscribed for 153,846 shares of Common Stock at
a purchase price of $13.00 per share. In connection with the subscription
agreement, Mr. Thomas Combrinck agreed to transfer, without cost to
Interfinance, one share of UTG Common Stock owned by him for each share
purchased by Interfinance under the subscription agreement. As of the date
hereof, all amounts owing to the Company in respect of Interfinance's November
1996 and January 1997 subscriptions have been paid (giving effect to
approximately $20,000 in credits for expenses incurred by Interfinance on behalf
of the Company). No Underwriter's discount or fee was incurred by the Company in
connection with these issuances. The Company has agreed to register the resale
of the shares purchased by Interfinance under the Securities Act of 1933. These
transactions were exempt from the registration requirements of the Securities
Act of 1933 by reason of the exemption provided by Section 4(2) thereunder and
on the basis of certain representations provided by Interfinance including that
it is an "accredited investor."

On January 15, 1997, the Company granted an aggregate of 57,692 shares of Common
Stock to employees and consultants in consideration for services and as an
incentive to further the interests of the Company. On March 25, 1997, the
Company issued an aggregate of 769 shares to two individuals as part of a
settlement of claims by one of the individuals regarding breach of an alleged
employment relationship. These issuances were exempt from the registration
requirements of the Securities Act of 1933 by reason of the exemption provided
by Section 4(2) thereunder.

On March 10, 1997, the Company granted an option to purchase up to an aggregate
of 38,462 shares to certain of the Company's officers. As such individuals have
ceased to serve the Company in their

                                       15
<PAGE>
 
respective executive capacity before the first anniversary of the above-
mentioned grant, non of such options vested.

Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 30,769 shares of common stock at a price of $6.50 per
share and, for no additional consideration, warrants to purchase an additional
15,385 shares of Common Stock at a price of $7.80 per share. At September 30,
1997, $125,000 of the total $200,000 had been received by the Company, and the
remaining $75,000 was fully paid by October 6, 1997. Interfinance acted as
placement agent for these issuances. No underwriter's discount or fee was
incurred by the Company in connection with these issuances. These issuances were
exempt from the registration requirements of the Securities Act of 1933 by
reason of the exemption provided by Section 4(2) thereunder.

On March 23, 1998, the Company issued 250,000 shares of Common Stock (post-
reverse split) at a purchase price of $2.00 per share. In addition, for each
share of Common Stock purchased, the subscriber received three warrants, each to
purchase one share of Common Stock, which warrants will expire five years from
the date of issuance and shall be exercisable at $2.00, $3.00 and $4.50 per
share, respectively. Net proceeds received by the Company were $500,000. In
connection with this issuance, Interfinance acted as placement agent and is
entitled to a placement fee of 3% of the gross proceeds to the Company. As of
the date hereof, Interfinance has not enforced its right to this fee. Under the
terms of the subscription agreement, as amended, the Company has the right,
subject to certain conditions, to request the subscriber to purchase up to an
additional 500,000 shares of Common Stock upon the same terms and purchase price
as for the initial purchase on or prior to September 30, 1998. These
transactions were exempt from the registration requirements of the Securities
Act of 1933 by reason of the exemption provided by Section 4(2) thereunder and
on the basis of certain representations provided by the subscriber including
that it is an "accredited investor."

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

The following discussion and analysis relates to the financial condition and
results of operations of the Company for the year ended March 31, 1998. This
information should be read in conjunction with the Company's consolidated
financial statements appearing elsewhere herein.

GENERAL 

The Company commenced operations in April 1996 and is a holding company for a
number of operating subsidiaries organized at various times since February 1996.
To date, the Company has received an aggregate of approximately $7,925,628 in
equity capital. Since inception, the Company's operations have been focused on
establishing and enhancing its switch-based European communications network and
expanding its European customer base. In implementing its network, the Company
experienced significant technical problems with multiplexers and transmission
equipment. The equipment has been upgraded by the suppliers at the supplier's
own expense. This has resulted in a lag in the realization of revenue.

The Company's revenue during the fiscal year ended March 31, 1998 was generated
from long distance telecom services provided to retail corporate customers and
wholesale customers. The Company's

                                       16
<PAGE>
 
wholesale customers presently comprise international telecom carriers and
national telecoms, and the Company's retail customers presently comprise medium-
sized companies located in Switzerland, Belgium and the United Kingdom. The
Company was granted an International Simple Resale ("ISR") license in the United
Kingdom. The ISR license permits the Company to engage in the international
resale of telecom services. The Company has filed an application to the United
Kingdom Department of Trade and Industry for the issuance of an International
Facility License ("IFL"). The IFL would permit the Company to own international
facilities such as circuits, thereby enabling the Company to gain a cost
advantage by eliminating leased line charges. See "Item 1. Business--
Regulation."

While the Company's retail operations were initially limited to Switzerland, the
Company has begun to expand its operations through subsidiaries and joint
ventures into other European countries. In June 1997, the Company consummated
the purchase of Multicom NV, a long distance reseller headquartered in Antwerp,
Belgium with a base of currently more than 450 customers. The purchase price for
Multicom NV was 11,101,043 Belgium Francs (approximately $317,000). See Note
5(b) of the Notes to the Consolidated Financial Statements. The Company's goal
is to continue to expand its operations into other European countries as and
when business, market and regulatory conditions permit. The Company is presently
exploring opportunities in Germany, the United Kingdom and other European
countries.

Effective as of December 1, 1997, and November 30, 1997, respectively, the
Company sold its subsidiaries, UTG (Network) Ltd., a company organized under the
laws of the United Kingdom ("UTG Network", and UTG Communications (Europe) AG, a
corporation incorporated under the laws of Switzerland ("UTG Europe"), to
Portmann Trading SA, a corporation incorporated under the laws of Panama with
interests in the telecommunications and energy industries, for a purchase price
equal to CHF1,000 (approximately $700) in cash for each of UTG Network and UTG
Europe and the assumption of the liabilities of these companies. Effective as of
December 1, 1997 the Company acquired certain assets, valued at $4,020,300 of
UTG Europe, including certain accounts receivable, loans, equipment, cash,
deposits and UTG Europe's customer base for a purchase price equal to
$4,020,300, which the Company paid by offsetting in part an outstanding loan to
UTG Europe in the aggregate amount of $4,538,899.

During the quarter ended December 31, 1997, in order to permit full business
operations under Swiss law, UTG Communications Holding AG was renamed UTG
Telecom AG ("UTG Telecom"). Effective May 26, 1998, for marketing reasons, UTG
Telecom's name was again changed to Starfon Telecom Services AG.

Following the regulatory opening of the Swiss and European Telecommunications
markets on January 1, 1998, it is no longer necessary to route all outgoing
calls via London. Applicable telecommunications regulations now permit
interconnection with all European countries. This revision is expected to save
the Company a considerable amount of fixed overhead costs, and management
believes that this development is likely to facilitate economical self-
sustaining operations for the Company within a shorter period of time than
originally contemplated.

In Germany, the Company has undertaken the development of an international
calling card project for a large bank and insurance company. In its efforts to
focus on profitable markets, the Company is reviewing this project to determine
whether future investment or divestment is appropriate. The Company is currently
exploring appropriate.

                                       17
<PAGE>
 
several opportunities in its core markets and in Germany as well as in other
countries. The Company will carefully evaluate expansion of its operations into
other European countries as and when business, market and regulatory conditions
permit. There can be no assurance that the Company's efforts in any of the
foregoing countries will result in successful commercial operations.

The Company's goal is to focus on its current operations and to continue the
streamlining of costs begun under the new management and to target optimal
network capacity utilization.

In reading the following comparison of the Company's financial condition and
results of operations for the fiscal year ended March 31, 1998 and March 31,
1997, readers should be aware of the fact that as a result of the disposition of
UTG Europe and UTG Network effective as of November 30, 1997 and December 1,
1997, respectively, the sales generated by such subsidiaries, which constituted
substantially all of the sales of the Company during the fiscal year ended March
31, 1997, are not included in the Company's Consolidated Statement of Operations
for the fiscal year ended March 31, 1998.

FINANCIAL CONDITION

At March 31, 1998, the Company had a positive working capital of $223,444, and
an accumulated deficit of $4,551,224, as compared to a working capital deficit
and accumulated deficit of $1,313,149 and $6,712,669, respectively, at March 31,
1997. This improvement in the financial position was achieved through the
disposition of certain subsidiaries and investments.

At March 31, 1998, the Company had no outstanding bank overdrafts, compared to
March 31, 1997 when the Company's outstanding bank balance was CHF 161,572
(approximately $132,237).

Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 30,769 shares of common stock at a price of $6.50 per
share and, for no additional consideration, warrants to purchase an additional
15,385 shares of Common Stock at a price of $7.80 per share. At September 30,
1997, $125,000 of the total $200,000 had been received by the Company, and the
remaining $75,000 was fully paid by October 6, 1997.

On March 23, 1998, the Company issued 250,000 shares of Common Stock (post stock
split) at a purchase price of $2.00 per share to an accredited investor.  In
addition, for each share of Common Stock purchased, the investor also received
three warrants, each to purchase one share of Common Stock, which warrants will
expire five years from the date of issuance and shall be exercisable at $2.00,
$3.00 and $4.50 per share, respectively.  Under the terms of the  subscription
agreement, as amended, the Company has the right, subject to certain conditions,
to request the Subscriber to purchase an additional 500,000 shares of Common
Stock upon the same terms and purchase price of the initial purchase on or prior
to September 30, 1998.

The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through calendar 1998. The Company initially
designed its network to take advantage of deregulation across Europe. It can
perform distributive least cost routing by using its hub sites in European
cities to direct traffic to carriers within a country, across the UTG network to
another

                                       18
<PAGE>
 
country for termination, or back to the switch in London for routing. The
selected path is based on the least cost. This provides a large amount of
flexibility to the Company, and to ensure the quality of the connections and
lowest cost. With this distributive architecture the capacity of UTG's main
switch is not expected to be a limiting factor with regard to expansion. The
opening of the European telecommunications markets allows the Company to take
full advantage of its network flexibility.

Based upon the Company's plan of operation, the Company estimates that its
existing financing resources (including the available resources pursuant to the
call right against the subscriber of the Common Stock issued on March 23, 1998),
together with funds generated from operations, will be sufficient to fund the
Company's current working capital requirements.  However, there can be no
assurance in that regard.

Accounts payable and accrued expenses amounted to approximately $1,369,818 at
March 31, 1998 compared to $3,208,711 at March 31, 1997.

RESULTS OF OPERATIONS

During the third and fourth quarter of the fiscal year ended March 31, 1998, the
new management of the Company commenced a revised management program under which
it implemented a system of controls and assessments to more closely monitor
gross profits, expenses and costs. In addition, the new management of the
Company is applying principles of lean management. Pursuant to these management
changes, the Company expects to realize significant savings and further expects
that its operations can be profitable within a reasonable period of time,
however there can be no assurance in this regard.

SALES

During the fiscal year ended March 31, 1998, the Company recorded net sales of
$2,319,631, in comparison to $1,743,377 during the fiscal year ended March 31,
1997. The sales recorded for the fiscal year ended March 31, 1998 reflect the
sales made by UTG Telecom during the four-month period from December 1, 1997
through March 31, 1998 and the sales made by UTG's Belgian subsidiaries during
the entire fiscal year ended March 31, 1998. The sales reported in the Company's
quarterly report on form 10-Q for the quarter ended December 31, 1997 for the
nine months ending December 31, 1997 of $4,264,938 included the sales generated
by UTG Europe and UTG Network prior to their disposition. The gross profit for
the fiscal year ended March 31, 1998 increased to $1,007,347 (or 43% of the
Company's net sales) as compared to the fiscal year ended March 31,1997 when the
Company had a gross loss of $77,467 (or 4% of the Company's net sales during
that period). The increase in gross profits reflects the fact that the Company's
volume of operations has increased and the cost of sales have decreased.

The Company's revenue has been generated primarily from long distance telecom
services provided to retail corporate customers in Switzerland and Belgium and
wholesale customers. The Company's wholesale customers presently comprise
international telecom carriers and national telecom companies. Management
anticipates that the allocation between wholesale and retail customers will
shift in favor of retail customers consistent with the Company's goal of
expanding its corporate retail customer base.

                                       19
<PAGE>
 
COST OF SALES

Cost of sales was $1,312,284 for the fiscal year ended March 31, 1998, as
compared to $1,820,844 for the fiscal year ended March 31, 1997 consisting of
carrier charges and costs for leased lines and related activities. Carrier
charges and transport (leased lines) charges per unit are ultimately dependent
on the Company's ability to generate high volumes of traffic. This decrease is
the result of the Company's new management and business strategy and the
Company's ability to purchase services from carriers at competitive rates. Cost
of sales have also decreased because of the relatively smaller proportion of
fixed costs related to leased lines, which are incurred regardless of the amount
of traffic carried, compared to the carrier costs, which vary depending on the
amount of traffic carried.

SELLING AND TECHNICAL EXPENSES

Selling and technical expenses for the fiscal year ended December 31, 1998 were
$223,420, compared to $2,053,305 for the previous fiscal year.  This decrease is
the result of the restructuring process the Company is undergoing, in which a
program of cost cutting measures has been implemented to limit expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the fiscal year ended March 31, 1998
were $3,020,117, compared to $4,298,438 for the fiscal year ended March 31,
1997.  General and Administrative Expenses include Bad Debt Expenses and other
operating expenses (including doubtful receivables and litigation expenses) in
the aggregate amount of $1,826,355.   A substantial portion of such expenses is
related to the Company's previous operations and the Company's restructuring and
constitute one-time, non-recurring expenses.

OTHER INCOME/EXPENSES

The Company realized an extraordinary gain of $4,529,000 related to the
disposition of certain of its subsidiaries which were deemed by the Company to
be no longer material to the Company's core market operations.

NET INCOME/LOSS

The Company's net loss from continuing operations for the fiscal year ended
March 31, 1998 was $2,367,555 as compared to $6,712,669 for the fiscal year
ended March 31, 1997.  The decrease in the loss is due to the increase in the
volume of the Company's operations and the resulting decrease in the ratio of
fixed costs to revenue, as well as substantially lower selling and technical
expenses and lower general and administrative expenses.

The Company realized a net income of $2,161,445 in the fiscal year ended March
31, 1998 and a net loss for the fiscal year ended March 31, 1997 of $6,712,669
primarily resulting from the continuing effect of initial delays and cost
overruns in setting up the Company's network and resulting lag in the
realization of revenues. The net income for the quarter ended December 31, 1996
reflects the gain realized on the sale of discontinued subsidiaries and the more
limited nature of the Company's

                                       20
<PAGE>
 
operations at that time with less overhead, personnel expenses, depreciation and
other operating expenses.

The Company is in the process of reviewing its computer systems to insure it
will not suffer catastrophic failures in connection with the change in the
calendar on January 1, 2000, but has not expended material amounts in this
respect.  The Company currently believes that the cost of year 2000-related
corrections will not have a material effect on the Company's business, operation
or financial condition.  The Company licenses most of the software it uses in
various functions.  Although this practice has minimized the Company effort and
cost needed to make the Company year 2000 compliant, it does place greater
reliance on the outside firms that provide the software.  Because most of the
Company's software is licensed, the Company's main internal compliance tasks are
auditing hardware and software, reviewing internal and external applications,
prioritizing applications by risk, creating a communications program to raise
awareness levels and enable correction of all existing application solutions,
and installation of vendor-provided year 2000 software fixes.  The Company
believes that the majority of the major software applications it uses are either
year 2000 compliant or contain only minor problems, and only a few need
significant modification.  The Company may be exposed in the event any of the
carriers with whom the Company currently (or in the future) is contracting for
network access if any such carrier experiences a catastrophic failure in
connection with the change of calendar on January 1, 2000.  While the Company
attempts to obtain contractual assurances from its carriers in this respect,
there can be no assurance that it is successful in its attempts or that such
assurances, if obtained, provide the Company with sufficient protection in the
event one of its carriers experienced a catastrophic year 2000 problem.

ITEM 7. FINANCIAL STATEMENTS 

See Index to Financial Statements on page F-1.

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

Not Applicable

                                       21
<PAGE>
 
PART III 

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

The executive officers, directors and significant employees of the Company on
March 31, 1998 were as follows:

<TABLE>
<CAPTION>
        Name                    Age                      Position
<S>                             <C>            <C>
Ueli Ernst                      51             Chairman of the Board, Chief
                                               Executive Officer and Director
 
Klaus Brenner                   40             Treasurer, Secretary and Director
 
Andreas Popovici (1)            44             Vice President of UTG Telecom AG
</TABLE>

-----------------------
(1)  Andreas Popovici is not an executive officer but is deemed a "significant
employee".

UELI ERNST has served as a director and Chief Executive Officer of the Company
since January 3, 1998.  Mr. Ernst currently devotes approximately 80% of his
business time to this position.  The remaining time is devoted to various other
business activities of Mr. Ernst, including his services as President of
Interfinance Investment Company Ltd.  He has 26 years of experience in
international business development in various industries primarily in management
consulting, financial advisory services and rendering advice to new growth
business ventures. He was Chairman of Swissray International Inc, a reporting
company listed on the NASDAQ Small Cap Market, from May 1995 through March 1997.
Mr. Ernst received his Masters of Business Administration (lic. oec. publ.)
degree in 1973 from the University of Zurich.

KLAUS BRENNER has served as a director of the Company since January 3, 1998.
Since 1996, Klaus Brenner has served as Chief Executive Officer of Brenner
Industrieholz-Spaene GmbH, Brenner Internationale Holz- und Spaenehandels-
gesellschaft and of Brenner Holding GmbH. From 1986 to 1996 Mr. Brenner has
served as the Chief Executive Officer of Brenner Bois Sprl., the Belgian
subsidiary of Brenner Holding GmbH. These companies are engaged in the lumber
business.

ANDREAS POPOVICI has served as vice president (Direktor) of United Telegroup AG
since March 1996 and currently serves as vice president of UTG Telecom.  From
October 1995 to March 1996, Mr. Popovici served as general manager of Callcom, a
Swiss telecom service company. From 1991 through October 1995 Mr. Popovici
served as vice president (Direktor) of the systems department at Swissphone, a
Swiss telecom company.

Directors of the Company hold office until the next annual meeting of
stockholders of the Company and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal.  

                                       22
<PAGE>
 
No family relationships exist among any of the directors or executive officers
of the Company.

The Company's equity securities are not registered pursuant to Section 12 of the
Securities Exchange Act of 1934.  As such, no person is required to comply with
the requirements of Section 16 of such Act.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the cash and other compensation awarded to,
earned by or paid to David Schlecht, Fritz Wolff, Ronald Kuzon and Ueli Ernst
who served as the Company's chief executive officer during the fiscal year ended
March 31, 1998, and each other executive officer whose total annual salary and
bonus exceeded $100,000 during the fiscal year ended March 31, 1998.  In certain
cases, dollar amounts are approximated based on foreign currency translations.

                                       23
<PAGE>
 
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                      Annual Compensation                       Long-Term Compensation
                                                                                  Awards                Payouts
  Name and     Fiscal Year       Salary      Bonus    Other Annual     Restricted       Securities        LTIP         All Other
 Principal     Ended March        ($)         ($)    Compen-sation   Stock Award(s)     Underlying       Payouts     Compen-sation
 Position          31,                                    ($)             ($)            Options/          ($)            ($)
                                                                                           SARs
                                                                                           (#)
<S>            <C>               <C>         <C>     <C>             <C>                <C>              <C>         <C>
Ueli Ernst,            1998          --       --          --              (2)               (2)             --              --
 Chairman of
 the Board &           1997          --       --          --                                                --              --
 Chief
 Executive
 Officer (1)
 
Ronald Kuzon,          1998          --
 Chairman              1997      10,625                                 200,000 (4)
 and Chief
 Executive
 Officer (3)
 
David Schlecht,        1998    5,000 (6)      --          --              --                --              --              --
 President &                  55,000 (6)
 Chief Executive       1997                   --          --            200,000 (4)         (7)             --              --
 Officer (5)
 
Fritz K. Wolff,        1998  172,359 (9)      --          --            100,000 (10)        (11)
 Executive  Vice              29,580 (9)
 President &           1997                   --          --              --
 Chief Operating 
 Officer (8)
 
Keith Rhea,            1998  124,500(13)      --          --                                (14)
 Chief Operating 
 Officer and
 Director (12) 
 
Robert Finn,           1998  182,228(16)
 Chief Financial                     --
 Officer (15)          1997
 </TABLE>

(1) Mr. Ernst was appointed Chairman of the Board and Chief Executive Officer on
January 3, 1998.  Mr. Ernst has not received any compensation for his services
in this capacity during the fiscal year ended March 31, 1998.

(2) Interfinance Investment Co. Ltd., a company controlled by Mr. Ernst was
issued an aggregate of 144,000 shares of Common Stock and 93,462 options to
purchase Common Stock of the Company in connection with various financings.

(3) Mr. Kuzon served as the Company's Chief Executive Officer from October 1997
through January 3, 1998.
(4) Represents the deemed fair market value of 15,385 unregistered shares of
Common Stock (as adjusted for the reverse stock split) on January 15, 1997, the
date of grant.

(5) Mr. Schlecht resigned as President and Chief Executive Officer on June 25,
1997. Prior to that time, he had been devoting 50% of his time to the business
of the Company in the indicated capacity. He resigned as a director on February
17, 1998.

                                       24
<PAGE>
 
(6) Does not include amounts paid as rent to a Company controlled by Mr.
Schlecht. See "Item 12. Certain Relationships and Related Transactions."

(7) On March 10, 1997, Mr. Schlecht was granted options exercisable for 7,693
shares of Common Stock.  Because of Mr. Schlecht's resignation from his position
prior to the expiration of the vesting period for such options, such options
have been forfeited.

(8) Mr. Wolff was the Company's Chief Executive Officer from June 28, 1997
through October 7, 1998.  From January 15, 1997 through June 25, 1997, Mr. Wolff
served as the Company's Executive Vice President and Chief Operating Officer.
Prior thereto he served as a business development consultant to the Company.

(9) Reflects amounts paid to Birand Ltd., a company through which Mr. Wolff
provided services to the Company. See "--Employment Agreements" and "Item 12 -
Certain Relationships and Related Transactions."

(10) Represents the deemed fair market value of 7,693 unregistered shares of
Common Stock on January 15, 1997, the date of grant.

(11) On March 10, 1997, Mr. Wolff was granted options exercisable for 23,077
shares of Company Common Stock.  Because of Mr. Wolff's resignation from his
position, prior to the expiration of the vesting period for the first
transaction of such options, such options have been forfeited.

(12) Mr. Rhea resigned from his positions with the Company on January 12, 1998.

(13) Includes amounts paid to Telepath Ltd., a company through which Mr. Rhea
provided services to the Company.  See "---Employment Agreements" and "Item 12-
Certain Relationships and Related Transactions."

(14) Pursuant to the Employment Agreement, dated June 30, 1997 between the
Company and Keith Rhea, Mr. Rhea was granted options for 15,385 shares, of which
options for 3,847 shares of Common Stock would have vested prior to Mr. Rhea's
resignation from his positions with the Company. In connection with his
resignation, Mr. Rhea released the Company from its obligations under such
agreement.

(15) Mr. Finn was appointed Chief Financial Officer of the Company on June 25,
1997.  He served in that capacity on a part-time basis until December 7, 1997.

(16) This amount includes $111,710 which Mr. Finn alleges he and Telepath Ltd.
are owed for consulting services performed by him.  The Company disputes that
such amount is owed.  Such amount is included herein merely for disclosure
purposes pending final determination of the dispute between the Company and Mr.
Finn.  The inclusion of such amount herein may not be construed as admission by
the Company that all or part of such amount is in fact owed to Mr. Finn or
Telepath Ltd.

The following table sets forth all grants of options to purchase Common Stock to
the executive officers named in the Summary Compensation Table for the fiscal
year ended March 31, 1998.

                                       25
<PAGE>
 
                   OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
                              (INDIVIDUAL GRANTS)
                                        
<TABLE>
<CAPTION>
        Name            Number Of Securities       Percent Of Total      Exercise Of Base Price       Expiration Date
         (a)                 Underlying          Options/SARs Granted            ($/Sh)                     (e)
                        Options/SARs Granted       to Employees In                 (d)
                                (#)                  Fiscal Year
                                (b)                      (c)
<S>                     <C>                      <C>                     <C>                          <C>
Ueli Ernst                   1,923 (1)                  8.06%                  7.80                     September 30, 2000
Ronald Kuzon                    --                                                --                                     --
David Schlecht                  --                       --                       --                                     --
Fritz K. Wolff                  --                       --                       --                                     --
Keith Rhea                  15,385 (2)                 64.52%                     --                                     --
Robert Finn                     --                       --                       --                                     --
</TABLE>

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

(1) These immediately exercisable options were issued to Interfinance Investment
Co. Ltd. for Interfinance's services in connection with a private placement of
equity securities during the period from September 30, 1997 through October 6,
1997.

(2) See footnote 14 to the Summary Compensation Table.

              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                         AND FY-END OPTIONS/SAR VALUES
                                        
<TABLE>
<CAPTION>
        Name             Shares Acquired On         Value Realized       Number Of Unexercised     Value Of Unexercised
         (a)                  Exercise                    ($)            Securities Underlying         In-The-Money
                                 (#)                      (c)               Options/SARs At          Options/SARs At
                                 (b)                                           FY-End (#)               FY-End ($)
                                                                              Exercisable/             Exercisable/
                                                                             Unexercisable            Unexercisable
                                                                                  (d)                      (e)
<S>                      <C>                        <C>                  <C>                       <C>
Ueli Ernst                       --                       --                  $94,227                  $10,000
Ronald Kuzon                     --                       --                       --                       --
David Schlecht                   --                       --                       --                       --
Fritz K. Wolff                   --                       --                       --                       --
Keith Rhea                       --                       --                      (1)                       --
Robert Finn                      --                       --                       --                       --
</TABLE>

(1) See footnote 14 to the Summary Compensation Table.

                                       26
<PAGE>
 
COMPENSATION OF DIRECTORS

The Company reimburses directors for reasonable out-of-pocket expenses incurred
in connection with attendance at board and committee meetings.  See "Item 10 --
Executive Compensation" for a description of any additional compensation paid to
Messrs. Ernst, Kuzon, Schlecht and Rhea.

Pursuant to Section 145 of the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that the Company shall, to the fullest
extent permitted by law, indemnify all directors, officers, incorporators,
employees and agents of the Company against liability for certain of their acts.
The Company's Certificate of Incorporation also provides that, with certain
exceptions, no director of the Company will be liable to the Company for
monetary damages as a result of certain breaches of fiduciary duties as a
director. Exceptions to this include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law, improper declaration of dividends and transactions
from which the director derived an improper personal benefit.

                                       27
<PAGE>
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of July 7, 1997, certain information
concerning beneficial ownership of the Company's Common Stock by (i) each
beneficial owner of  more than five percent of the outstanding Common Stock,
(ii) each director of the Company, (iii) each executive officer named in the
Summary Compensation Table under Item 10 above and (iv) all current executive
officers and directors of the Company as a group.

<TABLE>
<CAPTION>
NAME AND ADDRESS                            NUMBER OF SHARES BENEFICIALLY OWNED             PERCENTAGE OF COMMON STOCK(1)
<S>                                         <C>                                             <C>
Medfield Investments S.A.                   250,000                                         18.9%
Sonnenbergweg 12
5608-Stetten/AG
Switzerland

Ulrich Ernst                                144,233(2)                                      10.9%
c/o  UTG Communications
International Inc.
Morristown, N.J. 07460

Interfinance Inv. Co.                       144,233                                         10.9%
 Ltd.Steinhaldering 8,
8954 Geroldswil, Switzerland

Klaus Brenner                               138,462(3)                                      10.5%
c/o  UTG Communications
International Inc.
Morristown, N.J. 07460

Fritz Wolff                                      --                                         *
26 South Mall
Cork, Ireland

Keith Rhea                                       --                                         *
1105 Washington Street
Hoboken, NJ

David E. Schlecht                            15,692                                         1.2%
17 Cattano Avenue 
Morristown, NJ 07960

Ronald W. Kuzon                               5,247                                         *
300 Park Avenue, Suite 1940 
New York, NY 10022

All directors and executive officers        303,634                                         23.0%
as a group (six persons)
</TABLE>

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

*   Denotes less than 1%.

(1) Based on 1,322,421 shares of Common Stock issued and outstanding.

(2) Includes 144,233 shares of Common Stock beneficially owned by Interfinance
Inv. Co. Ltd., a company controlled by Mr. Ernst.

                                       28
<PAGE>
 
(3) Includes 115,385 shares of Common Stock owned by Prozal Investment Co., a
company controlled by Mr. Brenner.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As of April 30, 1996, in exchange for 557,692 shares of Common Stock, (as
adjusted for the Company's 1:13 reverse stock split) the Company acquired all of
the outstanding shares, other than qualifying shares, of UTG Telecom from Thomas
Combrinck. At such time Thomas Combrinck, who subsequently became a Chairman of
the Board of Directors of the Company, was not a director of the Company but was
a director of UTG Telecom. The Company did not engage a third-party to
independently review the fairness of this transaction because the cost of such
review would have been high; however, the Company believes that this transaction
was fair from a financial point of view. This belief is based on the fact that
this transaction was analyzed by the Company's Board of Directors and was
negotiated by the Company with a then-unaffiliated third party at arm's length.
At the time such transaction was consummated, the two directors who voted in
favor of the transaction were the Company's only stockholders. On January 29,
1997, Mr. Combrinck resigned from all of his positions with the Company.  For
compensation paid to or for the benefit of Mr. Combrinck during the Company's
last fiscal year, see "Item 10.  Executive Compensation."  In addition, as part
of the severance arrangement with Mr. Combrinck, the Company agreed to pay Mr.
Combrinck 10,000 CHF (approximately $7,000) per month through July 31, 1997 in
consideration of consulting services, if any, to be provided by Mr. Combrinck.
Mr. Combrinck agreed not to compete with the Company during the term of the
consultancy.  From time to time during the Company's last fiscal year the
Company advanced an aggregate of approximately $525,000 to UTG Communications
Ltd. UK ("UTK"), a company controlled by Mr. Combrinck, which amounts were used
to fund certain of UTG's working capital needs.  UTK is no longer active and the
Company does not anticipate recuperating any of such funds.  As such, these
amounts have been written off as a bad debt expense for fiscal 1997.

As of April 30, 1996, the Company issued 211,538 shares of Common Stock (as
adjusted for the Company's 1:13 reverse stock split) to Interfinance Inv. Co.
Ltd., a Panamanian company ("Interfinance"), 183,333 of which shares were issued
in exchange for $200,000 in cash and 197,435 of which shares were issued in
exchange for $26 in cash and a 7% promissory note.  The promissory note was
repaid as of June 28, 1996 from proceeds received from purchasers of a portion
of the shares resold by Interfinance. On August 15, 1996, the Company sold an
additional 30,769 shares of Common Stock to Interfinance for $1,000,000
consisting of $10,000 in cash and a 7% promissory note for $990,000.  The note
was repaid in full in November 1996.  Pursuant to a subscription agreement
entered into in November 1996, Interfinance subscribed for and the Company sold
an additional 9,615 shares of Common Stock at $52.00 per share. In connection
with that agreement, Mr. Combrinck transferred 5,769 shares to Interfinance for
no additional consideration.  In January 1997, Interfinance subscribed for an
additional 153,846 shares of Common Stock at a purchase price of $13.00 per
share.  In addition, the Company granted Interfinance an option to purchase up
to an additional 92,308 shares of Common Stock at $26.00 per share for a two
year period commencing on completion of the purchase of the full 153,846 shares
in accordance with the terms of the agreement.  In connection with the
agreement, Mr. Combrinck agreed to transfer, for no additional consideration,
one share of Common Stock owned by him for each share purchased by Interfinance
under the agreement.  As of the date hereof, all amounts owing to the Company in
respect of Interfinance's November 1996 and January 1997 subscriptions have 

                                       29
<PAGE>
 
been paid (giving effect to approximately $20,000 in credits for expenses
incurred by Interfinance on behalf of the Company). The Company has agreed to
register the resale of the shares purchased by Interfinance under the Securities
Act of 1933. The Company believes that the terms of all transactions with
Interfinance were as fair to the Company from a financial point of view as could
have been obtained from an unaffiliated third party.

In April, 1997, the Company's wholly-owned subsidiary, UTG Communications
Belgium N.V., acquired all of the equity of Multicom N.V., an Antwerp, Belgium
based company which offers direct and indirect dial services to more than 250
corporate customers.  The purchase price was 11,101,043 BEF (approximately
$317,000), payable 50% on April 9, 1997, 25% on May 2, 1997 and 25% on June
2,1997.  Payment of the purchase price was secured by the pledge by Interfinance
of 100,000 shares of the Company's Common Stock owned by Interfinance.

Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors (including Andreas Popovici) 30,769 shares of common
stock at a price of $6.50 per share and, for no additional consideration,
warrants to purchase an additional 15,385 shares of Common Stock at a price of
$7.80 per share. At September 30, 1997, $125,000 of the total $200,000 had been
received by the Company, and the remaining $75,000 was fully paid by October 6,
1997. Interfinance acted as placement agent for these issuances.  No
underwriter's discount or fee was incurred by the Company in connection with
these issuances.  These issuances were exempt from the registration requirements
of the Securities Act of 1933 by reason of the exemption provided by Section
4(2) thereunder.


On March 23, 1998, the Company issued 250,000 shares of Common Stock (post-
reverse split) at a purchase price of $2.00 per share.  In addition, for each
share of Common Stock purchased, the subscriber received three warrants, each to
purchase one share of Common Stock, which warrants will expire five years from
the date of issuance and shall be exercisable at $2.00, $3.00 and $4.50 per
share, respectively. Under the terms of the subscription agreement, as amended,
the Company has the right, subject to certain conditions, to request the
subscriber to purchase up to an additional 500,000 shares of Common Stock upon
the same terms and purchase price as for the initial purchase on or prior to
September 30, 1998.  In connection with this issuance, Interfinance acted as
placement agent and is entitled to a placement fee of 3% of the gross proceeds
to the Company.  As of the date hereof, Interfinance has not enforced its right
to this fee.    The Company believes that the terms of all transactions with
Interfinance were as fair to the Company from a financial point of view as could
have been obtained from an unaffiliated third party.

The Company's principal executive offices utilize space provided by Mr. David
Schlecht, for which the Company is obligated to pay a company controlled by Mr.
Schlecht approximately $1,000 per month.


See "Item 10.Executive Compensation" for a description of employment and other
compensation arrangements with the Company's executive officers and directors.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

                                       30
<PAGE>
 
(a)   Exhibits 

See Index to Exhibits on page E-1.
(b)   Reports on Form 8-K 

No reports on Form 8-K were filed during the last quarter of the fiscal year
ended March 31, 1998


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Amendment to its report to be signed on its behalf by the
undersigned, thereunto duly authorized.




                   UTG COMMUNICATIONS INTERNATIONAL, INC.

                   By:/s/ Ueli Ernst 
                      _________________________________________________
                    Ulrich Ernst, Chairman of the Board & Chief Executive 
                    Officer
                    

Date: July 14, 1998

                                       31
<PAGE>
 
                                 EXHIBIT INDEX

Reference is made below to exhibits indicated with the following footnotes which
are incorporated herein by reference thereto:

(1)  Filed with the U.S. Securities and Exchange Commission (the "Commission")
     as an exhibit to the Registration Statement on Form SB-2 (No. 333-8305)
     filed on July 17, 1996 (the "SB-2").
(2)  Filed with the Commission as an exhibit to Amendment No. 1 to the SB-2
     filed on August 16, 1996.
(3)  Filed with the Commission as an exhibit to Amendment No. 2 to the SB-2
     filed on August 30, 1996.
(4)  Filed with the Commisison as an exhibit to the Company's Form 10-Q for the
     quarterly period ended December 31, 1996.
(5)  Filed with the Commission as an exhibit to the Company's Form 10-K for the
     fiscal year ended March 31, 1997.
(6)  Filed with the Commission as an exhibit to the Company's Form 10-Q for the
     quarterly period ended June 30, 1997.
(7)  Filed with the Commission as an exhibit to the Company's Form 10-Q for the
     quarterly period ended September 30, 1997.

Exhibits indicated with footnote (8) are executive contracts or compensatory
plan arrangements filed pursuant to Part III, Item 2 of Form 10-KSB.

Exhibit No.     Description
-----------     -----------

3.1             Certificate of Incorporation of the Company (1)
3.1(a)          Amendment to Certificate of Incorporation of the Company (2)
3.1(b)          Amendment to Certificate of Incorporation of the Company (3)
3.1(c)          Amendment to Certificate of Incorporation of the Company
3.2             By-laws of the Company (1)
10.1            Stock Purchase Agreement dated April 30, 1996 between 
                Registrant and Tom Combrinck (2)
10.2            Subscription Agreement dated April 30, 1996 between Registrant 
                and Interfinance Inv. Co. Ltd. for the purchase of 183,333 
                shares of Common Stock (2)
10.3            Subscription Agreement dated April 30, 1996 between Registrant 
                and Interfinance Inv. Co. Ltd. for the purchase of 2,566,667 
                shares of Common Stock (2)
10.4            Promissory Note in the principal amount of $2,799,974, dated 
                April 30 1996, by Interfinance Inv. Co. Ltd. in favor of 
                Registrant (2)
10.5            Security and Pledge Agreement dated April 30, 1996 between 
                Registrant and Interfinance Inv. Co. Ltd. (2)
10.6            Registration Rights Agreement dated April 30, 1996 between 
                Registrant and 

                                       1
<PAGE>
 
                Interfinance Inv. Co. Ltd. (2)
10.7            Agreement dated December 21, 1995 between Registrant and 
                Telemedia International, together with Assignment dated July 1, 
                1996 (2)
10.8            Lease beginning April 1, 1996 between Registrant and Guido M. 
                Renggli (2)
10.9            Management Agreement dated March 14, 1996 between Registrant 
                and Andreas Popovici (2), (8)
10.10           Management Agreement dated April 4, 1996 between Registrant and 
                Franco Reinschmidt (2), (8)
10.11           Form of Customer Contract of Registrant (2)
10.12           Subscription Agreement dated August 15, 1996, between 
                Registrant and Interfinance Inv. Co. Ltd., for the purchase of 
                400,000 shares of Common Stock (2)
10.13           Promissory Note in the principal amount of $990,000 dated 
                August 15, 1996, by Interfinance Inv. Co. Ltd., in favor of 
                the Registrant (2)
10.14           Security and Pledge Agreement dated August 15, 1996 between 
                Registrant and Interfinance Inv. Co. Ltd. (2)
10.15           Subscription Agreement dated as of January 15, 1997 between the 
                Company and Interfinance Inv. Co. Ltd. (4)
10.16           Subscription Agreement dated as of November 21, 1996 between 
                the Company and Interfinance Inv. Co. Ltd. (4)
10.17           Joint Instructions of Registrant and Thomas Combrinck and 
                Interfinance Inv. Co. Ltd. dated January 16, 1997 (5)
10.18           Consultancy Agreement effective September 1, 1996 between UTG
                Communications (Europe) AG and Birand Ltd. (5), (8)
10.19           Share Purchase Agreement among UTG Communications Belgium N.V., 
                Messrs. Luc and Tom Van den Bogart and UTG Communications 
                Holding AG. (5)
10.20           Pledge Agreement among UTG Communications Belgium N.V., Messrs. 
                Luc and Tom Van den Bogart and UTG Communications Holding AG. 
                (5)
10.21           Employment Agreement dated June 30, 1997 between the Registrant 
                and Keith Rhea (5), (8)
10.22           Cooperation Agreement dated August 6, 1997 betweenTrafficom and 
                UTG Hungary (6)
10.23           Consulting Agreement between the Company and Telepath, Ltd. (7),
                (8)
10.24           Share Purchase Agreement dated December 29, 1997 between
                Portmann Trading AG and UTG Communications Holding AG
10.25           Share Purchase Agreement dated _______ between Portmann Trading
                AG and UTG Communications Holding AG
10.26           Asset Purchase Agreement dated December 30, 1997 between UTG
                Communications (Europe) AG and UTG Communications Holding AG
10.27           Subscription Agreement, dated as of January __, 1998 by and
                between the Registrant and Medfield Investment S.A. ("Medfield")
10.28           Agreement between Medfield and the Registrant, dated May 16, 
                1998
10.29           Form of Warrant issued to Medfield
10.30           Registration Rights Agreement, dated as of March 23, 1998
                between the Registrant and Medfield

                                       2
<PAGE>
 
10.31           Settlement Agreement among Fritz K. Wolff, Birand Ltd.,
                TeleInvest Ltd. and UTG International, Inc., together with Share
                Purchase Agreement dated as of May 31, 1998 among Fritz K.
                Wolff, TeleInvest Ltd. and Interfinance Inv. Co. Ltd.
21.1            List of Subsidiaries
23.1            Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
27.1            Financial Data Schedule

                                       3
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                       CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEAR ENDED MARCH 31, 1997


 
                                 INDEX
                                 -----


INDEPENDENT AUDITORS' REPORT                         F2


CONSOLIDATED BALANCE SHEETS                          F3 - F4


CONSOLIDATED STATEMENTS OF OPERATIONS                F5 - F6


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY      F7


CONSOLIDATED STATEMENTS OF CASH FLOWS                F8 - F9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           F10 - F20

                                      F-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT



TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
UTG COMMUNICATIONS INTERNATIONAL, INC.

We have audited the accompanying consolidated balance sheets of UTG
COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES as of March 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our 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 UTG COMMUNICATIONS
INTERNATIONAL, INC. AND SUBSIDIARIES as of March 31, 1998 and 1997, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and its limited capital resources raise substantial doubt about its ability to
continue as a going concern.  Management's plans in regard to these matters are
also described in Note 13.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



                                        MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
                                        Certified Public Accountants

New York, New York
June 22, 1998

                                      F-2
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               March 31,
                                                       ------------------------
         ASSETS                                           1998         1997
                                                       -----------  -----------
<S>                                                    <C>          <C>
CURRENT ASSETS
    Cash and Cash Equivalents                           $  363,169   $  388,198
    Subscription Receivable (Note 2)                             -      670,000
    Accounts Receivable, Net of allowance for
     doubtful accounts of $263,617 and $75,925             354,233      815,106
    Other Receivables (Note 3)                             902,563            -
    Prepaid Expenses and Other Current Assets               74,318      167,508
                                                       -----------  -----------
 
        Total Current Assets                             1,694,283    2,040,812
 
 
Property and Equipment, at cost, Net of Accumulated
 Depreciation of $1,184,547 and $401,898 (Note 4)        2,311,164    1,618,316
 
Organization Costs, at cost, Net of Accumulated
 Amortization of $3,303 and $6,795                          10,162       27,286
 
Goodwill, at cost, Net of Accumulated Amortization
 of $6,561 and $-0-                                        245,118            -
 
Customer Lists, at cost, Net of Accumulated
 Amortization of $104,119 and $-0- (Note 6)                832,950            -
 
Deferred Taxes (Note 9)                                          -            -
 
Other Assets                                                78,665       12,218
                                                       -----------  -----------
 
        TOTAL ASSETS                                    $5,172,342   $3,698,632
                                                       ===========  ===========
</TABLE>

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

                                      F-3
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                March 31,
                                                        --------------------------
                                                            1998          1997
                                                        ------------  ------------
<S>                                                     <C>           <C>
     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Bank Overdraft                                        $         -    $  132,237
  Accounts Payable and Accrued Expenses                   1,369,818     3,208,711
  Capital Lease Obligation, Current (Note 10)               101,021        13,013
                                                        -----------   -----------
 
    Total Current Liabilities                             1,470,839     3,353,961
 
Capital Lease Obligation, Long-Term (Note 10)               469,958        14,132
 
Commitments and Contingencies (Note 10)                           -             -
                                                        -----------   -----------
 
    TOTAL LIABILITIES                                     1,940,797     3,368,093
                                                        -----------   -----------
 
STOCKHOLDERS' EQUITY (Notes 2,7,11 & 12)
  Preferred stock - $.01 Par Value, Authorized
   10,000,000 Shares; None Issued and Outstanding                 -             -
 
  Common Stock - $0.00001 Par Value, Authorized
   60,000,000 Shares; 1,303,154 and 1,018,923
   Issued and Outstanding                                        13            10
 
  Additional Paid-in Capital                              7,925,628     7,180,631
 
  Accumulated Deficit                                    (4,551,224)   (6,712,669)
 
  Cumulative Foreign Currency Translation Adjustment     (  142,872)   (  137,450)
 
  Minority Interest                                               -            17
                                                        -----------   -----------
 
    Total Stockholders' Equity                            3,231,545       330,539
                                                        -----------   -----------
 
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY          $ 5,172,342   $ 3,698,632
                                                        ===========   ===========
 </TABLE>


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

                                      F4
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                    For The Years Ended
                                                          March 31,
                                                  ------------------------- 
                                                    1998            1997
                                                  ----------    -----------
<S>                                               <C>           <C>
NET SALES                                         $2,319,631    $1,743,377
                                                                          
COST OF SALES                                      1,312,284     1,820,844
                                                  ----------    ---------- 
 
GROSS PROFIT                                       1,007,347    (   77,467)
                                                  ----------    ----------
 
SELLING AND TECHNICAL EXPENSES
  Consulting Fees                                     75,457       366,801
  Technical Fees                                      83,563     1,209,702
  Sales Salaries                                      34,148       371,366
  Other Selling Expenses                              30,252       105,526 
                                                  ----------    ----------
    Total Selling and Technical Expenses             223,420     2,053,395
                                                  ----------    ----------

INCOME (LOSS) FROM OPERATIONS BEFORE
 GENERAL AND ADMINISTRATIVE EXPENSES                 783,927    (2,130,862)
                                                  ----------    ---------- 

GENERAL AND ADMINISTRATIVE EXPENSES
  Management and Consulting Fees                     248,170     1,231,148
  Salaries and Employee Benefits                     128,610       689,024
  Bad Debt Expense                                 1,026,900       611,987
  Depreciation and Amortization                      505,831       481,446
  Professional Fees                                  194,309       377,658
  Travel Expenses                                     40,379       160,601
  Rent Expense                                        46,468        88,983
  Insurance Expense                                   29,995        16,183
  Other Operating Expenses                           799,455       641,408 
                                                  ----------    ----------
    Total General and Administrative Expenses      3,020,117     4,298,438
                                                  ----------    ----------
 
LOSS FROM OPERATIONS                              (2,236,190)   (6,429,300)
</TABLE> 


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

                                      F-5
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          For The Years Ended
                                                                March 31,
                                                      ---------------------------
                                                          1998            1997
                                                      -----------     -----------
<S>                                                   <C>             <C>  
OTHER INCOME (EXPENSES)
  Interest Income                                              24          25,044
  Interest Expense                                    (   109,549)    (    37,688)
  Loss From Foreign Currency                          (     5,998)    (   123,012)
  Loss on Disposal of Fixed Asset                               -     (    47,151)
  Other Expenses                                      (    15,842)    (   100,562)
                                                      -----------     -----------
    Total Other Income (Expenses)                     (   131,365)    (   283,369)
                                                      -----------     -----------
 
 
LOSS BEFORE INCOME TAXES                               (2,367,555)     (6,712,669)
 
INCOME TAXES (Note 9)                                           -               -
                                                      -----------     -----------
 
LOSS FROM CONTINUING OPERATIONS                        (2,367,555)     (6,712,669)
                                                      -----------     -----------
 
DISCONTINUED OPERATIONS (Note 5)
 
  Loss From Operations of Discontinued
  Subsidiaries, Net of Income Tax                      (2,963,159)              -
 
  Gain on Sale of Discontinued Subsidiaries,
  Net of Income Taxes                                   7,492,159               -
                                                      -----------     -----------
 
    Total Gain on Discontinued Subsidiaries             4,529,000               -
                                                      -----------     -----------
 
NET INCOME (LOSS)                                     $ 2,161,445     $(6,712,669)
                                                      ===========     ===========
 
LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
  Basic                                               $(     2.26)    $(     8.35)
                                                      ===========     ===========
  Diluted                                             $(     1.25)    $(     8.35)
                                                      ===========     ===========

NET INCOME (LOSS) PER COMMON SHARE
  Basic                                               $      2.06     $(     8.35)
                                                      ===========     ============ 
  Diluted                                             $      1.14     $(     8.35)
                                                      ===========     ============ 
</TABLE> 

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

                                      F-6
<PAGE>
 
            UTG COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
 
 
                                                             Additional                      Foreign     
                                     Common Stock             Paid-In       Accumulated      Currency    
                             ----------------------------                                                
                                Shares         Amount         Capital         Deficit       Adjustment   
                             ------------  --------------  --------------  -------------  -------------- 
<S>                          <C>           <C>             <C>             <C>            <C>            
Balance at March 31, 1996              -   $           -   $           -   $        -     $           -  
Net Loss - For the Year                                                                                  
 Ended                                                                                                    
 March 31, 1997                        -               -               -   (6,712,669)                -  
                                                                                                         
Issuance of Common Stock      13,246,000             132       7,303,442            -                 -  
                                                                                                         
Offering Costs                         -               -       ( 122,933)           -                 -  
                                                                                                         
Cumulative Foreign                                                                                       
 Currency Translation                                                                                    
 Adjustment                            -               -               -            -     (     137,450) 
                                                                                                         
Minority Interest                      -               -               -            -                 -  
                             -----------   -------------   -------------   ------------   -------------  
                                                                                                         
Balance at March 31, 1997     13,246,000             132       7,180,509     (6,712,669)    (   137,450) 
                                                                                                         
Giving Effect to a 13:1                                                                                  
 Reverse                                                                                                 
 Stock Split                 (12,227,077)  (         122)            122              -               -  
                             -----------   -------------   -------------   ------------   -------------  
                                                                                                         
Balance at March 31, 1997,                                                                               
 Restated                      1,018,923              10       7,180,631     (6,712,669)  (     137,450) 
                                                                                                         
Net Income For The Year                                                                                  
 Ended                                                                                                   
 March 31, 1998                        -               -               -      2,161,445               -  
                                                                                                         
Issuance of Common Stock,                                                                                
 Giving                                                                                                  
 Effect to a 13:1 Reverse                                                                                
  Split                          284,231               3         744,997              -               -  
                                                                                                         
Cumulative Foreign Currency                                                                              
 Translation Adjustment                                -               -              -               -  
                                                                                                         
                                                                                                         
Minority Interest                      -               -               -              -   (       5,422) 
                             -----------   -------------   -------------   ------------   -------------  
                                                                                                         
Balance at March 31, 1998      1,303,154   $          13   $   7,925,628   $(4,551,224)   $(    142,872) 
                             ===========   =============   =============   ============   =============  

<CAPTION> 
                                                    Total
                                 Minority       Stockholders'                             
                                 Interest          Equity
                              ---------------  --------------
<S>                           <C>              <C>
Balance at March 31, 1996     $            -   $            -
Net Loss - For the Year      
 Ended                       
 March 31, 1997                            -      ( 6,712,669)
                             
Issuance of Common Stock                   -        7,303,574
                             
Offering Costs                             -     (    122,933)
                             
Cumulative Foreign           
 Currency Translation        
 Adjustment                                -     (    137,450)
                             
Minority Interest                         17               17
                              --------------     ------------
                             
Balance at March 31, 1997                 17          330,539
                             
Giving Effect to a 13:1      
 Reverse                     
 Stock Split                               -               -
                              --------------     ------------
                             
Balance at March 31, 1997,   
 Restated                                 17          330,539
                             
Net Income For The Year      
 Ended                       
 March 31, 1998                            -        2,161,445
                             
Issuance of Common Stock,    
 Giving                      
 Effect to a 13:1 Reverse    
  Split                                    -          745,000
                             
Cumulative Foreign Currency  
 Translation Adjustment       (           17)    (         17)
                                                        
                             
Minority Interest                          -     (      5,422)
                              --------------     ------------
                             
Balance at March 31, 1998     $            -     $  3,231,545
                              ==============     ============
</TABLE>

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

                                      F-7
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          For The Years Ended
                                                                               March 31,
                                                                  ------------------------------------
                                                                      1998                    1997
                                                                  -------------           -------------
<S>                                                               <C>                     <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income (Loss)                                                $  2,161,445            $(6,712,669)
  Adjustments to Reconcile Net Income (Loss) to
   Net Cash Used by Operating Activities
  Common Stock Issued for Services                                            -                770,000
  Depreciation and Amortization                                         505,831                481,446
  Changes in Certain Assets and Liabilities:
    Increase in Accounts Receivable                                     439,605           (    910,385)
    Increase in Other Receivables                                 (   1,904,890)                     -
    Increase in Prepaid Expenses and Other Current Assets                89,418           (    180,795)
    Increase in Organization Costs                                       13,048           (     38,091)
    Increase in Other Assets                                      (      69,846)          (     13,654)
    Increase in Accounts Payable and Accrued Ex                   (   1,780,166)             3,551,000
                                                                  -------------           -------------
Total Cash Used by Operating Activities                           (     545,555)          (  3,053,148)
                                                                  -------------           -------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Fixed Assets, Net                                   (   1,586,760)          (  2,263,081)
  Increase in Goodwill                                            (     304,535)                     _
                                                                  -------------           -------------
  For Cash Used by Investing Activities                           (   1,891,295)          (  2,263,081)
                                                                  -------------           -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in Bank Overdraft                                                  -                147,793
  Increase in Loan Payable                                        (      26,928)                     -
  Increase in Capital Lease Payable                                     594,479                 30,338
  Proceeds from Subscription Receivable                                 670,000                      -
  Contribution to Capital                                               745,000              5,863,574
  Offering Costs                                                              -           (    122,933)
  Minority Interest                                               (          17)                    17
                                                                  -------------           -------------
Total Cash Provided By Financing Activities                           1,982,534              5,918,789
                                                                  -------------           -------------
 
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH                                                         429,287           (    214,362)
                                                                  -------------           -------------
 
NET INCREASE IN CASH AND CASH EQUIVALENTS                         (      25,029)               388,198
 
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                           388,198                      -
                                                                  -------------           -------------
 
CASH AND CASH EQUIVALENTS - END OF YEAR                            $    363,169            $   388,198
                                                                  =============           =============
 
CASH PAID DURING THE YEAR FOR:
  Interest Expense                                                 $     64,609            $    37,688
                                                                  =============           =============
  Income Taxes                                                     $          -             $        -
                                                                  =============           =============
</TABLE>

                              
NON-CASH INVESTING AND FINANCING ACTIVITIES

Year Ended March 31, 1998:

In November 1997, the Company purchased an existing customer base for SFR 
1,426,500 (approximately $937,000) in exchange for a loan payable to a third 
party (see also note 5).

Year Ended March 31, 1997:

The Company issued common stock in exchange for a stock subscription agreement. 
As of March 31, 1997 the receivable on the agreement totalled $670,000 for 
51,538 shares.

The Company issued common stock totalling 57,693 shares as compensation for 
management and consulting services.

The Company issued common stock totalling 770 shares as payment for an 
outstanding debt.


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

                                      F-8
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 1998 AND 1997



NOTE 1 -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      a)    Basis of Presentation
            ---------------------

            The accompanying financial statements have been prepared in
            accordance with generally accepted accounting principles and with
            the instructions to Form 10-KSB and Regulation S-B. In the opinion
            of management, all adjustments (consisting only of normal recurring
            adjustments) considered necessary for a fair presentation have been
            included.

            The accompanying consolidated financial statements include the
            accounts of UTG Communications International, Inc. ("The Company"),
            a holding company organized under the laws of the state of Delaware
            on April 17, 1996 and its subsidiaries:

               1)  UTG Telecom AG ("Telecom"), formerly known as UTG
                   Communications Holding AG, ("UTG Holding"), incorporated
                   under the laws of Switzerland on February 29, 1996 (owned
                   100% by the Company);

               2)  UTG Communications (Europe) AG, ("Europe"), incorporated
                   under the laws of Switzerland on March 28, 1996, disposed off
                   (See Note 5d);

               3)  UTG Communications Belgium N.V., ("UTG Belgium"),
                   incorporated under the laws of Belgium on June 27, 1996
                   (owned 100% by Telecom);

               4)  United Telecom GMBH, ("UTG GmbH"), incorporated under the
                   laws of Switzerland on May 28, 1996 (owned 100% by Telecom);

               5)  UTG Communications (Network), Ltd., ("UTG NET") incorporated
                   under the laws of the United Kingdom on October 22, 1996,
                   disposed off (See Note 5e).

               6)  Multicom NV ("Multicom"), incorporated under the laws of
                   Belgium (owned 100% by UTG Belgium);

               7)  UTG Hungary ("Hungary") incorporated under the laws of
                   Hungary on April 2, 1997, disposed off (See Note 5a);

               8)  Tibesta Corporation N.V. ("Tibesta") incorporated under the
                   laws of Curacao on December 24, 1996, disposed off (See Note
                   5c);

               9)  Metatel Telemarketing N.V. ("Metatel") incoporated under the
                   laws of the Netherlands on February 5, 1979, disposed off 
                   (See Note 5c); and

              10)  UTG Communications France, S.A. ("UTG France") incorporated
                   under the laws of France on June 9, 1997, disposed off (See
                   Note 5c).

            All significant intercompany accounts and transactions have been
            eliminated in consolidation.

                                     F-10
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 1998 AND 1997


NOTE 1 -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      b)    Line of Business
            ----------------

            The Company is a switch-based provider of private voice, fax and
            data management telecommunication services throughout Europe and
            Canada.

      c)    Use of Estimates
            ----------------

            The preparation of financial statements in conformity with generally
            accepted accounting principles requires management to make estimates
            and assumptions that affect the reported amounts of assets and
            liabilities and disclosure of contingent assets and liabilities at
            the date of the financial statements and the reported amounts of
            revenues and expenses during the reporting period. Actual results
            could differ from those estimates.

      d)    Cash and Cash Equivalents
            -------------------------

            The Company considers all highly liquid investments purchased with
            original maturities of three months or less to be cash equivalents.

      e)    Property and Equipment
            ----------------------

            Property and equipment is stated at cost. Depreciation is computed
            using the straight-line method based upon the estimated useful lives
            of the various classes of assets. Maintenance and repairs are
            charged to expense as incurred.

      f)    Organization Costs
            ------------------

            Organization costs consist of legal and other administrative costs
            incurred relating to the formation of the Company. These costs have
            been capitalized and will be amortized over a period of five years.

      g)    Goodwill
            --------

            Goodwill represents the cost in excess of the fair market value of
            the acquisition of Multicom N.V. Amortization is being computed
            using the straight-line method over a period of forty years.

      h)    Customer Lists
            --------------

            Customer lists represents the cost of the acquisition of subscriber
            names at their fair market value. Amortization is being computed
            using the straight-line mthod over a period of three years.

      i)    Reclassifications
            -----------------

            Certain prior year amounts have been reclassified to conform with
            current year presentation.

      j)    Bank Overdraft
            --------------

            The Company maintains overdraft positions at certain banks. Such
            overdraft positions are included in current liabilities.

                                     F-11
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 1998 AND 1997


NOTE 1 -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      k)    Translation of Foreign Currency
            -------------------------------

            The Company translates the foreign currency financial statements of
            its Swiss and Belgium subsidiaries, in accordance with the
            requirements of Statement of Financial Accounting Standards No. 52,
            "Foreign Currency Translation". Assets and liabilities are
            translated at current exchange rates, and related revenues and
            expenses are translated at average exchange rates in effect during
            the period. Resulting translation adjustments are recorded as a
            separate component in stockholders' equity. Foreign currency
            transaction gains and losses are included in the statement of
            operations.

      l)    Income Taxes
            ------------

            Income taxes are provided for based on the liability method of
            accounting pursuant to Statement of Financial Accounting Standards
            (SFAS) No. 109, "Accounting for Income Taxes". The liability method
            requires the recognition of deferred tax assets and liabilities for
            the expected future tax consequences of temporary differences
            between the reported amount of assets and liabilities and their tax
            basis.

      m)    Fair Value of Financial Instruments
            -----------------------------------

            The carrying value of cash and cash equivalents, accounts
            receivable, accounts payable and accrued expenses, approximates fair
            value due to the relatively short maturity of these instruments.

      n)    Stock-Based Compensation
            ------------------------

            Statement of Financial Accounting Standards No. 123, "Accounting for
            Stock-Based Compensation", encourages, but does not require
            companies to record compensation cost for stock-based employee
            compensation plans at fair value. The Company has chosen to continue
            to account for stock-based compensation using the intrinsic value
            method prescribed in Accounting Principles Board Opinion No. 25,
            "Accounting for Stock Issued to Employees", and related
            Interpretations. Accordingly, compensation cost for stock options is
            measured as the excess, if any, of the quoted market price of the
            Company's stock at the date of the grant over the amount an employee
            must pay to acquire the stock.

      o)    Long-Lived Assets
            -----------------

            In March 1995, Statement of Financial Accounting Standards No. 121,
            "Accounting for the Impairment of Long-Lived Assets and for Long-
            Lived Assets to be Disposed of", was issued (SFAS No. 121). SFAS No.
            121 requires that long-lived assets and certain identifiable
            intangibles to be held and used or disposed of by an entity be
            reviewed for impairment whenever events or changes in circumstances
            indicate that the carrying amount of an asset may not be
            recoverable. The Company has adopted this statement and determined
            that no impairment loss need be recognized for applicable assets of
            continuing operations.

                                     F-12
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 1998 AND 1997


NOTE 1 -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      p)    Earnings Per Share
            ------------------

            During 1997, the Company adopted Statement of Financial Accounting
            Standards No. 128, "Earnings Per Share" (FAS 128), which requires
            presentation of basic earnings per share ("Basic EPS") and diluted
            earnings per share ("Diluted EPS").

            The computation of basic earnings per share is computed by dividing
            income available to common stockholders by the weighted average
            number of outstanding common shares during the period. Diluted
            earnings per share gives effect to all dilutive potential common
            shares outstanding during the period. The computation of diluted EPS
            does not assume conversion, exercise or contingent exercise of
            securities that would have an anti-dilutive effect on earnings. The
            shares used in the computations are as follows: 

<TABLE>
<CAPTION>
                                                                  March 31,
                                                            --------------------
                                                               1998      1997
                                                            ---------  ---------
            <S>                                             <C>        <C>
            Basic                                           1,046,756    803,846
            Diluted                                         1,896,756    803,846
</TABLE>

NOTE 2 -    SUBSCRIPTION RECEIVABLE

            On January 15, 1997, the Company entered into a subscription
            agreement to sell 2,000,000 shares of its common stock to
            Interfinance Inv. Co., Ltd. ("IIC") for an aggregate price of
            $2,000,000. As of March 31, 1997, $1,285,000 was received relating
            to the agreement.

            As of March 31, 1997, $670,000 was recorded as a receivable. This
            amount was received during the first fiscal quarter of 1998. The
            Company received the remaining $45,000 relating to the subscription
            agreement during the second fiscal quarter of 1998.

NOTE 3 -    OTHER RECEIVABLES

               A)  UTG Communications (Europe) AG     $ 602,563
               B)  Former Director                      300,000
                                                      ---------
                                                      $ 902,563
                                                      =========

      A)    This receivable represents a balance due from UTG Communications
            (Europe) AG, an unrelated thrid party. The balance relates to the
            sale of Europe. (See Note 5d).

      B)    This receivable represents a balance due from a former director of
            the Company relating to a settlement of services provided and the
            sale of UTG Hungary. (See Notes 5a and 14).

                                     F-13
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC. 
                               AND SUBSIDIARIES 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                            MARCH 31, 1998 AND 1997


NOTE 4 -    PROPERTY AND EQUIPMENT

            Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                                               March 31,
                                                      -------------------------
                                                          1998          1997
                                                      ------------  -----------
            <S>                                       <C>           <C>
            Telecommunications Equipment              $ 3,155,377   $ 1,681,212
            Computer Equipment & Software                 203,157       227,571
            Furniture and Fixtures                        137,177       111,431
                                                      -----------   -----------
                                                        3,495,711     2,020,214
            Less: Accumulated Depreciation            ( 1,184,547)  (   401,898)
                                                      -----------   -----------
                                                      $ 2,311,164   $ 1,618,316
                                                      ===========   ===========
</TABLE>

            Depreciation expense for the year ended March 31, 1998 and 1997 was
            $387,029 and $473,850, respectively.

NOTE 5 -    INVESTMENTS

      a)    On April 2, 1997, Telecom founded UTG Communications Hungary, Ltd.
            ("UTG Hungary"), incorporated under the laws of Hungary. Telecom's
            initial investment in UTG Hungary was CHF 8,000.

            During the third quarter, the Company, in connection with a
            settlement reached with a former director and his related companies,
            transferred its interest in UTG Hungary to this director, in return
            for his assumption of all of UTG Hungary's debts and obligations.
            The Company's loss from its investment in UTG Hungary amounted to
            $49,638 Swiss Francs or approximately $32,607 which is included in
            the Company's loss.

      b)    On April 2, 1997, UTG Belgium acquired a 100% ownership in Multicom
            NV ("Multicom"), an existing telecommunications company operating in
            the areas of direct and indirect dial for 11,101,043 Belgium Francs
            or approximately $317,000.

      c)    On April 8, 1997, Telecom consummated the purchase of its 49%
            interest in Tibesta Corporation NV ("Tibesta"), a company
            incorporated under the laws of Curacao. Tibesta is the 100% parent
            of Metatel Telemarketing BV ("Metatel"), a company incorporated
            under the laws of the Netherlands. The purchase price for the
            company's 49% ownership interest in Tibesta was $10,551 of which
            $2,940 represented their 49% interest ownership in Metatel.

            On June 9, 1997, Metatel founded UTG Communications Francs S.A.
            ("UTG France"), a 94% owned company with an initial investment of
            750,000 French Francs or approximately $129,500 of which 49% was
            paid by the Company.

            As of September 30, 1997, the Company's subsidiaries Tibesta,
            Metatel and UTG France were no longer active. The Company wrote off
            its investments in these companies. Loss from investments in these
            companies of $67,772 are included in loss from discontinued
            operations.

                                     F 14
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 1998 AND 1997


NOTE 5 -    INVESTMENTS (Continued)

      d)    On November 30, 1997, an unrelated third party purchased from
            Telecom 100% of Europe for 1,000 Swiss Francs or approximately $700
            and all of UTG Europe's assets and liabilities. The Company's loss
            from its investment in UTG Europe for the eight months ended
            November 30, 1997 amounted to 3,131,140 Swiss Francs or
            approximately $2,194,500 and is included in loss from discontinued
            operations. Due to significant losses in the prior year on UTG
            Europe and the current year loss, the sale resulted in a gain of
            5,517,200 Swiss Francs or approximately $3,840,000 and is included
            in gain on disposal of discontinued operations.

      e)    On December 1, 1997, an unrelated third party purchased from Telecom
            100% of UTG Communications (Network) Ltd. For 1,000 Swiss Francs or
            approximately $700. The Company's loss from its investment in "UTG
            Net" for the eight months ending November 30, 1997 amounted to
            618,900 British pounds or approximately $1,058,300 and is included
            in loss from discontinued operations. Due to significant losses in
            the prior year on UTG Network and the current loss, the sale
            resulted in a gain of 2,356,000 Swiss Francs or approximately
            $1,613,000 which is included in gain on disposal of discontinued
            operations.

NOTE 6 -    ACQUISITION OF ASSETS

            On December 1, 1997, after the sale of its ownership in UTG Europe
            to an unrelated third party, UTG Telecome purchased certain assets
            including property and equipment and customer lists from UTG Europe
            for a loan payable totalling approximately $4,020,300. These assets
            were recorded at cost which approximated their fair market value and
            are being depreciated over their estimated useful life.

NOTE 7 -    MINORITY INTEREST

            Minority interest represented less than a 1% share of the common
            equity of the Company's subsidiary UTG Telecom AG as of March 31,
            1997. As of March 31, 1998, the Company owned 100% of UTG Telecom.

NOTE 8 -    FOREIGN OPERATIONS

            As described in Note 1b, substantially all of The Company's
            operations take place throughout Europe and Canada and the majority
            of its identifiable assets are located in Switzerland, Belgium and
            the United Kingdom.

                                     F-15
<PAGE>
 
                      UTG COMMUNICATIONS INTERNATIONAL, INC.
                                 AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MARCH 31, 1998 AND 1997



NOTE 9 -  INCOME TAXES


          The components of the provision for income taxes is as follows:

<TABLE> 
          <S>                                                              <C>        
          Current Tax Expense                                                         
            U.S. Federal                                                    $       - 
            State and Local                                                         - 
                                                                           -----------
          Total Current                                                             - 
                                                                           -----------
                                                                                      
          Deferred Tax Expense                                                        
            U.S. Federal                                                    $       - 
            State and Local                                                         - 
                                                                           -----------
          Total Deferred                                                            - 
                                                                           -----------
                                                                                      
          Total Tax Provision from Continuing                                         
          Operations                                                       $        - 
                                                                           =========== 

          The reconciliation of the effective income tax rate to the Federal
          statutory rate is as follows:

          Federal Income Tax Rate                                              ( 34.0)%
          Deferred Tax Charge (Credit)                                              -
          Effect on Valuation Allowance                                          34.0%
          State Income Tax, Net of Federal Benefit                                  -
                                                                           ------------

          Effective Income Tax Rate                                               0.0%
                                                                           =========== 
</TABLE> 

          At March 31, 1998 and 1997, the Company had net carryforward losses of
          approximately $4,551,000 and $6,713,000, respectively. Because of the
          current uncertainty of realizing the benefits of the tax carryforward,
          valuation allowances equal to the tax benefits for deferred taxes have
          been established. The full realization of the tax benefit associated
          with the carryforward depends predominantly upon the Company's ability
          to generate taxable income during the carryforward period.

                                     F-16
<PAGE>
 
                      UTG COMMUNICATIONS INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MARCH 31, 1998 AND 1997


NOTE 9 -    INCOME TAXES (Continued)

            Deferred tax assets and liabilities reflect the net tax effect of
            temporary differences between the carrying amount of assets and
            liabilities for financial reporting purposes and amounts used for
            income tax purposes. Significant components of the Company's
            deferred tax assets and liabilities are as follows:

<TABLE> 
<CAPTION>                                          
                                                                March 31,
                                                      --------------------------
                                                          1998          1997
                                                      ------------    ------------
            <S>                                       <C>             <C>
            Deferred Tax Assets
            Loss Carryforwards                        $ 1,547,000     $ 2,282,000
 
            Less:  Valuation Allowance                 (1,547,000)     (2,282,000)
                                                      -----------      -----------
 
            Net Deferred Tax Assets                   $         -     $         -
                                                      ===========      ===========   
</TABLE>

            Net operating loss carryforwards expire starting in 2011 through
            2012. Per year availability is subject to change of ownership
            limitations under Internal Revenue Code Section 382.

NOTE 10 -  COMMITMENTS AND CONTINGENCIES


        a)  On March 14, 1996, United Telegroup AG entered into a three year
            Management Agreement with Andreas Popovici (the "Popovici
            Agreement"), pursuant to which he serves as the Managing Director of
            Telecom. The agreement states that he will devote 200 working days
            to Telecom per year at an annual salary of approximately $179,000
            and will also receive approximately $690 for each new customer he
            introduces to the Company during the first year and approximately
            $520 for each new Company customer he introduces to Telecom during
            the second and third year of the Agreement.

            Effective April 1, 1998, the Company and Mr. Popovici agreed to
            modify his previous employment arrangement. Pursuant to the new
            arrangement, Mr. Popovici serves as vice president of Telecom at an
            annual salary of SFR 180,000 or approximately $120,000. Mr. Popovici
            is reimbursed for expenses incurred in connection with the
            performance of his duties pursuant to the Company's policies in
            effect from time to time.

        b)  As of March 31, 1997, the Company had a bank overdraft facility with
            Credit Suisse in Switzerland of CHF 300,000 (approximately
            $207,000), which bears interest at 6 1/4% per annum plus 1% on
            average overdraft in excess of fixed limit. The overdraft was
            personally guaranteed by an officer of the Company. During fiscal
            1998, this overdraft line was cancelled. Furthermore, the Company
            had an overdraft position with the Union Bank of Switzerland. At
            March 31, 1997 the balance outstanding was 161,572 Swiss Francs or
            approximately $111,500. The balance beared interest of 7% per annum
            plus a commission of highest outstanding balance of 1/4%. During
            fiscal 1998, this overdraft line was also cancelled.

                                     F-17
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                              AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 1998 AND 1997



NOTE 10 -  COMMITMENTS AND CONTINGENCIES (Continued)


      c)   The Company's future minimum annual aggregate rental payments
           required under operating and capital leases that have initial or
           remaining non-cancelable lease terms in excess of one year are as
           follows:
         
<TABLE> 
<CAPTION> 
                                                      Operating                             Capital
                                                       Leases                                Leases
                                                   -------------                           ------------
          <S>                                      <C>                                   <C> 
           1999                                    $     51,238                             $  176,999                   
           2000                                          51,238                                175,631
           2001                                          51,238                                175,631
           2002                                          51,238                                175,631
           2003                                          51,238                                 69,145
           2004 and
           thereafter                                         -                                     -
                                                   ------------                            ------------ 
            Total Minimum Lease Payments                256,190                             $  773,037
                                                   =============                              
           Less: Amounts Representing Interest                                                (202,059)                      
                                                                                           ------------
            Present Value of Future Minimum                                                    570,979          
           Lease Payments                                                                     (101,021) 
           Less: Current Maturities                                                        ------------ 
            Total                                                                          $   469,958 
                                                                                           ============ 
</TABLE>


           Rent expense under operating leases for the year ended March 31, 1998
           and 1997 was $46,468 and $88,983, respectively.
           
     d)    The Company is a party to claims and lawsuits arising in the normal
           course of operations. Management is of the opinion that these claims
           and lawsuits will not have a material effect on the financial
           position of the Company. The Company believes these claims and
           lawsuits should not exceed $232,000, and accordingly, has established
           a reserve included in accounts payable and accrued expenses.

     e)    The Company's former subsidiary, UTG Europe, which was disposed of on
           November 30, 1997. (See Note 5) derived revenue from retail customers
           and carrier partners. For the year ending March 31, 1997, two carrier
           partners accounted for approximately 50% of the net sales. UTG Europe
           entered into agreements with these two carriers that continue through
           the fiscal year ending March 31, 1999 and renew automatically for two
           year cycles, unless terminated by either party in writing with one
           months notice.

        

     f)    On June 30, 1997, the Company entered into an employment agreement
           with Keith Rhea to serve as Chief Operating Officer of the Company
           and a member of the Board of Directors and a consulting agreement
           with Telegraph Ltd. a company believed to be affiliated with Mr.
           Keith Rhea. The terms of the agreements were for three years
           beginning on July 7, 1997 for an annual base salary of $100,000 and
           an annual consulting fee of $80,000. The Company also issued non-
           transferable stock options to purchase up to 200,000 shares of the
           Company's common stock at an exercise price of $1 per share. The
           options expire after 5 years and shall fully vest within 2 1/2
           years.    
                                      F-18
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                              AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 1998 AND 1997



NOTE 10 -  COMMITMENTS AND CONTINGENCIES (Continued)

      g)   Although other providers of telephone communications provide
           international access services, UTG Telecom AG, the Company's Swiss
           subsidiary, was using a single provider, UTG Europe AG, for
           international access services from December 1997 through March 31,
           1998. (See also Note 5d).

NOTE 11 -  STOCKHOLDERS' EQUITY

           On January 10, 1998, the UTG Board of Directors authorized the
           issuance of an additional 40,000,000 common stock at $.0001 par value
           bringing total authorized common shares to 60,000,000. The Board also
           authorized the issuance of 10,000,000 preferred shares at $.01 par
           value. At the same time, a reverse split of one-for-thirteen shares
           was authorized to shareholders of record on March 24, 1998.
           Shareholders' equity has been restated at March 31, 1997, to give
           retroactive recognition to the reverse stock split for both periods
           presented by reclassifying from common stock to additional capital
           the reduced par value arising from the reverse split.

NOTE 12 -  STOCK OPTIONS

           In connection with the subscription agreement dated January 15, 1997
           (See Note 2), the Company granted IIC an option to purchase up to an
           additional 92,308 as adjusted by reverse split shares of common stock
           at $26.00 per share for a two year period commencing on the
           completion of the purchase of the full 153,846 shares subscribed
           for.

           On March 25, 1997, the Company granted nonqualified stock options to
           purchase up to 7,692, 7,692 and 23,077 shares, respectively, as
           adjusted by reverse split to each of Ron Kuzon, David Schlecht and
           Fritz Wolff. The options are exercisable at $13.00 per share, vest in
           equal installments on the first, second and third anniversaries of
           the date of grant, and expire five years from the date of grant. As
           of March 31, 1998, these options expired due to the officers no
           longer being with the Company.

           On June 25, 1997, the Company granted to Mr. Allen Howe, an employee,
           a nonqualified stock option to purchase up to 13,846 shares, as
           adjusted by reverse split at an exercise price of $13.00 per share.
           The option vests in equal installments on July 1, 1997, July 1, 1998
           and July 1, 1999. The option is exercisable as to any vested portion
           during the 12 month period commencing on July 1, 1999. If Mr. Howe
           remains employed by the Company through July 1, 1999, the Company
           agreed to pay Mr. Howe a cash bonus which can only be used to satisfy
           payment of the exercise price.

           On March 23, 1998, the Company issued 250,000 shares of Common Stock
           (post-reverse split) at a purchase price of $2.00 per share. For each
           share of Common Stock purchased, the subscriber received three
           warrants, each to purchase one share of Common Stock at $2.00, $3.00
           and $4.50, respectively. The warrants will expire five years from
           date of issuance.


                                     F-19
<PAGE>
 
                    UTG COMMUNICATIONS INTERNATIONAL, INC.
                              AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 1998 AND 1997



NOTE 13 -  GOING CONCERN

           The accompanying consolidated financial statements have been prepared
           assuming the company will continue as a going concern. As of March
           31, 1998, the Company had a working capital of $223,444 and an
           accumulated deficit of $4,551,224. As of March 31, 1997, the company
           had a working capital deficit of $1,313,149 and an accumulated
           deficit of $6,712,669, the company's loss from operation for the
           years ended March 31, 1998 and 1997 were $2,236,190 and $6,429,300,
           respectively based upon the Company's plan of operation, the Company
           estimates that existing resources, together with funds generated from
           operations will not be sufficient to fund the Company's working
           capital. The Company is actively seeking additional equity financing.
           There can be no assurances that sufficient financing will be
           available on terms acceptable to the Company or at all. If the
           Company is unable to obtain such financing, the Company will be
           forced to scale back operations which would have an adverse effect on
           the Company's financial condition and results of operation.

NOTE 14 -  SUBSEQUENT EVENTS

           On May 26, 1998, the Company's subsidiary, UTG Telecom AG, changed
           its name to Starfon Telecom Services AG.

           On January 8, 1998, the Company's subsidiary, UTG Telecom AG signed a
           service agreement for international access service with Cable &
           Wireless (Switzerland) AG ("C&W") for international direct dial
           service. C&W commenced providing these services after March 31,
           1998

                                  F-20