AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999

REGISTRATION NO. 333-70885
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

PRE-EFFECTIVE

AMENDMENT NO. 2

FORM S-3

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in charter)

DELAWARE 4813 94-3068423
(State or other jurisdiction
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)

---------------------
1751 PINNACLE DRIVE
NORTH TOWER -- 12TH FLOOR
MCLEAN, VA 22102
(703) 918-4500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
GRIER C. RACLIN, ESQ.
1751 PINNACLE DRIVE
NORTH TOWER -- 12TH FLOOR
MCLEAN, VA 22102
(703) 918-4573
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
LINDA C. QUINN, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NY 10022
(212) 848-8747
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------------.

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
- ---------------------.

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]

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2

THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS SUPPLEMENT DATED APRIL 16, 1999

PROSPECTUS SUPPLEMENT

(TO PROSPECTUS DATED APRIL 16, 1999)

9,269,288 SHARES

[GLOBAL LOGO] GLOBAL TELESYSTEMS GROUP,
INC.

COMMON STOCK
------------------------

All of the 9,269,288 shares of common stock offered hereby are being
offered by certain of our stockholders.

Our common stock is quoted on the Nasdaq National Market and the European
Association of Securities Dealers Automated Quotation Market authority under the
symbol "GTSG." An application was made on April 16, 1999 for the admission of
the common stock to the Frankfurt Stock Exchange. On April 15, 1999, the last
reported sale price of our common stock on the Nasdaq National Market was $71.00
per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THE ACCOMPANYING PROSPECTUS.

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

PER
SHARE TOTAL
----- -----

Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds, before expenses, to selling stockholders.......... $ $

The underwriters may also purchase from the selling stockholders up to an
additional 1,390,393 shares at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus supplement to cover
over-allotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement is truthful or complete. Any representation to the
contrary is a criminal offense.

We expect that the shares of common stock will be ready for delivery in New
York, New York on or about , 1999.

------------------------
LEAD MANAGER

MERRILL LYNCH & CO.

BEAR, STEARNS & CO. INC. BT ALEX. BROWN DONALDSON, LUFKIN & JENRETTE
DRESDNER KLEINWORT BENSON LEHMAN BROTHERS
NORTH AMERICA LLC

BANCBOSTON ROBERTSON STEPHENS CIBC WORLD MARKETS

ING BARING FURMAN SELZ LLC PRUDENTIAL SECURITIES

ABN AMRO ROTHSCHILD ARNHOLD AND S. BLEICHROEDER, INC. CREDIT SUISSE FIRST
A DIVISION OF ABN AMRO INCORPORATED BOSTON

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

The date of this prospectus supplement is , 1999.
3

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

PAGE
----

Forward-Looking Statements.................................. S-4
Use of Proceeds............................................. S-4
Capitalization.............................................. S-5
Selling Stockholders........................................ S-6
Underwriting................................................ S-8
Legal Matters............................................... S-10
Experts..................................................... S-10

PROSPECTUS

Summary..................................................... 3
Summary Selected Financial Data............................. 7
Risk Factors................................................ 8
Forward-Looking Statements.................................. 21
Use of Proceeds............................................. 21
Price Range of Common Stock................................. 21
Dividend Policy............................................. 22
Selected Historical Financial Data.......................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Industry Overview........................................... 35
Business.................................................... 37
The Board of Directors and Executive Officers............... 75
Principal and Selling Stockholders.......................... 84
Certain Relationships and Related Transactions.............. 93
Description of Certain Indebtedness......................... 94
Description of Capital Stock................................ 98
Shares Eligible for Future Sale............................. 104
Summary of United States Federal Tax Consequences to
Non-United States Stockholders............................ 106
Plan of Distribution........................................ 109
Legal Matters............................................... 109
Where You Can Find More Information......................... 110
Incorporation of Information We File With the SEC........... 110
Experts..................................................... 111
Additional Information for Frankfurt Stock Exchange Listing
of GTS Common Stock....................................... 111
Index to Consolidated Financial Statements.................. F-1
Exhibit A -- Supplemental EASDAQ Information................ A-1

You should rely on the information provided in this prospectus supplement
and the accompanying prospectus, including the information incorporated by
reference. We have not authorized anyone to provide you with information
different from that contained or incorporated by reference in this prospectus
supplement and the accompanying prospectus. Global TeleSystems Group, Inc. is
offering to sell the shares and seeking offers to buy the shares, only in
jurisdictions where offers and sales are permitted. The information contained in
or incorporated by reference in this prospectus supplement and the accompanying
prospectus is accurate only as of the date of this prospectus supplement,
regardless of the time of delivery of this prospectus supplement and the
accompanying prospectus or of any sales of the shares.

S-3
4

FORWARD-LOOKING STATEMENTS

This prospectus supplement includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, and is subject to the safe-harbor created by
such sections. All statements other than statements of historical facts included
in this Prospectus Supplement or incorporated by reference herein regarding
industry prospects and our results of operations or financial position are
forward-looking statements. Such forward-looking statements represent our
current expectations and are inherently uncertain. Investors are warned that our
actual results may differ significantly from our expectations and, therefore,
from the results discussed in such forward-looking statements. Certain factors
that might cause such differences include, but are not limited to, the "Risk
Factors" described in the prospectus. Investors are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date of
this prospectus supplement.

USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from the sale of
their shares of our common stock and we will not receive any proceeds from the
sale of those shares.

OFFERING OF DEPOSITARY SHARES

Concurrently with this offering by our selling shareholders we intend to
offer, pursuant to an exemption from the Securities Act of 1933, pursuant to a
separate offering memorandum, 6,000,000 depositary shares, each representing
1/100 of a share of our convertible preferred stock, which is convertible into
shares of our common stock. The offering of common stock pursuant to this
prospectus supplement is not conditioned on the depositary share offering and we
cannot assure you that the depositary share offering will be consummated. If we
do not consummate the offering of depositary shares, we will need to find
additional sources of capital to replace the funding that we would have raised
through the offering of depositary shares.

S-4
5

CAPITALIZATION

The following table sets forth our consolidated capitalization as of
December 31, 1998. These amounts exclude 9,888,527 shares of common stock that
is issuable under our option plans, which is subject to vesting requirements,
and an additional 163,795 shares of common stock that we will issue in exchange
for NetSource shares that will be tendered in connection with our acquisition of
NetSource. The table also sets forth our consolidated capitalization on a pro
forma basis showing the effect of the Hermes Railtel high yield debenture
issuance on January 1999, comprised of $200 million of senior notes due January
2009 and E85 million (approximately $100 million) senior notes due January 2006.
The third column represents our consolidated capitalization on an as adjusted
basis showing the effect of the issuance by Hermes Railtel of approximately $300
million aggregate principal amount of senior notes and our offering of 6,000,000
depositary shares representing shares of our convertible preferred stock.

AS ADJUSTED
FOR THE
DEPOSITARY
SHARE
ACTUAL PRO FORMA OFFERING
---------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE DATA)

Cash and cash equivalents.............................. $ 998,510 $1,288,210 $1,579,210
========== ========== ==========
Debt maturing within one year.......................... $ 23,859 $ 23,859 $ 23,859
Current portion of capital lease obligations........... 43,102 43,102 43,102
---------- ---------- ----------
Current debt................................. 66,961 66,961 66,961
Long-term obligations, net of current portion:
Related party debt, net of current portion........... 2,600 2,600 2,600
5 3/4% Convertible Bonds due 2010.................... 466,902 466,902 466,902
11 1/2% Esprit Senior Notes due 2007................. 305,051 305,051 305,051
11 1/2% Hermes Railtel Senior Notes due 2007......... 265,000 265,000 265,000
10 7/8% and 11% Esprit Senior Notes due 2008......... 240,061 240,061 240,061
8 3/4% Convertible Bonds due 2000.................... 117,601 117,601 117,601
9 7/8% Senior Notes due 2005......................... 105,000 105,000 105,000
10 3/8% Hermes Railtel Senior Notes due 2006 and
2009.............................................. 300,000 300,000
Capital Leases....................................... 218,139 218,139 218,139
Other long-term debt, net of current portion......... 4,999 4,999 4,999
---------- ---------- ----------
Long-term debt.................................... 1,725,353 2,025,353 2,025,353
---------- ---------- ----------
Total debt........................................ 1,792,314 2,092,314 2,092,314
---------- ---------- ----------
Commitments and Contingencies:
Minority interest.................................... 37,329 37,329 37,329
Common stock subject to repurchase (288,441
shares)........................................... 16,081 16,081 16,081
Shareholders' equity:
Series B cumulative preferred stock, par value of
$0.0001 per share; authorized, issued and
outstanding; 60,000 "As Adjusted" (liquidation
preference of $5,000 per share)................... -- -- --
Common stock, $0.10 par value (135,000,000 shares
authorized; 80,733,372 shares issued and
outstanding)...................................... 8,073 8,073 8,073
Additional paid-in capital........................... 885,057 885,057 1,176,057
Accumulated deficit.................................. (543,715) (543,715) (543,715)
Other comprehensive loss............................. 488 488 488
---------- ---------- ----------
Total shareholders' equity........................ 349,903 349,903 640,903
---------- ---------- ----------
Total capitalization................................... $2,195,627 $2,495,627 $2,786,627
========== ========== ==========

S-5
6

SELLING STOCKHOLDERS

The following table sets forth certain information regarding ownership of
GTS common stock and rights to acquire common stock by each of the selling
stockholders under this prospectus supplement. For the purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares which such has the right to acquire within 60 days after such date, but
such shares are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.

The following table includes the number of shares beneficially owned prior
to the offering and shares of our common stock issuable upon the exercise of
stock options and stock warrants within 60 days of December 31, 1998. The
percentage of ownership for each beneficial owner is based upon 81,131,491
shares of our common stock issued and outstanding as of February 26, 1999 and
the number of warrants in common stock held by such beneficial owner. Excluded
from the calculation are: 9,914,880 shares of common stock issued under the GTS'
option plans that are subject to vesting requirements (including Esprit options
that are convertible into GTS common shares); and an additional 163,795 shares
of common stock that will be issued in exchange for NetSource shares that will
be tendered in connection with such acquisition. Subject to NetSource meeting
certain performance targets during the first two quarters of 1999, an additional
1.4 million shares of common stock may be issued. See "Shares Eligible for
Future Sale" in the accompanying prospectus.

The selling stockholders will receive all of the net proceeds from the sale
of shares and will pay any underwriting discounts and selling commissions. The
amounts of shares shown below as being offered and sold assumes no exercise of
the Underwriters' over-allotment option.

SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER THE
PRIOR TO SECONDARY OFFERING SECONDARY OFFERING
---------------------------- NUMBER OF --------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT
------------------------ ------------ ------------ ------------ --------- -------

Apax Funds Nominees Limited.......... 4,265,225(1) 5.26 3,708,891 556,334 *
62 Green Street
London WIY 4BA
The Open Society Institute........... 4,330,281(2) 5.13 240,414 4,089,867 4.86
c/o Soros Fund Management LLC
888 Seventh Avenue, 31st Floor
New York, NY 10106
Soros Foundation Hungary............. 3,074,199 3.79 2,673,217 400,982 *
Warburg, Pincus Ventures, L.P........ 1,962,697 2.43 1,706,693 256,004 *
Winston Partners II LDC.............. 694,454(3) * 273,700 420,754 *
Soros Charitable Foundation.......... 656,849 * 571,173 85,676 *
Winston Partners II LLC.............. 345,191(4) * 95,200 249,991 *

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

* Less than 1%

(1) Comprised of holdings in two blocks: (a) 3,539,474 shares of common stock
held in Apax Funds Nominees Limited B Account and (b) 725,751 shares of
common stock held in Apax Funds Nominees Limited D Account.

(2) Comprised of 996,948 shares and warrants to purchase 3,333,333 shares of
common stock held by The Open Society Institute. See "Shares Eligible for
Future Sale" in the accompanying prospectus.

(3) Comprised of 324,083 shares of common stock and warrants to purchase
370,371 shares of common stock. Information in the above entry excludes
21,500 shares of, and options for the purchase of, common stock held by
Stewart J. Paperin over which Winston Partners II LDC disclaims ownership.
GTS has filed a shelf registration statement covering such shares. See
"Shares Eligible for Future Sale" in the accompanying prospectus.

(4) Comprised of 160,007 shares of common stock and warrants to purchase
185,184 shares of common stock. Information in the above entry excludes
21,500 shares of, and options for the purchase of, common stock held by
Stewart J. Paperin over which Winston Partners II LLC disclaims ownership.
See "Shares Eligible for Future Sale" in the accompanying prospectus.

S-6
7

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among us, the selling stockholders and the underwriters
named below (collectively, the "Underwriters"), the selling stockholders
severally have agreed to sell to each of the Underwriters, and each of the
Underwriters has severally and not jointly agreed to purchase from the selling
stockholders, the respective number of shares of our common stock set forth
opposite its name below.

NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Bear, Stearns & Co. Inc. ...................................
BT Alex. Brown Incorporated.................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Dresdner Kleinwort Benson North America LLC.................
Lehman Brothers Inc. .......................................
BancBoston Robertson Stephens Inc. .........................
CIBC Oppenheimer Corp. .....................................
ING Baring Furman Selz LLC..................................
Prudential Securities Incorporated..........................
ABN AMRO Incorporated.......................................
Arnhold and S. Bleichroeder, Inc. ..........................
Credit Suisse First Boston Corporation......................
----------
Total.......................................... 9,269,288
==========

In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of our
common stock being sold pursuant to each such agreement if any of the shares of
our common stock being sold pursuant to such agreement are purchased. In the
event of a default by an Underwriter, the Purchase Agreement provides that, in
certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Purchase Agreement may be terminated.

The Underwriters have advised us that the Underwriters propose initially to
offer the shares of our common stock to the public at the initial public
offering price set forth on the cover page of this prospectus supplement, and to
certain dealers at such price less a concession not in excess of $ per share
of our common stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of our common stock on sales to
certain other dealers. After the offering contemplated hereby, the public
offering price, concession and discount may be changed.

The selling stockholders have granted options to the Underwriters,
exercisable for 30 days after the date of this prospectus supplement, to
purchase up to an aggregate of 1,390,393 additional shares of our common stock
at the public offering price set forth on the cover page of this prospectus
supplement, less the underwriting discount. The Underwriters may exercise these
options solely to cover over-allotments, if any, made on the sale of our common
stock offered by this prospectus supplement. To the extent that the Underwriters
exercise these options, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of our common stock
proportionate to such Underwriters' initial amount reflected in the foregoing
table.

The following table shows the per share and total public offering price,
underwriting discount to be paid by the selling stockholders to the Underwriters
and the proceeds before expenses to the selling stockholders.

S-7
8

This information is presented assuming either no exercise or full exercise by
the Underwriters of their over-allotment options.

WITHOUT WITH
PER SHARE OPTIONS OPTIONS
--------- ------- -------

Public offering price....................................... $ $ $
Underwriting discount....................................... $ $ $
Proceeds, before expenses, to the selling stockholders...... $ $ $

The expenses of the offering are estimated at $ (exclusive of the
underwriting discount) and are payable by us.

The shares of our common stock are being offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.

We have agreed, subject to certain exceptions, including issuances in
connection with strategic transactions, not to directly or indirectly (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase, any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer any shares of our common stock or securities
convertible into or exchangeable or exercisable for or repayable with our common
stock, whether now owned or thereafter acquired by the person executing the
agreement or with respect to which the person executing the agreement thereafter
acquires the power of disposition, or file a registration statement under the
Securities Act with respect to the foregoing or (2) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of our common stock whether any such swap or transaction is to be
settled by delivery of our common stock or other securities, in cash or
otherwise, without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Underwriters for a period of 60 days after
the date of this prospectus supplement.

We and the selling stockholders have agreed to indemnify the Underwriters
against certain liabilities, including certain liabilities under the Securities
Act, or to contribute to payments the Underwriters may be required to make in
respect thereof.

Until the distribution of our common stock offered by this prospectus
supplement is completed, rules of the Securities and Exchange Commission may
limit the ability of the Underwriters to bid for and purchase our common stock.
As an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of our common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of our common stock.

In connection with the offering, certain Underwriters and selling group
members may engage in passive market making transactions in our common stock on
the Nasdaq National Market in accordance with Regulation M under the Securities
Exchange Act of 1934, as amended, during a period before the commencement of
offers or sales of our common stock in the offering.

If the Underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common stock
than are set forth on the cover page of this prospectus supplement, they may
reduce that short position by purchasing our common stock in the open market.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.

Neither we nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transaction
described above may have on the price of our common stock. In addition, neither
we nor any of the Underwriters makes any representation that the Underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.

S-8
9

Certain of the Underwriters or their affiliates from time to time have
provided investment banking and financial advisory services to us and our
affiliates, and may in the future provide investment banking and financial
advisory services to us and our affiliates.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Shearman & Sterling, New York, New York. Certain matters for the Underwriters
will be passed upon by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.

EXPERTS

The consolidated financial statements and schedules of Global TeleSystems
Group, Inc. as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998 appearing in this offering memorandum have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein which is based in part on the report of
PricewaterhouseCoopers, independent auditors. The consolidated financial
statements referred to above are included in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.

S-9
10

THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED APRIL 16, 1999

PROSPECTUS

24,100,121 SHARES
[GLOBAL TELESYSTEMS
GROUP, INC. LOGO] GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK

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

The selling stockholders listed under "Principal and Selling Stockholders"
in this prospectus intend to offer and sell from time to time, up to 24,100,121
shares of Global TeleSystems Group, Inc.'s common stock. Our shares currently
trade on the Nasdaq National Market under the symbol "GTSG."

INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

The date of this prospectus is April 16, 1999.

SUMMARY

We are a leading independent provider of telecommunications services to
businesses, other high usage customers and telecommunications carriers in
Europe. We also provide telecommunications services in Russia and the
Commonwealth of Independent States (CIS). In October 1998 we realigned our
operations into five lines of business: GTS Carrier Services, GTS Business
Services, GTS Access Services, GTS Business Services - CIS and GTS Mobile
Services - CIS. In March 1999, we added a sixth line of business, GTS Wholesale
Services.

GTS CARRIER SERVICES

GTS Carrier Services has three components: Hermes Europe Railtel B.V.,
Transoceanic Services and IP Services. Through Hermes Railtel, we operate a
centrally managed fiber optic network that is designed to carry high volumes of
telecommunications traffic across national borders in Europe and to the United
States. We sell this capacity to other telecommunications carriers and, through
our subsidiary, Ebone A/S, we connect Internet service providers in Europe to
the Internet. Through Transoceanic Services, we intend to expand our ability to
provide these services between the United States and Europe by utilizing the
resources of FLAG Atlantic Limited, a joint venture in formation in which we
have a 50% equity interest. This joint venture will build and operate a new
transatlantic dual cable system, called FLAG Atlantic-1, designed to carry
voice, data and video traffic at much faster speeds than currently available on
existing transatlantic links. Through IP Services, we plan to offer Internet
services to businesses, other high usage customers and telecommunications
carriers. These services will range from providing access to and transporting
data on the Internet to other services, such as helping other companies to set
up and maintain their web sites. We intend to utilize the three components of
our Carrier Services line of business to become a leading provider of seamless
transatlantic city-to-city managed services to businesses and telecommunications
providers. For a comprehensive discussion on our Carrier Services line of
business, see "Business -- GTS Carrier Services."

GTS BUSINESS SERVICES

Through our Business Services line of business, we focus on providing high
quality, competitively priced telecommunications services to businesses and
other high usage customers. We currently conduct our Business Services line of
business through our two recently acquired subsidiaries, Esprit Telecom Group
plc and NetSource Europe ASA. We provide a range of telecommunications services
organized in the following two segments:

- long distance voice and fax services for corporate customers to
worldwide destinations; and

- network management services and services providing access to and
termination of traffic on our network for telecommunications service
providers who do not own their own telecommunications facilities, such
as calling card companies.

At December 31, 1998, we had over 35,000 business customers and
approximately 44,000 small office and home office and residential customers in
11 countries throughout Europe. We intend to increase our Business Services
product offering to include services such as toll free services and calling
cards. For a discussion of our Business Services line of business, see
"Business -- GTS Business Services."

GTS WHOLESALE SERVICES

In March 1999, we introduced Wholesale Services as our sixth line of
business. Wholesale Services provides international traffic termination services
to other telecommunications service providers, including public
telecommunications operators, global alliances and regional telephone companies.
Termination services involve the termination of traffic through our own network
or through other providers. Through our Wholesale Services line of business, we
expect to integrate the wholesale services activities of Esprit Telecom with the
international services and switching operations of our GTS-Monaco Access
operations.

3
12

At a later date, Wholesale Services will also incorporate NetSource's wholesale
activities. For a discussion of our Wholesale Services line of business, see
"Business -- GTS Wholesale Services."

GTS ACCESS SERVICES

Through our Access Services line of business, we plan to offer local access
to telecommunications networks for voice and data traffic to businesses, other
high usage customers and telecommunications carriers in 12 major Western
European cities by 2001. Our existing operations in Hungary and the Czech
Republic currently provide alternative local access and other services to
businesses and governmental customers in those markets. We plan to develop our
infrastructure through one or more of the following:

- constructing, purchasing or leasing fiber optic cable networks;

- obtaining licenses for telecommunications networks utilizing microwave
transmissions; or

- forming partnerships with or acquiring existing network operators.

We intend to reduce local access costs that we now incur for our Carrier
Services and Business Services customers by providing such local access
ourselves instead of purchasing it from incumbent public telecommunications
operators or other local access providers.

GTS BUSINESS SERVICES - CIS

Through our Business Services - CIS line of business we offer
telecommunications services to business customers in Russia and other countries
in the Commonwealth of Independent States. These services include:

- international long distance, local telephone services and access to
domestic long distance carriers in Moscow and St. Petersburg;

- domestic long distance services in Moscow and several other cities in
Russia; and

- data services, including high-speed data transmission, electronic mail
and Internet access services.

We currently operate in 31 regions, including 14 cities and the city of
Moscow, in Russia and the CIS. For a discussion of our Business Services - CIS
line of business, see "Business -- GTS Business Services - CIS and Mobile
Services - CIS -- GTS Business Services - CIS."

GTS MOBILE SERVICES - CIS

Through our Mobile Services - CIS line of business, we offer cellular
telephone services to business customers in 14 regions in Russia and in Kiev,
Ukraine. For a discussion of our Mobile Services - CIS line of business, see
"Business -- GTS Business Services - CIS and Mobile Services - CIS -- GTS Mobile
Services - CIS."

BUSINESS STRATEGY

In order to achieve our objective of becoming Europe's premier independent
provider of telecommunications services to businesses, other high usage
customers and telecommunications carriers, we intend to implement the following
key strategies:

- Continue construction of the Hermes Railtel network to expand its
geographic reach;

- Develop local access infrastructure in 12 major metropolitan markets
throughout Europe by 2001;

- Expand our Internet capabilities and product offerings;

- Reinforce and extend market penetration of Hermes Railtel's network by
enhancing the scope, capacity, reliability and efficiency of our
infrastructure, and by providing our own local access;

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- Increase high usage retail customer base and route traffic over our own
networks; and

- Integrate the marketing and service offerings of each of our six lines of
business.

RECENT DEVELOPMENTS

CONCURRENT SECONDARY STOCK AND PREFERRED STOCK OFFERINGS

We have filed with the SEC a prospectus supplement to this prospectus for
an underwritten public offering of common stock owned by some of our affiliates
and other shareholders. These selling shareholders have indicated that they
currently anticipate offering an aggregate of approximately 9.5 million shares
for sale in the offering, although final decisions regarding the amount that
will be offered, if any, will be made only at the pricing of the offering. The
selling shareholders are expected to include George Soros associates; Apax Funds
Nominees; and Warburg, Pincus Ventures.

OMNICOM ACQUISITION

On April 14, 1999, we announced our agreement to buy 52 percent of the
shares of Omnicom, a French corporation, for E194.6 million (approximately $210
million). We will pay total consideration consisting of 50% in cash
(approximately $103,000,000) and 50% in shares of our common stock . The
1,850,497 shares that we will issue will be unregistered and are therefore
subject to transfer restrictions, unless transferred in compliance with, or
pursuant to an exemption from the Securities Act. Certain of the Omnicom
majority shareholders have agreed to the following:

- to place a total of approximately 20% of the shares that they will
acquire in escrow until the later of June 30, 2000 and thirty days after
the filing of our Form 10-K for year end December 31, 1999; and

- not to transfer a total of approximately 30% of the shares that they will
acquire until six months after the date of acquisition.

In accordance with the terms of the Omnicom agreement, we expect the acquisition
to be completed by April 21, 1999.

As required by French law and regulation, we have filed with the Conseil
des Marches Financiers and intend to proceed promptly with an offer to purchase
the remaining minority shares and the convertible bonds of Omnicom. Our board
and the board of Omnicom have approved the agreement and endorse the pending
offer to the remaining minority shareholders and convertible bond holders.

Omnicom is one of the first successful new entrants in the
telecommunications industry in France. Omnicom is the second operator to connect
with France Telecom's network and also holds a national network operator's
license for France. Excluding France Telecom, Omnicom is the leading provider of
telecommunications services for small and medium-sized businesses in France.
Omnicom markets its services through both a direct sales force and sales agents
throughout France. Omnicom's other service offerings include the sale and
distribution of pre-paid cards to outlets in France and the offering of
telecommunications services to residential customers.

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We believe that Omnicom's business is complementary with ours and benefits
will result from combining the two companies.

OUR NEW CHIEF EXECUTIVE OFFICER

In March 1999, our board of directors elected H. Brian Thompson as chairman
and chief executive officer. Mr. Thompson served as chairman and chief executive
officer of LCI International, Inc. from 1991 until June 1998, when Qwest
Communications International, Inc. acquired LCI. During Mr. Thompson's tenure at
LCI, that company grew in annual revenues from $220 million to $1.6 billion in
1997. LCI provided long-distance voice and data services in the United States
and to more than 230 international locations. In addition, our board elected
Robert J. Amman, a board member, president of our company.

ESPRIT TELECOM ACQUISITION

On February 2, 1999, we commenced an offer to purchase all of the issued
share capital of Esprit Telecom. On March 4, 1999, after all of the conditions
to our offer were satisfied, we accepted ordinary shares and American depositary
shares representing approximately 97.9% of the issued share capital of Esprit
Telecom. In exchange, we issued approximately 15.7 million shares of our common
stock.

We are in the process of developing our business plan and strategy for
Esprit Telecom, including the manner in which Esprit Telecom will be integrated
into our existing lines of business and corporate structure. We have accounted
for this transaction as a pooling of interests. On April 16, 1999, we announced
30-day postmerger combined financial results. The combined company generated
revenues of $59 million, net loss of $26 million and earnings per share of
$(0.32) for the 30-day postmerger period beginning March 5, 1999. In addition,
we will incur charges in the first quarter of 1999 in connection with the
Espirit Telecom combination. We will recognize a charge of approximately $46
million in transaction costs, including investment banking, advising, debt
restructuring, legal, accounting, printing and employee-related expenses. We
will also incur additional charges of $25 million to eliminate or reduce
redundancies of the GTS and Espirit Telecom networks, including, fiber lease
cancellation, write-off of excess equipment and redeployment of switches. For a
discussion of risks associated with the integration of this acquisition, see
"Risk Factors -- Failure to successfully integrate our recent acquisitions could
disrupt the operations of our businesses and prevent us from realizing intended
benefits."

HERMES DEBT OFFERING

On January 4, 1999, Hermes Railtel, an 89.9% owned subsidiary, completed a
private placement of $200 million principal amount of 10 3/8% senior notes due
2009 and E85 million principal amount of 10 3/8% senior notes due 2006. Hermes
Railtel will use the proceeds of this offering to finance the cost of building
the remainder of the network and increasing transatlantic capacity and enhancing
the speed and capacity of the network.

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SUMMARY SELECTED FINANCIAL DATA

The following is a summary of selected historical financial data as of and
for the five years ended December 31, 1998. The historical financial data as of
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996 have been derived from the historical financial statements of the Company,
which financial statements have been audited by Ernst & Young LLP, independent
public accountants, as indicated in their report included elsewhere herein. The
selected financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited Consolidated Financial Statements and related notes
thereto appearing elsewhere in this document.

The selected financial data presents the restatement of our historical
financial statements for 1998 and prior periods to reflect the business
combination with Esprit Telecom Group plc, which was accounted for as a pooling
of interests.

YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Statement of Operations Data:
Revenues......................... $ 372,392 $ 121,461 $ 62,497 $ 30,458 $ 8,348
Gross margin..................... 134,286 24,352 17,902 6,415 256
Operating loss................... (145,045) (105,968) (65,579) (52,316) (18,472)
Other income (expense)........... (94,178) (29,985) (9,293) 10,683 521
Loss before extraordinary loss... (243,052) (134,761) (76,205) (44,196) (17,951)
Extraordinary loss............... (12,704) -- -- -- --
Net loss......................... (255,756) (134,761) (76,205) (44,196) (17,951)
Loss per share before
extraordinary loss............ (3.41) (2.74) (2.01) (1.48) (0.83)
Extraordinary loss per share..... (0.18) -- -- -- --
Net loss per share............... (3.59) (2.74) (2.01) (1.48) (0.83)
Other Data:
EBITDA(1)........................ $ (66,222) $ (87,436) $(55,866) $(46,442) $(16,733)
Net cash used in operating
activities.................... (120,852) (52,268) (42,763) (5,637) (18,506)
Net cash used in investing
activities.................... (455,916) (117,646) (86,421) (80,984) (22,783)
Net cash provided by financing
activities.................... 1,032,377 468,339 178,998 74,890 67,338
Balance Sheet Data (at end of period):
Cash and cash equivalents........ $ 998,510 $ 358,384 $ 67,927 $ 17,767 $ 29,917
Property and equipment, net...... 643,044 259,971 46,992 34,982 12,153
Total assets..................... 2,614,602 876,647 275,058 136,093 68,640
Total debt....................... 1,792,314 645,710 89,349 39,379 8,694
Shareholders' equity............. 349,903 77,649 128,267 63,869 54,825

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

(1) EBITDA is earnings (loss) from operations before foreign currency gains
(losses), interest, taxes, depreciation and amortization. In computing
EBITDA, we have not included our share of the foreign currency gains
(losses), interest, taxes and depreciation and amortization that we have
recognized from our respective equity method investees, for the periods
presented, that is included within our equity in losses of ventures line
item in our consolidated statements of operations. EBITDA is a measure of a
company's performance commonly used in the telecommunications industry, but
should not be construed as an alternative to net income (loss) determined in
accordance with generally accepted accounting principles ("GAAP") as an
indicator of operating performance or as an alternative to cash from
operating activities determined in accordance with GAAP as a measure of
liquidity.

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RISK FACTORS

Investing in our common stock will provide you with an equity ownership
interest in GTS. As a shareholder, you may be subject to risks inherent in our
business. The value of your investment may increase or decline and could result
in a loss. You should carefully consider the following factors relating to us as
well as other information contained in this prospectus before deciding to invest
in shares of our common stock.

WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO IMPLEMENT OUR
BUSINESS STRATEGY

We will require additional capital to fund future acquisitions, capital
expenditures and ongoing operations. If we fail to generate sufficient funds in
the future from a combination of operating cash flow and additional debt or
equity financings, we may have to delay or abandon executing significant
elements of our business plan including:

- our plans to offer local access services in twelve major Western
European cities by 2001;

- our plans to further extend our network in Europe;

- our participation in the FLAG Atlantic Limited joint venture, which
plans to operate and build a new transatlantic cable; and

- capital expenditures and other costs necessary to develop and offer
Internet services.

Failure to implement elements of our business plan could have a material adverse
effect on our operations and on the market price of our common stock.

OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE DISADVANTAGE

We have incurred substantial debt (including the assumed debt of Esprit
Telecom) and may incur substantial additional debt to implement our business
plans.

As a result of our current high level of debt, we:

- will need significant cash to service our debt, which will reduce funds
available for operations, future business opportunities and investments
in new or developing technologies and make us more vulnerable to adverse
economic conditions;

- may not be able to refinance our existing debt or raise additional
financing to fund future working capital, capital expenditures, debt
service requirements, acquisitions or other general corporate
requirements;

- may be less flexible in planning for, or reacting to, changes in our
business and in the telecommunications industry that affect how we
implement our financing, construction or operating plans; and

- will have more debt than some of our competitors, which may place us at
a competitive disadvantage with respect to such competitors.

If we fail to make the required payments or to comply with our debt
covenants we will default on our debt. A default would permit our debtholders to
accelerate the maturity of the debt, which in turn would cause defaults under
our other indebtedness.

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COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO BORROW AND INVEST,
WHICH COULD IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR FUTURE OPERATIONS

The covenants in our currently outstanding debt may materially and
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities. Among other things, these covenants
limit our ability to:

- incur additional indebtedness;

- pay dividends, make distributions on our common stock or make certain
other restricted payments;

- limit our ability to use our assets as collateral for loans;

- dispose of our assets; or

- enter into transactions with affiliates.

FAILURE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITIONS COULD DISRUPT THE
OPERATIONS OF OUR BUSINESSES AND PREVENT US FROM REALIZING INTENDED BENEFITS

If we are unable to integrate our newly acquired companies, we may fail to
realize the expected cost savings, increases in revenue and other projected
benefits from such integration, and may suffer material adverse short and
long-term effects on our operating results and financial condition. The process
of integrating NetSource and Esprit Telecom may disrupt our respective
businesses and may cause an interruption of, or a loss of momentum in, our
respective businesses as a result of a number of obstacles such as:

- loss of key employees or customers;

- possible inconsistencies in standards, controls, procedures and policies
among the companies being combined and the need to implement common
company-wide financial, accounting, information, billing and other
systems;

- failure to maintain the quality of customer service that such companies
have historically provided;

- the need to coordinate geographically diverse organizations;

- incompatible equipment;

- changes in management may impair relationship with employees and
customers;

- limitations under existing Esprit Telecom debt covenants;

- the resulting diversion of management's attention from our day-to-day
business and the need to hire management personnel to address such
obstacles; and

- additional expenditures required to facilitate this integration.

For a discussion of the integration of recent acquisitions, see
"Summary -- GTS Wholesale Services" and "Summary -- Recent
Developments -- Esprit Telecom Acquisition."

OUR INABILITY TO IDENTIFY FUTURE ACQUISITION OPPORTUNITIES OR ACQUIRE THE
FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE SUCH OPPORTUNITIES MAY HINDER THE
GROWTH OF OUR NETWORK

Our inability to successfully implement our acquisition strategy may hinder
the expansion of our network and make our services less attractive to customers
seeking a geographically broader network. We believe that additional attractive
acquisition opportunities currently exist in Western and Central Europe and the
United States. We continuously evaluate attractive acquisition opportunities
and, at any given time, may be engaged in discussions with respect to possible
material acquisitions or other business combinations. Some of these transactions
may involve our selling in one or more private or public transactions certain of
our Russian businesses or our interests in these businesses, or our contributing
some of our Russian businesses in exchange for an interest in the surviving
entity. Although we have discussions

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with other companies to assess opportunities on an ongoing basis, we do not
currently have a definitive agreement with respect to any material acquisition
or joint venture. We may be unable to identify, finance and complete, on
acceptable terms, suitable acquisitions, transactions or business combinations.
Furthermore, we may not be able to raise the additional capital necessary to
fund such acquisitions and may have to divert management's attention and our
financial and other resources from other areas. For a comprehensive discussion
of our acquisition strategy, see "Business -- GTS Carrier Services -- Business
and Marketing Strategy," "Business -- GTS Business Services -- Business and
Marketing Strategy," "Business -- GTS Wholesale Services -- Business and
Marketing Strategy," and "Business -- GTS Access Services -- Business and
Marketing Strategy."

OUR HISTORY OF SUBSTANTIAL NET LOSSES MAY CONTINUE INDEFINITELY AND MAKE IT
DIFFICULT TO FUND OUR OPERATIONS

We have historically sustained substantial operating and net losses. If we
do not become profitable in the future, the value of our common stock may fall
and we could have difficulty obtaining funds to continue our operations. For the
following periods, we reported net losses of:

PERIOD NET LOSS
- ------ --------------

Year ended December 31, 1996................................ $ 76.2 million
Year ended December 31, 1997................................ $134.8 million
Year ended December 31, 1998................................ $255.8 million
Inception through December 31, 1998......................... $543.7 million

These net losses reflect the restatement of our historical financial statements
for 1998 and prior periods to account for the acquisition of Esprit Telecom as a
pooling of interests. Since December 31, 1998, we have incurred higher net
losses as compared to the corresponding period for the previous year. We expect
to continue incurring significant operating losses during the next several years
while we develop our operations, infrastructure and customer base in new
European markets.

ESTABLISHED COMPETITORS WITH GREATER RESOURCES MAY MAKE IT MORE DIFFICULT FOR US
TO EFFECTIVELY MARKET OUR SERVICES, OFFER OUR SERVICES AT A PROFIT AND ATTRACT
AND RETAIN CUSTOMERS

Competitors may force us to lower our prices or modify our service
offerings to remain competitive. We may not be able to effectively market our
expanded service offerings, keep prices at a profitable level or attract and
retain customers. Specifically, prices for international long distance calls
have decreased substantially over the last few years in most of our current and
potential markets. We expect our prices for services to continue to decrease for
the foreseeable future.

Our competitors include large established national carriers, alliances
among telecommunications companies, competitors that own equipment and networks,
companies that purchase and resell the services of other carriers, Internet
service providers and other providers of bundled services. We may also face
competition from cable television companies, wireless telephone companies,
microwave carriers and satellite companies. Many of these competitors have
established customer bases and extensive brand name recognition and have greater
financial, management and other resources. Our medium- to large-sized business
and governmental agency customers and organizations may also be reluctant to
entrust their telecommunications needs to what they perceive to be a relatively
new and unproven operator.

In addition, various telecommunications companies, including MCI WorldCom,
Inc., Viatel, Inc., KPN N.V., Qwest Communications International, Inc., Deutsche
Telekom AG and France Telecom S.A., Global Crossing Ltd. and British
Telecommunications plc, have announced plans to construct, have begun to
construct or are operating fiber optic networks across various European
countries which do or will compete with Hermes Railtel.

For more information on our competitors in Business Services and Access
Services lines of business, see "Business -- Competition Faced by Our Lines of
Business."

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OUR COMPETITIVE POSITION MAY BE COMPROMISED BY OUR DEPENDENCE ON OTHER
TELECOMMUNICATIONS SERVICE PROVIDERS

We need to enter into interconnection agreements with large established
national carriers and other local service providers operating in our target
markets. We may also need to enter into agreements which permit us to place our
equipment at the facilities of such third parties and/or lease
telecommunications transport capacity from such third parties. Failure to enter
into interconnection and other agreements which provide satisfactory pricing and
other terms could affect our ability to compete in a targeted market. For a
comprehensive discussion on our dependence on other telecommunications service
providers, see "Business -- Competition Faced by Our Lines of Business."

OUR ACCESS SERVICES AND BUSINESS SERVICES ACTIVITIES MAY CAUSE OUR CARRIER
SERVICES LINE OF BUSINESS TO LOSE CUSTOMERS

Our Carrier Services line of business, through Hermes Railtel, offers
services to customers that may compete with our Access Services and Business
Services lines of business. Our Business Services and Access Services lines of
business may contract with Hermes Railtel for capacity on an arms-length basis.
However, Hermes Railtel's customers and potential customers may not perceive
Hermes Railtel as an independent operator in such transactions. Such a
perception could negatively impact Hermes Railtel's ability to attract and
retain customers, which could, in turn, adversely affect our revenues.

WE MAY INCUR ADDITIONAL CHARGES UNDER OUR RESALE AGREEMENTS WITH LONG-DISTANCE
AND INTERNATIONAL CARRIERS

We enter into many telecommunications traffic resale agreements with long
distance and international carriers. These agreements often contain minimum
volume commitments. We may be obligated to pay underutilization charges if we
overestimate our need for transmission capacity. If we underestimate our need
for transmission capacity, we may need to pay more for the extra capacity
needed. Under these arrangements, we are subject to the risk of unanticipated
price fluctuations and service restrictions or cancellations. For a
comprehensive discussion on our dependence on other telecommunications service
providers, see "Business -- Competition Faced by Our Lines of Business."

OUR INABILITY TO MANAGE OUR RAPID GROWTH COULD ADVERSELY AFFECT OUR FINANCIAL
REPORTING, CUSTOMER SERVICE AND REVENUES

Our rapid expansion has placed and will continue to place significant
demands on our operating and financial control systems and infrastructure. In
order to manage our growth effectively, we expect to purchase additional
telecommunications facilities and expand, train and manage the employee base.
Inaccuracies in our forecasts of market demand could result in insufficient or
excessive telecommunications facilities and excessively increase our fixed
expenses. Additionally our business development and expansion will create
additional demands on our customer support, sales and marketing and
administrative resources and network infrastructure.

OUR FAILURE TO INTEGRATE, MANAGE AND OPERATE NEW TECHNOLOGY COULD RESULT IN
SYSTEM FAILURES

Our operations depend on our ability to successfully integrate new and
emerging technologies and equipment. These include the technology and equipment
required for dense wavelength division multiplexing, which allows multiple
signals to be carried simultaneously and Internet-data transmission using dense
wavelength division multiplexing technology. Integrating these new technologies
could increase the risk of system failure and result in further strains on our
resources. Additionally, any damage to our Carrier Services network management
center or our major Business Services switching centers could harm our ability
to monitor and manage the network operations and generate accurate call detail
reports from which billing information is derived. See "Business -- GTS Carrier
Services" and "Business -- GTS Business Services."

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SYSTEM FAILURES OR INTERRUPTIONS IN OUR NETWORK MAY CAUSE LOSS OF CUSTOMERS

Our success depends on the seamless uninterrupted operation of our network
and on the management of traffic volumes and route preferences over our network.
Furthermore, as we continue to expand our network to increase both its capacity
and reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our circuit capacity and traffic management
systems. Any prolonged failure of our communications network or other systems or
hardware that causes significant interruptions to our operations could seriously
damage our reputation and result in customer attrition and financial losses.

THE TECHNOLOGY OF OUR HERMES RAILTEL NETWORK COULD BECOME OBSOLETE AND HARM OUR
COMPETITIVENESS

If our network is not able to meet its design specifications or if it is
unable to keep pace with technological changes in the telecommunications
industry, our network could become obsolete. Our network has been designed to
utilize dense wavelength division multiplexing and synchronous digital hierarchy
technology, another digital transmission standard that facilitates the
compatibility of dissimilar equipment from different vendors. In addition, the
network will be extended to support IP Services in 1999. While the currently
operational portion of our network has performed at or above design
specifications since November 1996, our network may not achieve the technical
specifications which we designed it for. Additionally, we may be unable to
allocate the funds necessary to upgrade our network as technological
improvements in telecommunications equipment are introduced. This could harm our
competitive position relative to other more technologically advanced networks.
For a more comprehensive discussion of the Hermes Railtel network technology,
see "Business -- GTS Carrier Services -- Hermes Railtel Network."

WE MAY ENCOUNTER DELAYS IN IMPLEMENTING KEY ELEMENTS OF OUR BUSINESS STRATEGY
WHICH COULD ADVERSELY AFFECT OUR PROJECTED REVENUE GROWTH

We may be unable to successfully, timely and cost-effectively realize
numerous elements of our business plan, including:

- our plan to provide local access services in twelve major Western
European cities by 2001;

- our plan to build and operate the FLAG Atlantic-1 transatlantic cable by
the end of 2000;

- our plan to develop and offer Internet services;

- the execution of agreements with various parties regarding, among other
things, rights-of-way and development and maintenance of infrastructure
and equipment; and

- the timely performance by third parties of their contractual obligations
to engineer, design and construct the infrastructure underlying our
local access strategy, transatlantic services and Internet services.

We believe that our cost estimates and the network expansion schedule are
reasonable with respect to these projects. However, the actual construction
costs or time required to complete the plans could substantially exceed current
estimates. Any significant delay or increase in the costs to develop such plans
could have a material adverse effect on our operations.

DELAYS IN REGULATORY LIBERALIZATION IN EU MEMBER STATES COULD ADVERSELY AFFECT
OUR SERVICE OFFERINGS IN THOSE COUNTRIES

A substantial portion of our strategy depends on the timely implementation
of regulatory liberalization of the EU telecommunications market. Although EU
member states had a legal obligation to liberalize their markets in accordance
with these directives by January 1, 1998, Greece and Portugal have been granted
extensions. In many countries where we implement our business plan and make
capital expenditures there is a risk that regulatory liberalization may not
occur. As a result, we may be unable to

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provide many of our services and to proceed with the planned growth and
expansion of our networks, infrastructure and other systems.

Even if an EU member state promptly adopts liberalization measures in a
timely fashion, we may encounter difficulty in executing our business plan if
(1) established national or regional telecommunications operators, regulators,
trade unions and other sources resist implementation of such measures or (2) any
EU member state imposes greater restrictions on international services between
the EU member state and non-EU countries. For a comprehensive discussion of our
business strategy, see "Business -- Business Strategy," "Business -- GTS Carrier
Services -- Business and Marketing Strategy," "Business -- GTS Business
Services -- Business and Marketing Strategy," "Business -- GTS Wholesale
Services -- Business and Marketing Strategy," and "Business -- GTS Access
Services -- Business and Marketing Strategy."

WE MAY ENCOUNTER DELAYS, OPERATIONAL PROBLEMS AND INCREASED COSTS IF WE ARE
UNABLE TO ACQUIRE KEY EQUIPMENT FROM OUR MAJOR SUPPLIERS

We are significantly dependent on the technology and equipment which we
acquire from telecommunications equipment manufacturers that may provide vendor
financing for, and maintenance of, this equipment. Without this equipment, we
would face delays, operational disruption and higher expenses. Our main
suppliers are Alcatel, Nortel, Ericsson and Siemens. While we could obtain
equipment of comparable quality from several alternative suppliers, we may be
unable to acquire compatible equipment from such alternative sources on a timely
and cost-efficient basis.

FAILURE TO OBTAIN NEW LEASES OF TRANSMISSION CAPACITY OR RENEW EXISTING LEASES
ON OUR LEASED LINES COULD CAUSE US TO INCUR LOSSES ON THE LEASED PORTIONS OF OUR
NETWORK

We currently lease a substantial portion of our network transmission
capacity under agreements which generally have twelve-month or longer fixed
terms. These lease arrangements result in high fixed costs. If our lease
arrangements deteriorate or terminate and we are unable to enter into new
arrangements, our cost structure, service quality, network coverage, results of
operations and financial condition could be adversely affected. For a more
comprehensive discussion of our network agreements, see "Business -- GTS Carrier
Services -- Hermes Railtel Network -- Network Agreements."

FAILURE TO CARRY SUFFICIENT TRAFFIC ON OUR LEASED LINES COULD CAUSE US TO INCUR
LOSSES ON THE LEASED PORTION OF OUR NETWORK

The revenues generated by transporting traffic in these leased fiber routes
may vary with traffic volumes and prices. Accordingly, if we do not carry enough
traffic volume over the particular route or are unable to charge an appropriate
price for such traffic, we could fail to generate revenue sufficient to cover
our lease costs, and would therefore incur operating losses on the particular
route or routes. For a more comprehensive discussion of our network agreements,
see "Business -- GTS Carrier Services -- Hermes Railtel Network -- Network
Agreements."

OUR REVENUES FROM OUR WHOLESALE AND RESELLER CUSTOMERS ARE SUBJECT TO
FLUCTUATIONS AND MAY RESULT IN LOSSES OR INCONSISTENT PROFITABILITY

Customers of our Business Services line of business that purchase services
on a wholesale basis or for resale to retail customers typically change their
routing or providers to take advantage of the lowest cost alternative. This
often results in greater fluctuations in revenue generated by these customers
than by other categories of customers. Due to capacity and quality constraints
on our least-cost routes, we have occasionally been forced to carry traffic over
a higher-cost route, thereby decreasing our revenues. We may continue to
experience short term fluctuations in usage and revenue as customers change
routing and providers. For a discussion of our wholesale and resale customers,
see "Business -- GTS Wholesale Services -- Targeted Customers."

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WE MAY BE AT A COMPETITIVE DISADVANTAGE DUE TO RESTRICTIONS IMPOSED BY THE
FOREIGN CORRUPT PRACTICES ACT ON CERTAIN OF OUR BUSINESS PRACTICES

Many of our current and potential competitors are not subject to, or
constrained by the prohibitions of, the Foreign Corrupt Practices Act, including
the prohibition against making payments to government officials in order to
obtain commercial benefits. We are subject to, and seek to comply with, the
limitations and prohibitions of such law, and accordingly may be subject to
competitive disadvantages to the extent that our competitors are able to secure
business, licenses or other preferential treatment through the making of such
payments. Accordingly, we cannot assure you that we will be able to compete
effectively against companies free from such limitations in the emerging markets
where such commercial practices are commonplace.

WE WILL LOSE TAX BENEFITS IF WE ARE UNABLE TO USE OUR NET OPERATING LOSS
CARRYFORWARDS

As of December 31, 1998, we had net operating loss carryforwards for U.S.
federal tax purposes of approximately $251.0 million expiring in 2003 through
2018. We cannot assure you that U.S. tax authorities will allow us to apply
these loss carryforwards, in part or full, to reduce taxes on our future income.
Because of the change in ownership provisions of the Tax Reform Act of 1986, our
ability to use the tax benefits from our net operating loss carryforwards is
subject to an annual limit as a result of the initial public offering and the
follow on stock offering, convertible senior subordinated debenture due 2010
offering carried out in July 1998 and our recent acquisitions of Esprit and
NetSource.

FLUCTUATIONS IN FOREIGN CURRENCIES MAY MAKE IT MORE COSTLY FOR US TO PAY OUR
U.S. DOLLAR-, DEUTSCHMARK-AND EURO-DENOMINATED DEBT

Changes in foreign currency exchange rates can reduce the value of our
assets and revenues and increase our liabilities and costs, as our revenue and
some of our costs, assets and liabilities are denominated in multiple local
currencies. We have substantial debt denominated in U.S. dollars, Deutschmarks
and Euros. However, most of our revenues are denominated in European currencies.
Therefore, our ability to pay interest and principal on such debt is dependent
on the then current exchange rates between U.S. dollars and the currencies in
which our revenues are denominated. We historically have not used hedging
transactions to limit our exposure to risks from doing business in foreign
currencies. In April 1998, Hermes Europe Railtel B.V. entered into a currency
swap contract to limit its exposure to some if its currency risks. For further
discussion of our exposure to currency fluctuations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

OUR RISK OF FRAUD AND BAD DEBT MAY GROW AS OUR SMALL TO MEDIUM SIZED CUSTOMERS
INCREASE

We have experienced problems relating to the fraudulent use of our access
codes and the failure of some customers to make full payment for services
rendered. However, we do not believe that such problems are substantially
different from what is generally experienced in the telecommunications industry.
We expect that the credit risk characteristic of our customer base may increase
as the share of our revenue deriving from small to medium sized enterprises and
service provider/reseller customers increases.

WE MAY NOT IMPLEMENT BILLING AND MANAGEMENT INFORMATION SYSTEMS EFFECTIVELY AND
ON SCHEDULE

We may encounter difficulties in implementing and enhancing our new billing
and management information systems and in integrating new technology into such
systems. While our existing billing system is sufficient for its current
operations, we have selected a new billing system which we believe will provide
the capability and flexibility to support our anticipated growth. If our billing
and management information systems are not effectively implemented, our call
details may not be accurately recorded and customer bills may not be generated
promptly and accurately. This would adversely impact on our business since we
would not be able to promptly collect on customer balances due to us. For a
comprehensive discussion of our Billing and Management Information Systems, see
"Business -- GTS Business Services -- Billing and

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23

Management Information Systems" and "Business -- GTS Access Services -- Billing
and Management Information Systems."

FAILURE OF OUR COMPUTER SYSTEMS TO RECOGNIZE THE YEAR 2000 COULD DISRUPT OUR
BUSINESS AND OPERATIONS

We rely greatly on computer systems and other technological devices.
However, these devices may not be capable of recognizing dates beginning on
January 1, 2000. This problem could cause any of our network, Internet or
programming operations to malfunction or fail. We are communicating with third
parties significant to our business to find out more about their Year 2000
compliance programs. We cannot assure you that our Year 2000 program or the
programs of third parties who do business with us will be effective or that our
estimates about the timing and cost of completing our program will be accurate.

We have spent approximately $4.9 million for our Year 2000 compliance
through December 31, 1998, and expect to spend approximately an additional $5.0
million to $6.0 million through the end of calendar year 1999. We currently
expect to incur $2.0 million to replace identified telecommunications equipment
and software. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance."

LOSS OF KEY PERSONNEL COULD AFFECT OUR GROWTH AND FUTURE SUCCESS

We believe that our growth and future success will depend in large part
upon a small number of key executive officers, as well as on our ability to
attract and retain highly skilled personnel to work in the emerging markets in
which we operate. Key personnel include our senior management and the heads of
our lines of business as well as senior management personnel formerly employed
by NetSource and Esprit Telecom, which we recently acquired. We cannot assure
you that we will be able to hire and retain qualified personnel. The competition
for qualified personnel in the telecommunications industry is intense,
particularly in the emerging markets where we operate.

SIGNIFICANT STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS

At December 31, 1998, the Open Society Institute, Soros Foundation Hungary,
Soros Charitable Foundation, Soros Humanitarian Foundation, Winston Partners II
LLC, Winston Partners II LDC and Chatterjee Fund Management, L.P., which we
collectively refer to as the Soros associates, beneficially owned approximately
11.91% of our common stock and Alan B. Slifka and affiliates beneficially owned
4.60% of our common stock. In addition, two persons who are affiliated with the
Soros associates and one person who is affiliated with the Slifka affiliates
serve on our board. As a result, either of these two stockholder groups may
significantly influence decisions which stockholders must approve, such as the
election of directors and other decisions relating to the management of
business.

TURMOIL IN RUSSIA AND THE CIS CREATES SIGNIFICANT UNCERTAINTY FOR OUR OPERATIONS

To date, we have earned a significant portion of our revenue from
operations in Russia and the other countries of the CIS. All foreign companies
operating in the former Soviet Union, including our company, face significant
political, economic, regulatory, legal and tax risks, as described below.

For a discussion of our consideration of a possible sale of our interest in
certain of our Russian businesses, including through a public offering, see
"Business -- GTS Business Services -- CIS and Mobile Services -- CIS."

THE EFFECT OF POLITICAL INSTABILITY ON OUR BUSINESS IS UNCERTAIN

Instability in the political systems of Russia and the other independent
countries of the CIS discourages investment and spending and could reduce our
revenues and profits from our operations in these countries. The political
instability results from political gridlock, dissatisfaction with reform, social
and ethnic unrest, economic difficulties, and changes in government policies,
and may grow worse in the future. Russia's current president continues to
institute political reforms, but the pace of reform is slowing.

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The dismissal of a significant number of government leaders by the Russian
president over the past year has contributed to continuing political
instability.

The Russian parliament has passed legislation to protect private property
from expropriation and nationalization. However, since the Russian government
lacks experience in enforcing these provisions and since the present political
system is unstable, we do not know if these protections will be enforced in the
future. Expropriation or nationalization of our business would have a material
adverse effect on our operations.

RUSSIA'S UNSTABLE ECONOMY MAY REDUCE DEMAND FOR OUR SERVICES

The Russian economy has experienced severe volatility in both financial and
currency markets. These developments have been accompanied by a substantial
decline in the Russian stock market and the failure of banks and other
businesses. Reforms enacted by the Russian government to create a more market-
oriented economy are at risk in this environment and it is uncertain whether
stability will return to the Russian financial markets. If the Russian economy
does not improve, this condition will most likely have an impact on the demand
for our services offered in Russia.

THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT OUR ABILITY TO CONVERT
RUBLES AND RECOVER FUNDS

The instability of the ruble and the institution of further restrictions on
certain foreign exchange payments could negatively affect our ability to convert
rubles into foreign currency and transfer foreign exchange payments out of
Russia. Through our Business Services - CIS and Mobile Services - CIS lines of
business, we have earned and continue to earn significant revenue in Russia. The
value of the ruble against the U.S. Dollar, however, has steadily declined. As a
result of the August 17, 1998 decision by the Russian Government and the Central
Bank of Russia to devalue the ruble and its aftermath, the value of the ruble
against the U.S. Dollar has fallen even more significantly, negatively affecting
our financial performance. During the quarter ended September 30, 1998, we
recorded a $13.1 million pre-tax charge, the largest portion of which consisted
of foreign currency exchange losses on our net monetary assets that are
denominated in rubles. Since the August 17th decision, the Russian authorities
have been unable to maintain a stable exchange rate. Thus, an additional
significant and sudden decline in the value of the ruble might occur which could
negatively affect our financial performance and require us to record another
significant pre-tax charge.

Our ability to hedge against further declines in the values of the ruble by
converting to other currencies is significantly limited. The ruble is generally
non-convertible outside Russia. Within Russia, the market for converting rubles
into other currencies is limited and is subject to rules that restrict the
purposes for which conversion and payment are allowed. This market may become
even more restricted or may cease to exist as a result of policies the Russian
government may implement.

The 90-day moratorium that the August 17th decision imposed on certain
foreign exchange payments delayed transfers of funds. Although the 90-day
moratorium has expired, it could be renewed or established in another form if
the Russian government and Central Bank anticipate further liquidity crises. Any
delay in converting rubles into foreign currency to make a payment or delay in
the transfer of such foreign currency could have a material adverse effect on
our operations.

For a more comprehensive discussion of the economic crisis in Russia and
the other independent countries of the CIS, see "Business -- GTS Business
Services - CIS and Mobile Services - CIS -- Background on the Political,
Economic and Tax Environment in Russia."

MORE RESTRICTIVE RUSSIAN TELECOMMUNICATIONS POLICIES COULD CONSTRAIN OUR
OPERATIONS

Presently, Russian legislation does not restrict foreign investment in the
telecommunications industry, but there have been press reports of renewed
consideration of nationalization and foreign ownership restrictions of certain
strategic industries, such as the telecommunications industry. Any change to
current government regulations or policies that negatively affects the licenses
that we hold or our ability to obtain

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licenses in the future would restrict our operations in Russia and the CIS. For
a more comprehensive discussion of regulatory issues in Russia and the other
independent countries of the CIS, see "Business -- Licenses and Regulatory
Issues -- GTS Business Services - CIS and Mobile Services - CIS."

WE MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO CONFUSION IN RUSSIA'S LAWS AND
LEGAL STRUCTURES

The current confusion with the Russian and CIS legal structure makes it
difficult to know if we would be able to enforce our rights in disputes with our
joint venture partners or other parties, or if we are in compliance with all
applicable laws, rules and regulations. The Russian and other CIS governments
have rapidly introduced laws and regulations and have changed their legal
structures in an effort to make their economies more market-oriented, resulting
in considerable legal confusion, especially in areas of the law that directly
affect our operations. There can be no assurance that local laws and regulations
will become stable in the future. Our ability to provide services in Russia and
the other independent countries of the CIS could be adversely affected by
difficulties in protecting and enforcing our rights and by future changes to
local laws and regulations.

OUR RUSSIAN TAX BURDEN MAY BE SIGNIFICANTLY GREATER THAN ANTICIPATED

It is possible that our Russian taxes may be greater than the estimated
amount that we have expensed to date and accrued on our balance sheets. The
Russian tax system has many uncertainties and Russian tax authorities have
become increasingly aggressive in their interpretation of the tax law, and in
their enforcement and collection activities. We believe that the resolution of
our Russian tax liability will not have a material adverse effect on our Russian
shareholdings and financial condition. However, the amount and timing of an
unfavorable resolution of our tax liability could have a material adverse effect
on future results of operations or cash flows in a particular period.

OUR MANAGEMENT, LEGAL AND FINANCIAL CONTROLS MAY BE INADEQUATE TO ENSURE THAT
WE COMPLY WITH APPLICABLE LAWS

As a result of deficient reporting and control standards, we have been
unable to ascertain whether certain practices by our ventures were in compliance
with applicable U.S. and foreign laws. If we or any of our ventures were found
to be involved in unlawful practices we or our ventures could be exposed, among
other things, to significant fines, the risk of prosecution and the loss of our
licenses. Russia and the other independent countries of the CIS in which we
operate lack corporate management and financial reporting legal requirements,
and have underdeveloped banking, computer and other internal control systems.
Additionally, we have had difficulty hiring and retaining qualified employees in
these markets. As a result, we have had difficulty:

- establishing internal management, legal and financial controls;

- collecting financial data;

- preparing financial statements, books of account and corporate records;
and

- instituting business practices that meet Western standards.

In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. In addition, in early 1997, we retained special outside counsel to
conduct a thorough review of our business practices in the emerging markets in
which we operate. The review did not identify any violations of law that we
believe would have a material adverse effect on our financial condition. We
believe that the special counsel review was properly conducted and was
sufficient in scope, but we cannot assure you that all potential deficiencies
have been identified or that the control procedures and compliance programs
initiated by us will be effective. In addition, if government authorities were
to disagree with our assessment, our future results of operations and cash flows
could be materially adversely affected.

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THE REORGANIZATION OF THE RUSSIAN TELECOMMUNICATIONS INDUSTRY MAY CREATE
STRONGER COMPETITION FOR US AND HURT OUR RELATIONS WITH OUR RUSSIAN PARTNERS

The Russian government has reorganized the Russian telecommunications
industry so that one entity, Svyazinvest, now owns a majority interest in most
of our principal venture partners and other telecommunications service providers
in Russia. This reorganization could make it more difficult for us to attract
and retain customers, and thereby reduce our revenues, because:

- Svyazinvest is likely to become a stronger competitor; and

- Our business relationships with our principal venture partners, which
make up a major component of our business strategy in Russia, may be
hurt.

For a further discussion of Svyazinvest, see "Business -- Licenses and
Regulatory Issues -- GTS Business Services - CIS and Mobile Services - CIS."

WE MAY BE OVERLY DEPENDENT ON OUR JOINT VENTURE PARTNERS

INABILITY TO OBTAIN LOCAL ASSISTANCE ON MARKETING AND REGULATORY MATTERS MAY
DISRUPT OUR RUSSIAN AND CIS OPERATIONS

We are substantially dependent on our local partners to provide us with
marketing expertise and knowledge of the local regulatory environment. Because
their local knowledge helps facilitate the acquisition of necessary licenses and
permits, any significant disruption in our relationship with these parties could
make it more difficult for us to obtain and maintain licenses and permits for
our Russian and CIS operations.

TERMS OF OUR JOINT VENTURE AGREEMENTS LIMIT OUR ABILITY TO MANAGE JOINT
VENTURES

Under the terms of various joint venture agreements we have the right to
nominate key employees, direct the operations and determine the strategies of
such joint ventures' governance. However, our partners in some ventures have the
ability to frustrate the exercise of such rights. Significant actions by most
ventures, such as approving budgets and business plans, declaring and paying
dividends, and entering into significant corporate transactions effectively
require the approval of our local partners. Further, we would be unlikely as a
practical matter to want to take significant actions without the approval of our
joint venture partners. Accordingly, we are unable to unilaterally control the
operations of our joint ventures. For a discussion of these joint ventures, see
"Business -- GTS Business Services - CIS and Mobile Services - CIS -- GTS
Business Services - CIS -- Operations."

OUR COMPETITION WITH OUR JOINT VENTURE PARTNERS MAY RESULT IN CONFLICTS OF
INTEREST

We frequently compete with some joint venture partners in the same markets
which may lead to conflicts of interest. For example, Rostelecom, our partner in
Sovintel, is the dominant international and domestic long distance carrier in
Russia. Similarly, many of our regional telephone company partners in the
TeleRoss Ventures offer cellular services in direct competition with certain of
the operations of Mobile Services - CIS. We cannot assure you that any such
conflicts will be resolved in our favor.

WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN
CONTROL, EVEN IF IT WOULD BENEFIT SHAREHOLDERS

We have adopted anti-takeover provisions that could delay or prevent a
third party from gaining control of us in a transaction that our board of
directors had not negotiated and approved, even if such

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change in control would be beneficial to you. These anti-takeover provisions
could depress the market price of your common stock. These anti-takeover
provisions include:

- Section 203 of the Delaware General Corporation Law, which prohibits a
business combination between a corporation and an interested stockholder
within three years of the stockholder becoming an "interested
stockholder" except in limited circumstances.

- provisions of our charter and by-laws, including:

- a classified board of directors serving staggered three-year terms;

- restrictions on who may call a special meeting of stockholders;

- a prohibition on stockholder action by written consent;

- restrictions on the removal of directors;

- supermajority voting requirements with respect to certain amendments
to our charter;

- the authority to issue shares of preferred stock and to determine the
rights without stockholder approval; and

- a shareholders' rights plan.

For a more comprehensive discussion of the provisions of our charter and
by-laws affecting our capital stock, see "Description of Capital
Stock -- Certain Charter and By-law Provisions."

ANY U.S. JUDGMENTS YOU MAY OBTAIN AGAINST US MAY NOT BE ENFORCEABLE IN OTHER
COUNTRIES

Substantially all of our assets are located outside the U.S. As a result,
it will be necessary for you to comply with non-U.S. laws in order to enforce
judgments obtained in a U.S. court (including those with respect to federal
securities law claims) against the non-U.S. assets of our operating ventures. We
cannot assure you that any U.S. judgments would be enforced under any such
non-U.S. laws.

OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK MAY BE LIMITED

We do not expect to pay any cash dividends in the foreseeable future. Also,
our ability to pay dividends is limited under the terms of indentures governing
our outstanding debt securities. If we raise any capital in the future, we may
be restricted from paying dividends under the terms of such financings. In
addition, the decision on August 17, 1998 by the Russian government and the
Central Bank of Russia to devalue the ruble and other actions that the Russian
government may take in the future may restrict the ability of the ventures in
Russia to declare and pay dividends. For more information on these debt
securities, see "Description of Certain Indebtedness."

SUBSTANTIAL RESALES OF OUR COMMON STOCK PURSUANT TO RULE 144 MAY DEPRESS OUR
STOCK PRICE AND DILUTE YOUR OWNERSHIP INTEREST

We cannot predict what effect future sales of our common stock or the
availability of our common stock for sale would have on the market price for our
common stock. Sales of large numbers of shares of our common stock in the public
market pursuant to Rule 144 or pursuant to an effective registration statement
under the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for our common stock. Presently, we filed and
the SEC declared effective three registration statements. One registration
statement covers the resale of the 8.75% convertible bonds due 2000 and the
shares of common stock into which they are convertible. Two registration
statements on Form S-8 cover the resale of shares of common stock issued to
employees, officers and directors under our employee benefit plans. See
"Description of Capital Stock -- Prior Purchase Agreements -- Registration
Rights."

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OUR STOCK PRICE HAS BEEN AND CONTINUES TO BE VOLATILE

The market price for your common stock could fluctuate due to various
factors. These factors include:

- failure to integrate or realize projected benefits from our recent
acquisitions;

- acquisition-related announcements;

- announcements by us or our competitors of new contracts, technological
innovations or new products;

- changes in government regulations;

- fluctuations in our quarterly and annual operating results;

- political and economic development in emerging markets (including Russia
and the other independent countries of the CIS); and

- general market conditions.

In addition, the stock markets have, in recent years, experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, have adversely affected,
and may continue to adversely affect, the market price of your common stock.

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FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements as to how we may
perform in the future. We have based these forward-looking statements on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements are subject to risks, uncertainties and assumptions about us,
including, among other things:

- Risk of delay in implementing our business plan;

- Risks of completing acquisitions and integrating acquired businesses;

- Political, economic and legal changes in the markets where we operate;

- Heightened competition; and

- Our need for additional, substantial financing.

These forward-looking statements are principally contained in the following
sections of the prospectus:

- Risk Factors;

- Management's Discussion and Analysis of Financial Condition and Results
of Operations; and

- Business.

In addition, in those and other portions of this prospectus, the words and
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimated", "intends", "plans", "projection" and "outlook" are
intended to identify forward-looking statements. These statements should be
viewed with caution.

These forward-looking statements may differ materially from actual results
because they involve estimates, assumptions and uncertainties. In making these
forward-looking statements in this prospectus, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1998. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from the sale of
their shares of our common stock and we will not receive any proceeds from the
sale of those shares.

PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the Nasdaq National Market since
February 5, 1998, the date of the IPO, under the symbol "GTSG." The following
table sets forth, for the periods indicated, the high and low closing bid prices
per share of our common stock as reported on the Nasdaq National Market.

HIGH LOW
------ ------

Quarter ending March 31, 1998............................... $49.00 $25.94
Quarter ending June 30, 1998................................ $51.25 $35.38
Quarter ending September 30, 1998........................... $64.25 $24.50
Quarter ending December 31, 1998............................ $59.50 $21.13
Quarter ending March 31, 1999............................... $68.25 $47.81
------ ------
Quarter ending June 30, 1999 (through April 15, 1999)....... $76.50 $52.75
====== ======

The closing bid price for the common stock as reported on the Nasdaq
National Market on April 15, 1999 was $71.00. As of December 31, 1998, there
were approximately 484 holders of record of our common stock.

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DIVIDEND POLICY

We have not paid any dividend on our common stock and do not intend to pay
dividends in the foreseeable future. In addition, the indenture governing our
9 7/8% notes currently prohibits the payment of dividends. This indenture
contains restrictions against making restricted payments (in the form of the
declaration or payment of certain dividends or distributions, the purchase,
redemption or other acquisition of any of our capital stock, the voluntary
prepayment of pari passu or subordinated indebtedness and the making of certain
investments, loans and advances) unless no default or event of default exists,
our leverage ratio does not exceed 6.0 to 1.0 and such restricted payments do
not exceed certain amounts.

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SELECTED HISTORICAL FINANCIAL DATA

The selected financial data presents the restatement of the Company's
historical financial statements for 1998 and prior periods to reflect the
business combination with Esprit Telecom Group plc, which was accounted for as a
pooling of interests.

YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis relates to our financial condition
and results of operations for the three years ended December 31, 1998. This
information should be read in conjunction with the "Selected Historical
Financial Data" and our Consolidated Financial Statements and the notes related
thereto appearing elsewhere in the document.

OVERVIEW

From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and (2)
establishing and developing Hermes Europe Railtel B.V., a venture designed to
provide a high speed transmission network across national borders in Western
Europe. We intended to capitalize on the rapidly growing demand for
telecommunications services in countries emerging from totalitarian rule and
state-controlled economies. In addition, in Western Europe, growing
liberalization of regulations governing the provision of telecommunications
services has resulted in a proliferation of new competitors to the incumbent
public telecommunications operators. At the same time, with the trend toward the
increasing globalization of business, there has been substantial growth in
demand for high-quality voice and data telecommunications. We perceived a need
for a fast, efficient and lower cost cross-border network that would carry the
traffic of established public telecommunications operators and other carriers.
Since we began operating our Hermes Railtel network in late 1996, the demand for
its services has validated our decision to build and develop such a network.

In 1998, we changed our strategy in response to the economic crisis in
emerging markets and the advent on January 1, 1998 of the deregulation of the
provision of telecommunications services in Western Europe. We also sought to
build on the success of our Hermes Railtel network by developing a plan to
provide telecommunications services, including local access services, directly
to businesses and other customers. In October 1998 we realigned our operations
into five lines of business: GTS Carrier Services, GTS Business Services, GTS
Access Services, GTS Business Services - CIS and GTS Mobile Services - CIS. In
March 1999, we added a sixth line of business, GTS Wholesale Services.

Our strategy to develop our businesses is to:

- Continue the buildout of the Hermes Railtel network by extending its
coverage and by putting in place a cost-efficient transatlantic link
through our participation in FLAG Atlantic Limited;

- Develop local access infrastructure to facilitate our customers' access
to our network and to exploit what we believe to be an expanding market;

- Capitalize on growth in data/Internet traffic by expanding our Internet
capabilities and product offerings;

- Reinforce and extend market penetration of Hermes Railtel's network by
enhancing the scope, capacity, reliability and efficiency of our
infrastructure, and by providing our own local access; and

- Increase high usage retail customer base and route traffic over our own
network.

As part of our business strategy, we expect to continue to expand through
additional significant acquisitions and by entering into additional joint
ventures and other cooperative business relationships. As part of our business
strategy, we expect to make significant acquisitions in the future. We believe
that additional attractive acquisitions opportunities currently exist in Western
and Central Europe and in the United States. We have evaluated and expect to
continue to evaluate possible acquisition transactions on an ongoing basis and,
at any given time, may be engaged in discussions with respect to possible
acquisitions or other business combinations. Some of these transactions, if
consummated, may be material

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to our operations and financial condition. Such acquisitions may not be
successfully integrated or result in projected benefits. We may not be able to
raise the additional capital necessary to fund such acquisitions and may have to
divert management's attention and our financial and other resources from other
areas. Although we periodically have discussions with other companies to assess
opportunities on an ongoing basis, we do not have a definitive agreement with
respect to any material acquisition or joint venture. For a comprehensive
discussion of our acquisition strategy, see "Business -- GTS Carrier
Services -- Business and Marketing Strategy," "Business -- GTS Business
Services -- Business and Marketing Strategy," "Business -- GTS Wholesale
Services -- Business and Marketing Strategy," and "Business -- GTS Access
Services -- Business and Marketing Strategy." We anticipate that we will
continue to incur substantial additional costs and charges associated with this
strategy in addition to the capital expenditures related to the expansion of our
network and lines of business.

ESPRIT TELECOM GROUP -- BUSINESS COMBINATION

The following discussion of our results of operations and liquidity and
capital resource requirements reflects the restatement of our financial results
for 1998 and prior periods as a result of the business combination with Esprit
Telecom, which we accounted for as a pooling of interests.

RESULTS OF OPERATIONS

The following table sets forth our statement of operations as a percentage
of revenues:

FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
----- ------ ------

Revenues.................................................. 100.0% 100.0% 100.0%
Telecommunications services............................... 63.9 80.0 71.4
Selling, general and administrative....................... 53.5 80.0 101.8
Depreciation and amortization............................. 21.1 15.2 15.5
Equity in losses of ventures.............................. 0.4 12.0 16.2
----- ------ ------
Loss from operations...................................... (38.9) (87.2) (104.9)
Interest income........................................... 16.1 10.9 6.1
Interest expense.......................................... (35.2) (32.8) (18.7)
Foreign currency losses................................... (6.2) (2.8) (2.3)
----- ------ ------
Net loss before income taxes, minority interest and
extraordinary loss...................................... (64.2) (111.9) (119.8)
Income taxes.............................................. 2.1 2.1 2.2
----- ------ ------
Net loss before minority interest and extraordinary
loss.................................................... (66.3) (114.0) (122.0)
Minority interest......................................... 1.1 3.0 --
----- ------ ------
Net loss before extraordinary loss........................ (65.2) (111.0) 122.0
----- ------ ------
Extraordinary loss -- debt refinancing.................... (3.4) -- --
----- ------ ------
Net loss.................................................. (68.6)% (111.0)% 122.0%
===== ====== ======

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

Revenue. Our consolidated revenue increased to $372.4 million for the year
ended December 31, 1998 as compared to $121.5 million for the year ended
December 31, 1997. Significant components of revenue for the year ended December
31, 1998 were Business Services ($180.6 million), Carrier Services ($85.3
million) and Business Services - CIS ($75.4 million). Revenue for the year ended
December 31, 1997 was primarily comprised of Business Services ($74.4 million),
Business Services - CIS ($24.7 million) and Access Services ($13.5 million). The
growth in revenue was primarily attributable to the increase in our customer
base and resulting traffic in all of our operations. An additional contributor
to the

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revenue growth in 1998 was that we followed the consolidation method of
accounting for certain business ventures, whereas in 1997, these business
ventures were accounted for following the equity method of accounting.

Telecommunications Services. Our costs associated with providing
telecommunications services through our five lines of business in 1998 increased
to $238.1 million or 63.9% of revenues as compared to $97.1 million or 80.0% of
revenues for 1997. The decrease in telecommunication services as a percentage of
revenues in 1998 is attributable to the growth in our customer revenue offset by
increased settlement and interconnect costs paid to third parties and direct
network operating and maintenance costs. Although telecommunications services
costs as a percentage of revenue have decreased, we are incurring substantial
costs related to the implementation of our business strategy.

Selling, General and Administrative. Selling, general and administrative
expenses for 1998 increased to $199.2 million or 53.5% of revenues as compared
to $97.2 million or 80.0% of revenues for 1997. The decrease in selling, general
and administrative expenses as a percentage of revenues in 1998 is attributable
to growth in our customer revenue offset by increases in the number of staff
associated with business growth, as well as administrative and marketing costs
required for our increased customer base. We expect to establish sales offices
in additional European cities, which involves incurring substantial start-up
costs. Accordingly, our consolidated results of operations will fluctuate
depending on the timing of our expansion strategy. During a period of rapid
expansion, selling, general and administrative expenses will be relatively
higher than during more stable periods of growth.

Depreciation and Amortization. Depreciation and amortization increased to
$78.8 million or 21.1% of revenues for the year ended December 31, 1998 as
compared to $18.5 million or 15.2% of revenues for the year ended December 31,
1997. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of our network
infrastructure that we have undertaken over the past several years.
Additionally, we have experienced an increase in amortization expense associated
with goodwill that has arisen from our acquisition activities.

Losses in Ventures. We recognized losses in our investments in
non-consolidated ventures of $1.3 million for the year ended December 31, 1998
as compared to $14.6 million of the year ended December 31, 1997. Included in
these losses was our ownership share of earnings of $1.8 million and losses of
$3.6 million for the years ended December 31, 1998 and 1997, respectively. This
improvement is primarily the result of our 1998 consolidation of certain
business ventures that were previously accounted for following the equity method
of accounting, offset by a $7.7 million charge associated with our business
operations in Russia as a result of the deterioration of the Russian economy.
Included in the 1997 loss was a write-off of approximately $5.4 million, which
represented the net balance of certain investments in, and advances to, business
ventures in Asia and Central Europe that were previously stated in excess of
their net realizable value.

Interest Expense. Interest expense increased to approximately $131.0
million in 1998 from $39.8 million in 1997. This significant increase in
interest expense is attributable to the substantial increase in our outstanding
debt obligations during 1998.

Interest Income. Interest income for 1998 increased to $60.0 million from
$13.2 million in 1997. This increase was due to the interest we earned through
our short-term investments that has grown, due to the proceeds of our financing
activities.

Foreign Currency Loss. We recognized foreign currency losses of $23.2
million in 1998 as compared to $3.4 million in 1997. The losses in 1998 were
attributable to the devaluation of the Russian ruble and losses on several
forward exchange contracts and the weakening of the U.S. dollar versus European
currencies in the third and fourth quarters of 1998.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

Revenue. Our consolidated revenue increased to $121.5 million for the year
ended December 31, 1997 as compared to $62.5 million for the year ended December
31, 1996. Revenue for the year ended

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December 31, 1997 was primarily comprised of Business Services ($74.4 million),
Business Services - CIS ($24.7 million) and Access Services ($13.5 million).
Significant components of revenue for the year ended December 31, 1996 were
Business Services ($38.4 million), Business Services - CIS ($9.2 million) and
Access Services ($9.4 million) and there were no revenues recognized for Carrier
Services during the year ended December 31, 1996. The growth in revenue was
primarily attributable to the increase in our customer base and resulting
traffic in all of our operations.

Telecommunications Services. Our costs associated with providing
telecommunications services through our five lines of business in 1997 increased
to $97.1 million or 80.0% of revenues as compared to $44.6 million or 71.4% of
revenues in 1996. The increase in telecommunications services as a percentage of
revenue is attributable to our increased costs related to network operations
without the benefit of a commensurate growth in our customer revenue.

Selling, General and Administrative. Selling, general and administrative
expenses for 1997 increased to $97.2 million or 80.0% of revenues as compared to
$63.6 million or 101.8% of revenues for 1996. The decrease in selling, general
and administrative expenses as a percentage of revenues in 1997 is attributable
to growth in our customer revenue offset by increases in the number of staff
required as a result of business growth as well as administrative and marketing
costs required for our increased customer base.

Depreciation and Amortization. Depreciation and amortization increased to
$18.5 million or 15.2% of revenues for 1997 as compared to $9.7 million or 15.5%
of revenues for 1996. This increase in depreciation is primarily due to the
expansion of our network offset by a proportional increase in our revenue base.

Losses in Ventures. We recognized losses in our investments in
non-consolidated ventures of $14.6 million for 1997 as compared to $10.2 million
for 1996. Included in these losses was our equity ownership share of losses of
$3.6 million and $5.7 million for 1997 and 1996, respectively. Additionally,
included in the 1997 loss was the write-off of approximately $5.4 million, as
discussed above.

Interest Expense. Interest expense increased to $39.8 million in 1997 from
$11.7 million in 1996. This increase was attributable to the substantial
increase in our outstanding debt obligations during 1997.

Interest Income. Interest income for 1997 increased to $13.2 million from
$3.8 million for 1996. This increase was due to the interest we earned through
our short-term investments that has grown, due to the proceeds generated through
our financing activities.

Foreign Currency Loss. We recognized foreign currency losses of $3.4
million for 1997 as compared to $1.4 million for 1996.

LIQUIDITY AND CAPITAL RESOURCES

CORPORATE

The telecommunications industry is capital intensive. In order for us to
successfully compete, we will require substantial capital to continue to develop
our networks and meet the funding requirements of our operations, including
losses from operations, as well as to provide capital for our acquisition and
business development initiatives. We expect that we will spend over $1.3 billion
in cash over the next three years to meet our capital expenditures and operating
funding requirements to implement our business plan.

Historically, we have raised capital through a combination of public and
private offerings of equity and debt securities. We have received cash proceeds
of $370.1 million, $89.8 million and $141.7 million in 1998, 1997 and 1996,
respectively, net of placement costs, associated with the issuance of our common
stock in connection with these offerings, including issuance of warrants and the
exercise of stock options. In addition, the Company received $812.0 million,
$714.8 million and $60.0 million in gross proceeds in 1998, 1997 and 1996,
respectively, for a total of approximately $1.6 billion under various debt
securities that were issued by Hermes Railtel, Esprit Telecom and ourselves.

We had working capital of $882.3 million and $312.1 million as of December
31, 1998 and 1997, respectively. In addition, we had an accumulated deficit of
$543.7 million as of December 31, 1998,

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including net losses of approximately $255.8 million and $134.8 million for the
years ended December 31, 1998 and 1997, respectively. During 1997 and 1998, we
incurred substantial expenditures to build out our network, fund the working
capital requirements of our businesses, purchase capital equipment, engage in
new development and acquisitions and increase our ownership interest in Hermes
Railtel and in some of our ventures in Russia and the CIS. We expect to continue
to incur substantial expenditures to fund these requirements.

We believe that our existing cash balances, cash flow received from certain
operating ventures and proceeds from the January 1999 offering of Hermes
Railtel's notes will be sufficient to fund our currently anticipated capital
needs over at least the next 12 months. We expect that we will need to raise
additional capital. In addition, we may decide in the future to initiate a
tender or exchange offer or consent solicitations with respect to Esprit
Telecom's outstanding senior notes, if we determine it is advantageous in order
to enable us to better integrate Esprit Telecom into our overall corporate
structure.

The actual amount and timing of our future capital requirements may differ
materially from our estimates. In particular, the accuracy of our estimates is
subject to changes and fluctuations in our revenues, operating costs and
development expenses, which can be affected by our ability to:

(1) effectively and efficiently manage the expansion of the Hermes
Railtel network and operations and the buildout of our local access
infrastructure in our targeted metropolitan markets;

(2) effectively and efficiently manage the build-out of the FLAG
Atlantic-1 transatlantic cable, either directly or through our
participation in the FLAG Atlantic joint venture;

(3) obtain infrastructure contracts, rights-of-way, licenses,
interconnection agreements and other regulatory approvals necessary to
complete and operate the Hermes Railtel network, construct our local access
infrastructure and offer telecommunications services to end-users;

(4) negotiate favorable contracts with suppliers, including large
volume discounts on purchases of capital equipment; and

(5) access markets, attract sufficient numbers of customers and
provide and develop services for which customers will subscribe.

Our revenues and costs are also dependent upon factors that are not within
our control such as political, economic and regulatory changes, changes in
technology, increased competition and various factors such as strikes, weather,
and performance by third parties in connection with our operations. Due to the
uncertainty of these factors, actual revenues and costs may vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
our future capital requirements. In addition, if we expand our operations at an
accelerated rate or consummate acquisitions, our funding needs will increase,
possibly to a significant degree, and we will expend our capital resources
sooner than currently expected. As a result of the foregoing, or if our capital
resources otherwise prove to be insufficient, we will need to raise additional
capital to execute our current business plan and to fund expected operating
losses, as well as to consummate future acquisitions and exploit opportunities
to expand and develop our businesses.

We cannot assure you that we will be able to consummate additional
financing on favorable terms. As a result, we may be subject to additional or
more restrictive financial covenants, our interest obligations may increase
significantly and our existing shareholders may be adversely diluted. Failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require us to delay or abandon some or
all of our anticipated expenditures, to sell assets, or both, either of which
could have a material adverse effect on our operations.

HERMES RAILTEL NETWORK

Development of Hermes Railtel's fiber optic network has required and will
continue to require substantial capital. Hermes Railtel raised $265.0 million in
gross proceeds from its offering of senior notes in July 1997 (of which $56.6
million was placed in escrow as an interest reserve). We have spent

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approximately $192 million in cash on network capital expenditures through
December 31, 1998 and we expect to incur an additional $598 million through 2000
in order to complete the buildout of the network and enhance its capacity
through the implementation of dense wave division multiplexing technology. In
addition, as of December 31, 1998, we had capitalized $271 million in connection
with long-term fiber lease arrangements and an additional $152 million is
expected to be capitalized through 2000. In January 1999, Hermes Railtel issued
$200 million aggregate principal amount of 10.375% senior notes due 2009 and
Euro 85 million (approximately $100 million) aggregate principal amount of
10.375% senior notes due 2006. These new senior notes have substantially the
same terms as the notes Hermes Railtel issued in 1997. We believe that the net
proceeds from the 1997 senior notes and the new senior notes, combined with
projected internally generated funds, should be sufficient to fund expected
capital expenditures as well as payments on the long-term fiber lease
arrangements. However, the actual amount and timing of our future requirements
may differ materially from our estimates. Any failure to obtain necessary
financing may require us to delay or abandon our plans for deploying the
remainder of the network.

TRANSOCEANIC SERVICES

We are participating in the construction and operation of the FLAG
Atlantic-1 transoceanic cable through our 50% interest in the Flag Atlantic
Limited joint venture. The terms of the joint venture require that we (1) invest
$100 million for our interest in the venture and (2) purchase capacity on the
cable for $150 million. Although these expenditures are payable over a number of
years, we may be required to cover these payments by posting a fully cash
collateralized letter of credit during the second quarter of 1999. We expect to
fund these cash requirements from existing cash balances. We may also fund or
refinance a portion of these cash requirements through the proceeds of debt or
equity financings that we may execute during 1999.

In addition, the terms of the joint venture contemplate that we will be
responsible in part for constructing the European and U.S. backhaul portion of
the FLAG Atlantic project, that is, the terrestrial portion of the network
connecting the landing points of FLAG Atlantic-1 to Paris, London and New York.
At this time, we estimate that our share of the costs associated with this
portion of the project will be approximately $200 million, of which
approximately $150 million is scheduled to be incurred in 2000. We expect to
meet this cash requirement through a combination of cash on hand and equity or
debt financings. We cannot assure you, however, that we will be able to fund our
expenditures associated with our Transoceanic Services business or that this
business will achieve or sustain profitability or positive cash flow.

ACCESS SERVICES BUILDOUT

We plan to provide local access services in up to 12 major European cities
by the end of 2001. We plan to develop our infrastructure by constructing,
purchasing or leasing fiber optic networks, developing microwave transmission
networks or through acquisition or partnership. We project that approximately
$250 million will be required through the end of 2000 to implement these
networks. We expect to be able to fund these expenditures through a combination
of cash on hand and equity and debt financings.

We cannot estimate with any degree of certainty the amount and timing of
these future capital requirements or other cash requirements for the
implementation of our Access Services plans. These expenditures will be
dependent on many factors, including the rate at which we roll out our Access
Services networks, the types of services we offer, staffing levels, acquisitions
and customer growth, as well as other factors that are not within our control,
including competitive conditions, regulatory developments and capital costs. We
expect that we will have significant operating and net losses and will record
significant net cash outflow, before financing, in coming years in connection
with our Access Services business. We cannot assure you that we will be able to
fund the $250 million in projected expenditures or any additional expenditures
or that our Access Services line of business will achieve or sustain
profitability or positive cash flow in the future.

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LIQUIDITY ANALYSIS

We had cash and cash equivalents of $998.5 million and $358.4 million as of
December 31, 1998 and 1997, respectively. We had restricted cash of $143.4
million and $66.8 million as of December 31, 1998 and 1997, respectively, that
primarily represent amounts held in escrow for debt interest payments.

In 1998, 1997 and 1996, we used cash of $120.9 million, $52.3 million and
$42.8 million, respectively, for our operating activities. The significant
increase in cash spending for our operations in 1998 as compared to 1997 is
attributable to the growth of our business operations which has resulted in
higher operating cash costs and accounts receivable carrying balances. We also
used cash of $455.9 million, $117.6 million and $86.4 million for our investing
activities in 1998, 1997 and 1996, respectively. Of the $455.9 million of 1998
investing activities, $257.4 million of cash was spent on business acquisitions
(principally the Plusnet and NetSource businesses) and $231.0 million of cash
was spent primarily on building our telecommunications networks. We cannot
assure you that our operations will achieve or sustain profitability or positive
cash flow in the future. If we cannot achieve and sustain operating
profitability or positive cash flow from operations, we may not be able to meet
our debt service obligations or working capital requirements.

Substantially all of our operations are outside the United States and
therefore our consolidated financial results are subject to fluctuations in
currency exchange rates. Our operations transact their business in the following
significant currencies: Deutschmark, French Franc, British Pound Sterling,
Belgian Franc, Dutch Guilder, the Russian Ruble, and, effective January 1, 1999,
the Euro. For those operating companies that transact their business in
currencies that are not readily convertible, we attempt to minimize our exposure
by indexing our invoices and collections to the applicable dollar/foreign
currency exchange rate to the extent our costs (including interest expense,
capital expenditures and equity) are incurred in U.S. Dollars. Although we are
attempting to match revenues, costs, borrowing and repayments in terms of their
respective currencies, we have experienced, and may continue to experience,
losses and a resulting negative impact on earnings with respect to holdings
solely as a result of foreign currency exchange rate fluctuations, which include
foreign currency devaluations against the U.S. Dollar. Furthermore, certain of
our operations have notes payable and notes receivable which are denominated in
a currency other than their own functional currency or loans linked to the U.S.
Dollar. We may also experience economic loss and a negative impact on earnings
related to these monetary assets and liabilities.

We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We are currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. Our ability to hedge our exposure is
limited since certain of our operations are located in countries whose
currencies are not easily convertible. Financial hedge instruments for these
countries are nonexistent or limited and also pricing of these instruments is
often volatile and not always efficient. We designed and implemented reporting
processes to monitor the potential exposure on an ongoing basis in 1998. We will
use the output of this process to execute financial hedges to cover foreign
exchange exposure when practical and economically justified.

In April 1998, we consummated a foreign exchange swap transaction to
mitigate the foreign exchange exposure resulting from the issuance of $265
million senior notes issued by Hermes Railtel.

On August 17, 1998 the Russian government and the Russia Central Bank
announced the following measures: a) the repayment of GKO treasury bills and OFZ
federal bonds was suspended; subsequently, secondary trading therein was halted
(since many Russian banks had substantial investments in these securities,
severe liquidity problems resulted for the banks), b) the value of the ruble was
allowed to fluctuate below the ruble/U.S. dollar exchange rate corridor that the
government had committed to support, which effectively devalued the ruble and c)
a 90-day moratorium on offshore credit repayments was issued. The 90-day
moratorium was not extended when it expired on November 16, 1998 and it is
anticipated that the ruble will continue to be devalued. Due to the devaluation
and the end of the 90-day moratorium, there is an ongoing risk that many Russian
banks may be declared bankrupt. Deposits held at Russian banks, other than
Sberbank, are not insured. The official exchange rate as of December 31, 1998,

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was 20.65 rubles per U.S. Dollar, respectively. The last official exchange rate
prior to the suspension of trading on August 17, 1998 was 6.2725 rubles per U.S.
Dollar.

As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, we recorded a $13.1 million pre-tax
charge within our financial statements in the third quarter 1998, that is mainly
comprised of foreign currency exchange losses for ruble-denominated net monetary
assets. The remainder is associated with estimates for uncollectible accounts
receivable and unrecoverable cash deposits in Russian banks.

Moreover, the Russian government has defaulted on payments, and proposed a
restructuring, of GKO treasury bills and OFZ federal bonds which has been
criticized by Western holders of such obligations. As a result, it is likely
that the Russian government and Russian businesses will have difficulty
accessing Western financial markets for the foreseeable future. The consequences
of the Russian government's decision on August 17th and its aftermath remain
unclear, but we cannot assure you that these emergency measures, coupled with
the policies of Russia's new government, will be sufficient to stabilize the
currency, enhance liquidity or prevent further economic dislocation. In
particular, we cannot assure you that there will not be a further significant
and sudden decline in the value of the ruble and consequent increased
exchange-related losses and increased loss of investor confidence in the Russian
economy. Such consequences coupled with an overall downturn in the Russian
economy and resulting reduced demand for telecommunication services could have a
material adverse effect on us and our financial condition and results of
operations.

YEAR 2000 COMPLIANCE

The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. Use of non-Year 2000 compliant programs
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, a temporary
inability to process transactions and invoices or engage in similar normal
business activities.

Issues Posed by the Year 2000 Issue. We are exposed to the Year 2000 issue
in a number of ways. Among other things, the Year 2000 issue might affect our:

(1) computer hardware and software;

(2) telecommunications equipment and other systems with embedded logic
(among other things, this includes our fire detection, access control
systems, heating, ventilation and air conditioning, and uninterruptible
power supply);

(3) operating partners and organizations upon which we are dependent;

(4) local access connections, upon which we are dependent; and

(5) supply chain.

Our Year 2000 Compliance Program. We have initiated a Year 2000 compliance
program to address the aforementioned risks which the Year 2000 issue poses and
to avoid any material loss or impact to us or our customers due to these risks.
The object of this Year 2000 compliance program is to ensure that neither the
performance nor functionality of our operations are affected by dates, prior to,
during and after 2000. The scope of the Year 2000 compliance program includes
all of the business functions, locations and resources which are essential to
us. The resources which are within the scope of the Year 2000 compliance program
are, among other things, our computer systems, software, vendor supplied
software, telecommunications equipment, third party telecommunications partners
and other network service suppliers, environmental and building control systems,
internal communication systems and other interfaces with

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third party services. As explained below, our efforts to assess our systems as
well as non-system areas related to Year 2000 compliance involve

(1) a wide-ranging assessment of the Year 2000 problems that may
affect us,

(2) the development of remedies to address the problems discovered in
the assessment phase and

(3) testing of the remedies.

Assessment Phase. The assessment phase includes internal and third party
review of potential risks associated with the availability, integrity and
reliability of operational systems necessary to conduct business. During the
assessment phase we have identified substantially all of our major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 compliance program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
which might be materially impacted by Year 2000 issues. Our observations from
the assessment phase during the third and fourth quarters of 1998 is that most
of our telecommunications equipment and software has been purchased within the
past three years and the majority is already compliant or can be made compliant
with minor upgrades. We completed the assessment phase of our Year 2000
readiness in the fourth quarter of 1998.

Remediation, Prevention and Testing Phases. Based on those resources
identified in the assessment phase, we developed a detailed plan in the fourth
quarter of 1998, that will then be followed by an upgrade, a remediation, a
prevention and a testing phase in early 1999. These phases are expected to be
completed during the second quarter of 1999.

Assessment of Third Party Compliance. As noted above, we have also
undertaken under our Year 2000 compliance program to assess and monitor the
progress of third party vendors in resolving Year 2000 issues. To ensure the
compliance of vendors of hardware and software applications used by us, we are
obtaining confirmations from our primary telecommunication vendors, business
partners and hardware and software vendors as to what plans, if any, are being
developed or are already in place to address their ability to process
transactions in the Year 2000. We intend to continue follow up with any vendors
who indicate any material problems in their replies. We expect to receive
statements of intended compliance by mid-1999.

Our Worst Case Scenario. Our worst case scenario would be the failing of
our telecommunications equipment, power providers and/or interfaces with other
telecommunication vendors and either or both of the following:

- a loss of interconnect capacity from one or more major suppliers of
transmission capacity; and

- our inability to record, track or invoice billable minutes which could
ultimately cause us to temporarily stop carrying traffic.

These cases would create business interruption at some of our operations
and would adversely affect our revenues. For example, the Moscow power
authorities have publicly stated that they do not intend to address Year 2000
issues until problems arise. However, we have operations that are geographically
diversified; therefore, it is not anticipated that the worst case scenario would
affect all operations at the same time. Additionally, if power failures occur,
we currently have diesel generators at certain of our major sites. Based on our
assessment during the third and fourth quarters of 1998, we do not foresee a
material loss due to these conditions and management is hopeful that our
remediation and testing efforts will ensure that we have addressed our Year 2000
readiness. However, we cannot assure you that Year 2000 non-compliance by our
systems or the systems of vendors, customers, partners or others will not result
in a material adverse effect.

Contingency Plans. We are considering a contingency plan to address our
worst case scenario; however, certain of the initiatives are subject to
execution risk. This risk would include the ability to have access to diesel
fuel or large generators should power failures occur, the ability to quickly
replace

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telecommunications equipment and the ability to contract with alternative
telecommunication and maintenance providers at reasonable terms. Moreover, we
are further limited in resources in certain geographical regions due to the
market volatility and weak economies in which we have business operations, which
is discussed in the section "Risk Factors -- Turmoil in Russia and the CIS
creates significant uncertainty for our operations."

Costs Related to the Year 2000 Issue. We expect that we will incur between
$10.0 million to $11.5 million in expenses to complete the assessment, detailed
planning, remediation, prevention and testing phases, exclusive of replacement
costs for telecommunications equipment and software, of which approximately $4.9
million had been incurred during 1998. It is estimated that between $5.0 million
to $6.0 million of the total expenditure will be required to complete the
remediation and testing phase, excluding the replacement of telecommunications
equipment and software. We have currently identified that certain
telecommunications equipment and software will need to be replaced and we
anticipate that we will incur approximately $2.0 million to replace the
identified telecommunications equipment and software. Further, we are currently
unable to quantify the total costs that we may incur for the replacement of all
telecommunications equipment and software due to the stage of our Year 2000
readiness review. These costs will be funded from operating cash flows and
expensed as incurred. In addition, the preceding cost estimate does not include
amounts associated with the accelerated acquisition of replacement systems as
none are included in the initial assessment during the third and fourth quarters
of 1998. We do not expect that the costs of addressing our Year 2000 readiness
will have a material effect on our financial condition or results of operations.
However, we cannot assure you that Year 2000 non-compliance by our systems or
the systems of vendors, customers, partners or others will not result in a
material adverse effect for us.

Risks Related to the Year 2000 Issue. Although our efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
our business and operations, the actual effects of the issue will not be known
until 2000. Difficulties in implementing the remediation or prevention phases or
failure by us to fully implement the planning or remediation phases or the
failure of our major vendors, third party network service providers, and other
material service providers and customers to adequately address their respective
Year 2000 issues in a timely manner would have a material adverse effect on our
business, results of operations, and financial condition. For a comprehensive
discussion of Year 2000 risks, see "Risk Factors -- Failure of our computer
systems to recognize the Year 2000 could disrupt our business and operations."

IMPACT OF THE EURO

Implementation

In accordance with the Treaty on EU, signed at Maastricht on February 7,
1992, Stage III of the Economic and Monetary Union (EMU) commenced on January 1,
1999, and a single currency, the 'Euro', has been introduced. The Euro exists in
parallel with national currencies, and transactions may be denominated in either
currency until December 31, 2001 (though only notes and coins of the national
currencies will be available for physical exchange). From January 1, 2002, Euro
notes and coins will be introduced and national currencies will be withdrawn by
June 30, 2002. Those participating member states have also transferred authority
for conducting monetary policy to the European Central Bank. Since January 1,
1999, the value of the Euro as against the currencies of each of the
participating member states has been irrevocably fixed.

Those member states which are currently participating in the third stage of
EMU are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg,
The Netherlands, Portugal and Spain.

Through certain of our subsidiaries we have significant operations within
the EU, including many of the countries that adopted the Euro. We are currently
evaluating the systems and business issues raised by the adoption of the Euro,
including: preparing business systems for trading in Euros and converting the
accounting systems of companies in the common currency area from their national
currency to Euros; the benefit of the elimination of exchange rate risk in cross
border transactions within the common currency

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area; the potential impact of increases in pricing transparency on price
differentials between member states; and training and human resources issues. We
are also working actively with key business suppliers and customers to prepare
for EMU. In addition, monetary union may have a significant impact on
macroeconomic factors, including interest and foreign exchange rates.

Looking forward, key commercial risks, such as pricing transparency, are
being analyzed by each business, with a view to minimizing any impact through
active management in these areas over the EMU transition period and beyond.
However, there can be no assurance that the Euro will not have a negative
impact. The impact of future entry to EMU of other European countries
(particularly the United Kingdom)is being similarly analyzed.

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INDUSTRY OVERVIEW

EUROPEAN TELECOMMUNICATIONS MARKET

Liberalization in the European telecommunications markets has proceeded
rapidly since the late 1980's. Historically, the European public
telecommunications operators monopolized the provision of telecommunications
services in their home markets and designed their networks according to national
rather than continental and international considerations. Between 1990 and 1997,
however, the European Union implemented a series of directives designed to open
up the telecommunications markets to competition. These directives required
member states to implement legislation liberalizing their respective
telecommunications markets to permit alternative telecommunications companies
both to provide telecommunications services and to access the existing
telecommunications infrastructure controlled by these national and regional
providers. In response to these European regulatory changes, a number of new
interests, including our company, have emerged to compete with the European
public telecommunications operators.

INTERNET INDUSTRY

The Internet is a global collection of interconnected computer networks
that allows commercial organizations, educational institutions, government
agencies and individuals to communicate, access and share information and
conduct business electronically. The Internet originated with the ARPAnet, a
restricted network that was created in 1969 by the United States Department of
Defense Advanced Research Projects Agency to provide efficient and reliable long
distance data communications among the disparate computer systems used by
government-funded researchers and academic organizations. The networks that
comprise the Internet, or its backbone, are connected in a variety of ways,
including by public switched telephone networks and by high speed, dedicated
leased lines. Communications on the Internet are enabled by Internet Protocol or
IP, which is a market-based standard computer language broadly adopted on the
Internet and elsewhere that allows computers with different architectures and
operating systems software to communicate with each other on the Internet.

Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an Internet service provider became more prevalent.
Internet service providers offer access, e-mail, customized content and other
specialized services and products aimed at allowing both commercial and
residential customers to obtain information from, transmit information to, and
utilize resources available on the Internet.

Internet service providers generally operate networks composed of dedicated
lines leased from public telecommunications operators, local access providers
and internet service providers using IP-based switching and routing equipment
and server-based applications and databases. Customers are connected to the
Internet service provider switching equipment by facilities obtained by the
customer or the Internet service provider from either public telecommunications
operators or local access providers through a dedicated access line or the
placement of a circuit-switched local telephone to the Internet service
provider.

IP COMMUNICATIONS TECHNOLOGY

There are two widely used switching technologies in currently deployed
communications networks: circuit-switching systems and packet-switching systems.
Circuit-switch based communications systems establish a dedicated channel for
each communication (such as a telephone call for voice or fax), maintain the
channel for the duration of the call and disconnect the channel at the
conclusion of the call. Packet-switch based communications systems format the
information to be transmitted, such as e-mail, voice, fax and data, into a
series of shorter digital messages called "packets." Each packet consists of a
portion of the complete message plus the addressing information to identify the
destination and return address.

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Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, some
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by the Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communication transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.

Initiatives are under way to develop technology to address these
disadvantages of packet-switch based systems. We believe that the evolving IP
standard will remain a primary focus of these development efforts. We expect the
benefits of these efforts to be improved communications, reduced latency and
declining networking hardware costs.

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BUSINESS

OUR HISTORICAL OVERVIEW

We were founded in 1983 as a not-for-profit company under the name San
Francisco/Moscow Teleport, Inc. We incorporated as a for-profit corporation in
1986, and reincorporated into Delaware in 1993 and changed our name to Global
TeleSystems Group, Inc. in February 1995. Our principal business office is
located at 1751 Pinnacle Drive, North Tower -- 12th Floor, McLean, Virginia
22102, United States, and our telephone number is (703) 918-4500.

From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and (2)
establishing and developing Hermes Europe Railtel B.V., a venture designed to
provide a high speed transmission network across national borders in Western
Europe. We intended to capitalize on the rapidly growing demand for
telecommunications services in countries emerging from totalitarian rule and
state-controlled economies. In addition, in Western Europe growing
liberalization of regulations governing the provision of telecommunications
services has resulted in a proliferation of new competitors to incumbent public
telecommunications operators. At the same time, with the trend toward the
increasing globalization of business, there has been a substantial growth in
demand for high quality voice and data telecommunications. We perceived a need
for a fast, efficient and lower cost cross-border network that would carry the
traffic of established public telecommunications operators and other carriers.
Since we began operating our Hermes Railtel network in late 1996, the demand for
its services has validated our decision to build and develop such a network.

In 1998, we changed our strategy in response to the economic crisis in
emerging markets and the advent on January 1, 1998 of the deregulation of the
provision of telecommunications services in Western Europe. We also sought to
build on the success of our Hermes Railtel network by developing a plan to
provide telecommunications services, including local access services, directly
to businesses and other customers. Accordingly, during 1998, we acquired two
companies that provide such services to businesses and other high usage
customers in Western Europe and developed a plan to provide local access
services in 12 major Western European cities. In addition, we realigned our
operations into five lines of business to facilitate the coordination and
management of our activities.

BUSINESS STRATEGY

CONTINUE BUILDOUT OF HERMES RAILTEL NETWORK

We intend to make Hermes Railtel's service offerings more attractive to our
carrier customers by expanding the geographic reach and reliability of our core
network. We are continuing to build our Hermes Railtel network by extending its
coverage to include approximately 50 cities throughout Europe by the end of 2000
and by putting in place a high speed, cost-efficient transatlantic link through
our FLAG Atlantic Limited joint venture. We are also deploying dense wavelength
division multiplexing technology that will permit significant expansion of the
core network's transmission capacity and allow us to upgrade the reliability and
efficiency of the network.

DEVELOP LOCAL ACCESS INFRASTRUCTURE

In order to facilitate our customers' access to our network and to exploit
what we believe to be an expanding market, we intend to build, lease or acquire
local access infrastructure in 12 major metropolitan markets throughout Europe
by 2001. We believe that the increasing liberalization of telecommunications
regulation in Europe and the existing level of competition in Europe for local
access services offer an

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attractive opportunity to build out local access infrastructure. We believe that
implementing this strategy will also benefit our Carrier Services and Business
Services lines of business.

CAPITALIZE ON GROWTH IN DATA/IP TRAFFIC

In anticipation of continued rapid growth in data and Internet traffic, we
plan to expand our IP-based capabilities and product offerings. We intend to
apply IP technology to Hermes Railtel's fiber optic network in order to enhance
its efficiency and capacity. In addition to offering IP transport services, we
intend to offer Internet access and IP-based services, such as web site
management.

REINFORCE AND EXTEND MARKET PENETRATION OF HERMES RAILTEL'S NETWORK

We intend to reinforce and extend the market penetration of Hermes
Railtel's network by enhancing the scope, capacity, reliability and efficiency
of our infrastructure, and by providing our own local access. As a result of
these enhancements, we believe that we are well-positioned to generate
additional revenues from existing carrier customers and attract new customers as
demand for seamless transatlantic city-to-city services increases. Targeted new
customers include the U.S. regional Bell operating companies, as well as U.S.
and European Internet service providers.

INCREASE HIGH USAGE RETAIL CUSTOMER BASE AND ROUTE TRAFFIC OVER OUR OWN
NETWORK

As a result of the Esprit Telecom and NetSource acquisitions, we have an
established retail customer base of leading international businesses,
organizations and governmental agencies. We intend to continue to focus our
retail marketing efforts on small, medium and large-sized businesses,
governmental agencies and other organizations that have extensive
telecommunications needs and which generate substantial volumes of
telecommunications traffic. By routing this traffic over our Hermes Railtel,
Business Services and Access Services networks, we seek to realize the benefits
of owning our own infrastructure. In order to build our customer base, we
anticipate significantly increasing the size of our direct sales force. We also
seek to offer a level of service superior to that provided by incumbent
telecommunications providers. We believe that providing a high level of customer
service is a key element in establishing customer loyalty and attracting new
customers. For a discussion of the risks associated with our business strategy,
see "Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenues."

GTS CARRIER SERVICES

OVERVIEW

Our Carrier Services line of business is made up of three components:

- Hermes Railtel;

- Transoceanic Services; and

- IP Services.

Cross-border transmission capacity has historically been used predominantly
for the transmission of voice traffic. We believe that cross-border transmission
capacity will increasingly be used to transport data traffic and in several
years the volume of capacity used for transporting data traffic will
significantly exceed that used for transporting voice traffic. This trend is
being driven by the rapid growth of the Internet and other data-intensive
applications such as videoconferencing, multimedia, and medical and business
imaging, among others.

We intend to participate in this developing market by providing
comprehensive telecommunications transport services to established and emerging
telecommunications carriers, Internet service providers and other significant
consumers of transmission services. We believe that our customers will
increasingly demand network connection to the world's major commercial and
financial centers. In addition, we believe

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that our customers will demand Internet or IP-based services such as Internet
access, web hosting and management services in order to participate in the
expected growth of the Internet.

HERMES RAILTEL NETWORK

We are one of the leading providers of telecommunications services to other
telecommunications carriers. We operate a centrally managed fiber optic network
that is designed to carry high volumes of telecommunications traffic across
national borders in Europe and to the United States. At March 3, 1999, the
network operated over approximately 12,200 kilometers connecting 19 cities in 10
countries. We expect the network to extend approximately 25,000 kilometers with
points of presence, or equipment for switching or relaying traffic, in
approximately 50 cities in 20 European countries by the end of 2000.

Capacity on the Hermes Railtel network is sold to public telecommunications
operators, other carriers, Internet service providers, resellers of unused
telecommunications capacity and other telecommunication service providers. We
believe that we are able to provide our customers a service that is superior to
other services currently available through public telecommunications operators
or through other independent providers.

At March 3, 1999, we operated the Hermes Railtel network in Belgium, The
Netherlands, the United Kingdom, France, Germany, Switzerland, Italy, Denmark,
Sweden and Spain, linking the following 19 cities: Brussels, Antwerp, Rotterdam,
Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich, Geneva, Stuttgart,
Dusseldorf, Munich, Milan, Berlin, Copenhagen, Stockholm, Hamburg and Madrid. If
completed as expected by the end of 2000, our network will extend approximately
25,000 kilometers. During 1999, we plan to extend our network through France to
Barcelona and commence operating in Austria, the Czech Republic, Luxembourg and
Portugal.

We currently lease capacity on transatlantic cables linking the network
with North America and are exploring various interconnectivity options to
Russia. At March 3, 1999, 54 customers were under contract for service on the
Hermes Railtel network, and at December 31, 1998 our customers were
contractually obligated to pay us an aggregate of $418 million for future
services, provided Hermes Railtel performs in accordance with contractual
specifications.

We intend to continue to build Hermes Railtel's network using
cost-efficient access to an infrastructure of railways, motorways, pipeline
companies, waterways and power companies. We have a flexible approach to the
network plan and intend to fine-tune the scope, route and design of the network
based on our evaluation of customer demand. We have entered into agreements for
the construction and/or lease of fiber optic routes for the network in the
countries where we currently operate. We continue to negotiate rights-of-way and
other infrastructure arrangements in order to extend the network. We expect to
incur approximately $750 million in additional capital expenditures, including
capital lease obligations, through 2000 in connection with the build-out of the
network.

In June 1998, we acquired our 75% interest in Ebone, a Danish company which
connects European Internet service providers to the Internet over its own
network. As of December 31, 1998, Ebone served 83 customers in 25 countries. As
part of the transaction, Ebone purchased approximately $100 million of long-term
capacity rights on Hermes Railtel's network. It will provide Ebone with capacity
of up to 622 megabits per second between the majority of European cities that
Ebone serves. Many of Ebone's existing customers own a portion of Ebone's shares
through an association.

MANAGED BANDWIDTH SERVICES

Hermes Railtel provides primarily large capacity cross-border European
circuits and transatlantic services to carriers and service providers over an
integrated, managed network. The Hermes Railtel network, based on dense
wavelength division multiplexing and synchronous digital hierarchy technology (a
form of packet switched transmission technology), provides digital transmission
capability upon which a broad range of advanced functionality may be built. The
Hermes Railtel network offers network availability, flexibility, bandwidth
speeds and error performance not otherwise available to carriers for

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transport of telecommunications traffic across national borders in Western and
Central Europe. Our network is designed to provide customers with a wide variety
of bandwidth speeds, ranging from a data transmission rate of 2.048 Mbps (or
millions of bits per second) to a data transmission rate of 2.5 gigabits per
second (or billions of bits per second). For more information on technology in
the telecommunications industry, see "Industry Overview -- IP Communications
Technology."

Point-to-Point Transmission Capacity. The current market for cross-border
transport is also served by international private leased circuits provided by
public telecommunications operators. Traditionally, such private leased circuits
are formed by combining half-circuits from two public telecommunications
operators between customer locations, often with additional public
telecommunications operators providing transit segments. Under such private
leased circuits, overall service quality guarantees generally are not provided
and only a limited range of bandwidth is available, usually only at a data
transmission rate of 2.048 Mbps, and in certain instances, at a data
transmission rate of 34 Mbps. We provide a Point-to-Point Transmission Capacity
service to our customers. We believe this service is a significant improvement
to private leased circuits because it provides a greater range of bandwidths
from 2,048 Mbps to multiples of 140 Mbps or 155 Mbps and allows customers to
choose a service level agreement which provides service guarantees appropriate
for their applications, including guarantees for on-time service delivery and
service availability.

Our point-to-point transmission capacity consists of "integrated" and
"node-to-node" services. Our network integrated service provides an end-to-end
service between customer-specified locations where we arrange for the connection
between the network node location and the customer's location. The node-to-node
service can be selected when the customer prefers to provide its own connection
to the local network node location. In node-to-node service, we guarantee
service only on our network and not from our network node to the customer's
location. Our network prices for both services are competitive relative to
current service offerings. Our customers can choose flexible contract terms from
one to ten years in duration, with discount schemes designed to ensure that we
remain a cost-effective solution.

Virtual Network Transmission Services. As the European marketplace
liberalizes and carriers and other telecommunications service providers plan to
expand their operations across Europe, a need arises for a flexible and
cost-effective means of telecommunications transport. Such service providers
have traditionally obtained international transport service by leasing
international private leased circuits. Leasing private leased circuits requires
a carrier to lease channels on a segment-by-segment basis from multiple public
telecommunications operators, linking the target cities under arrangements
having a fixed capacity and pricing structure for each segment of the carrier's
network. Private leased circuits have several disadvantages, including (1)
difficulty in obtaining discount/volume pricing schemes since there is no single
provider of pan-European coverage, (2) delays in implementation due to numerous
contractual negotiations and the need to interconnect numerous leased circuits,
(3) limited opportunities to lease high-bandwidth pan-European capacity and (4)
variability of quality due to the absence of a centrally managed single uniform
network. Telecommunications carriers could also construct their own network,
which is expensive, time-consuming and complex and which may not be justified by
traffic volume.

Our network transmission service provides a new solution and an attractive
alternative to leasing circuits or building infrastructure. This service enables
our customers to obtain a uniform pan-European or cross-border network under one
service agreement by allowing the customer to select any number of cities along
our network with a pricing structure based on the overall amount of leased
capacity for the customer's entire network.

Ring Service. Most medium to large carriers and operators purchase network
capacity in excess of actual requirements and prefer to have control over the
physical configuration of their networks. This service connects multiple
customer locations with multiple paths in a ring configuration. We provide the
customer with reliable and direct control over the paths dedicated to its
traffic within the ring and exclusive control over the routing. We can add
additional ring capacity with no service interruption and additional customer
locations with minimal service interruption. We can provide this ring service at
a very competitive rate compared to other point-to-point services. For a
discussion of the risks associated with the

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Hermes Railtel network technology, see "Risk Factors -- The technology of our
Hermes Railtel network could become obsolete and harm our competitiveness."

INTERNET ACCESS AND IP TRANSPORT

Ebone Internet Access Services. Internet service providers, which are
companies that provide Internet access to end-users, have purchased Internet
access from Ebone since 1991. Ebone has one of the largest installed bases of
Internet service provider customers in Europe. Building on the expertise
developed since the advent of the Internet in Europe, Ebone now offers Internet
service providers a high quality Internet access service with the following
significant features:

- Reliable access to Internet service throughout Ebone's network, which is
made possible by always dedicating excess bandwidth capacity on its
network;

- Access to other Internet networks through links with major Internet
backbone providers in Europe and in the United States; and

- Access speeds ranging up to 620 Mbps.

IP Transport Services. We are developing IP transport services for service
providers that focus on building their own Internet backbone, Intranet or voice
over IP services. This IP traffic has been traditionally supported by a
combination of managed bandwidth services (like the ring or the point-to-point
services of Hermes Railtel's network) and Internet network services (like
Ebone's Internet services).

Today, large service providers building their Internet networks demand the
speed offered by fiber infrastructure, the reliability of managed bandwidth
services and the flexibility of Internet network services.

We intend to carry the international Internet traffic of service providers
between their private points of presence and/or Internet exchange points. We
expect these services to combine high quality transmission services with the
ability to upgrade transmission capacity and speed and to control configurations
which are the strengths of large Internet network providers. For a discussion of
the risks associated with the Hermes Railtel network technology, see "Risk
Factors -- The technology of our Hermes Railtel network could become obsolete
and harm our competitiveness."

BUSINESS AND MARKETING STRATEGY

The overall strategy of Hermes Railtel is to offer public
telecommunications operators and other carriers pan-European cross-border
telecommunications transport services. Our Hermes Railtel network provides a
vehicle through which a carrier can compete in markets where it does not own
infrastructure. Our primary service offering is the sale of large capacity
cross-border circuits to our customers. Our network's focus on carriers is
designed to complement and not compete with such carriers' own business
objectives in providing services to their end-users.

As a result of our acquisition of Ebone, we are now accelerating our plans
to become a leading player in the provision of seamless transatlantic
city-to-city services in order to take advantage of the increased market demand
for low cost transatlantic city-to-city services. In 1998, we contracted for
long-term leased capacity on transatlantic cables linking the Hermes Railtel
network to North America. In addition, we intend to further increase our
transatlantic capacity through the purchase of capacity from the FLAG Atlantic
Limited joint venture. We also intend to invest further in extending and
increasing the capacity of the Hermes Railtel network.

To establish ourselves as the leading provider of telecommunications
services to carriers within Europe, we offer our customers significantly higher
quality transmission and advanced network capabilities at a competitive price by
focusing on the following:

- High Capacity Cross-Border Network Facilities. Our network is designed to
offer our customers high capacity network facilities outside their
domestic markets, providing cross-border capabilities without requiring
customers to invest in network infrastructure or being constrained by a
narrow

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range of capacity offerings. By utilizing dense wavelength division
multiplexing technology over our network, we anticipate that, once fully
deployed, this technology will enable our network to provide a minimum
speed of 800 gigabits per second on all major routes. Options are in
place to expand fiber capacity further on a number of routes.

- Uniform Network Architecture. Our network is designed to offer managed
transport services from country to country and across multiple countries
utilizing a single uniform network, in contrast to services currently
available that use multiple providers over several networks with varying
technologies under the control of separate, not necessarily compatible,
network control systems. The Hermes Railtel network's uniform technology
enhances service by providing quality and reliability as well as
uniformity of features throughout the network.

- Diverse Routing. We have designed our network over multiple routes to
provide high levels of reliability so that if a failure occurs on one
route, traffic can be diverted to an alternate route. The network is
designed to provide availability of over 99.9% for most routes and to
provide customers with a wide range of telecommunications transmission
capacity. We believe that to achieve this level of reliability without
the use of a network similar to Hermes Railtel's network, carrier
customers would need to purchase additional dedicated circuits.

- Rapid Provisioning. Our customers can quickly obtain additional capacity
on our network. This ability to rapidly provide service is largely due to
our development of capacity substantially in excess of our forecasted
requirements.

- Flexibility. Our services provide customers flexibility across Hermes
Railtel's network so that the customer may minimize risk by enabling
network rerouting, eventually even under customer direct control.

- Advanced Technology. We are deploying dense wavelength division
multiplexing and synchronous digital hierarchy technology that can be
upgraded and will permit significant expansion of transmission capacity
without increasing the number of fiber pairs on a network. This
technology also provides the basis for structuring advanced operating
features, such as virtual private network services and IP-based services.

- Innovative Pricing. We believe that the price of high-bandwidth circuits
on transborder European routes is artificially high and not necessarily
related to the cost of such circuits. We offer competitive pricing with
tailored contract terms and volume discounts. This allows our customers
to plan more efficiently the fixed costs of their service portfolio. Our
customers can select varying capacity, access, guaranteed availability
and contract terms at competitive prices. Customers purchasing capacity
from public telecommunications operators generally choose from a narrow
set of capabilities under inflexible pricing plans.

For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."

PRICING AND DISTRIBUTION

We primarily conduct sales of Hermes Railtel's services through Hermes
Europe Railtel (Ireland) Limited, a subsidiary.

Currently, the price of cross-border pan-European calls is often
significantly higher than the underlying cost of transport and termination of
such calls and higher than the price of intra-country calls or transborder calls
to and from liberalized markets. The low cost of operating our network enables
us to attractively and competitively price services even as overall tariffs for
telecommunication services decline. Our low cost basis is a result of, among
other things, the application of new technologies to our network, which allows
us to operate our network with fewer employees than legacy networks.

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The term of a typical customer agreement currently ranges from one to three
years in length. The customer agrees to purchase, and we agree to provide,
cross-border transmission capacity. In general, the customer agrees to pay
certain non-recurring charges upfront and recurring charges on an annual basis,
payable in twelve monthly installments. If the customer terminates the service
order prior to the end of the contract term, the customer is generally required
to pay us a cancellation charge equal to three months' service for every twelve
months remaining in the contract term. We guarantee transmission services to a
certain service level. If such levels are not met or we fail to deliver service
by the committed delivery date, the customer is eligible for a credit against
charges otherwise payable for the failed link.

CUSTOMERS

At March 3, 1999, 54 customers were under contract for service on Hermes
Railtel's network, including public telecommunications operators and other
carriers, global consortia, Internet service providers and resellers. As of
December 31, 1998, our customers were contractually obligated to pay us an
aggregate of $418 million for future services, provided our network performs in
accordance with contractual specifications. We believe that the type and quality
of our customers validate our business plan and network concept and illustrate
the type of customers we expect to be attracted to the full network. The success
of our network to date also demonstrates the demand for cross-border transport
services. We are targeting seven major market segments or customer groups, which
can be characterized as follows:

- Existing Public Telecommunications Operators. This customer segment
consists of the traditional European public telecommunications operators
that generally participate in the standard bilateral agreements for
cross-border connectivity. We provide a vehicle for public
telecommunications operators to compete in non-domestic markets. As of
January 1, 1998, all public telecommunications traffic can be transported
by carriers other than the domestic public telecommunications operator,
thus vastly expanding the potential demand from public telecommunications
operators for our services.

- Global Consortia of Telecommunications Operators. Many of the largest
public telecommunications operators and international carriers have
pooled resources and formed consortia in order to compete more
effectively in important telecommunications markets such as those in
Western Europe, particularly outside their home markets. Prior to
liberalization of the provision of switched voice services in Western
European markets, one of the primary objectives of these consortia was to
provide pan-European services to multinational business customers,
including X.25/frame relay (high speed data network) service and voice
services for a closed user group. We believe that we provide an
attractive alternative at better pricing in those environments where such
a consortium does not already own its infrastructure. Furthermore, we
believe that we are well-positioned to provide cross-border connectivity
between different domestic infrastructures of these alliances.

- International Carriers. This customer segment consists of non-European
carriers with traffic between European and other international gateways.
Existing customers in this segment include Teleglobe and targeted future
customers include the United States regional Bell operating companies. We
can provide these customers a pan-European distribution network to gather
and deliver traffic to and from their own and other hubs.

- Other Carriers. This segment consists of other European carriers
competing with existing public telecommunications operators, cable TV and
mobile carriers and competitive access providers. These other carriers
have chosen to compete with the incumbent public telecommunications
operators in their respective countries. We believe that these other
carriers will prefer to use the services of independent carriers such as
ourselves to meet their cross-border telecommunication transport needs.

- Internet Backbone Networks. Internet backbone networks are providers of
large capacity international connectivity services between Internet nodes
(points of interconnection between local Internet service providers).
These networks are a fast-emerging segment and are expected to

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generate significant demand for the services we offer. The Internet
segment is experiencing significant growth in demand for transmission
capacity.

- Resellers. Resellers are telecommunications service providers that do
not own transmission facilities, but obtain communications services from
other carriers for resale to the public. Resellers are a growing segment
of the market and are expected to increase in conjunction with the
liberalization of the European telecommunications market. In the United
States, for example, resellers were a significant factor in the expansion
of competition.

- Other Service Providers. We also target data communications systems in
which special service features enhance the basic data transmission
facilities offered to customers. Many of these networks are targeted to
the data transfer requirements of specific international customer
segments such as airlines and financial institutions. Their basic network
transmission requirement is to connect data switches or processors, and
they currently purchase their own international circuits and build
additional resiliency into their network infrastructure. We expect to
allow them to meet these needs cost-effectively and to extend their
services to new markets or customers without substantial capital
investment.

We expect that additional demand for alternative service providers will
come from increased usage of dedicated circuits for Internet access, private
lines for the deployment of wide-area networks by large corporations,
single-source local and long distance services for small and medium-sized
businesses and emerging broadband applications such as cable TV programming
distribution (other than broadcast) to the end-user.

NETWORK DESIGN

Network Architecture. Our network design is based on a layered architecture
that separates physical, optical and telecom layers of our network with standard
interfaces in order to optimize design and operation and provide flexibility for
introducing new technologies, such as IP.

Physical Layer. The physical layer of our network is based on a mesh of
routes comprised of dark fiber, or fiber optic cable that is not yet equipped or
activated for commercial use. When the network is completed, the physical layer
will interconnect cities on the network via at least two or three different
paths to minimize service interruptions when fiber or equipment failures occur.
In each major city, we intend to locate two additional customer access sites for
maximum reliability.

Optical Layer. The optical layer of our network is based on dense
wavelength division multiplexing. This is a cost-effective technology that
substantially increases the capacity of an existing fiber optic network by
multiplying the number of signals that it can carry simultaneously.
Specifically, this layer:

- supports the provision of optical services directly to customers at 2.5
gigabits per second, representing the speed for digital signal
transmission expressed in billions of bits per second; and

- provides for the operation of multiple synchronous digital hierarchy
transmission networks and/or IP systems to run concurrently on a single
fiber pair in a highly cost-efficient manner. Ciena 40 wavelength systems
are currently installed on our network in five countries with a potential
capacity of 100 gigabits per second on a fiber pair.

Telecom Layer. The synchronous digital hierarchy layer of our network,
running via dense wavelength division multiplexing channels in the core of the
network, and directly on fiber elsewhere, supports the provision of
point-to-point services to customers at speeds of 2 Mbps up to 155 Mbps. The
synchronous digital hierarchy layer is itself a multi-layered architecture
consisting of multiple synchronous digital hierarchy rings, or cables, which are
optimized for different telecommunications traffic characteristics. Each
synchronous digital hierarchy ring supports fully automatic re-routing of
traffic in the case of a break in the ring.

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We expect to add an IP layer to our network starting in the second quarter
of 1999. This layer will support high capacity IP routers, or computer devices
for routing packet-switched data traffic, which can deliver IP services to
customers at speeds up to 2.5 gigabits per second. These routers will be
supported on the dense wavelength division multiplexing layer of the network
directly and/or through asynchronous transfer mode technology in the core of our
network and on top of the synchronous digital hierarchy layer elsewhere. These
changes will also enhance the services that Ebone can offer to its Internet
service provider customers. We plan to extend our enhanced IP transport
capabilities to all cities on our network by 2000. This layer will be able to
handle failures independently of the lower layers by re-routing at the IP level.

Our network is controlled by a single active network operations center in
Brussels, Belgium. We maintain a backup center in Amsterdam, The Netherlands
that has equivalent management systems continuously synchronized with the
primary center.

Our network operations center can pinpoint potential service problems and
deal with service re-routing much more effectively than other networks that are
controlled by multiple operators in different countries. Our advanced
operational support systems also provide comprehensive support for:

- managing the large number of network components and local repair
organizations required for an extensive international network of our
size; and

- providing advanced customer support for customer operational activities.

Overall, our combination of backup paths and management components enable
recovery from individual failures at the optical, synchronous digital hierarchy
and IP layers. Our resilient approach provides for a high level of network
performance and reliability. As a result, we are able to enter into strong
performance commitments with our customers, and services on most routes of our
network have performed at or above 99.9% availability.

We expect to operate our network and to own substantially all of our
network equipment as well as some segments of the fiber optic cable. A
substantial portion of the fiber is leased from third parties on a long-term
basis. Long-term leases for fiber are advantageous to us because they reduce or
eliminate the costly burden of building large quantities of capacity before they
can be fully utilized. Where we lease dark fiber, the owner of such fiber will
generally be responsible for maintaining such fiber optic cable. In general, we
will enter into agreements with equipment vendors and infrastructure providers
and other third parties to supply and/or maintain the necessary equipment for
our network. For a discussion of the risks associated with the Hermes Railtel
network technology, see "Risk Factors -- The technology of our Hermes Railtel
network could become obsolete and harm our competitiveness."

NETWORK CAPACITY

We are building our network to include Ciena 40 dense wavelength division
multiplexing systems on a majority of our routes. This allows for synchronous
digital hierarchy and IP systems of 2.5 gigabits per second to be installed only
when required, thus providing for efficient management of capital investment.

Should capacity be required beyond the initial 100 gigabits per second on
the first fiber pair, we can bring additional fiber pair(s) into operation that
utilize either higher capacity dense wavelength division multiplexing systems at
2.5 gigabits per second or at 10 gigabits per second. Such systems have been
available on some routes on our network since 1998. The remaining routes are
planned to have this upgrade in 1999. We plan to have a minimum of two fiber
pairs on all routes. This approach will extend capacity as we implement it on
new paths and on selected existing paths over time.

NETWORK AGREEMENTS

We have entered into agreements and letters of intent with various
infrastructure providers for construction and/or leasing of dark fiber for
portions of our network. Our agreements for leases of portions of our network
typically require the infrastructure provider to provide a certain number of
pairs of dark

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fiber and in some cases facilities along our network route commencing on dates
we provide. The term of a lease agreement typically ranges from 10 to 18 years.
An agreement typically contains optical specification standards for the fiber
and methods of testing. We are allowed to use the cable for the transmission of
messages and other purposes, including increasing capacity. The infrastructure
provider is responsible for maintenance of the cable facilities. The
infrastructure provider may also provide space for the location of our equipment
and related maintenance. The agreements typically provide for termination by the
parties only for material breach, but allow the breaching party 90 days to cure
their breach. The agreements typically contain a transition period after
termination of the agreement to allow us to continue to serve our customers
until we can reach agreement with an alternative infrastructure provider. In
certain areas of our network where it is not possible to lease dark fiber, we
have signed agreements or letters of intent for the right to use managed
bandwidth. The terms of these agreements typically range from 10 to 25 years.
For a discussion of the risks associated with our network agreements, see "Risk
Factors -- Failure to obtain new leases of transmission capacity or renew
existing leases on our leased lines could cause us to incur losses on the leased
portions of our network" and "Risk Factors -- Failure to carry sufficient
traffic on our leased lines could cause us to incur losses on the leased portion
of our network."

We are also deploying our network along the rights-of-way of a variety of
alternative sources, including railways, motorways, waterways, pipelines and
utilities. We constantly evaluate multiple alternative infrastructure suppliers
in order to maximize our flexibility. Many portions of our network utilize
long-term right-of-way agreements with landowners. As a result of our network
development activities to date, we have gained access to infrastructure for our
network routes which we believe will be difficult for competitors to duplicate.

LOCAL ACCESS

We expect to provide customer access to our network primarily through our
Access Services line of business using synchronous digital hierarchy access
lines in those cities where Access Services will be present and the Hermes
Railtel network has nodes. Arrangements with our Access Services line of
business are expected to be on an arms length basis. In each city, as one of our
points of presence is deployed, we may contract with one or more suppliers to
provide local access service to customer locations. Currently, we have
contracted with a number of unaffiliated local access providers to connect our
network to intra-city networks. Pursuant to these agreements, we can offer our
carrier customers service from their premises in one city to their premises in
another city. Various local access network suppliers may also be interested in
linking the business centers in which they are active to our network. Therefore,
we believe that the relationships between ourselves and local access network
suppliers can benefit both parties.

TRANSOCEANIC SERVICES

In January 1999, we signed an agreement with FLAG Telecom, to establish a
50/50 joint venture to build and operate the world's first transoceanic dual
cable system designed to carry voice, high-speed data and video traffic at
speeds up to 1.28 terabits or trillions of bits per second. The high-capacity
fiber optic link between Europe and the United States, to be known as FLAG
Atlantic-1, is expected to begin offering services in the last quarter of 2000.
The joint venture plans to offer a direct link between New York City, London and
Paris, with connections to numerous other cities in the United States, Europe
and other countries in the Middle East and Asia Pacific. The project is subject
to financing, the execution of related agreements and other conditions.

Construction of the initial 160 Gbps portion of FLAG Atlantic-1 will cost
approximately US$1 billion. Financing will be provided by a combination of
equity contributions and capacity purchases by the joint venture participants,
customer sales, and non-recourse bank debt. A contract to build the cable has
been awarded to Alcatel Submarine Networks, the general contractor. The system's
design allows for 160 Gbps incremental upgrades as demand warrants. Under the
terms of the joint venture agreement, we will be responsible for the
construction and maintenance of the land-based portion of FLAG Atlantic-1.

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The two subsea sections of the cable are approximately 5,900 kilometers and
6,350 kilometers for each link, with an overall system length of approximately
12,500 kilometers. The joint venture will provide links from the European
landing points to the cities of Paris and London where plans are for customers
to be able to connect to Carrier Services' network as well as to other networks
that customers may choose.

BUSINESS AND MARKETING STRATEGY

We believe that a large portion of Carrier Services' market growth will
come in the form of IP-based voice and data services. Because a majority of the
world's IP traffic originates in the United States, our Carrier Services line of
business has chosen to invest in its own capacity infrastructure through
Transoceanic Services' participation in FLAG Atlantic Limited. We believe that
owning a large volume of capacity will provide us with a competitive low cost
position to serve existing and future customers. We also intend to utilize FLAG
Atlantic Limited as a lessor of transatlantic capacity to Hermes Railtel, thus
extending the Hermes Railtel network at favorable prices. Transoceanic Services
will also provide backhaul services which it will market through a newly
developed sales force. For a discussion of the risks associated with our
business strategy, see "Risk Factors -- We may encounter delays in implementing
key elements of our business strategy which could adversely affect our projected
revenue growth."

CUSTOMERS

In addition to selling capacity to Hermes Railtel, Transoceanic Services
intends to target customers, including emerging alternative carriers, incumbent
telecommunications carriers and Internet service providers that require high
quality dedicated transmission capacity to major commercial and financial
centers. Sales will be made with our direct sales forces, as well as through
indirect channels.

IP SERVICES

In order to capitalize on the projected growth in IP voice and data
transmission services and to take full advantage of Hermes Railtel's network, as
well as its Ebone subsidiary and transoceanic capacity, we intend to offer
IP-based services to telecommunications carriers, businesses and other high
usage customers. We have recently developed a strategic plan which envisions
progressing from a service offering focused on IP transport to one which focuses
on value-added IP-based service offerings.

PRODUCTS AND SERVICES

We intend to offer a broad array of competitively priced comprehensive IP
services to meet our customers' requirements.

- Connectivity. Connectivity services may include dial-up and dedicated
access, IP transport, voice over IP, fax over IP, virtual private
networks and IP clearinghouse services;

- Network and Management Services. These services may include security and
network integration as well as router and server management, billing and
information services to managed IP networks; and

- Value Added Services. These services may include web hosting,
collocation, unified messaging and basic Internet service provider
services such as newsgroups, mail, groupware and directory services. We
are also considering metering and billing services as well as e-commerce
and call center applications.

BUSINESS AND MARKETING STRATEGY

We estimate that a large portion of our market growth will come in IP-based
voice and data services. These services will range from Internet access and IP
transport to value-added services such as

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e-commerce and unified messaging. We expect to use a number of complementary
strategies to enter these service markets, including:

- acquisition or partnership with emerging providers of value-added
services and IP-based application companies;

- expansion of Internet access and IP transport capabilities and service
offerings;

- development of a full web hosting capability either through acquisition,
partnership or our own development; and

- expansion of virtual private network, intranet and extranet service
offerings.

GTS BUSINESS SERVICES

OVERVIEW

Through our Business Services line of business we provide high quality,
competitively priced long distance voice and fax services for retail business
customers to worldwide destinations and network management, access and
termination services to telecommunications service providers such as calling
card companies and resellers in the United Kingdom, Germany, The Netherlands,
Spain, France, Italy, Norway, Sweden, Belgium, Denmark and Ireland. We provide
these services using our switches, fiber optic cable and other infrastructure,
as well as leased lines and capacity provided by other carriers and service
providers. We established our Business Services customer base and sales network
and acquired additional switches, routers and other infrastructure through the
recent acquisitions of Esprit Telecom and NetSource.

We are in the process of developing our plans for integrating Esprit
Telecom and NetSource into our Business Services, Carrier Services and Wholesale
Services lines of business. We may have one or more of our other entities
purchase assets from Esprit Telecom as part of our strategy. Any such
transaction must be effected in accordance with the applicable covenants in the
indentures governing the Esprit Telecom 11.5% senior notes due 2007 and 10.875%
senior notes due 2008. In addition, we may also decide in the future to execute
a tender or exchange offer or consent solicitations with respect to these notes,
if we determine that it is advisable to better integrate Esprit Telecom into our
overall corporate structure.

PRODUCTS AND SERVICES

We currently offer a range of telecommunications services to two targeted
business customer segments: (i) retail business customers consisting of small,
medium and large-sized businesses, governmental agencies and other organizations
with significant international traffic and (ii) telecommunications service
providers and resellers. We have recently introduced a new category of
service -- enhanced services -- to complement our established telecommunications
services and products. In some markets, we plan to target small and medium-sized
enterprises, small and home offices and high-value residential customers.

Retail Services. The largest share of the business and corporate retail
market is currently international voice and fax transmission services. In most
of our Business Services markets, we also provide our retail clients with
national long distance services. As we integrate Esprit Telecom and NetSource
and build out local access in targeted metropolitan markets throughout Europe,
we intend to provide our retail clients with seamless national and international
city-to-city service through our Carrier Services and Access Services
infrastructure. We believe that customers have selected us as a provider on the
basis of competitive pricing, network quality, responsive account management and
customized services. See "-- Competition Faced by Our Lines of Business."

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We distinguish our retail business customers between direct access retail
customers and indirect access retail customers. Our direct access customers use
our owned or dedicated leased lines, while our indirect access customers access
our services indirectly on a switched basis using the public telecommunications
operator network by means of an access code. Our direct access retail customers
are generally users of telecommunication services who generate relatively large
amounts of long distance traffic, with such traffic usually being important to
the execution of their core businesses. We offer retail direct access in all of
our existing Business Services markets.

Our indirect access retail clients access our services by dialing an access
code, generally either using an auto dialer or via a code programmed directly
into their own switches so that it is transparent to the user. These customers
generally consist of small and medium-size businesses whose telecommunication
requirements do not warrant the costs associated with the dedicated leased lines
of direct access service. Contracts for both direct and indirect access are
typically for a period of one year. See "-- Business and Marketing Strategy
- -- Target High Users of Long Distance Traffic." For a discussion of regulatory
issues relating to the provision of retail indirect access services, see
"-- Licenses and Regulatory Issues."

Service Provider/Reseller Services. We provide network management, access
and termination services to a number of telecommunications service providers,
such as calling card companies and Internet service providers, and to resellers
which distribute our telecommunication services to customers with average
monthly revenue levels below those that we currently target. These companies are
typically marketing-focused rather than network-focused, and we are able to
provide a high degree of telecommunication support to such providers, including
stationing their equipment at our switch sites, incoming call verification and
bill generation. In some cases, these customers use competitor carriers to
either seek lower costs overall or to have backup services. Contracts for our
service provider and reseller services are typically for a period of one year.

Enhanced Services. We focus on developing new products and services which
address the specific needs of our customer base including calling cards, an
international toll free service and itemized billing, which we target to
organizations that require their customers or employees to be able to simply and
cost-effectively call them from other countries. We plan to introduce additional
services, including unified messaging, interactive voice services, prepaid
calling cards and prepaid mobile phone services. Our target customers include
calling card operators, hotels and information technology companies. In
addition, we provide itemized billing and detailed costing for accounting and
control purposes, national freephone services, as well as limited prepaid and
account-based calling card services in some markets, and limited data services
on a trial basis.

Fixed-to-Mobile Traffic. This service allows our Business Services
customers with a router to place calls to cellular phone subscribers at more
favorable rates than if they were placed directly to the relevant cellular phone
service through the public telecommunications operator. Due to the relatively
high penetration of cellular phones throughout Europe, the cost of calls to such
phones is an increasingly significant part of companies' total telephony costs.
Consequently, we believe that this service will continue to prove attractive.

BUSINESS AND MARKETING STRATEGY

In order to achieve our objective of becoming one of the largest
pan-European independent telecommunications service providers to business and
other high-usage customers, we intend to implement the following strategies:

TARGET HIGH USERS OF LONG DISTANCE TRAFFIC

We have an established retail customer base of leading international
businesses, organizations and governmental agencies, including a number of
international financial institutions and large global hotel chains. We intend to
continue to focus a significant part of our retail marketing efforts on medium-
to large-sized businesses, governmental agencies and other organizations that
have extensive telecommunications needs and which typically generate long
distance telecommunications expenditures in excess of

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$5,000 per month. We will increasingly focus our marketing efforts on small to
medium-sized enterprises that utilize significant amounts of long distance
services, and plan to target small offices and home offices and high value
residential customers in certain countries. We believe that these market
segments offer significant opportunities, because a substantial portion of them
have traditionally been under-served by the public telecommunications operators.

PROVIDE CUSTOMER VALUE AND SERVICE

We seek to offer our business services to our customers not only at a
discount to the prices charged by public telecommunications operators, but with
a level of service superior to that provided by such other service providers. We
believe that providing a high level of customer service is a key element in
establishing customer loyalty and attracting new customers. We focus on
providing individual attention to potential and current customers, beginning
early in the sales cycle and continuing throughout a customer's relationship
with us. We offer each client direct, personalized service to ensure full access
and a smooth transition to the services we provide.

DEVELOP OUR PRODUCT AND SERVICES PORTFOLIO

We seek to develop new products and services which address the specific and
changing needs of our current customer base and to attract and retain new
customers. Our infrastructure gives us the flexibility to offer new products and
services without undertaking major network modifications, and we believe that we
are well positioned, both from a technical and marketing perspective, to add
additional products and service offerings. The provision of national long
distance services is one of our rapidly growing businesses and we expect that
this will offer us major opportunities, as liberalization leads to more
favorable public telephone operator connection rates in Europe.

NETWORK AND OPERATIONS

Through our acquisitions of Esprit Telecom and NetSource, we have acquired
a core infrastructure network for providing services to business customers. This
consists of three components: the switching equipment, the transmission
infrastructure and network between those switches, and systems to support the
management of the network.

SWITCHING EQUIPMENT

We utilize advanced digital switching equipment and network routing
architecture from recognized industry manufacturers to form a reliable network
platform for the delivery of quality telecommunications transmissions. We own
and operate three switches at switching centers in London, Dusseldorf and
Amsterdam for switching national and international long distance calls. We own
and operate a switch in Mannheim, Germany and a switch in Dublin, Ireland for
switching national and international long-distance calls. We have has also
acquired additional switches, in Dusseldorf, Frankfurt and Hamburg. We have
installed and are currently testing additional switches which have been
installed in Paris and Barcelona. We will add more switches to the network as
traffic flows, capacity and business conditions warrant and as we expand into
new markets.

We continuously evaluate developments in switching technology and products
offered by other companies, and will add different platforms which are
complementary and beneficial to our service network. We maintain our switches
with up-to-date software and ensure their compatibility with the large number of
signaling systems in use in the European and United States markets. Using
least-cost routing technologies, each switch is programmed to select the most
cost-efficient route or carrier for the required destination. We also employ
dynamic compression equipment to improve utilization of our most costly
transmission lines.

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TRANSMISSION INFRASTRUCTURE AND NETWORK

We currently maintain network sites in 31 locations in 11 European
countries, 11 of which locations are primary switching centers and 20 are local
points of presence, as well as network connections to certain carriers located
in the United States. In most cases, network sites are situated at the site of
the sales offices. We intend to extend the reach of our services network by
linking new sales offices and terminating sites with a view to providing
seamless and cost-effective transmission. Overall management of our services is
carried out centrally from our network management center in the United Kingdom,
with additional support staff based locally to facilitate complete oversight of
all network functions. Thus, we are able to evaluate current and projected
traffic patterns in order to establish buildout priorities.

One of our key services is least cost routing. The equipment required to
provide this service consists of a small programmable call router which is
connected to the PBX of a corporate customer or, in the case of a smaller office
without a PBX, connected directly to an outbound telephone cable. In certain
service areas such as The Netherlands, we also market telephone equipment with
routing technology already incorporated into the equipment (called a dialer). We
offer different types of routers depending on the market being served and local
technological requirements.

MONITORING AND MAINTENANCE

From our network management center in the United Kingdom, we monitor our
equipment and facilities and provide technical assistance and support 24 hours a
day, year-round. Various quality measures are monitored on an ongoing basis,
with the aim of identifying problems at an early stage before they affect the
customer. Through the use of sophisticated network management equipment, we are
able to effectively control bandwidth and provide diagnostic services. We use an
internal staff of technicians both to install and repair electronics and to
provide service to customers.

NETWORK RESILIENCE

Our network infrastructure is designed to provide resilience through
back-up power systems, automatic traffic re-routing and computerized automatic
network monitoring. If our network experiences a failure of one of its links,
the routing intelligence of the switch is designed to enable the call to be
transferred to the next choice route or, if all other routes are unavailable, to
the public switched telephone network, thus ensuring call delivery without
affecting the customer.

SALES

The local managing directors in each country are responsible for all local
sales activities and local marketing, local regulatory compliance and licensing
requirements, and the relationship with the local telecommunications companies.
A central marketing organization is responsible for coordinating the country
market initiatives, driving product development, market research and analysis,
and promotion and advertising. From our network management center in the United
Kingdom we provide transmission, technical support and billing services to each
of our sales offices and terminating sites. In addition, our network management
center is also responsible for the implementation, upgrading and functionality
of information technology systems (including the billing and management
information systems).

Direct sales constitute our principal sales method in the United Kingdom,
Germany, Spain, France, Belgium, Luxembourg, Italy, Sweden, Norway, Denmark, The
Netherlands and Ireland. We support our direct sales effort by telemarketing and
telesales, and complement it to a lesser extent by independent sales
intermediaries and resellers. In Sweden, Denmark and Norway we market our
products and services principally through sales agents. In addition, because we
have begun to increase our focus on specific industry groups, such as financial
institutions, hotels, travel service organizations and transport companies, we
have assigned specialists to particular industries.

We currently operate in eleven countries that account for approximately 80%
of the international long distance telecommunications minutes that originated in
EU member states in the 1998 calendar year, and

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maintain sales offices in 42 cities. Each country's sales operation is run as a
profit center by a country manager, and varies from smaller operations in the
early stages of development, to fully operational businesses in the more
developed markets consisting of support and sales staff, as well as customer
service personnel. The sales operation in each country is responsible for
originating and managing business in its respective local market, and is staffed
with employees who understand our Business Services line of business,
philosophy, products and systems and local telecommunication systems and
products, business practices, languages and customs. As of December 31, 1998 we
had approximately 245 direct sales people, 300 sales agents and 150 full-time
equivalent telemarketing employees in our Business Services line of business.

The United Kingdom. From sales offices in London, Reading, the Midlands,
Manchester and Glasgow, we currently offer both direct and indirect retail
access and service provider and reseller services to all international and
national long distance destinations in our Business Services line of business.

Germany. We offer both direct and indirect retail access and service
provider and reseller services to all international and national long distance
locations and through NetSource, we also provide services to small-office and
home-office and residential customers. In addition, we offer retail services to
businesses through six regional sales offices located in Frankfurt, Hamburg,
Berlin, Munich, Oberhausen and Stuttgart and through relationships with
third-party distributors. In June 1998, Esprit Telecom acquired the switch-based
telecommunications services business of Plusnet, which at that date offered
national and international long distance voice telephony to approximately 700
business customers.

The Netherlands. We have sales offices in Amsterdam, Rotterdam, Leiden,
Zwolle, Eindhoven and Venray. We currently offer both direct and indirect retail
access, wholesale and service provider and reseller services to all
international and national long distance destinations.

Scandinavia. We operate in Sweden, Norway and Denmark as a reseller,
providing our business customers with indirect retail access and service
provider and reseller services to all international and national long distance
destinations using least cost routing.

Spain. We operate one of the few alternative telecommunications providers
currently operating in the Spanish market. From sales offices in Madrid,
Barcelona and Bilbao, we currently offer both direct and indirect retail access
and service provider and reseller services to all international and national
long distance destinations.

France. We operate sales offices in Paris, Lille, Lyon, and Strasbourg. We
currently offer both direct and indirect retail access, wholesale and service
provider and reseller services to all international and national long distance
destinations.

Belgium. From sales offices in Brussels and Antwerp, we currently offer
direct and indirect retail access wholesale and service provider and reseller
services to all international and national long distance destinations.

Italy. From a sales office in Milan, we currently offer direct and indirect
retail access to all international and national long distance destinations.

Ireland. From sales offices in Dublin and Cork, we offer both direct and
indirect retail access services to all international and national long distance
destinations.

BILLING AND MANAGEMENT INFORMATION SYSTEMS

Our detail records for customers we acquired through the acquisition of
Esprit Telecom are collected and backed-up locally and transmitted to the
internal billing center in the United Kingdom for processing. Call records are
transmitted electronically to Tel Labs Inc., a data processing company in the
United States, for final processing of customer records, which are then returned
for verification, printing and distribution to customers. In 1997, we began to
consider an upgrade to our information and management systems, which we believed
to be required in order to provide the capability and flexibility to support our
anticipated growth. We have selected a new customer care and billing system from
Seville Systems, a

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billing system vendor headquartered in Edmonton, Canada. The new system is
undergoing final customization and testing. The introduction of the new system
will be accompanied by additional systems designed to support the critical
service activation, customer care and service assurance processes. We expect
that investment will continue with major additional systems in the billing,
customer care, network management, product management, prospect management and
information systems areas being introduced over the next several years. We
expect to integrate the acquired legacy billing systems at NetSource and Esprit
Telecom into our new Business Services billing process by mid-1999. See "Risk
Factors -- We may not implement billing and management information systems
effectively and on schedule."

GTS WHOLESALE SERVICES

OVERVIEW

By utilizing the existing infrastructure of Esprit Telecom, we are creating
a sixth line of business to be known as Wholesale Services. Wholesale Services
will provide international traffic termination services to other
telecommunication carriers, including public telecommunications companies, new
operators, global alliances and regional telephone companies, to which it is
able to provide highly responsive and flexible services. Wholesale traffic will
enable us to benefit from greater purchasing power and higher network
utilization. Through our Wholesale Services line of business, we will integrate
the wholesale services activities of Esprit Telecom with the international
switching and transit service activities of GTS -- Monaco Access. At a later
date, our Wholesale Services line of business will also incorporate the
wholesale activities of NetSource.

Through our Wholesale Services line of business, we offer competitively
priced international switching and transit services, primarily to the
"wholesale" international gateway and carrier-to-carrier portion of the
international calling market, as distinguished from "retail" services offered to
end-users. These services include:

- international switched traffic;

- international private lines;

- facilities management, including billing, customer management and fault
reduction systems;

- resale distribution for Internet service providers; and

- prepaid calling card platform services.

Wholesale customers are other international and national carriers that
connect with Wholesale Services to carry their traffic to destinations where our
rates are competitive, both on the Hermes Railtel network and on other
off-network routes. Wholesale Services has contracts with these customers, but
they generally do not include minimum usage levels. Our wholesale customers
generally maintain relationships with a number of telecommunications providers.
In several cases, Wholesale Services will also use its wholesale customers as
suppliers for termination of its off-network calls. We believe that success in
the wholesale business is predicated on high network quality at a low cost base.
At present, the majority of our Wholesale Services' wholesale customers are
located throughout Europe. We expect that demand for our Wholesale Services line
of business will further increase in other European markets as these markets
mature. As we continue to increase the capacity of Hermes Railtel's network, we
anticipate that our resultant cost base will enable us to price our wholesale
services more competitively and therefore increase the volume of such services.

Our partner in GTS-Monaco Access, SNF, is an investment fund designated by
the Principality of Monaco to represent its interests. We exercise operational
control of the joint venture, and provide managerial and financial support,
international telecommunications expertise and strategic planning. We are
currently in negotiations with the Principality of Monaco to terminate the
GTS-Monaco Access joint venture and transfer its customers and revenues to the
UK as we combine with Esprit's wholesale activities.

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By utilizing our Carrier Services and Access Services networks as well as
over 25 third-party carriers in London and 40 third-party carriers across Europe
and North America, we provide telecommunications termination to destinations
world-wide and a wide range of alternative routing paths that facilitate cost-
effective termination and ensure reliability and increased call/termination
success rates. Calls are carried from the entry switch point to the switch point
from which the call can be terminated most economically. If this exit switch
site is within the country of the termination, we consider the call to be an
"on-net" call, whereas we otherwise consider it to be an "off-net" call. Off-net
calls are passed on to other carriers for transmission and termination. In
general, we realize higher gross margins with respect to on-net calls because we
utilize our own infrastructure. We expect that the expansion of the our Carrier
Services and Access Services networks will allow us to increase the proportion
of on-net calls as well as further reduce the cost of these calls.

BUSINESS AND MARKETING STRATEGY

Our strategy for developing our Wholesale Services line of business
includes the following:

- Develop Advanced Carrier Services Offerings. Wholesale Services may
develop its "advanced carrier services" offerings to include global 0800
services and international free phone services, which we believe will
broaden customer relationships, enhance revenues and help to protect us
from price-based competition.

- Develop Relationships to Broaden Service Offerings. Our Wholesale
Services line of business may develop relationships to broaden its
service offerings. Wholesale Services has entered into agreements with
UUNET, one of its gateway customers, to provide wholesale Internet access
to Wholesale Services' carrier customers in a number of Western European
countries. The agreement allows these services to use the same brand
names as those of our affiliates.

- Pricing. Price is a critical factor in the market for international
switching as competition increases due to expanding international
capacity, advances in technology and falling regulatory barriers.
Wholesale Services intends to price its services competitively with the
prevailing price for comparable inter-public telecommunications operators
transit and gateway services. Wholesale Services is not bound by legacy
systems, infrastructure and personnel levels and can, therefore, manage
competitive cost operations.

- Attractiveness of Independence. Because our Western European activities
are not affiliated with any of the major consortia or large Western
European telecommunications companies, our Wholesale Services line of
business may be considered an attractive service provider for Western
European carriers who may otherwise be reluctant to obtain services from
the larger operators of international gateways that are often their
competitors in the retail market.

- Exploit Internal Opportunities. Wholesale Services may collaborate with
our other companies in Europe and the CIS. Wholesale Services is expected
to realize significant reductions in its cost structure through access to
low-cost European transmission capacity through an alternative
infrastructure provider such as Hermes Railtel. Wholesale Services will
act as the international carrier for traffic generated by our other lines
of business.

TARGETED CUSTOMERS

Targeted customers for our Wholesale Services line of business include:

- Non-Affiliated Public Telecommunications Operators. We believe that
various large American and Western European public telecommunications
operators that lack adequate international switching and transport
facilities of their own may be persuaded to purchase international
services

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from Wholesale Services rather than from competing public
telecommunications operators or consortia;

- Mobile Carriers. We believe that some of the alternative mobile
carriers, which currently provide only a small percentage of Western
European mobile telecommunications traffic, may prefer the "independent"
international gateway service offerings of Wholesale Services to those
of their public telecommunications operator competitors;

- Internet Service Providers. Growth in Internet usage creates a
significant opportunity for a nonaligned Internet access provider such
as Wholesale Services, since many Internet service providers will be in
direct competition with public telecommunications operator-owned
services in large European markets;

- Second Carriers/Resellers. We believe that many second carriers will
seek to enter new markets quickly without investing in international
switching capacity; and

- Established Public Telecommunications Operators. This customer segment
will be a niche market for Wholesale Services. As markets are
deregulated and carriers become increasingly competitive, opportunities
may emerge to leverage our non-aligned status to route traffic between
those new competitors.

GTS ACCESS SERVICES

OVERVIEW

Through Access Services, we intend to capitalize on our experience in
developing and operating local telecommunications networks in Russia and Central
Europe by building, acquiring or leasing technologically advanced fiber optic
networks in order to provide local access services in up to 12 metropolitan
markets throughout Europe, by 2001. We presently provide local telecommunication
access infrastructure and leased lines in several cities in Russia, the CIS and
Central Europe, including Moscow, St. Petersburg, Kiev, Prague and Budapest.
Currently, the regulatory regimes in Europe vary from country to country and
some countries do not permit alternative providers of local access to operate.

PRODUCTS AND SERVICES

Together with our Business Services line of business, we intend to offer
through Access Services a broad array of competitively priced, comprehensive
services to meet customer telecommunications service requirements, including
private line services, local, national and international switched telephony
services, high-speed local access network interconnection services, virtual
private network services, video transmission services and IP-based services,
including voice over IP, web hosting and data transmission services. According
to industry sources, demand for data transmission in the United States is
currently growing much faster than voice, and we expect that this trend will
develop in Europe as competitively priced telecommunications services become
available. In addition, we intend to develop competitively priced value-added
telecommunications services that are tailored to the specific needs of
individual customers.

The types of services that we intend to offer in combination with our
Business Services include:

- Switched Services. Switched services involve the transmission of voice,
data or video to locations specified by end-users or carriers. Through
our Business Services, we have the technological capability to offer a
full range of switched service, including local, national and
international calls as well as enhanced services. We intend to own and
operate switches and enter into interconnection agreements with other
telecommunication service providers and carriers, including Hermes
Railtel's network, in order to offer to customers cost-effective local,
national and international calling services. Switched service features
are expected to include, to the extent allowed by local regulations,
enhanced services such as conference calling, call forwarding, analog or
digital

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connectivity, desk-to-desk calling, four digit dialing, full network
monitoring and maintenance, caller ID, voice mail/messaging and e-mail to
voice-mail conversion.

- Non-Switched Services. Non-switched services involve a fixed, dedicated
communications link between two or more specific locations. Businesses
commonly use this service to obtain a private direct link between
multiple business facilities or to another end-user/carrier. We expect to
provide high capacity, advanced technology to deliver customer traffic
with a lower cost and higher reliability as compared to the local public
telephone operator. Through a highly reliable and cost-efficient network
that can carry significant amounts of capacity, we intend to provide
non-switched voice, data and video transmission between (1) end users,
(2) end users and carriers and (3) multiple carriers, allowing our
customers the option to bypass the older, less efficient technology and
higher priced services of the incumbent public telecommunications
operators.

- Other Services. We also intend to develop service offerings to take
advantage of new market opportunities. We expect such services to include
one or more of the following: high speed data transmission services,
IP-based services, including Internet for multi-media applications, Web
hosting, voice over IP, calling card services, and enhanced voice
services. These products are expected to be developed and offered as
customer demand dictates and as the relevant regulatory environment
permits. We believe that there will be substantial demand for data and
Internet services by large business and other high-usage customers, and
that a bundled service offering of national and international data and
voice services will be attractive to this targeted customer base.

BUSINESS AND MARKETING STRATEGY

We believe that the size and growth potential of the European
telecommunications market, and the increasing liberalization of
telecommunications regulations in Europe, offer considerable opportunities to
expand into the provision of local access to retail customers in metropolitan
markets throughout Europe.

Our strategy for entering into a specific metropolitan market will be
determined through an analysis of a number of demographic and economic factors,
including:

- business concentration;

- presence of governmental, financial and business customers;

- local economic trends and prospects;

- demand and spending for switched and non-switched voice, data and video
telecommunications services;

- feasibility of construction;

- presence of existing and potential competitors;

- the regulatory environment;

- the market's proximity to the Hermes Railtel network; and

- the presence of local access companies that may be potential acquisition
candidates.

In targeting cities in which our entry strategy will be the construction of a
fiber optic cable network, we will initially focus on cities in which there are
no competitive local exchange carrier competitors providing local access
services or only one other such competitor. Our current intention is to enter
two metropolitan markets by the end of 1999 and to provide services in up to 12
target metropolitan markets by 2001.

We expect to use one or more of the following strategies to enter a market:

- constructing a fiber-loop network;

- purchasing or leasing fiber optic cable which has not been equipped or
activated for commercial use;

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- obtaining licenses for telecommunications networks utilizing microwave
transmissions; or

- forming partnerships with or acquiring providers of local access services
that own and operate their own fiber loops and network equipment.

CUSTOMERS

We plan to offer local access and other telecommunications services
primarily to telecommunications-intensive businesses for which reliable
telecommunications services are critical, as well as to our Carrier Services and
Business Services lines of business. We will use our fiber switches and other
equipment where available and/or reselling other carriers' equipment as needed.
These businesses include financial services companies, multi-national companies,
governmental agencies, resellers, Internet service providers and wireless
communications companies.

NETWORK

In those markets in which we determine to build our own fiber loops, we
intend to construct, acquire or lease facilities to operate advanced,
competitive local telecommunications networks employing current transmission
technology with dual ring architecture and central system monitoring and
maintenance. We believe that a base of uniform, reliable networks, which employ
the most current technology and support a broad array of high quality services,
will allow us to compete cost-effectively against products and services offered
by public telecommunications operators and, in certain markets, other
competitive providers of local access.

Our plan for our basic transmission platform is fiber optic cable deployed
in rings, equipped with high-capacity synchronous digital hierarchy equipment.
Such rings will provide redundancy by using dual paths for telecommunications
transmissions and will extend to a customer facility either directly or on a
point-to-point link from the rings. Such rings will finally connect to the
customer through customer-dedicated or shared electronics on or near the
customer premises.

NETWORK CONSTRUCTION

Prior to undertaking acquisition or construction of a network in a
particular market, we will undertake an analysis of a number of factors, as
discussed above, to determine whether such acquisition or construction is
economically justifiable. Wherever appropriate, we will seek to purchase or
lease fiber optic cable that is not equipped or has not been activated for
commercial use or utilize high-frequency short-haul microwave transmissions as a
method of accelerated entry into a selected market.

We expect that we will contract construction and installation services to
independent contractors selected through a competitive bidding process. Our
personnel are expected to provide project management services, including
contract negotiation, construction supervision, testing and certification of
installed facilities. The construction period of a network is expected to vary
greatly, depending on such factors as network route kilometers, number of
buildings involved in the initial installation and local construction
regulations. Upon completion of the first phase of construction, or the initial
loop, we expect to commence generating revenue. Further expansion of the network
will be dictated by customer growth and customers' relative proximity to the
initial loop.

Our initial capital requirement to develop our Access Services business in
Europe will be financed with a majority of the proceeds from our July 1998 stock
and convertible debt offerings. In addition, we contemplate that we will raise
additional financing, the proceeds of which will be applied toward the
construction of our local access infrastructure. We have not yet determined the
size and timing of such financing. We cannot estimate with any degree of
certainty the amount and timing of our future capital requirements for the
development of our Access Services line of business, which will be dependent on
many factors, including the success of our Access Services business, the rate at
which we expand our networks and develop new networks, the types of services we
offer, staffing levels, acquisitions and customer growth, as well as other
factors that are not within our control including competitive conditions,

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regulatory developments and capital costs. We believe that as we develop our
Access Services line of business, it is likely that we will need to raise
additional capital. See "Risk Factors -- We may be unable to raise the
additional capital necessary to implement our business strategy."

SALES AND MARKETING

In each of our target markets, we intend to establish our own direct sales
force. As we will be targeting large financial, corporate and governmental
customers with demanding telecommunications service requirements, we expect that
our internal sales force will include dedicated sales and customer service
representatives. Our Access Services sales force will offer direct local access
to Business Services customers in those metropolitan markets in which our Access
Services builds local fiber loops. In addition, our Access Services will work
closely with our Business Services to identify key customers and develop joint
service offerings.

GTS ACCESS SERVICES IN CENTRAL EUROPE

In Central Europe, we currently provide private data communications
services to government and commercial customers in Hungary, the Czech Republic,
Slovakia and Romania. In the Czech Republic, we provide outgoing voice services
and high-speed Internet access to business customers and operate an
international gateway and a data services network. In Hungary, we provide data
transmission services through a nationwide microwave network and a
satellite-based network installed at customer sites throughout the country. We
plan to develop two fiber loops in Budapest. Subject to certain regulatory
approvals, we have also obtained a license to provide international data
services in Poland and expect to begin operations during the first quarter of
1999.

In January and February 1999, we acquired an interest in two Internet
providers in Central Europe, DataNet in Hungary and NetForce in the Czech
Republic. In addition, we also acquired interests in two of the largest Internet
service providers in Poland, Internet Technologies and ATOM.

Our strategy in Central Europe is to expand our service offerings as the
regulatory environment permits, utilizing our existing infrastructure where
possible and providing a broad range of services to our target markets. The
establishment of competitive providers of local access in various Central
European cities is a major component of this strategy.

BILLING AND MANAGEMENT INFORMATION SYSTEMS

Sophisticated information and processing systems will be vital to the
success of Access Services. Specifically, we will need to develop systems to
enter, schedule, provision, and track a customer's order from the point of sale
to the initiation of service and such systems will need to include, or interface
with, trouble-shooting systems, management, billing, collection and customer
service systems. We expect the development of our systems to require substantial
capital and management resources. See "Risk Factors -- We may not implement
billing and management information systems effectively and on schedule."

GTS BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS

We provide digital voice, data, Internet and local services in Moscow
through our Sovintel, Sovam and TeleCommunications of Moscow ventures and
provide these same services to fourteen additional cities in the CIS through our
TeleRoss long distance network. We continue to evaluate the business environment
in Russia and the CIS for possible attractive opportunities for investments that
may complement our existing operations in Russia and the CIS. We are exploring
with our advisors a number of potential transactions, some of which may involve
the sale, including through a public offering, of certain of our Russian
businesses, or the contribution of these businesses in exchange for an interest
of equivalent or greater value in the surviving entity and, if consummated, may
be material to our operations and financial condition. Our ability to carry out
these transactions is subject to political, economic, market and other
conditions, and we cannot assure you whether or when these transactions would
occur. We will effect any such transactions in compliance with the provisions of
the indenture governing our 9 7/8% senior notes.

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BACKGROUND ON THE POLITICAL, ECONOMIC AND TAX ENVIRONMENT IN RUSSIA

Political. In recent years, Russia has been undergoing a substantial
political transformation. The various government institutions in Russia and the
other independent countries of the CIS and the relations between them, as well
as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change.

The political and economic changes in Russia have resulted in significant
dislocations of authority. As a result of the turmoil at the federal government
level and the continuing absence of a strong central government, the regions of
Russia are exercising more independence in both political and economic policies.
Significant organized criminal activity and high levels of corruption among
government officials exist where we operate. For a description of political
risks our operations in Russia and the CIS face, see "Risk Factors -- Turmoil in
Russia and the CIS creates significant uncertainty for our operations."

Economic. In May and early June 1998, the Central Bank of Russia and other
Russian governmental authorities adopted a number of measures, including
increasing the inter-bank lending rate charged by the Russian Central Bank and
the rate offered on sovereign debt obligations, in order to maintain the value
of the ruble and reduce the risk of the flight of foreign capital from the
Russian economy. These measures failed to stabilize the economy or provide
adequate liquidity.

On August 17, 1998, the Russian government and the Central Bank of Russia
announced emergency steps to improve liquidity. Pursuant to this decision, the
ruble's value was allowed to float between 6.0 and 9.5 rubles to the United
States Dollar. Also, a 90-day moratorium was placed on the payment of foreign
exchange to meet certain obligations of Russian entities. Finally, the Russian
government announced that it intended to restructure the payment terms of
certain treasury bills. Since the decision on August 17th, the ruble's value has
declined substantially below the 9.5 ruble/United States Dollar floor set on
that date. Although the 90-day moratorium has not been extended, the
consequences of the decision on August 17 and its aftermath remain unclear. The
International Monetary Fund and the G-7 have thus far refused to advance
emergency funds to Russia to address the recent liquidity crisis. For a
description of economic risks relating to our operations in Russia and the CIS
face, see "Risk Factors -- Turmoil in Russia and the CIS creates significant
uncertainty for our operations."

Taxes. Generally, taxes payable by Russian companies are substantial. There
is no consolidation provision, and thus, dividends are subject to Russian taxes
at each level that they are paid. Currently, dividends are taxed at 15% and the
payor is required to withhold the tax when paying the dividend, except with
respect to dividends to foreign entities that qualify for an exemption under
treaties on the avoidance of double taxation. To date, the system of tax
collection has been relatively ineffective, resulting in the continual
imposition of new taxes in an attempt to raise government revenues. This
history, plus the existence of large government budget deficits, raises the risk
of a sudden imposition of arbitrary or onerous taxes, which could adversely
affect us. For a description of tax risks relating to our operations in Russia
and the CIS face, see "Risk Factors -- Turmoil in Russia and the CIS creates
significant uncertainty for our operations -- Our Russian tax burden may be
significantly greater than anticipated."

OVERVIEW OF RUSSIAN TELECOMMUNICATIONS MARKET

We believe that evolving changes in government policy over the last several
years and the overall inadequacy of basic telecommunications services throughout
Russia have created a significant opportunity, although recent political and
economic developments have created considerable uncertainty. Following the
former Soviet Union's transformation from a centralized economy to a more
market-oriented economy, increased demand from emerging private businesses and
from individuals, together with the poor state of the public telephone network,
has led to rapid growth in the telecommunications sector in Russia and the other
independent republics of the CIS.

Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia and the other
independent republics of the CIS has occurred. Under Russian law, state-owned
enterprises within the telecommunications sector were subject to

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privatization but only pursuant to a decision of the Russian government in each
individual case and with the state retaining a certain percentage of the stock
of the privatized entity for three years, subject to extension for national
security reasons. At present, virtually all of the former state
telecommunications enterprises have been privatized and, subject to the above
restrictions, shares of the newly formed joint stock companies have been sold to
the public.

Despite the recent changes in the Russian telecommunications industry, the
level and quality of telecommunications service generally available from most
public operators in Moscow remains significantly below that available in cities
of Western Europe and the United States, although in recent years, the Moscow
local telephone infrastructure has benefitted from significant capital
investment. Outside Moscow (and to a lesser extent St. Petersburg), most
standard Russian telecommunications equipment is obsolete.

MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN RUSSIA AND THE CIS

We have a policy worldwide of complying with all applicable laws. However,
emerging market countries often have commercial practices and less developed
legal and regulatory frameworks that differ significantly from practices in the
United States and other Western countries. In addition, some local practices,
such as the payment of fees for the purpose of obtaining expedited customs
clearance and other commercial benefits that may be common methods of doing
business in these markets, might be unlawful under the laws of the United States
and other countries.

In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. We recruited a more experienced financial and legal team, including a
new Chief Financial Officer, a senior finance officer overseeing all of the
regions in which we operate, a senior finance officer for the CIS region, and a
senior legal officer for the CIS region and adopted a more rigorous Foreign
Corrupt Practices Act and applicable local laws compliance program.

In addition, in early 1997, we retained special outside counsel to conduct
a thorough review of certain of our business practices in the emerging markets
in which we operate to determine whether deficiencies existed that needed to be
remedied. In the course of this review, we replaced certain senior employees in
Russia and instituted additional and more stringent management and financial
controls. The review did not identify any violations of law that we believe
would have a material adverse effect on our financial condition. However, if we
were found by government authorities to have violated any law, depending on the
penalties assessed and the timing of any unfavorable resolution, future results
of operations and cash flows could be materially adversely affected in a
particular period.

We believe that the special counsel review was properly conducted and
sufficient in scope and that the actions taken since the review to strengthen
our management, financial controls and legal compliance will be adequate to
address any possible deficiencies. However, we cannot assure you that all
potential deficiencies have been identified or that the control procedures and
compliance programs we have implemented will be effective. The audit committee
of our board recently reviewed our legal compliance procedures. We believe that
this continued oversight will help to ensure that any problems in these
procedures are addressed. For a discussion of the risks we face, see "Risk
Factors -- Our management, legal and financial controls may be inadequate to
ensure that we comply with applicable laws."

GTS BUSINESS SERVICES - CIS

OPERATIONS

We provide a broad range of telecommunications services in Russia,
including international long distance services, domestic long distance services,
cellular services, high speed data transmission, Internet access and local
access services. Dedicated and leased capacity supplements our own
infrastructure, allowing us to bypass the severely congested and poorly
maintained local, domestic and long distance circuits of the Russian and
Ukrainian carriers.

Our business units seek to integrate and co-market their service offerings,
utilizing TeleRoss as the long distance provider, Sovintel as the international
gateway, TeleCommunications of Moscow and Mobile

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Services for local access, and Sovam Teleport as the data communications and
Internet access network for business applications and on-line services. This
integrated marketing approach enables us to provide comprehensive
telecommunications solutions to multinational corporations operating throughout
Russia and the other independent countries of the CIS. We have taken preliminary
steps to combine Telecommunications of Moscow, TeleRoss and Sovam. For a
discussion of the risks associated with our joint ventures, see "Risk
Factors -- Turmoil in Russia and the CIS creates uncertainty for our
operations -- We may be overly dependent on our joint ventures partners."

Sovintel. We own 50% of Sovintel, a joint venture with Rostelecom, the
national long distance carrier. Sovintel markets a broad range of high quality
telecommunications services by (i) directly providing international direct dial
access to over 180 countries and private line dedicated voice channels and (ii)
leveraging the infrastructure and services of our other Russian ventures,
including TeleRoss, TeleCommunications of Moscow and Sovam. Sovintel customers,
which primarily consist of businesses, hotels and Moscow-based cellular
operators, are able to access these telecommunications services through
Sovintel's fully-digital overlay network in Moscow. In addition, Sovintel
continues construction of its St. Petersburg network which is interconnected to
Sovintel's Moscow network and is intended to support Sovintel's Moscow clients
which have a presence in St. Petersburg.

Telecommunications of Moscow. During the third quarter of 1998, we
increased our beneficial ownership of Telecommunications of Moscow to 95%.
Telecommunications of Moscow provides a licensed numbering plan and
interconnection to the Moscow city telephone network for carriers needing basic
local access service in Moscow. Telecommunications of Moscow is currently
licensed to provide 100,000 numbers in Moscow, of which over 78,000 have been
leased. Telecommunications of Moscow has completed agreements required to
construct and provide an additional 50,000 numbers. The construction started in
1998 and is expected to be completed by the end of 1999. Telecommunications of
Moscow's switching facilities are fully integrated with the networks of
Rostelecom, Sovintel, and Moscow city telephone network, allowing it to provide
high quality digital service to its customers.

Telecommunications of Moscow acts as a local gateway by providing numbers
and ports to carriers in Moscow, including Sovintel, VimpelCom and Moscow
Cellular, and thus providing interconnectivity to the Moscow city telephone
network. Access to the Moscow city telephone network provides customers with the
higher quality and broader range of services available in Moscow, such as the
services provided by Sovintel. Access from outlying regions is typically
obtained through a domestic long distance service provider such as TeleRoss. See
"-- Sovintel" and "-- TeleRoss."

TeleRoss. TeleRoss is a wholly owned subsidiary that operates a domestic
long distance network. In addition, TeleRoss has a 50% ownership interest in 14
joint ventures that originate traffic and provide local termination of calls.
The TeleRoss domestic long distance network serves 15 major Russian cities,
including Moscow and, through satellite technology, 21 customers located outside
these cities. TeleRoss provides digital domestic long distance services and
other value-added services through its own infrastructure as well as access to
Sovintel's international gateway services and access to the Moscow city
telephone network through Telecommunications of Moscow's switching facilities.
Sovam uses the TeleRoss digital channels to provide regional data service and
has co-located its access facilities with TeleRoss.

Sovam. Sovam provides high-speed data communications services, electronic
mail and database access over a high-speed packet/frame relay network to its
customers in a large number of major Russian and CIS cities. Sovam also offers
Russia On Line, the first Russian language Internet service. Russia on Line
(which is our registered trademark) provides direct access to the Internet as
well as access to a wide range of local and international information services
and databases. In addition to serving the Moscow and St. Petersburg markets,
Sovam offers its services in all TeleRoss cities, as well as 32 additional
cities in Russia and the CIS.

Sovam employs a dedicated sales and marketing force. Sovam's sales efforts
are focused primarily on the banking and financial communities and large
multinational companies. We frequently market bundled service packages, which
include Sovam's data and Internet service, Sovintel's international service

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and TeleRoss's long distance service in order to offer customers a comprehensive
telecommunications solution.

GTS MOBILE SERVICES - CIS

Our Mobile Services line of business operates cellular businesses in Russia
and the Ukraine. In Russia, we have a wholly owned subsidiary, Vostok Mobile,
which currently operates thirteen AMPS cellular companies in Russian regions
located primarily west of the Urals under the trade name Unicel. Vostok Mobile
owns between 50% and 100% of the Unicel cellular joint ventures in Russia.
Unicel provides analog cellular telephone service based on the Advanced Mobile
Phone System, or AMPS technology. In addition, through Vostok Mobile, we
participate in PrimTelefone, a 50%-owned joint venture that operates an analog
network in Vladivostok and other cities in the Primorsky region of Russia based
on the Nordic Mobile Telephone System, or NMT technology. In April 1998,
PrimTelefone was also awarded a license to operate GSM-1800 in 14 regions of the
Russian Far East. In the Ukraine, we have an approximately 57% beneficial
interest in Golden Telecom, which operates a digital GSM-1800 cellular network
in Kiev, and an international overlay network in the Ukraine. Our Mobile
Services entities hold licenses covering major Russian and the Ukrainian markets
excluding Moscow and St. Petersburg, with an aggregate 1997 population of
approximately 42 million people.

COMPETITION FACED BY OUR LINES OF BUSINESS

The European and international telecommunications industries are highly
competitive. Our competitors in these markets include the following entities,
many of which have substantially greater technical, financial, marketing and
other resources:

- established national or regional public telecommunications operators and
providers;

- private multinational telecommunications carriers;

- other private telecommunications developers and niche providers; and

- consortia of telecommunications providers.

Historically, the European public telecommunications operators monopolized
the provision of telecommunications services in their national or regional home
markets and designed their networks according to national rather than
international considerations. Between 1990 and 1997, however, the European Union
implemented a series of directives designed to open up European
telecommunications markets to competition. These directives required EU member
states to implement legislation liberalizing their respective telecommunications
markets to permit alternative telecommunications companies both to provide
telecommunications services and to access the existing telecommunications
infrastructure controlled by these national and regional providers. In response
to these European regulatory changes, a number of companies, including our
company, have emerged to compete with the European public telecommunications
operators. We believe that competition for telecommunications services in Europe
will continue to increase as a result of continuing liberalization.

Accordingly, we compete primarily with national public telecommunications
operators and other providers which have established market presences,
fully-built networks and financial and other resources which are substantially
greater than ours and, in the case of many public telecommunications operators,
control over the intra-national transmission lines and connections to such
lines. Additionally, the ownership of such infrastructure provides them with
significant cost advantages. Since we utilize many of these networks to provide
our services, the failure to gain cost-oriented access to such networks could
have a material adverse impact on our business, results of operations and
financial condition.

We believe that other competitors in the European markets will include
private multinational consortia such as Unisource, Concert and Global One, as
well as resellers, microwave and satellite carriers, mobile wireless
telecommunications providers, cable television companies, utilities and other
competitive

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local telecommunications providers. We also compete with other medium-sized
private carriers and resellers in Europe. These companies are generally more
aggressive than the public telecommunications operators and other dominant
providers and sometimes bring experience from more mature marketplaces. Like
ourselves, these providers often target medium-to large-sized business customers
and other big market segments. In addition, the development of new technologies
could give rise to significant new competitors.

Competition in the European telecommunications industry is based upon
price, customer service, type and quality of services and customer
relationships. Our strategy is predicated on our ability to reduce our prices
below the prices charged by the public telecommunications operators or dominant
carriers in each of our markets, yet offer high-quality products and
telecommunications services. However, prices have decreased substantially over
the last few years in most of our markets. Some of our larger competitors may be
able to use their greater financial resources to cause severe price competition
in the countries in which we operate. We expect that prices will continue to
decrease for the foreseeable future and that public telecommunications operators
and other providers will continue to improve their product offerings. For a
discussion of the risks posed by our competitors' operations, see "Risk
Factors -- Established competitors with greater resources may make it more
difficult for us to effectively market our services, offer our services at a
profit and attract and retain customers and "Risk Factors-- Our competitive
position may be compromised by our dependence on other telecommunications
service providers."

We have outlined below the competitive environment with respect to each of
our six lines of business.

GTS CARRIER SERVICES

The success of our Carrier Services line of business depends upon our
ability to compete with a variety of other telecommunications providers offering
or seeking to offer cross-border services, including (1) the respective public
telecommunications operator in each country in which Hermes Railtel's network
operates, (2) global alliances among some of the world's largest
telecommunications carriers, and (3) global operators. We expect that some of
these current and future competitors may also become our customers. We also
believe that the ongoing liberalization of the European telecommunications
market will attract additional entrants to the carrier's carrier market and
increase the intensity of competition. Competitors in this market compete
primarily on the basis of price and quality. We intend to focus on these factors
and on service innovation as well. Our Carrier Services business plan
anticipates substantial direct and indirect competition. For a discussion of the
risks associated with our Carrier Services line of business, see "Risk
Factors -- Our Access Services and Business Services activities may cause our
Carrier Services line of business to lose customers" and "Risk Factors -- The
technology of our Hermes Railtel network could become obsolete and harm our
competitiveness."

Various telecommunications companies, including MCI/WorldCom, Inc., Viatel,
Inc., KPN-Qwest, Deutsche Telekom AG, France Telecom S.A., Global Crossing Ltd.,
and British Telecommunications plc, have announced plans to construct, have
begun to construct or are operating fiber optic networks across various European
countries. Some of these networks include, or their promoters have expressed
their intentions to include, transatlantic connectivity.

GTS BUSINESS SERVICES

We have not achieved and we do not expect to achieve a significant market
share for our services in any of Business Services' markets. We expect that
prices for our Business Services line of business will continue to decrease for
the foreseeable future. In addition, certain of our customers, in particular
wholesale carriers, may sometimes use more than one service provider and may
reduce their use of our services and switch to other providers.

In each of our current Business Services markets we compete primarily with
the national public telecommunications providers. Other competitors of Business
Services include private multinational consortia as well as microwave and
satellite carriers, mobile wireless telecommunications providers, cable
television companies, utilities and competing local telecommunications providers
and other medium-sized carriers and resellers in Europe. Some of these carriers
have established their own switch sites and operate

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their own networks. Competitors in this segment include MCI/WorldCom, COLT,
Viatel and RSL, which compete in multiple countries, and country-specific
competitors such as Energis (UK), Arcor (Germany), Telfort (The Netherlands),
Retevision (Spain), Infostrada (Italy) and Cegetel (France). These providers are
generally more entrepreneurial than the public telecommunications operators and
other dominant providers and sometimes bring experience from more mature
markets. Like us, these providers often target small, medium and large-sized
business customers or other market niches.

GTS WHOLESALE SERVICES

Our Wholesale Services line of business will face competition from a
consortia of telecommunications operators, large public telecommunications
operators and other international telephone operators with advanced network
infrastructures, access to large quantities of long-haul capacity and
established customer bases. Public telecommunications operators currently
providing large amounts of international traffic have already established direct
routes, transit arrangements and correspondent relations and many have excess
capacity that they resell in competition with Wholesale Services.

With deregulation of the telecommunications markets, opportunities for the
establishment of international gateways will likely develop and, as a result,
competition in the market for our Wholesale Services will increase. We intend to
relocate and consolidate our Wholesale Services operations in London, which is
served by the Hermes Railtel network. This will allow us to route our Wholesale
Services customers' traffic through the Hermes Railtel network and incur reduced
transmission expenses, thereby enhancing the competitiveness of Wholesale
Services' operations.

GTS ACCESS SERVICES

Public telecommunications operators often offer both local and long
distance services and benefit greatly from their position as sole historic
provider in the markets they serve. We believe that the market for the provision
of local services is sufficiently attractive to cause additional competitive
local exchange carriers, including multi-national carriers, to enter the market
to offer products and services which would compete with ours.

We will compete with public telecommunications providers and, in certain
markets, competitive local exchange carriers, including, among others, COLT
TeleCom Group plc, which is providing service through networks in London,
Frankfurt, Munich, Hamburg, Berlin, Paris, Zurich, Amsterdam, Brussels, Madrid
and Dusseldorf, and MCI/WorldCom, whose pan-European fiber network connects
London, Amsterdam, Brussels, Frankfurt and Paris. We believe, based on our
experience in Western and Central Europe, Russia and the CIS, that we have the
knowledge and ability to develop products and services which will be competitive
with other competitive local exchange carriers in terms of content, quality and
price.

GTS BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS

We face significant competition in virtually all of our existing
telecommunications businesses in Russia and the other independent countries of
the CIS. We believe that we have certain competitive advantages in each of these
markets because of our operating history, our ability to bundle a broad range of
telecommunications services in the region and our ability to make rapid
decisions in pursuing new business opportunities and addressing customer service
needs. We also believe that our local partnerships and reliance on nationals in
the management of its businesses and joint ventures provide us with better
knowledge of local political and regulatory structures, cultural awareness and
access to customers.

LICENSES AND REGULATORY ISSUES

OVERVIEW

The regulation of the European telecommunications industry is in the midst
of significant changes. In 1987, a policy document, the EC Green Paper on
Telecommunications, charted the course for the current changes in the EU
telecommunications industry by advancing principles such as separation of
operators

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from regulators, transparency of procedures and information, cost orientation of
tariffs, access to monopoly public telephone operator networks and the
liberalization of services. In 1990, the EU member states approved two
directives that established these principles in EU law: the Open Network
Provision Framework Directive and the EU Services Directive. Combined, these two
directives set forth the basic rules for access to public telephone networks and
the liberalization of the provision of all telecommunications services within
the EU except for certain reserved services, including voice telephony.

In 1992, the EU approved the Open Network Provision Leased Line Directive,
which requires the incumbent operators to lease lines to competitors and end
users, and to establish cost accounting systems for these products by the end of
1993. The national regulatory authorities were to use this cost information to
set cost-orientated tariffs for leased lines. Even though most EU member states
have established regulatory frameworks requiring public telecommunications
operators to lease lines to competitors and end users, we believe that, in some
EU member states, such lines are not yet being offered at cost-orientated
prices.

In 1996, the EU issued the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the date by which all EU member states must remove all remaining restrictions on
the provision of telecommunications services, including voice telephony.
However, the following EU member states were granted a delay in implementing
this liberalization directive:

(1) Greece, through December 31, 2000;

(2) Ireland, through January 1, 2000;

(3) Luxembourg, through July 1, 1998;

(4) Portugal, through January 1, 2000; and

(5) Spain, until November 30, 1998.

Ireland implemented the Full Competition Directive in December 1998.
Subject to the foregoing, each EU member state is obliged, under EU law, to
enforce the terms of the Full Competition Directive in such a manner so as to
ensure that its aim and purpose is carried out. Enforceability of the Full
Competition Directive may be challenged at the EU level or at the EU member
state level. In practice, implementation and enforcement of the directive has
been and may also continue to be delayed on a country by country basis.

As a complement to the Full Competition Directive, the European Parliament
and Council of Ministers in June 1997 adopted a directive which governs the
manner in which public network operators and service providers interconnect with
the public telecommunications operators' public networks. Among other things,
this directive requires EU member states to ensure that public
telecommunications operators with significant market power should provide
interconnection on the basis of cost-oriented charges.

In April 1997, the European Parliament and the Council of Ministers adopted
a directive on a common framework for general authorizations and individual
licenses in the field of telecommunications services, including networks.
Licenses must be awarded through open, non-discriminatory and transparent
procedures and applications will be required to be dealt with in a timely
fashion. The number of licenses may be restricted only to the extent required to
ensure the efficient use of scarce resources, such as radio frequencies or
numbers.

In February 1998, the European Parliament and the Council of Ministers
adopted a directive on the application of the Open Network Provision to voice
telephony and on universal service.

Despite these regulatory initiatives supporting the liberalization of the
telecommunications market, most EU member states are still in the initial stages
of liberalizing their telecommunications markets and

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establishing regulatory structures suitable for a competitive environment. For
example, most EU member states have only recently established a national
regulatory authority. In addition, the implementation, interpretation and
enforcement of EU directives differs significantly among the EU member states.
While some EU member states have embraced the liberalization process and
achieved a high level of openness, others have delayed the full implementation
of the directives and maintain several levels of restrictions on full
competition.

Member states of the EU are also bound as a matter of international law to
comply with certain multilateral trade rules and regulations. On February 15,
1997, over 60 members of the World Trade Organization committed to open their
telecommunications markets for basic telecommunications services to foreign
competition and ownership and to adopt regulatory measures designed to protect
foreign telecommunications providers against anticompetitive behavior by
domestic public telecommunications operators. For most signatories to this World
Trade Organization Telecommunications Agreement, these commitments took effect
on February 5, 1998 (including the EU member states). We believe that the World
Trade Organization Telecommunications Agreement will contribute to the creation
of a more competitive environment internationally. Specifically, it will result
in downward pressure call termination charges outside the EU. For a discussion
of the regulatory risks involved, see "Risk Factors -- Delays in regulatory
liberalization in EU member states could adversely affect our service offerings
in those countries."

As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services. Local laws and regulations and the interpretation of such laws and
regulations differ significantly among the jurisdictions in which we operate.
For a discussion of the regulatory risks we face, see "Risk Factors -- Delays in
regulatory liberalization in EU member states could adversely affect our service
offerings in those countries."

We are in the process of reviewing the licenses, permits and authorizations
that we obtained through our acquisition of NetSource and Esprit Telecom. It may
be possible for us to use certain of these licenses to provide services through
our Carrier Services, Business Services or Access Services lines of business.

GTS CARRIER SERVICES

HERMES RAILTEL

A summary discussion of the regulatory framework in certain countries where
Hermes Railtel has developed and is developing its network is set forth below.
This discussion is intended to provide a general outline, rather than a
comprehensive discussion, of the more relevant regulations and current
regulatory posture of the various jurisdictions.

National authorities in individual member states of the EU are responsible
for regulating the construction and operation of telecommunications
infrastructure. We believe that the adoption of the Full Competition Directive
and the various related directives adopted by the European Parliament and the
Council of the EU have resulted in the removal of most regulatory barriers to
the construction and operation of telecommunications infrastructure in the
countries of the EU where we currently operate.

Hermes Railtel requires licenses, authorizations or registrations in almost
all countries to operate the network. Licenses, authorizations or registrations
have been obtained in Belgium, France, Germany, Italy, Luxembourg, The
Netherlands, Spain, Sweden, Switzerland, the UK and the United States. No
license or authorization is required to operate a network in Denmark. Hermes
Railtel intends to file applications in other countries in anticipation of
service launch in accordance with the network roll-out plan.

Belgium. Belgium has implemented the "alternative infrastructure" provider
provision of the Full Competition Directive. Most of the EC telecommunications
liberalization package was adopted at the end of December 1997. The implementing
legislation (Royal Decrees) regarding the licensing regimes for the provision of
voice telephony services and the establishment of public network infrastructure
was approved by the Council of Ministers at the end of June 1998. The official
publication and the entry into force of that implementing legislation took place
in July 1998. Until such entry into force, the Belgian

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Telecommunication Authority continued to work with the system of provisional
licenses. Hermes Railtel obtained, through a wholly owned subsidiary, a license
in February 1997 from the Belgian regulatory authority to build infrastructure
between major Belgian population centers and the relevant border crossings.
Hermes Railtel also had an authorization to provide liberalized services using
alternative infrastructure. The liberalization legislation requires all
previously licenced operators to apply for new licenses or authorizations.
Hermes Railtel applied for a new license in October 1998 and was granted its
license to build and operate its network under the new regulatory framework on
January 26, 1999.

Denmark. With the liberalization of infrastructure as of July 1, 1997,
Denmark has fully liberalized its telecommunications markets in accordance with
the requirements of the relevant EC Directives. According to the Danish rules,
Hermes Railtel will not require any regulatory approval in order to install or
operate the network in Denmark.

France. A new regulatory agency, the Autorite de Regulation des
Telecommunications, was established in France effective January 1, 1997. In
1996, France approved legislation to implement the Full Competition Directive
and to remove all remaining restrictions on competition from January 1998. In
October 1997, Hermes Railtel obtained authorization to operate its network in
specific regions of France. In August 1998, Hermes Railtel was granted an
extension of its license in order to extend its network in France to reach Italy
and Spain. Such authorization requires prior notification to and approval of the
Autorite de Regulation des Telecommunications of any substantial changes in the
capital of Hermes Railtel or its controlling shareholder.

Germany. Germany has approved legislation to implement the Full Competition
Directive and remove all remaining restrictions on competition from August 1996.
Hermes Railtel was granted a license by the German regulatory authorities on
July 18, 1997. The license permits Hermes Railtel to operate the portions of the
network in Germany connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to
the Dutch border; and Stuttgart to the French border. In 1998, Hermes Railtel
was granted extensions to its license to include operation of routes linking
Hamburg, Hanover, Munich and Berlin and of routes to Denmark.

Italy. Although in the past Italy has been dilatory in implementing EC
liberalization measures, Italy enacted legislation on July 31, 1997 creating an
independent national regulatory authority for the telecommunications and
audiovisual sectors. On September 19, 1997, Italy enacted a regulation
implementing all EC directives in the telecommunications sector and since then
specific laws relating to licensing and interconnection and universal service
have been approved. Hermes Railtel was granted a license by the Italian
authorities in August 1998, enabling the development of its network in the
northwest region of Italy and the offering of services in Milan.

Luxembourg. A new Telecommunication Act entered into force in April 1997,
and a Royal Decree on licensing conditions entered into force in July 1998.
Hermes Railtel applied to the Luxembourg regulatory authority for a license to
build and operate its network in Luxembourg in October 1998. On February 11,
1999, we were granted a license to build and operate a public telecommunications
network.

The Netherlands. On July 1, 1997, the Dutch government abolished the
prohibition on the use of fixed infrastructure for the provision of public voice
telephony, thereby complying with the requirements of the Full Competition
Directive six months ahead of schedule. On August 1, 1996, Hermes Railtel was
granted an authorization for the installation, maintenance and use of a fixed
telecommunications infrastructure.

A new Telecommunications Act came partly into force on December 15, 1998.
The new Act confirms the full liberalization of the telecommunications market
according to European Community standards. When the new Telecommunications Act
entered into force, the authorization held by Hermes Railtel ceased to exist.
Under the new Telecommunications Act, Hermes Railtel has an obligation to
register its activities. A request for registration with the Dutch regulatory
authority ("OPTA") was filed in February 1999 and the OPTA granted Hermes
Railtel its registration as a public telecommunications operator on March 3,
1999.

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Spain. Spain was granted the right to delay in liberalizing its
telecommunications market until November 30, 1998. In April 1998, Spain adopted
the LGT, its new telecommunications law. The LGT was implemented through the use
of secondary legislation. The LGT and the secondary legislation resulted in the
full liberalization of the Spanish telecommunications market on December 1,
1998. On December 3, 1998, the Spanish regulatory authority began to issue
licenses under the new regime. Hermes Railtel was granted a license to install
and operate a telecommunications network in Spain on January 14, 1999.

Sweden. Full liberalization of the Swedish telecommunications market
occurred in 1993. A new Telecommunications Act was passed in 1997 to reinforce
the powers of the national regulatory authority, to ensure conformity with EC
Directives and to supplement the pre-existing licensing regime with a general
authorization regime for certain services. Hermes Railtel registered with
Swedish authorities and has been able to provide service in Sweden since July
1998.

Switzerland. The Swiss Parliament has passed a Telecommunications Law which
entered into force on January 1, 1998. Although Switzerland is not a Member
State of the EU, the effect of the law is largely to mirror the EC
telecommunications liberalization directives. From that date, voice telephony
monopoly was abolished and services fully liberalized. In September 1998, the
Swiss regulatory authority granted Hermes Railtel a definitive concession
(replacing an earlier provisional concession) to build and operate its network
in Switzerland.

United Kingdom. Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the UK telecommunications regulatory authority, to create
a competitive marketplace from which detailed regulation could eventually be
withdrawn. The UK has already liberalized its market beyond the requirements of
the Full Competition Directive, and most restrictions on competition have been
removed in practice as well as in law. Hermes Railtel has received a license
from the Secretary of State for Trade and Industry dated December 18, 1996 which
grants it the right to run a telecommunications system or systems in the UK
connected to an overseas telecommunications system and to provide international
services over such systems. Like the licenses granted to other providers of
international facilities-based services, the license granted to Hermes Railtel
was for an initial six months' duration and thereafter is subject to revocation
on one month's notice in writing. The short duration of these initial licenses
was adopted for administrative convenience to facilitate reforms to the
licensing regime which are expected in 1999. The Department of Trade and
Industry has confirmed that it intends to replace the initial licenses with new
licenses and that it would not revoke an initial license without replacing it
with another license giving an equivalent authorization. The Department of Trade
and Industry is currently discussing with license holders the arrangements to
put these new licenses into effect. Although the Department of Trade and
Industry has indicated that the new licenses are expected to be of 25 years'
duration, we cannot assure you that this will be the case or that the new
licenses will not contain terms or conditions unfavorable to Hermes Railtel.

United States. Hermes Railtel was granted a license by the FCC pursuant to
section 214 of the Communications Act of 1934 authorizing it to provide limited
global facilities-based and global resale services (subject to the terms and
conditions imposed by the law and authorization), effective October 23, 1998.
The 214 authorization does not allow Hermes Railtel to offer US services to or
from Hungary, Poland, the Czech Republic, Romania, Monaco, Russia, Ukraine,
Kazakhstan, Uzbekistan, Azerbaijan, China and India.

Hermes Railtel intends to file applications in other countries (including
Austria, Croatia, Czech Republic, Hungary, Poland, Portugal, Slovakia and
Russia) in anticipation of service launch in accordance with the Hermes Railtel
network roll-out plan. With the exception of Austria and Portugal, which are
members of the EU and whose laws must comply with EC Directives, these countries
have not generally liberalized their telecommunications sector. We cannot assure
you that they will do so in a timely manner or at all. In addition, the terms
and conditions of Hermes Railtel's licenses, authorizations or registrations may
limit or otherwise affect Hermes Railtel's scope of operations.

We cannot assure you that (1) Hermes Railtel will be able to obtain,
maintain or renew licenses, authorizations or registrations to provide the
services it currently provides and plans to provide, (2) such

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licenses, authorizations or registrations will be issued or renewed on terms or
with fees that are commercially viable, or (3) the licenses, authorizations or
registrations required in the future can be obtained by Hermes Railtel. The loss
of, or failure to obtain, these licenses, authorizations or registrations or a
substantial limitation upon the terms of these licenses, authorizations or
registrations could have a material adverse effect on Hermes Railtel.

TRANSOCEANIC SERVICES

A summary discussion of the regulatory framework in the United Kingdom,
United States and France that will apply to Transoceanic Services has already
been provided in the section on Hermes Railtel above. Transoceanic Services,
like Hermes Railtel, will require licenses, authorizations or registrations to
operate its own network in the United Kingdom, United States and France. Since
Hermes Railtel has obtained similar licenses, authorizations or registrations in
the United Kingdom, United States and France, Transoceanic Services will
endeavor to use the same (where allowed by national licensing frameworks) in
order to build its initial network, while it obtains its own licenses,
authorizations and registrations. Alternatively, Transoceanic Services may seek
to benefit from Hermes Railtel's licenses to the extent that they may be
transferred from Hermes Railtel to GTS Carrier Services. The transfer of these
licenses could be undertaken in the event that the Hermes Railtel network and
Transoceanic Services can be operated under one license. Such a transfer
initially may be envisaged in France where licenses may be transferred subject
to ministerial approval. The regulatory framework in the United Kingdom and
United States, however, would require GTS Carrier Services to obtain new
licenses, authorizations or registrations.

In addition, the terms and conditions of the licenses, authorizations or
registrations may limit or otherwise affect Transoceanic Services' scope of
operations. We cannot assure you that Transoceanic Services will be able to
obtain such licenses, authorizations or registrations or that Transoceanic
Services' operations will not become subject to other regulatory, authorization
or registration requirements in the countries in which it plans to operate. For
a discussion of these risks, see "Risk Factors -- Delays in regulatory
liberalization in EU member states could adversely affect our service offering
in those countries."

IP SERVICES

At present there is no general consensus on the regulatory position of IP
services in Europe and the United States. At the moment IP services are
generally treated as unregulated or, in some European countries, as a
telecommunications service subject to minimal regulatory requirements. We cannot
assure you that IP services will not be regulated in the future in Europe or the
United States. We will continue to monitor regulatory developments that may
impact IP services' operations.

GTS BUSINESS SERVICES

A summary discussion of the regulatory framework in the countries in which
Business Services operates has already been provided in the section on Hermes
Railtel above.

UNITED KINGDOM

The telecommunications services which we provide through Business Services
are subject to and affected by licenses issued by the United Kingdom's
Department of Trade and Industry and regulations introduced by Oftel, the United
Kingdom telecommunications regulatory authority. Business Services' UK
subsidiary received an international simple resale license from the Department
of Trade and Industry in 1993, which permitted us to provide international
telecommunications services by way of resale of other carriers' facilities. In
December 1996, Business Services' UK subsidiary was among the first recipients
of an international facilities license, which permits us to purchase, lease or
build our own international infrastructure and to interconnect to the public
network. In December 1997, we were granted a domestic public telephone operator
license that will enable us to build out our network and obtain more favorable
interconnect terms from British Telecom.

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Business Services' UK subsidiary also holds a license issued by the U.S.
Federal Communications Commission under Section 214 of the United States
Communications Act of 1934, as amended. Subject to certain restrictions, the
Section 214 authorization permits us to originate and terminate facilities-based
and resold private line and switched telecommunications services in the United
States, including among other things, reselling international private lines
interconnected at both ends to the public switched telephone network on the
United States-United Kingdom route for the provision of switched services. Under
the FCC's rules, such interconnected private lines may at present be used only
for switched traffic that either:

(1) originates in the United Kingdom and terminates in the United
States or vice versa;

(2) originates in the United States, the United Kingdom, Canada, New
Zealand, Australia, Sweden, The Netherlands, France, Germany, Belgium,
Denmark, Norway, Luxembourg, Austria, Switzerland, Japan, Italy, Ireland
and Hong Kong, and terminates in another of those countries, having been
routed through the third country via private lines; or

(3) uses the interconnected international private lines to reach a
switching hub.

This third routing arrangement, termed "switched hubbing," may involve
several configurations:

(1) traffic originates in the United States, is carried via private
lines to the United Kingdom and is routed through a switch to points beyond
the United Kingdom;

(2) traffic originates in the United Kingdom, is carried over private
lines to the United States, and is routed through a switch to points beyond
the United States; or

(3) traffic originates in points beyond the United States or the
United Kingdom and is routed via a United States or United Kingdom switch
to terminate in another country (provided that no traffic originates or
terminates in a country that we are not authorized to serve). With respect
to switched hubbing traffic originated or terminated on the Esprit Network
at switches in EU member states other than the United Kingdom, domestic
laws of such EU member states require that the leased lines be
interconnected with the public switched telephone network at one end only.
In addition, the FCC has not made any pronouncement about the legality of
switched hubbing arrangements where the carrier in the destination country
does not consent to receiving traffic indirectly from the originating
country and does not realize the traffic it receives from the "hub" country
is actually originating from a different country.

GERMANY

Our German subsidiaries have authority to provide value-added
telecommunications services throughout Germany. In June 1997, we also received
Type 3 and Type 4 licenses authorizing us to build, acquire and operate
infrastructure and to provide public voice telephony services and to
interconnect with the incumbent public telecommunications operators' network.
These licenses applied initially to restricted areas within Dusseldorf but have
since been expanded to the whole Dusseldorf area and to permit connection to a
cable landing station in northern Germany. In addition, the acquisition of
Plusnet has provided us with a national network licensed to provide
point-to-point service on 55 national routes and 300 local routes. We have also
been granted a carrier select code to provide Indirect Access to our retail
services. We entered into an interconnect agreement with Deutsche Telekom in
November 1997. Pursuant to this agreement, we interconnect with Deutsche
Telekom's network in five locations, while Plusnet's network interconnects with
Deutsche Telekom's network in six locations.

NetSource received a Type 4 license and entered into interconnect
agreements in February 1998.

FRANCE

In March 1998, our French subsidiary was granted a public voice telephony
and public network operator license permitting us to serve all of France. This
license permits us to provide all services, including managed bandwidth on the
London-Paris ring. They also facilitate our building out the fiber

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optic ring to Belgium. In July 1998, our French subsidiary was granted the right
to receive one of the seven available one digit access codes. After a challenge
by a disappointed applicant, the Conseil d'Etat, the French high court, affirmed
the ART's decision. In July 1998, our license was amended to impose certain
network deployment obligations on us. We are now in the process of building out
a national network.

THE NETHERLANDS

NetSource is qualified as a telecommunications provider and obtained a
carrier selection code license in September 1997.

BELGIUM

The Belgian regulator, BIPT, has granted our Belgian subsidiary provisional
national voice telephony and network operator licenses, and our Belgian
subsidiary was the first independent operator to achieve interconnection with
the incumbent public telephone operator, Belgacom. Following the recent adoption
of final legislation, our Belgian subsidiary has filed an application for
definitive national voice telephony and network operator licenses and expects to
receive the same shortly. NetSource plans on using the Esprit Telecom licenses
for its Belgian operations.

SPAIN

On December 3, 1998, Business Services' Spanish subsidiary was granted
class B1 licenses for Madrid, Barcelona and Gerona. We were also granted similar
licenses for Bilbao and Valencia. These licenses permit us to provide public
telephony services and operate a network in those cities. A C1 license allowing
the installation of a national network was granted on December 17, 1998.

ITALY

Our Italian subsidiary received a closed user group voice telephony license
in May 1998. We filed an application for authorization to install infrastructure
and provide services on a national basis in March 1999.

IRELAND

Through NetSource we received a general telecommunications license to
operate in Ireland in December 1998.

NORWAY

Through NetSource, we are registered as a public telecommunications
provider. We expect to enter into interconnection agreements shortly.

DENMARK

Under Danish rules, we do not require any regulatory approvals to install
or operate a network in Denmark. Through a subsidiary of NetSource, we are
registered as a public telecommunications provider. We expect to enter into
interconnection agreements shortly.

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SWEDEN

Through NetSource, we were registered as a public telecommunications
provider in October 1998 and we entered into interconnection agreements in
January 1999.

LUXEMBOURG

Through NetSource, we have applied for licenses to operate in Luxembourg.

WHOLESALE SERVICES

Currently, GTS-Monaco Access's telecommunications activities in Monaco
require no telecommunications license. However, GTS-Monaco Access will have to
comply with EU regulation to the extent it does business in EU member states or
its business has an effect on trade between EU member states. The regulatory
requirements established by the EU create general guidelines under which the
national agencies of EU member states regulate. Accordingly, local laws and
regulations may differ significantly among these jurisdictions, and the
interpretation and enforcement of such laws and regulations may vary. In certain
of our existing and target markets, there are laws and regulations which affect
the number and types of customers which we can address. For instance, certain
countries may and do require licenses for communication companies to
interconnect to the public network to originate traffic.

In addition, one of the services provided by GTS-Monaco Access is a form of
transit service, known in the industry as "re-filing." Re-filing is the practice
of routing traffic through a third country in order to take advantage of
disparities in settlement rates between different countries, thereby resulting
in lower overall costs on an end-to-end basis. Re-filing is prevalent in the
industry even though the practice is technically in contravention of ITU
regulations. In practice, because of the widespread non-observance of these
regulations, such a contravention normally does not give rise to specific legal
problems. However, we cannot assure you that GTS-Monaco Access's re-filing
services might not be disrupted or be the subject of legal process at some time
in the future.

ACCESS SERVICES

Access Services has been granted Type 3 (infrastructure) and Type 4 (voice
telephony) licenses authorizing it to serve seven major cities in Germany. In
April 1999, we were granted for licenses authorizing us to install local access
networks and to provide voice telephony services in Geneva and Zurich. We are
currently evaluating Access Services' ability to build out fiber loops and
provide access services in its target metropolitan markets under existing
infrastructure licenses and authorizations to provide telephony services held by
our Business Services line of business.

Our determination as to which markets we may enter will depend in part on
our evaluation of the regulatory regime in such market. The detailed regulation
varies from country to country. Delays in receiving required regulatory
approvals and licenses, or the enactment of adverse regulations or regulatory
requirements, may delay or prevent us from entering a particular market or
offering our services in any European market, restrict the types of services
offered by us, constrain our deployment of its networks or otherwise adversely
affect our operations.

We cannot assure you that Access Services will be able to obtain the
necessary regulatory approvals on a timely basis or that we will not otherwise
be affected by regulatory developments, either of which may have a material
adverse effect on us.

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BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS

Telecommunications operators in Russia are nominally subject to the
regulations of Goskomsvyaz, the successor of the Russian Ministry of
Communications, and its subordinated bodies, Gossvyaznadzor and the State Radio
Frequency Commission. As a practical matter, these national telecommunications
authorities as well as certain regional and local authorities generally regulate
telecommunications operators in their jurisdictions through their power to issue
licenses and permits.

The Communications Law sets out a comprehensive legal and regulatory
framework for the sector. It also sets forth general principles for the right to
carry on telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. Separate
legislation implements this institutional framework.

Goskomsvyaz issues licenses to provide telecommunications services on the
basis of a decision by the Licensing Commission at Goskomsvyaz. Goskomsvyaz has
generally issued no new licensing regulations since the enactment of the
Communications Law, and in practice Goskomsvyaz continues to issue licenses
based on the pre-existing licensing regulations, except to the extent such
regulations have been modified by licensing regulations with respect to cellular
services. According to the general licensing regulations, licenses for rendering
telecommunications services may be issued and renewed for periods which range
from 5 to 15 years and several different licenses may be issued to one person.
Under the cellular licensing regulations, licenses for rendering cellular
services may be issued only on the basis of a competitive tender for longer
periods ranging from five to 15 years. Once the licenses are received, the
licensee is required to register its right to hold and operate under the license
with Gossvyaznadzor, the national authority responsible for monitoring
compliance with regulatory and technical norms. Renewals may be obtained upon
application to Goskomsvyaz and verification by appropriate government
authorities that the licensee has conducted its activities in accordance with
the licenses. Officials of Goskomsvyaz have fairly broad discretion with respect
to both the issuance and renewal procedures. The Communications Law as well as
the general and cellular licensing regulations provide that a license may not be
transferred or assigned to another holder. Regional authorities also exercise
some influence especially in directly influencing the issuance of AMPS licenses
because AMPS has been designated a "regional standard." In August 1995, the
Russian government created Svyazinvest, a holding company, to hold the federal
government's interests in the majority of Russian local telecommunications
operators. In addition, entities such as Svyazinvest at the federal level, as
well as other entities at the oblast and krai levels (administrative regions
within Russia) and Moscow and St. Petersburg exercise significant control over
their respective local telephone networks and may therefore affect the licensing
process.

Telecommunications laws and regulations in Ukraine are similar in many
respects to those of Russia, but are subject to greater risks and uncertainties.
Regulations currently prohibit foreign entities from directly owning more than
49% of any telecommunications operating company. Our Ukrainian joint venture
agreements provide us with the option of purchasing an additional 1% of the
cellular network if these rules are liberalized. The Ukrainian government has
imposed substantial frequency permit fees in connection with providing GSM
service in Ukraine, and Golden Telecom has paid a $2.9 million frequency license
fee on Golden Telecom's license. We cannot assure you that additional fees will
not be imposed in the future upon the reissuance and/or renewal of such license.
For a comprehensive discussion of these regulatory risks, see also "Risk
Factors -- Turmoil in Russia and the CIS creates significant uncertainty for our
operations."

EMPLOYEES

On December 31, 1998, GTS, our consolidated subsidiaries and joint ventures
in which we participate, employed approximately 3,300 persons. We believe our
future success will depend on our continued ability to attract and retain highly
skilled and qualified employees. We believe that our relations with our
employees are good. The average number of our employees in fiscal 1997 was 387
and in fiscal 1998 was

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1,844. The average number of Hermes Railtel's employees in fiscal 1996 was 65,
in fiscal 1997 was 116 and in fiscal 1998 was 198.

PROPERTIES

We lease office space to serve as sales office and/or administrative
facilities, including its 15,000 square-foot headquarters in McLean, Virginia
with a five-year lease expiring December, 2000. We are currently negotiating for
additional office space for our McLean headquarters; however, our growth and
ability to operate have not been constrained by the lack of suitable office
space. We maintain regional headquarters in Moscow and Budapest, as well as
facilities in London.

Esprit Telecom leases its principal executive offices, located in Reading,
United Kingdom, under long-term leases, which expire 2008. The leases contain a
tenant only option to cancel in March 2003. In addition, Esprit Telecom leases
property at each of the locations where it maintains sales offices.

Hermes Railtel leases its executive and principal administrative offices
and its network operations center located just outside Brussels, Belgium, under
two long-term leases, which expire on June 30, 2005. One of the leases has an
option to cancel on January 1, 2002 with a penalty of six months rent. Hermes
Railtel has negotiated leases for two additional buildings, which are currently
under construction and are expected to be ready for occupation in January 2000.
These leases expire in January 2009, but may be terminated after six years with
six-month notice plus six months rental penalty. In addition to the office in
Belgium, Hermes Railtel has leases for office space in Dublin, Ireland, which
expires in 2022, and London, United Kingdom, which expires in 2002.

Hermes Railtel owns substantially all of the telecommunications equipment
required for its business; however, a substantial part of the fiber is on a
long-term basis. The installed fiber optic cable is laid under the various
rights-of-way held by us.

LITIGATION

In addition to routine legal proceedings incidental to the conduct of our
business, we have, along with GTS-Hungaro and GTS-Hungary, been named as
defendants in an action captioned USH Ventures and USH Telecom, L.L.C. v. Global
TeleSystems Group, Inc. and GTS-Hungaro, Inc., Civil Action No. 97C-08-86,
commenced in August 1997, which is currently pending in the Superior Court of
the State of Delaware in and for New Castle County. The complaint alleges breach
of contract and interference with a business relationship. While it is not
possible at this time to make a meaningful assessment of the outcome of this
litigation, based upon information currently available and upon consultation
with counsel, we do not believe that the outcome of this litigation will have a
material adverse effect upon our financial condition. In addition, no litigation
has had a material effect on our operations in the past two years.

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THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, current business address,
citizenship and present principal occupation or employment, and material
occupations, positions, offices or employments and business addresses thereof
for the past five years of each director and executive officer of the Company.
Unless otherwise indicated, the current business address of each person is 1751
Pinnacle Drive, North Tower -- 12th floor, McLean, VA 22102. Unless otherwise
indicated, each such person is a citizen of the United States.

MEMBERS OF THE BOARD OF DIRECTORS

PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS HELD
NAME AGE DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---- --- -------------------------------------------------------------------

Robert J. Amman........................... 61 Mr. Amman was elected to the Company's Board of Directors in May
1998. His term expires at the 2000 annual stockholders meeting. Mr.
Amman was elected President of the Company in March 1999. Mr. Amman
was Chairman, President and Chief Executive Officer of John H.
Harland Company, a printing firm, from 1995 to 1998. Previously,
from 1994 to 1995, he served as Vice Chairman of First Financial
Management Corporation, where he was responsible for the merchant
services businesses consisting of Western Union, NaBanco,
Telecheck, Nationwide Credit and International Banking
Technologies. From 1988 to 1994, Mr. Amman served as President and
Chief Executive Officer of Western Union Corporation, where he
oversaw the transformation of the firm from a telecommunications to
a financial services company. Mr. Amman is a member of the
Executive and Nominations and Governance Committees of the Board of
Directors.
David Dey................................. 61 Mr. Dey was elected to the Company's Board of Directors in May
1998. His term expires at the 2001 annual stockholders meeting.
Since 1995, Mr. Dey has served as an independent consultant,
particularly to high technology start-up companies in Europe. In
that capacity, he serves as Chairman of World Telecom and as
Chairman of STARTECH Scotland. From 1992 to 1995, Mr. Dey served as
Chief Executive Officer of Energis Communications, which grew from
a start-up company to become the United Kingdom's third national
telecommunications operation during his tenure. Mr. Dey was
employed by British Telecom plc from 1987 to 1991, most recently as
Managing Director of its Business Communications Division, and he
held various management positions at IBM Corporation where he was
employed from 1961 to 1985. Mr. Dey is a member of the Audit and
Budget, and Compensation Committees of the Board of Directors. Mr.
Dey is a citizen of the United Kingdom.

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Roger W. Hale............................. 55 Mr. Hale was elected to the Company's Board of Directors in May
1998. His term expires at the 2001 annual stockholders meeting. Mr.
Hale is Chairman, President and Chief Executive Officer of LG&E
Energy Corp., a diversified energy services company with businesses
in retail gas and electric utility services, energy marketing and
power generation and project development. Mr. Hale has served in
that capacity since August 1990. Previously, Mr. Hale served as
Executive Vice President of Bell South Corp. and Bell South
Enterprises, Inc. from 1986 to 1989 and with AT&T Corporation from
1966 to 1986, serving in various management positions including
Vice President of Marketing, Southern Region. Mr. Hale is a
Director of H&R Block, Inc. Mr. Hale is Chairman of the Nominations
and Governance Committee and is a member of the Executive Committee
of the Board of Directors.
Bernard McFadden.......................... 65 Mr. McFadden has served as a director of GTS since February 1994.
His term expires at the 2000 annual stockholders meeting. Mr.
McFadden currently serves as an independent consultant for GTS and
is a GTS representative on the supervisory board of Hermes Railtel.
Mr. McFadden's career in international telecommunications includes
32 years with ITT Corporation, where he served as President and
Chief Executive Officer of ITT's Telecom International Group, and a
four and one-half year assignment as President and Chief Operating
Officer of Alcatel Trade International, S.A. Mr. McFadden is a
member of the Executive, Compensation, and Nominations and
Governance Committees of the Board of Directors.
Stewart J. Paperin........................ 51 Mr. Paperin has served as a director of GTS since March 1997. His
term expires at the 2000 annual stockholders meeting. Mr. Paperin
serves as Chief Financial Officer of the Soros Foundations. In
addition, he has served as the President of Capital Resource East
since October 1993. Prior to that, Mr. Paperin was President of
Brooke Group International from 1990 to 1993 where he was
responsible for investments in the former Soviet Union. Mr. Paperin
also served as Chief Financial Officer of Western Union Corporation
from 1989 to 1990. Mr. Paperin serves as a director of the Board of
Penn Octane Corporation. Mr. Paperin is Chairman of the Audit and
Budget Committee and is a member of the Compensation, and
Nominations and Governance Committees of the Board of Directors.

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85

W. James Peet............................. 43 Mr. Peet has served as a director of GTS since January 1996. His
term expires at the 1999 annual stockholders meeting. Mr. Peet was
affiliated with The Chatterjee Group, an investment firm, from 1991
until February 1999. Prior to that, Mr. Peet spent 6 years with
McKinsey & Company. Mr. Peet was a director of Hainan Airlines and
of Phoenix Information Systems Corporation. In addition, Mr. Peet
served as director of Viatel, Inc. from November 1995 until June
1998. Mr. Peet is a member of the Executive Committee of the Board
of Directors.
Jean Salmona.............................. 63 Mr. Salmona has served as a director of GTS since March 1996. His
term expires at the 2001 annual stockholders meeting. Between
December 1989 and November 1998, Mr. Salmona was Chairman and
C.E.O. of CESIA Consulting Group ("CESIA"), of which he is now
Honorary Chairman and member of the Board. He is President and
C.E.O. of J&P Partners, a consulting concern for high-tech
companies which invest in Europe, India and China. Mr. Salmona is
also Chairman and Director General, Data for Development
International Association, a nongovernmental organization with
consultative status to the United Nations Economic and Social
Council. Mr. Salmona is a graduate of Ecole Polytechnique, Paris,
Institut d'Etudes Politiques, Paris, and Ecole Nationale de la
Statistique et de l'Administration Economique, Paris. Mr. Salmona
is a member of the Audit and Budget Committee of the Board of
Directors. Mr. Salmona is a citizen of France.
Joel Schatz............................... 61 Mr. Schatz has served as a director of GTS since the inception of
the Company. His term expires at the 1999 annual stockholders
meeting. Mr. Schatz was a founder of the Company and served as its
President from 1985 to 1991. Mr. Schatz is presently the Chairman
and Chief Executive Officer of Datafusion, Inc., a company
developing software to accelerate knowledge synthesis. Mr. Schatz
is a member of the Audit and Budget Committee of the Board of
Directors.
Frank V. Sica............................. 47 Mr. Sica was elected as a director of GTS in March 1999. His term
expires at the 1999 annual stockholders meeting. Mr. Sica is a
Managing Director of Soros Fund Management LLC and head of Soros
Fund Management's private equity operations. Prior to joining Soros
Fund Management, Mr. Sica was a Managing Director at Morgan Stanley
Dean Witter & Co., the investment banking and brokerage firm. He is
also a director of CSG Systems International, Inc., Kohl's
Corporation and Emmis Broadcasting.

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Alan B. Slifka............................ 69 Mr. Slifka has served as a director of GTS since 1990, and was
Chairman until March 1999 when he was elected Executive Vice
Chairman. His term expires at the 2000 annual stockholders meeting.
Mr. Slifka is a New York investment banker and the Managing
Principal of Halcyon/Alan B. Slifka Management Company LLC, an
equity asset management firm specializing in nontraditional
investments, specifically corporate event investing. Previously,
Mr. Slifka was a partner of L.F. Rothschild, Unterberg, Towbin from
1961 to 1982. He is a director of Pall Corporation and is active in
other business, civic and philanthropic affairs as founder,
director or officer of numerous for-profit and not-for-profit
corporations and foundations. Mr. Slifka served as acting Chief
Executive Officer of GTS during most of 1993. Mr. Slifka is a
member of the Executive and Nominations and Governance Committees
of the Board of Directors.
Adam Solomon.............................. 46 Mr. Solomon has served as a director of the Company since June
1995. His term expires at the 2001 annual stockholders meeting. Mr.
Solomon is also Chairman of Shaker Investments, Inc., a growth
equity investment firm and Chairman of Signature Properties
International, L.P., a venture/development firm whose initial focus
is redeveloping existing residential/golf communities, and a member
of the board of directors of MetaSolv Software, Inc. Prior to that,
Mr. Solomon spent eleven years with E.M. Warburg, Pincus & Co.,
Inc., where he was Managing Director from 1988 to 1992. While at
E.M. Warburg, Pincus & Co., Inc., Mr. Solomon served as a member of
the board of directors of LCI International, Inc., a regional
long-distance carrier. Mr. Solomon is a member of the Executive and
Compensation Committees of the Board of Directors.
Gerald W. Thames.......................... 52 Mr. Thames joined GTS as Chief Executive Officer in February 1994,
and has served as a director of GTS since February 1994. He was
elected Vice Chairman of the Board of Directors in 1998 and
Executive Vice Chairman in March 1999. His term expires at the 1999
annual stockholders meeting. From 1990 to 1994, Mr. Thames was
President and Chief Executive Officer for British Telecom North
America and Syncordia, a joint venture company focused on the
international outsourcing market. Mr. Thames has spent over 18
years in senior positions with telecommunications companies, where
he was responsible for developing start-up telecommunications
companies, including 15 years with AT&T, where he rose to the
position of General Manager of Network Services for the Northeast
Region of AT&T Communications. Mr. Thames is a member of the
Executive Committee of the Board of Directors.

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H. Brian Thompson......................... 59 Mr. Thompson was elected Chairman of the Board and Chief Executive
Officer of the Company in March 1999. From 1991 until June 1998,
Mr. Thompson was Chairman and Chief Executive Officer of LCI
International, Inc., a provider of telecommunications services in
the United States and to more than 230 international locations. In
June 1998, LCI was acquired by Qwest Communications International,
Inc. and Mr. Thompson became Vice Chairman of Qwest. He resigned
from the Board of Directors of Qwest in December 1998. From 1981 to
1990, Mr. Thompson served as Executive Vice President of MCI
Communications Corporation with responsibility for eight operating
divisions, including MCI International. Prior to MCI, Mr. Thompson
was a management consultant with McKinsey & Company. He serves as a
member of the board of directors of Bell Canada International, Inc.
and Golden Books Family Entertainment, Inc., and is a member of the
Listed Company Advisory Committee of The New York Stock Exchange
board of directors. Mr. Thompson is also a trustee of Capitol
College in Laurel, Maryland and serves as Americas Co-Chairman of
the Global Information Infrastructure Commission, a multinational
organization formed in 1995 to chart the role of the private sector
in developing global information and telecommunications
infrastructure.

EXECUTIVE OFFICERS

NAME AGE
---- ---

Robert J. Amman........................... 61 See biographical information under "Directors"
above.
Bruno d'Avanzo............................ 57 Mr. d'Avanzo joined GTS as Executive Vice President
and Chief Operating Officer in August 1996. From
1994 to 1996, Mr. d'Avanzo was Executive Vice
President and Chief Operating Officer of Intelsat,
the largest telecommunications satellite operator
in the world. From 1992 to 1994, Mr. d'Avanzo was a
senior executive with Olivetti Corporation, serving
as Vice President and General Manager -- Europe and
as Vice President -- United States, Canada and
South America. Mr. d'Avanzo also spent 15 years
with Digital Equipment Corporation, a diversified
computer manufacturer where his last position was
Vice President -- European Sales and Marketing. Mr.
d'Avanzo is a citizen of Italy.

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NAME AGE
---- ---

Gerard Essing............................. 36 Mr. Essing is the Chief Executive Officer -- GTS
Mobile Services (CIS). Mr. Essing has been general
director of Vostok Mobile, a GTS subsidiary, since
1994. Prior to that, Mr. Essing held a variety of
management positions with what is now Lucent
Technologies from 1989 to 1994. Mr. Essing holds a
Master's Degree in International Management from
American Graduate School of International
Management in the United States. He has also
received post-graduate telecommunications training
at Technical University Delft in the Netherlands.
Leslie M. Harris.......................... 49 Mr. Harris joined GTS in October 1998 as President
of GTS Access Services, which is based in London.
Since 1995, he was President and Chief Executive
Officer of New T&T (Hong Kong) Ltd., the leading
competitive local exchange carrier in Hong Kong.
From September 1992 to December 1994, Mr. Harris
was Joint Managing Director of BT. Australasia Ltd.
Prior to that, Mr. Harris held a variety of senior
executive positions with British Telecom in the
United Kingdom and Australia.
Hans Peter Kohlhammer..................... 51 Mr. Kohlhammer joined GTS as President of GTS
Business Services -- Western Europe on March 5,
1999. From October 1998 to March 1999, Mr.
Kohlhammer was director of sales and marketing of
Esprit Telecom. Prior to that, Mr. Kohlhammer was
Chairman of the Board at Thyssen Telecom AG and
held a Board position with Loewe Opta. Dr.
Kohlhammer holds a degree in mathematics and
physics and a doctorate in mathematics from the
University of Bonn.
Jan Loeber................................ 55 Mr. Loeber is President, GTS Carrier Services, and
Managing Director of Hermes Railtel. Mr. Loeber
joined GTS in January 1995. From October 1992 to
December 1994, Mr. Loeber was a Managing Director
of BT Securities Corporation. From April 1990 to
September 1992, Mr. Loeber held positions as
Managing Director of UnitelLtd. (now One 2 One) in
the United Kingdom, Group President of Nokia North
America Inc., Vice President of ITT Corporation,
and Marketing and Product Management Director of
ITT Europe. Mr. Loeber also spent almost 10 years
with AT&T, where his last position was Executive
Director, Bell Laboratories. Mr. Loeber has over 22
years of experience in the telecommunications
industry and an additional 9 years of experience in
information technology with the Pentagon, IBM and
Chemical Bank of New York.

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NAME AGE
---- ---

James M. Newman........................... 49 Mr. Newman joined GTS as Senior Vice President and
Chief Information Officer in February 1999. Since
1997, he was Senior Vice President and Chief
Information Officer of ICG Telecom Group, Inc.,
which provides competitive local exchange, long
distance and Internet services. From 1996-1997, Mr.
Newman was a Director of San Francisco Consulting
Group, the telecommunications consulting division
of KPMG Peat Marwick LLP. From 1994-1996, Mr.
Newman was Vice President -- Information Technology
of Dial Call Communications, Inc., a
telecommunications services company.
Kevin Power............................... 45 Mr. Power is President of GTS Wholesale Services
since March 1999. Prior to that he served as
Interim Head of GTS Business Services (Western
Europe). Prior to joining GTS Monaco Access in
October 1995, Mr. Power was Vice President, Carrier
Relations for GTS beginning in November 1994, where
he was responsible for assisting and coordinating
the carrier activities of the GTS group of
companies. In 1988, Mr. Power was one of a group of
five people who started the commercial operations
of Orion Network Systems and he stayed with the
company until the launch of its first satellite in
1994. His last position there was Vice President of
Carrier Services. Prior to that, he held positions
with Intelsat, National Economic Research
Associates (NERA) and the United States Department
of Commerce.
Grier C. Raclin........................... 46 Mr. Raclin joined GTS as its Senior Vice President
and General Counsel in September, 1997, and was
elected Corporate Secretary of the Company in
December 1997. In March 1999, Mr. Raclin was
elected Senior Vice President -- External Affairs,
General Counsel and Corporate Secretary. Prior to
joining GTS, Mr. Raclin served as Vice-Chairman and
a Managing Partner of the Washington, D.C. office
of Gardner, Carton & Douglas, a 250-attorney,
corporate law firm based in Chicago, Illinois,
where his practice was concentrated in the area of
international telecommunications. Mr. Raclin
received his undergraduate and law degrees from
Northwestern University and attended the University
of Chicago School of Business Executive Program.

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NAME AGE
---- ---

Stewart P. Reich.......................... 54 Mr. Reich joined GTS as President -- GTS Russia in
September 1997. From September 1992 to August 1997,
Mr. Reich was President of UTEL, a joint venture of
AT&T, Deutsche Telekom, PTT Telecom (Netherlands),
and Ukrtelecom (a Ukrainian telecommunications
company) which provides international and
interregional telecommunications services in
Ukraine. From 1982 to 1992, Mr. Reich held various
positions at AT&T where his last position was
Financial Manager, AT&T International
Communications Switched Services. Mr. Reich was
also employed for 20 years with Western Electric
Company from 1961 to 1981.
Jim Reynolds.............................. 47 Jim Reynolds, President of Hermes Europe Railtel
B.V., was formerly chief operating officer of
Esprit Telecom. His experience and track record
extends over 26 years in the information technology
and telecommunications field. Previously director
of products and services at Mercury Communications,
Mr. Reynolds was responsible for the
rationalization and development of the Mercury
service portfolio during the period when Mercury
was focusing on making major improvements to
service delivery and profit. As part of this role
he managed the Mercury Enterprise businesses
disposing of a number of these and integrating
others into the main company. Before joining
Mercury in 1992 he led the first Digital Equipment
product group outside the United States and spent
15 years with ITT Corporation.
Robert A. Schriesheim..................... 39 Mr. Schriesheim joined GTS as Executive Vice
President and Chief Corporate Development Officer
in February 1999. Since 1997, he was President,
Chief Executive Officer and Director of SBC Equity
Partners, Inc., a private equity firm affiliated
with Sanwa Business Credit Corporation that invests
in technology-based service and manufacturing
companies. From 1996-1997, Mr. Schriesheim was Vice
President -- Corporate Business Development for
Ameritech Corp., the regional Bell operating
company, and Managing Director -- Ameritech
Development Corporation. From 1993-1996, he was
Vice President -- Acquisitions and New Business
Development (1993-1994) and Vice
President -- Global Corporate Development
(1995-1996) of A.C. Nielsen Company, a consumer
marketing research, information and
decision-support service.

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NAME AGE
---- ---

William H. Seippel........................ 42 Mr. Seippel joined GTS as Executive Vice President
of Finance and Chief Financial Officer in October
1996. From July 1992 to October 1996, Mr. Seippel
was Vice President -- Finance and Chief Financial
Officer of Landmark Graphics Corporation. From
August 1990 to July 1992, Mr. Seippel was Director
of Finance for Covia, Inc., an affiliate of United
Airlines. From April 1984 to August 1990, Mr.
Seippel held the positions of Group Business
Controller (1989 to 1990), Group Controller
Sales/Marketing (1986 to 1989), and Product Line
Controller (1984 to 1986) with Digital Equipment
Corporation, a diversified computer manufacturer.
Eileen K. Sweeney......................... 47 Ms. Sweeney joined GTS as Senior Vice President --
Human Resources in November, 1997. Prior to joining
GTS, Ms. Sweeney was President of Global Resource
Associates, a consulting company specializing in
international human resource issues. Prior to that
time, Ms. Sweeney spent 10 years with ITT
Corporation in a variety of human resource
management positions, including eight years based
in Europe and in the Middle East. Ms. Sweeney holds
a Master's Degree in Business Administration from
Simmons Graduate School of Management in Boston.
H. Brian Thompson......................... 59 See biographical information under "Directors"
above.
Louis T. Toth............................. 56 Mr. Toth joined GTS as Senior Vice
President -- Central Europe in July 1993. From
February 1987 to July 1991, Mr. Toth served as
President of Dynaforce Inc. and as Partner and
General Manager for the pan-European expansion of
Andlinger & Company. Mr. Toth, who is currently
based in London, has 23 years of telecommunications
experience with ITT Corporation in Europe, Latin
America and Asia.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding ownership of
GTS common stock and rights to acquire common stock by (1) stockholders that
manage or own, either beneficially or of record, five percent or more of the
common stock of the Company and (2) each of the selling stockholders under this
prospectus. For the purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares which such has the right to
acquire within 60 days after such date, but such shares are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person.

The selling stockholders may sell their shares in the over-the-counter
market, in the Nasdaq National Market, in privately negotiated transactions or
otherwise. Shares will be sold at market prices prevailing at the time of sale,
at prices related to such prevailing market prices or at negotiated prices.
Transferees of these stockholders or other persons acquiring shares, including
brokers who borrow the shares to settle short sales of shares of the common
stock, may also use this prospectus.

The selling stockholders will receive all of the net proceeds from the sale
of shares and will pay any underwriting discounts and selling commissions.

SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER THE
PRIOR TO SHELF OFFERING SHELF OFFERING
-------------------------- NUMBER OF -------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT
------------------------ ----------- ------------ ------------ --------- -------

Mutuelles AXA/AXA-UAP/.................. 9,261,880(1) 11.42 0 9,261,880 11.42
The Equitable Companies Incorporated
9 Place Vendome
75001 Paris, France
Fidelity Management and Research
Corporation........................... 6,857,252(2) 8.45 0 6,857,252 8.45
82 Devonshire Street
Boston, MA 02109
Putnam Investments...................... 5,806,779(3) 7.16 0 5,806,779 7.16
One Post Office Square
Boston, MA 02109
Invesco Inc............................. 4,373,078(4) 5.39 0 4,373,078 5.39
1315 Peachtree Street, N.E.
Atlanta, GA 30309
The Open Society Institute.............. 4,330,281(5) 5.13 4,330,281 0 0
c/o Soros Fund Management LLC
888 Seventh Avenue, 31st Floor
New York, NY 10106
Apax Funds Nominees Limited............. 4,265,225(6) 5.26 4,265,225 0 0
62 Green Street
London WIY 4BA

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Gold & Appel Transfer................... 4,148,277 5.11 0 4,148,277 5.11
Omar Hodge Building
Wickam's Cay
Road Tour
Tortola
British Virgin Islands
Alan B. Slifka and affiliates........... 3,657,978(7) 4.59 3,657,978 0 0
Soros Foundation Hungary................ 3,074,199 3.79 3,074,199 0 0
Warburg, Pincus Ventures, L.P........... 1,962,697 2.43 1,962,697 0 0
Winston Partners II LDC................. 694,454(8) * 694,454 0 0
Soros Charitable Foundation............. 656,849 * 656,849 0 0
Chatterjee Fund Management, L.P......... 497,425(9) * 497,425 0 0
Winston Partners II LLC................. 345,191(10) * 345,191 0 0
Soros Humanitarian Foundation........... 37,718 * 37,718 0 0
Robert Amman............................ 10,500 * 0 10,500 *
David Dey............................... 7,900 * 0 7,900 *
Roger Hale.............................. 7,109 * 0 7,109 *
Bernard McFadden........................ 50,000 * 0 50,000 *
Stewart J. Paperin...................... 21,500 * 0 21,500 *
W. James Peet........................... 8,000 * 0 8,000 *
Jean Salmona............................ 26,000 * 0 26,000 *
Joel Schatz............................. 512,750 * 0 512,750
Frank V. Sica(11)....................... -- * 0 -- *
Adam Solomon............................ 65,414 * 0 65,414 *
Gerald W. Thames........................ 863,722 1.06 0 863,722 1.06
H. Brian Thompson(11)................... -- * 0 -- *
Bruno d'Avanzo.......................... 48,212 * 0
Jan Loeber.............................. 20,000 * 0 20,000 *
William H. Seippel...................... 189,375 * 0 189,375 *
Stewart Reich........................... 28,125 * 0 28,125 *
Other officers.......................... 316,462 * 0 316,462 *
Jacqueline Slifka....................... 12,000 * 12,000 0 0
Barbara J. Slifka....................... 116,877 * 116,877 0 0
Virginia Slifka......................... 74,134 * 74,134 0 0
Miriam Alford........................... 21,428 * 21,428 0 0
Gray Capital Corp....................... 27,043 * 27,043 0 0
Carolyn Chaliff & Carl T. Wolff......... 4,023 * 4,023 0 0
Molly and Merwin Bayer.................. 3,277 * 3,277 0 0
Ronald Claman........................... 1,596 * 1,596 0 0
Monica Saurma........................... 25,868 * 25,868 0 0
Donald Zucker........................... 44,130 * 44,130 0 0
Janice Bayer............................ 3,750 * 3,750 0 0
Riane Gruss............................. 11,033 * 11,033 0 0
James and Shira Levin................... 2,038 * 2,038 0 0
Barbaralee Diamondstein-Spielvogel...... 5,013 * 5,013 0 0
David Dove.............................. 7,500 * 7,500 0 0
Susan Ginsberg.......................... 1,803 * 1,803 0 0
Myron Simon............................. 5,214 * 5,214 0 0
Stephen K. Rush......................... 150 * 150 0 0

85
94

Philip Rush............................. 150 * 150 0 0
Ruth Shuman............................. 15,000 * 15,000 0 0
David Jaffee............................ 8,325 * 8,325 0 0
Elliot Jaffee........................... 22,200 * 22,200 0 0
Jaffee Family Limited Partnership....... 24,975 * 24,975 0 0
A and M Services Limited................ 210,015 * 210,015 0 0
A/S Frec A/S............................ 3,525 * 3,525 0 0
A/S Frec................................ 564 * 564 0 0
A/S Gerida.............................. 29,062 * 29,062 0 0
A/S Chico............................... 4,230 * 4,230 0 0
ABN Amro Bank DK........................ 3,412 * 3,412 0 0
ABN Amro Bank, Copenhagen Branch........ 1,833 * 1,833 0 0
ABN Amro Bank Luxembourg S.A. .......... 13,431 * 13,431 0 0
ABN Amro Global Custody N.V. ........... 3,842 * 3,842 0 0
Adrian Wynter........................... 2,468 * 2,468 0 0
Aksje K-5............................... 1,974 * 1,974 0 0
Alan McGonell........................... 353 * 353 0 0
Alaska AS............................... 874 * 874 0 0
Alf Albert.............................. 212 * 212 0 0
Alfred Berg Fondk. AB AS Nominee........ 705 * 705 0 0
Anders Preben Svendsen.................. 466 * 466 0 0
Andre Kjetsa............................ 212 * 212 0 0
Anette Svelander........................ 3,110 * 3,110 0 0
Anita Morling........................... 42 * 42 0 0
Anne-Marie Darth........................ 141 * 141 0 0
Antonio Rodriguez Pina.................. 353 * 353 0 0
Aoibhinn Bolger......................... 212 * 212 0 0
Are Lundefaret.......................... 847 * 847 0 0
Are Jansrud............................. 14 * 14 0 0
Arne Kristian Nilsen.................... 423 * 423 0 0
Arne Vik A/S Mathuset................... 71 * 71 0 0
Arvid Jacobsen.......................... 564 * 564 0 0
AS Kisterfos............................ 2,820 * 2,820 0 0
AS Kurt G. Hoen......................... 141 * 141 0 0
Asa Joelson............................. 71 * 71 0 0
Asbjronsens Tobaksfabrik A.............. 42 * 42 0 0
Ask Burlefot Aksjespareklubben.......... 141 * 141 0 0
ATC Telecom Holding B.V. ............... 24 * 24 0 0
Atle Gronas............................. 536 * 536 0 0
Banca Della Svizzera Italiana........... 282 * 282 0 0
Bancoval S.A. .......................... 1,337 * 1,337 0 0
Bank J. Vontobel & Co. AG............... 4,512 * 4,512 0 0
Bank Sarasin & CIE...................... 11,844 * 11,844 0 0
Bank of New York, Brussels Branch....... 8,178 * 8,178 0 0
Bank Sal Oppenheim Jr. & CIE (Schweiz)
AG.................................... 3,920 * 3,920 0 0
Bank Leu AG............................. 1,410 * 1,410 0 0
Bank Julius Baer & Co. AG............... 5,358 * 5,358 0 0

86
95

Banque Bruxelles Lambert France......... 353 * 353 0 0
Banque Bruxelles Lambert SA............. 17,767 * 17,767 0 0
Banque Edouard Constant SA.............. 8,235 * 8,235 0 0
Banque International A
Luxembourg SA......................... 13,647 * 13,647 0 0
Berit Evenstad.......................... 141 * 141 0 0
Berit Sivencrona........................ 282 * 282 0 0
Bernt Sandstrom......................... 564 * 564 0 0
Bernt Hausvik........................... 155 * 155 0 0
Bert-Jan Bakker......................... 27,089 * 27,089 0 0
Besix Limited........................... 96,058 * 96,058 0 0
Bill Norlander.......................... 96,820 * 96,820 0 0
Bjarne Roland........................... 141 * 141 0 0
Bjorn Tore Wiik......................... 141 * 141 0 0
Bjorn Sabel............................. 415 * 415 0 0
BNP Switzerland Basle................... 3,807 * 3,807 0 0
Bo Gerdin............................... 423 * 423 0 0
Borgvall Lundberg....................... 212 * 212 0 0
Brendan McGonnell....................... 28,817 * 28,817 0 0
Brown Brothers Harriman & Co............ 74,258 * 74,258 0 0
Cantrade Privatbank AG.................. 2,961 * 2,961 0 0
Carlos Diez Fuentes..................... 42 * 42 0 0
Carlos Sciamma Liebig and Emilia de
Miguel Garcia......................... 1,128 * 1,128 0 0
CDC Gestitres........................... 49 * 49 0 0
CDC-- Gestitres (ETI)................... 14,100 * 14,100 0 0
CEDE & Co. ............................. 74,210 * 74,210 0 0
Chase Manhattan Bank S.A. .............. 2,115 * 2,115 0 0
Christensen Gunnar Harris............... 141 * 141 0 0
Christian Lorentzen..................... 3,398 * 3,398 0 0
Christianne Valand Sorensen............. 564 * 564 0 0
Citibank, N.A........................... 3,426 * 3,426 0 0
Citibank (Luxembourg) S.A............... 705 * 705 0 0
Citibank Switzerland.................... 423 * 423 0 0
Clariden Bank........................... 1,551 * 1,551 0 0
Clas-Goran Gillsvik..................... 141 * 141 0 0
Commerzbank AG, Frankfurt............... 212 * 212 0 0
Cook & CIE S.A.......................... 824 * 824 0 0
Coop Bank, Basle-- Switzerland.......... 3,384 * 3,384 0 0
Craglux/Clients......................... 3,525 * 3,525 0 0
Craglux/Sicav........................... 5,908 * 5,908 0 0
Credit Suisse First Boston.............. 191,888 * 191,888 0 0
Cristobal Thomas........................ 339 * 339 0 0
Cyril Aubry............................. 71 * 71 0 0
Dagfinn Sundal.......................... 3,666 * 3,666 0 0
Dan Rene Vestlund....................... 212 * 212 0 0
Danske & Co. ........................... 1,988 * 1,988 0 0
Declan McLoughlin....................... 353 * 353 0 0
Delta Lloyd Bank N.V., Amsterdam........ 282 * 282 0 0

87
96

Den norske Bank ASA, DNB Markets F...... 71 * 71 0 0
DNB Hjelpekonto/Konverteringskonto...... 8,710 * 8,710 0 0
Dominic Ferguson........................ 282 * 282 0 0
Donald McGonnell........................ 28,817 * 28,817 0 0
Douglas Hume............................ 85 * 85 0 0
Douwe de Boer........................... 342 * 342 0 0
Dresdner Bank AG........................ 1,840 * 1,840 0 0
Eiendom Ringstad........................ 987 * 987 0 0
Einar KR. Larsen A/S.................... 1,058 * 1,058 0 0
Elin Gerrard............................ 423 * 423 0 0
Eoin Bolger............................. 212 * 212 0 0
Erlend Jerstad.......................... 1,552 * 1,552 0 0
Espen Bjaarstad......................... 28 * 28 0 0
Even Birkeland.......................... 141 * 141 0 0
Ewa Grane............................... 212 * 212 0 0
Finter Bank Zurich...................... 5,118 * 5,118 0 0
Frank Bredius........................... 1,410 * 1,410 0 0
Frank Eikeland.......................... 113 * 113 0 0
Frank Olsen............................. 71 * 71 0 0
Frans Enger A/S......................... 22,847 * 22,847 0 0
Fred Michael Manasse.................... 141 * 141 0 0
Fredrik Carksson........................ 141 * 141 0 0
Fredrik Olausson........................ 98 * 98 0 0
Fridolvssoen Ake........................ 219 * 219 0 0
Geir Smith.............................. 28 * 28 0 0
Geraldine P. Bateman.................... 212 * 212 0 0
Gerlach and Co. ........................ 5,429 * 5,429 0 0
Gerry O'Connell......................... 53,793 * 53,793 0 0
Glenn Ivar Tonnessen.................... 28 * 28 0 0
Grane Kristian.......................... 71 * 71 0 0
Guyerzeller Bank AG..................... 2,820 * 2,820 0 0
Hali A/S................................ 5,372 * 5,372 0 0
Handelsbanken Equities London........... 3,060 * 3,060 0 0
Hans Eigill Jacobsen.................... 1,551 * 1,551 0 0
Hans Nordstrom.......................... 141 * 141 0 0
Hans Sommerfelt Helle................... 6,937 * 6,937 0 0
Harrco A/S.............................. 212 * 212 0 0
Havard Johnset.......................... 423 * 423 0 0
Helge Frustol........................... 141 * 141 0 0
Helge Lundefaret........................ 49 * 49 0 0
Henrik Grane............................ 28 * 28 0 0
Heos AS................................. 141 * 141 0 0
Hjordis Asbjornsen...................... 42 * 42 0 0
Hodne Eiendom AS........................ 141 * 141 0 0
HSBC Investment Bank PLC................ 2,820 * 2,820 0 0
Hugo Sorstrom........................... 7 * 7 0 0
I. Bjorneboe & Co. AS................... 353 * 353 0 0
IMP Telecom............................. 141 * 141 0 0
Ingela Anna-Kaisa Nilsson............... 14 * 14 0 0

88
97

Ingela T.M. Norlander................... 564 * 564 0 0
Inger Sande Brovig...................... 8,883 * 8,883 0 0
Ingvar Leremar.......................... 141 * 141 0 0
Internationale Nederlanden Bank NV...... 8,359 * 8,359 0 0
Intersettle Nominee..................... 353 * 353 0 0
Intersettle............................. 84,655 * 84,655 0 0
Intersettle 25PCT....................... 212 * 212 0 0
Itelium AS.............................. 717,550 * 717,550 0 0
Ivar Tonnessen.......................... 113 * 113 0 0
Iver Arthur Mittet...................... 71 * 71 0 0
Jan G. Mikkelsen........................ 564 * 564 0 0
Jan Hogetveit........................... 494 * 494 0 0
Jan Morling............................. 155 * 155 0 0
Janne Krohn............................. 71 * 71 0 0
Jarlsby & Co............................ 24,852 * 24,852 0 0
Jarlsby & Co. AS........................ 5,852 * 5,852 0 0
Jerker Fridolvsson...................... 176 * 176 0 0
Johannes Henk de Bruijn................. 2,680 * 2,680 0 0
Johannes Riiser Helle................... 92 * 92 0 0
John Hartigan........................... 212 * 212 0 0
John James Cronin....................... 7,755 * 7,755 0 0
John-Kristian Sandberg.................. 141 * 141 0 0
Jorunn Hartvigsen....................... 71 * 71 0 0
Jose Luis Dorado Ocana and Magdalena
Prado Herrero......................... 3,017 * 3,017 0 0
Juan Jose Rojo Sastre and Ana Mari
Conejo Luque.......................... 1,128 * 1,128 0 0
Kari Lovaas-Gerber...................... 4,230 * 4,230 0 0
Kas Depository Trust Co................. 18,091 * 18,091 0 0
KBC Bank NV............................. 635 * 635 0 0
Kenneth Olausson........................ 106 * 106 0 0
Kistefos AS............................. 180 * 180 0 0
Kjell Egil Gjerde....................... 282 * 282 0 0
Kjell Solheim........................... 705 * 705 0 0
Kjell S. Tonnessen...................... 141 * 141 0 0
Kjetil Onstad........................... 1,128 * 1,128 0 0
Konto Odd-Lots.......................... 12 * 12 0 0
Krister Fingal.......................... 141 * 141 0 0
Lanschot Global Custory B.V. ........... 11,583 * 11,583 0 0
Lars BH. Boe............................ 987 * 987 0 0
Lars Gadefelt........................... 212 * 212 0 0
Lars Lofquist........................... 353 * 353 0 0
Lars Rabe Jonsson....................... 28 * 28 0 0
Leif Gardal............................. 141 * 141 0 0
Liechtensteinische Landesbank........... 1,868 * 1,868 0 0
Lina Larsson............................ 494 * 494 0 0
Liv Herum............................... 212 * 212 0 0
Loco A/S................................ 3,666 * 3,666 0 0
Lombard, Odier & Cie.................... 5,076 * 5,076 0 0

89
98

Lots Odd................................ 21 * 21 0 0
Luctor Et Emergo B.V.................... 31,430 * 31,430 0 0
Magne Gumpen............................ 282 * 282 0 0
Manuela Horn Martens.................... 353 * 353 0 0
Marcuard Cook & Cic S.A................. 14,100 * 14,100 0 0
Marcus Wanerskog........................ 141 * 141 0 0
Marion Anna Elizabeth Panhuijzen........ 106 * 106 0 0
Marita Henriksson....................... 14 * 14 0 0
Maura Coyne............................. 4,230 * 4,230 0 0
Meespierson Global Custody Services
N.V................................... 1,692 * 1,692 0 0
Meieribrukets Pensjonskasse............. 11,280 * 11,280 0 0
Mercur Messereiser AS................... 282 * 282 0 0
Merita Bank Luxembourg S.A. ............ 705 * 705 0 0
Merrill Lynch........................... 1,692 * 1,692 0 0
Michael Ohara........................... 353 * 353 0 0
Migros Bank............................. 2,355 * 2,355 0 0
Migrosbank Zurich....................... 2,045 * 2,045 0 0
Mikael Bjork............................ 423 * 423 0 0
Minova AS............................... 31,021 * 31,021 0 0
Miroslav Slavic......................... 564 * 564 0 0
Montbellohaven AS....................... 9,165 * 9,165 0 0
Mr. J.H. Volbeda........................ 282 * 282 0 0
Muir International Inc. ................ 10,311 * 10,311 0 0
MVI Consulting Limited.................. 3,389 * 3,389 0 0
Nabila Shipping A/S..................... 16,920 * 16,920 0 0
Netup Invest AS......................... 32,431 * 32,431 0 0
Nicolai E. Lorentzen.................... 8,418 * 8,418 0 0
Noel Lynn............................... 212 * 212 0 0
Nordbanken.............................. 4,225 * 4,225 0 0
Norddeutsche Landesbank GZ.............. 1,318 * 1,318 0 0
Northern/USL Exempt..................... 29,611 * 29,611 0 0
Odd Bjorn Ness.......................... 20,703 * 20,703 0 0
Odd Royland............................. 282 * 282 0 0
Ola Lien................................ 42 * 42 0 0
Olaus Bottegard......................... 141 * 141 0 0
Olav R. Haland.......................... 141 * 141 0 0
OMI Invest.............................. 46,531 * 46,531 0 0
Ostgota Enskilda Bank................... 564 * 564 0 0
Oystein Berg............................ 706 * 706 0 0
Oyvind Lauvland......................... 169 * 169 0 0
Paal Ber Asbjornsen..................... 423 * 423 0 0
PAB Invest A/S.......................... 571 * 571 0 0
Patrick Voorman......................... 1,198 * 1,198 0 0
Paul Zetterstrom........................ 282 * 282 0 0
Per Erik Berger......................... 142 * 142 0 0
Per Halvor Jerstad...................... 296 * 296 0 0
Peter Andersson......................... 353 * 353 0 0
Peter Colmer............................ 197 * 197 0 0
Pictet & CIE Banquiers.................. 7,910 * 7,910 0 0

90
99

Petter Backstrom........................ 846 * 846 0 0
Procedo Capital Corp.................... 7,050 * 7,050 0 0
Prudential Securities Inc............... 3,617 * 3,617 0 0
Rabobank (Switzerland) Ltd.............. 2,115 * 2,115 0 0
Rabobank Nerderland B................... 71,806 * 71,806 0 0
Ragnhild Bakke.......................... 71 * 71 0 0
Rahn & Bodmer........................... 71 * 71 0 0
Ramm A/S................................ 3,176 * 3,176 0 0
Relewi Ltd.............................. 39,657 * 39,657 0 0
Renneville AS........................... 1,410 * 1,410 0 0
Robert Stier............................ 282 * 282 0 0
Robert Eckert........................... 2,468 * 2,468 0 0
Robert Sohlberg......................... 212 * 212 0 0
Roland Ernst Jurgen Orf................. 282 * 282 0 0
Rolf Andresen........................... 141 * 141 0 0
Rosita Bakker-Chang..................... 27,089 * 27,089 0 0
Roy Royland............................. 42 * 42 0 0
Ruediger Scholl......................... 11,447 * 11,447 0 0
Ruegg Bank AG........................... 1,340 * 1,340 0 0
Rush and Co............................. 92,898 * 92,898 0 0
Sabinum AS.............................. 14,453 * 14,453 0 0
Salvador Alfonso Navarro................ 1,058 * 1,058 0 0
Santiago Valbuena....................... 507 * 507 0 0
Schaffhauser Kantonalbank............... 16,723 * 16,723 0 0
Seagull Shipping A/S.................... 7,111 * 7,111 0 0
Sean Bolger............................. 176,747 * 176,747 0 0
SGBT Luxembourg......................... 437 * 437 0 0
Siff Dalsoren........................... 42 * 42 0 0
Sikkerhet I Butikk Sverige Sweden AB.... 494 * 494 0 0
Skandinaviska Enskilda Banken........... 23,054 * 23,054 0 0
Societe Generale Bank & Trust S.A....... 725 * 725 0 0
Solveig Hansen.......................... 141 * 141 0 0
Solveig Inger Jacobsen.................. 1,410 * 1,410 0 0
Staffen Uvabeck......................... 212 * 212 0 0
Sten Osther............................. 4,935 * 4,935 0 0
Suez Nederland/Clients AC............... 3,525 * 3,525 0 0
Svenska Handelsbanken Depot............. 212 * 212 0 0
Svenska Handelsbanke Depot.............. 4,695 * 4,695 0 0
SwedBank Markets........................ 141 * 141 0 0
Swiss American Nominees Ltd.
Depository............................ 263,499 * 263,499 0 0
Tamas Pal Plaszko....................... 2,115 * 2,115 0 0
Tangen Investment AS Halfdan............ 282 * 282 0 0
Terje Berntsen.......................... 169 * 169 0 0
Terje Breilid........................... 212 * 212 0 0
Thore Berthelsen........................ 1,410 * 1,410 0 0
Tommy Land.............................. 71 * 71 0 0
Tong Gustavsson......................... 141 * 141 0 0
Tor Helge Midtbo........................ 3,525 * 3,525 0 0

91
100

Tore Kristiansen Key.................... 71 * 71 0 0
Torsten Scholl.......................... 115,715 * 115,715 0 0
Tove Bottolfsen......................... 7,050 * 7,050 0 0
UBS AG-EX UBS........................... 497,708 * 497,708 0 0
UBS AG-EX SBC........................... 56,345 * 56,345 0 0
Ulf Holmgren............................ 353 * 353 0 0
Ulf Christian Carlsen................... 212 * 212 0 0
Ulf Larsson............................. 141 * 141 0 0
Ulleval Utvikling AS.................... 5,640 * 5,640 0 0
Ulrik Larsson........................... 564 * 564 0 0
Unibank A/S............................. 5,358 * 5,358 0 0
Union Bancaire Privee, CBI-TDB.......... 1,269 * 1,269 0 0
Union Interiores S.A. .................. 4,167 * 4,167 0 0
Unni Sorensen........................... 353 * 353 0 0
Uno Hufvudsson.......................... 4,653 * 4,653 0 0
Vereins-Und Westbank AG................. 338 * 338 0 0
Vereinsbank International S.A........... 705 * 705 0 0
Verwaltungs-Und Privat-Bank AG.......... 81,711 * 81,711 0 0
Vibeke Sohlberg......................... 141 * 141 0 0
Vidar Byklum Olsen...................... 706 * 706 0 0
Vidar Plaszko........................... 592 * 592 0 0
Westdeutsche Landesbank................. 282 * 282 0 0
Westdeutsche Landesbank AG.............. 3,948 * 3,948 0 0
Westdeutsche Landesbank (Suisse)........ 11,280 * 11,280 0 0
Westdeutsche Landesbank (Sveits)........ 494 * 494 0 0
Wilco Scandinavia AB.................... 3,739 * 3,739 0 0

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

* Less than 1%

(1) Ownership information, that represents holdings of several separately
managed funds, is based on a Schedule 13G filed in February 1999 with the
SEC. Number of shares as to which such holder has: sole voting
power -- 3,078,108 shares; shared voting power -- 6,168,273 shares; sole
dispositive power -- 9,252,376 shares; and shared dispositive
power -- 9,505 shares.

(2) Ownership information, that represents holdings of several separately
managed funds, is based on a Schedule 13 G/A dated as of December 31, 1998,
disclosing their ownership interest in us, that was filed in February 1999
with the SEC and a Schedule 13 F-E dated as of December 31, 1998,
disclosing their ownership interest in Esprit Telecom Group plc, that was
filed with the SEC in February 1999.

(3) Ownership information is based on a Schedule 13G filed in February 1999
with the SEC. Number of shares with sole voting power -- none; shared
voting power -- 42,400; shared dispositive power -- 5,806,779.

(4) Ownership information is based on a Schedule 13G filed in February 1999
with the SEC. Number of shares with shared voting power -- 4,373,078;
shared dispositive power -- 4,373,078.

(5) Comprised of 996,948 shares and warrants to purchase 3,333,333 shares of
common stock held by The Open Society Institute. See "Shares Eligible for
Future Sale."

(6) Comprised of holdings in two blocks: (a) 3,539,474 shares of common stock
held in Apax Funds Nominees Limited B Account and (b) 725,751 shares of
common stock held in Apax Funds Nominees Limited D Account.

(7) Includes 2,530,562 shares of common stock owned by Mr. Slifka, 569,938
shares of common stock held in various trusts, options to purchase 8,000
shares of common stock owned by Mr. Slifka,

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101

214,478 shares of common stock held by various Halcyon partnerships which
are managed by Halcyon/Alan B. Slifka Management Company (over which Mr.
Slifka disclaims beneficial ownership), 130,000 shares of common stock
issuable upon the conversion of GTS' 8.75% Convertible Bonds held by
various Halcyon partnerships which are managed by Halcyon/Allan B. Slifka
Management Company (over which Mr. Slifka disclaims beneficial ownership),
and options to purchase 205,000 shares of common stock held by Halcyon/Alan
B. Slifka Management Company (over which Mr. Slifka disclaims beneficial
ownership).

(8) Comprised of 324,083 shares of common stock and warrants to purchase
370,371 shares of common stock. Information in the above entry excludes
21,500 shares of, and options for the purchase of, common stock held by
Stewart J. Paperin over which Winston Partners II LDC disclaims ownership.
GTS has filed a shelf registration statement covering such shares. See
"Shares Eligible for Future Sale."

(9) Comprised of warrants to purchase 497,425 shares of common stock.
Information in the above entry excludes 21,500 shares of, and options for
the purchase of, common stock held by Stewart J. Paperin over which
Chatterjee Fund Management, L.P., disclaims ownership. GTS has filed a
shelf registration statement covering such shares. See "Shares Eligible for
Future Sale."

(10) Comprised of 160,007 shares of common stock and warrants to purchase
185,184 shares of common stock. Information in the above entry excludes
21,500 shares of, and options for the purchase of, common stock held by
Stewart J. Paperin over which Winston Partners II LLC disclaims ownership.
See "Shares Eligible for Future Sale."

(11) Messrs. Sica and Thompson were elected to the Board and as Chairman and
Chief Executive Officer, respectively, in March 1999.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

W. James Peet, a director of GTS, entered into a consulting agreement with
us dated as of February 22, 1999, whereby we engaged Mr. Peet to assist us in
the identification, assessment, evaluation of potential acquisition targets. Mr.
Peet may also assist us in the negotiation, documentation and consummation of
certain acquisitions as agreed between us and Mr. Peet from time to time. The
agreement has no specified duration and may be terminated by either party at
will. During the term of the agreement, we will pay Mr. Peet $25,000 per month
and upon our consummation of a transaction with certain target companies, a
success fee of (A) 0.5% of the transaction's value up to $100 million and (B)
0.25% of the transaction's value in excess of $100 million, plus $500,000.

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102

DESCRIPTION OF CERTAIN INDEBTEDNESS

SENIOR NOTES DUE 2005

Concurrently with the initial public offering, we offered $105 million of
9 7/8% notes. The notes were issued pursuant to an indenture between us and The
Bank of New York as trustee, dated February 10, 1998. The notes mature in 2005
and bear interest, payable semi-annually, at 9 7/8% per annum. The indenture
governing the notes does not provide for a sinking fund. The notes are subject
to redemption at any time on or after February 15, 2002, at our option, in whole
or in part, at declining redemption prices set forth in the indenture governing
the notes. Notwithstanding the foregoing, during the first three years after the
date of the indenture, we will be permitted to redeem up to 33 1/3% of the
aggregate principal amount of the notes with the net proceeds of any public
equity offerings or strategic equity investments at 109.875% of the principal
amount thereof. We placed net proceeds of U.S.$19.6 million from the offering of
the notes representing funds that, together with the proceeds from the
investment thereof, are sufficient to pay the first four scheduled interest
payments (but not additional interest) on the notes, into an escrow account to
be held by The Bank of New York as trustee for the benefit of the holders of the
notes. We granted to the trustee for the benefit of the holders, a first
priority and exclusive security interest in the escrow account and the proceeds
thereof. Funds will be disbursed from the escrow account for interest payments
(but not additional interest) on the notes. Pending such disbursement, all funds
contained in the escrow account are invested in cash equivalents.

Upon a change of control of GTS, or in the event of asset sales (as defined
in the related indenture) in certain circumstances, we are required by the terms
of the indenture to make an offer to purchase the outstanding notes at a
purchase price equal to 101% and 100%, respectively, of the principal amount
thereof plus accrued and unpaid interest thereon to the date of repurchase.

Our indebtedness evidenced by the 9 7/8% notes ranks pari passu in right of
payment with all of our other existing and future unsubordinated indebtedness
and senior in right of payment to all of our existing and future obligations
expressly subordinated in right of payment to the 9 7/8% notes. The indenture
governing the notes contains a number of covenants restricting our operations
and our restricted group members, including those restricting: the incurrence of
indebtedness; the making of restricted payments unless no default or event of
default exists, our leverage ratio does not exceed 6.0 to 1.0 and such
restricted payments do not exceed the basket; transactions with stockholders and
affiliates; the incurrence of liens; sale-leaseback transactions; issuances and
sales of capital stock of subsidiaries; the incurrence of guarantees by
subsidiaries; dividend and other payment restrictions affecting subsidiaries;
consolidation, merger or sale of substantially all of our assets; and requiring
the purchase of notes, at the option of the holder, upon the occurrence of a
change of control and certain asset sales.

The events of default under the indenture governing the 9 7/8% notes
include provisions that are typical of senior debt financings, including a
cross-acceleration to a default by us or any restricted group member on any
indebtedness that has an aggregate principal amount in excess of certain levels.
Upon the occurrence of such an event of default, the trustee or the holders of
not less than 25% in principal amount at maturity of the outstanding notes may
immediately accelerate the maturity of all the notes as provided in the related
indenture.

THE CONVERTIBLE BONDS

In July, 1997, we issued $144.8 million principal amount of senior
subordinated convertible bonds. The convertible bonds were initially issued
under an indenture dated as of July 14, 1997 between us and The Bank of New
York, as trustee, registrar and paying, conversion and transfer agent. The
convertible bonds mature on June 30, 2000. At December 31, 1998, U.S.$117.6
million aggregate principal amount of the convertible bonds was outstanding. An
aggregate principal amount of U.S.$27.2 million had been converted at that date
into shares of a common stock. The conversion price of the convertible bonds is
U.S.$20 per share.

94
103

The convertible bonds bear interest payable at the rate of 8.75% per annum
from and including the date of their issuance. Interest is payable semiannually
in arrears on July 15 and January 15 of each year commencing January 15, 1998.
The convertible bonds are redeemable at our option, in whole but not in part on
or after the second anniversary of a complying public equity offering, at the
principal amount thereof plus accrued interest to the redemption date. The
initial public offering in February 1998 constituted a complying public equity
offering.

Upon the occurrence of a change of control, we will be obligated to make an
offer to purchase all of the outstanding convertible bonds at a purchase price
equal to 113.5%, (if the date of such purchase occurs after June 30, 1998 but on
or before June 30, 1999) or 121.0%, (if the date of such purchase occurs after
June 30, 1999), as applicable, of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.

DEBENTURES DUE 2010

On July 8 and July 22, 1998, we issued approximately U.S.$466.9 million of
debentures. The debentures will mature on July 1, 2010 and are unsecured senior
subordinated obligations of GTS. In the event of our change of control, holders
of the debentures will have the right to require us to purchase such holder's
debentures at a price equal to 100% of the principal amount plus accrued
interest. The debentures will bear interest payable semiannually at a rate of
5 3/4% per annum.

Each debenture will be convertible into such number of shares of our common
stock as is equal to the principal amount of such debenture divided by
U.S.$55.05. We covenanted that at all times we will cause there to be authorized
and reserved for issuance upon conversion of the debenture such number of shares
of our common stock as would be issuable upon conversion of all the debentures
then outstanding. The debentures are subordinated to all existing and future
senior indebtedness of GTS and to all current and future obligations of our
subsidiaries, including trade obligations. The debentures rank pari passu with
the convertible bonds.

We, at our option, may elect to redeem all or a portion of the debentures
commencing on July 1, 2001, at redemption prices beginning at 104.025% of
principal amount for the twelve-month period commencing July 1, 2001 declining
to par at July 1, 2008 and thereafter.

HERMES RAILTEL NOTES

Hermes Railtel sold U.S.$265 million aggregate principal amount of notes in
August 1997. These notes have a ten year maturity and are unsecured, senior
obligations of Hermes Railtel. Hermes Railtel placed approximately $56.6 million
of the net proceeds in escrow for the first two years' interest payments on the
notes. The notes were issued pursuant to an indenture containing certain
covenants for the benefit of the holders of the notes, including, among other
things, covenants limiting the incurrence of indebtedness, restricted payments,
liens, payment restrictions affecting certain subsidiaries and joint ventures,
transactions with affiliates, assets sales and mergers. The notes are redeemable
in whole or part, at the option of Hermes Railtel at any time on or after August
15, 2002 at a price ranging from 105.75% to 100.0% of the principal amount.

A portion of the notes are also redeemable at any time or from time to time
prior to August 15, 2000 at a redemption price equal to 111.5% of the principal
amount of the notes so redeemed, plus accrued and unpaid interest thereon, if
any, to the date of redemption with the net cash proceeds of one or more public
equity offerings or strategic equity investments resulting in aggregate gross
cash proceeds to Hermes Railtel of at least U.S.$75 million. In the event of a
change of control of Hermes Railtel, holders of the notes have the right to
require Hermes Railtel to purchase such holder's notes at a price equal to 101%
of the aggregate principal amount plus accrued and unpaid interest thereon to
the date of repurchase.

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NEW HERMES RAILTEL NOTES

On December 21, 1998, Hermes Railtel sold U.S.$200 million aggregate
principal amount of U.S. dollar notes and Euro 85 million aggregate principal
amount of Euro denominated notes. This transaction closed on January 4, 1999.
The U.S. dollar notes have a ten year maturity, and the Euro denominated notes
have a seven year maturity. The notes are unsecured, senior obligations of
Hermes Railtel. The notes were issued pursuant to two indentures among Hermes
Railtel and The Bank of New York as trustee, both dated January 4, 1999, which
are substantially similar to the indenture governing the notes sold in August
1997 by Hermes Railtel. Both indentures dated January 4, 1999, contain certain
covenants made by Hermes Railtel for the benefit of the holders of the notes,
including, among other things, covenants limiting the incurrence of
indebtedness, restricted payments, liens, payment restrictions affecting certain
subsidiaries, transactions with affiliates, asset sales and mergers. The U.S.
dollar notes are redeemable in whole or in part, at the option of Hermes Railtel
at any time on or after January 15, 2004 at a price ranging from 105.188% to
100.0% of the principal amount. The Euro denominated notes are redeemable in
whole or in part, at the option of Hermes Railtel at any time on or after
January 15, 2003 at a price ranging from 105.188% to 100.0% of the principal
amount.

A portion of the notes are also redeemable at any time prior to or from
time to time prior to January 15, 2002 at a redemption price equal to 110.375%
of the principal amount of the notes so redeemed, plus accrued and unpaid
interest thereon, if any, to the date of redemption with the net cash proceeds
of one or more public equity offerings or strategic equity investments resulting
in aggregate gross cash proceeds to Hermes Railtel of at least U.S.$75 million,
provided, however, that following such redemption at least two-thirds of the
principal amount of each of the original U.S. dollar notes and Euro notes remain
outstanding. In the event of a change of control of Hermes Railtel or us,
holders of the notes have the right to require Hermes Railtel to purchase such
holder's notes at a price equal to 101% of the aggregate principal amount plus
accrued and unpaid interest thereon to the date of repurchase.

THE ESPRIT TELECOM NOTES

Pursuant to our acquisition of Esprit Telecom, we assumed all of Esprit
Telecom's outstanding indebtedness. This includes $230,000,000 principal amount
of 11 1/2% senior notes due 2007 and DM 125,000,000 principal amount of 11 1/2%
senior notes due 2007 issued in December 1997. In June 1998, Esprit Telecom also
issued $150,000,000 principal amount of 10 7/8% senior notes due 2008 and DM
150,000,000 principal amount of 11% senior notes due 2008. Interest on both the
1997 notes and the 1998 notes is paid semi-annually on each June 15 and December
15. We may redeem any 1997 notes, at our option, at any time on or after
December 15, 2002 at 105.75% of their principal amount at maturity, plus accrued
interest, declining to 100%, on or after December 2005. We may redeem any 1998
notes, at our option, at any time on or after June 15, 2003, at 105.438% of
their principal amount at maturity, plus accrued interest, declining to 100% on
or after December 2006. We may redeem, at our option, up to 35% of the principal
amount of each series of the 1997 and 1998 notes prior to December 15, 2000 and
June 15, 2001, respectively, at redemption prices equal to 111.50% of the
principal amount of the 1997 notes, and 110.875% of the principal amount of the
1998 notes, in addition to other amounts. We may also redeem, at our option, the
1997 and 1998 notes, in whole but not in part, in the event of certain changes
affecting UK withholding taxes or in the event definitive notes are issued at a
redemption price equal to their principal amount plus accrued and unpaid
interest in addition to other amounts. The 1997 and 1998 notes rank pari passu
with each other and all other senior indebtedness of Esprit Telecom.

The material terms of the indentures governing the 1997 and 1998 notes are
substantially the same and contain covenants with respect to Esprit Telecom,
including limitations on indebtedness, restricted payments, dividends and other
payments affecting Esprit Telecom subsidiaries, the issuance and sale of capital
stock of Esprit Telecom subsidiaries, transactions with stockholders and
affiliates, liens, asset sales, issuances of guarantees of indebtedness by
Esprit Telecom subsidiaries, sale-leaseback transactions, consolidations and
mergers and provision of financial statements and reports.

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EQUIPMENT FINANCING

In connection with the purchase of equipment and services for certain
cellular ventures in the CIS region, we entered into a credit agreement with a
bank providing for up to $30.7 million financing. The facility is guaranteed by
the vendor of such equipment and services, and is insured against certain
political risks by the Overseas Private Investment Corporation. The loans under
the facility bear interest at LIBOR plus 35 basis points, with principal and
interest payments due semiannually in June and December of each year through
December 15, 2002. At December 31, 1998, U.S.$16.5 million was outstanding under
the facility.

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DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 135,000,000 shares of common
stock, par value $0.10 per share, of which 81,131,491 shares were issued and
outstanding as of February 26, 1999, and 10,000,000 shares of preferred stock,
par value $0.0001 per share, none of which is outstanding. In addition, we (1)
agreed to issue up to 5,437,500 shares of common stock in connection with our
acquisition of NetSource (of which 3,873,705 shares of common stock were issued
as of December 31, 1998 and up to 1.4 million shares of common stock may be
issued, at our option, contingent on NetSource achieving certain performance
targets in the first two quarters of 1999) and (2) agreed to issue 16,027,512
shares of common stock to shareholders of record, as of March 4, 1999, of Esprit
Telecom shares and ADSs, who will tender their shares and ADSs upon the
completion of the exchange offer in connection with our acquisition of Esprit
Telecom. Further, we will issue an additional 1,784,205 shares of common stock
to Esprit option holders, upon their exercise of these common stock rights. For
a discussion of the risks associated with these additional issuances of stock,
see "Risk Factors -- Substantial resales of our common stock pursuant to Rule
144 may depress our stock price and dilute your ownership interest."

In our annual shareholders meeting scheduled for June 16, 1999, we intend
to seek approval to increase our authorized capital stock from 135,000,000
shares of common stock, par value $0.10 per share to 270,000,000 shares of
common stock, par value $0.10 per share. The vote of the holders of at least a
majority of the issued and outstanding shares of common stock, voting together
as a single class, is required to approve the increase in the authorized common
stock. We believe the increase in the number of authorized shares of common
stock will provide flexibility in connection with financings, acquisitions of
other companies, other investment opportunities, stock dividends or splits, and
for other corporate purposes that the Board of Directors deems advisable. The
following summary of the rights, privileges, restrictions and conditions of each
of the classes of shares we issue does not purport to be complete and is subject
to the detailed provisions of, and qualified in its entirety by reference to,
the Certificate of Incorporation and By-laws, and to the applicable provisions
of the General Corporation Law of the State of Delaware, which we refer to as
the DGCL.

OUR COMMON STOCK

You are entitled to one vote for one share held of record on all matters
upon which shareholders have the right to vote. There are no cumulative voting
rights. All issued and outstanding shares of common stock are, and the offered
shares, when issued and paid for, will be, validly issued, fully paid and non-
assessable. You are entitled to such dividends as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
See "Dividend Policy." Upon dissolution, you are entitled to share pro rata in
our assets remaining after payment in full of all of our liabilities and
obligations, including payment of the liquidation preference, if any, of any
preferred stock then outstanding.

OUR PREFERRED STOCK

The board of directors may authorize the issuance of one or more series of
preferred stock having such rights, including voting, conversion and redemption
rights, and such preferences, including dividend and liquidation preferences, as
the Board may determine, without further action by our stockholders.

The issuance of preferred stock by the board of directors could adversely
affect your rights. For example, the issuance of preferred stock could result in
a series of securities outstanding that would have preferences over the common
stock with respect to dividends and in liquidation and that could, upon
conversion or otherwise, enjoy all the rights appurtenant to the common stock.
As of December 31, 1998, we have authorized 200,000 shares of Series A junior
participating preferred stock, par value $.0001 per share. No other series of
preferred stock has been authorized. There are no issued and outstanding shares
of Series A preferred stock and no such shares are being offered hereby. A right
to purchase shares of Series A preferred stock, however, is attached to each
share of common stock. We have authorized 200,000 shares of Series A preferred
stock initially for issuance upon exercise of such rights.

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The units of Series A preferred stock that may be acquired upon exercise of
the rights will be nonredeemable and subordinate to any other shares of
preferred stock that we may issue. Each unit of Series A preferred stock will
have a minimum preferential quarterly dividend of $.01 per unit or any higher
per share dividend declared on the common stock. In the event of liquidation,
the holder of a unit of Series A preferred stock will receive a preferred
liquidation payment equal to the greater of $.01 per unit and the per share
amount paid in respect of a share of common stock.

Each unit of Series A preferred stock will have one vote, voting together
with the common stock. The holders of units of Series A preferred stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Series A preferred stock are in arrears for six fiscal quarters.

In the event of any merger, consolidation or other transaction in which
shares of common stock are exchanged, each unit of Series A preferred stock will
be entitled to receive the per share amount paid in respect of each share of
common stock. The rights of holders of the Series A preferred stock to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions. Because of
the nature of the Series A preferred stock's dividend, liquidation and voting
rights, the economic value of one unit of Series A preferred stock that may be
acquired upon the exercise of each right is expected to approximate the economic
value of one share of common stock.

For a discussion of our contemplated offering of 6,000,000 depositary
shares, each representing 1/100 of a share of our convertible preferred stock,
see "Summary -- Recent Developments."

SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS

Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation). A corporation may indemnify such person if he is or was a
director, officer, employee or agent of the corporation. A corporation may also
indemnify such person if he is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. Such person may recover the following
from the corporation:

- expenses (including attorneys' fees);

- judgments;

- fines; and

- amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.

Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor. Such person
may recover expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. However, no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.

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eliminate or limit the liability of a director (1) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (2) for acts
or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or (4)
for any transaction from which the director derived an improper personal
benefit.

Our Certificate of Incorporation provides that our directors shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director provided, however, that such exculpation from liabilities is
not permitted with respect to liability arising from items described in clauses
(1) through (4) in the preceding paragraph. The Certificate and our By-laws
further provide that we shall indemnify our directors and officers to the
fullest extent permitted by the DGCL.

Our directors and officers are covered under directors' and officers'
liability insurance policies that we maintain.

CERTAIN CHARTER AND BY-LAW PROVISIONS

Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. Provisions of the Certificate of
Incorporation and the By-laws, which are summarized below, may discourage or
make more difficult a takeover attempt that a shareholder might consider in its
best interest, although certain of such provisions in the By-laws are subject to
final approval by our board of directors. Such provisions may also adversely
affect prevailing market prices for the common stock which is discussed in the
section "Risk Factors -- We have anti-takeover provisions that could delay or
prevent a change in control, even if it would benefit shareholders."

Classified Board of Directors and Related Provisions. The Certificate of
Incorporation provides that our board of directors be divided into three classes
of directors serving staggered three-year terms. The classes of directors
(designated class I, class II and class III) shall be, as nearly as possible,
equal in number. Accordingly, one-third of our board of directors will be
elected each year. The terms of the initial class I directors terminated at the
May 20, 1998 annual meeting of stockholders and such directors were re-elected
to a three-year term terminating on the date of the 2001 annual meeting of
stockholders; the term of the initial class II directors shall terminate on the
date of the 1999 annual meeting of stockholders; and the term of the initial
class III directors shall terminate on the date of the 2000 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1998,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. The classified board provision may
prevent a party who acquires control of a majority of our outstanding voting
stock from obtaining control of the board of directors until the second annual
shareholders meeting following the date such party obtains the controlling
interest.

Subject to the rights of the holders of any series of preferred stock or
any other class of our capital stock (other than common stock) then outstanding,
directors may only be removed for cause by a majority vote of our holders of
capital stock issued and outstanding and entitled to vote generally in the
election of directors, voting together as a single class.

No Shareholder Action by Written Consent; Special Meetings. The
Certificate of Incorporation prohibits shareholders from taking action by
written consent in lieu of an annual or special meeting, and thus shareholders
may take action at an annual or special meeting called in accordance with the
By-laws. The Certificate of Incorporation and By-laws provide that special
meetings of shareholders may only be called only by the Chairman of the board of
directors, the Chief Executive Officer or a majority of the board of directors.
Special meetings may not be called by the shareholders, except as permitted by
the shareholder rights By-law described below.

Amendments to the Certificate of Incorporation. The provisions of the
Certificate of Incorporation described above may not be amended, altered,
changed or repealed without the affirmative vote of the holders of at least 75%
of the shares of our capital stock issued and outstanding and entitled to vote.

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SECTION 203 OF DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION

Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder." An interested stockholder is
defined as a person who, together with any affiliates or associates of such
person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder becomes an interested stockholder. Section 203 further provides that
under certain circumstances, business combinations are allowed, such as when (1)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder,
(2) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder or (3) the business combination is approved by a majority
of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.

In addition, our Certificate of Incorporation grants the board of directors
the authority to issue up to 10,000,000 shares of preferred stock in one or more
series and to determine the rights, voting powers, dividend rate, conversion
rights, redemption price, liquidation preference and other terms of such
preferred stock without any further vote or action by the stockholders. The
foregoing provisions of Section 203 of the DGCL and our Certificate of
Incorporation, and any issuance of preferred stock with voting or conversion
rights, may adversely affect your voting power and may have the effect of
delaying or preventing a change of control of GTS or adversely affect the market
price of our common stock.

SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW

Shareholder Rights Plan. We have entered into a rights agreement. In
connection with the rights agreement, our board of directors declared a
distribution of one right for each outstanding share of common stock, each share
of common stock offered hereby and each share of our common stock issued
(including shares distributed from treasury) thereafter and prior to a
distribution date. Each right will entitle the registered holder, subject to the
terms of the rights agreement, to purchase from us one one-thousandth of a share
or a unit of Series A preferred stock at a purchase price of $75 per unit,
subject to adjustment.

Initially, the rights will attach to all certificates representing shares
of outstanding common stock, and no separate rights certificates will be
distributed. The rights will separate from the common stock and the distribution
date will occur upon the earlier of (1) 10 days following a public announcement
that a person or group of affiliated or associated persons (other than us, any
of our subsidiaries or any of our employee benefit plans or such subsidiary) has
acquired, obtained the right to acquire, or otherwise obtained beneficial
ownership of 15% or more of the then outstanding shares of common stock and (2)
10 business days (or such later date as may be determined by action of the board
of directors prior to such time as any person makes such announcement) following
the commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning 15% or more of the then outstanding shares
of common stock. The Soros associates and Alan B. Slifka and his affiliates are
excluded from being an acquiring person described in (1) and (2) above under the
rights agreement unless they increase the aggregate percentage of their
ownership interest in us to 20%.

Until a distribution date:

(1) the rights will be evidenced by common stock certificates and will
be transferred with and only with such common stock certificates,

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(2) new common stock certificates issued after date of consummation of
the offerings in July 1998 (also including shares distributed from
treasury) will contain a notation incorporating the rights agreement by
reference and

(3) the surrender for transfer of any certificates representing
outstanding common stock will also constitute the transfer of the rights
associated with the common stock represented by such certificates.

The rights will not be exercisable until a distribution date and will
expire at the close of business on the tenth anniversary of the rights agreement
unless we redeem them earlier.

In the event that:

(1) we are the surviving corporation in a merger with an acquiring
person described above and shares of common stock shall remain outstanding,

(2) a person becomes an acquiring person,

(3) an acquiring person engages in one or more "self-dealing"
transactions as set forth in the rights agreement or

(4) during such time as there is an acquiring person, an event occurs
which results in such person's ownership interest being increased by more
than 1% (e.g., by means of a recapitalization), then, in each such case,
each holder of a right (other than such person) will thereafter have the
right to receive, upon exercise, units of Series A preferred stock (or, in
some circumstances, our common stock, cash, property or other securities)
having a value equal to two times the exercise price of the right. The
exercise price is the purchase price multiplied by the number of units of
Series A preferred stock issuable upon exercise of a right prior to the
events described in this paragraph.

In the event that, at any time following a stock acquisition date:

(1) we are acquired in a merger or other business combination
transaction and we are not the surviving corporation (other than a merger
described in the preceding paragraph),

(2) any person consolidates or merges with us and all or part of our
common stock is converted or exchanged for securities, cash or property of
any other person or

(3) 50% or more of our assets or earning power is sold or transferred,
each holder of a right (other than an acquiring person) shall thereafter
have the right to receive, upon exercise, common stock of the ultimate
parent of such person having a value equal to two times the exercise price
of the right.

The purchase price payable, and the number of units of Series A preferred
stock issuable, upon exercise of the rights are subject to adjustment from time
to time to prevent dilution:

(1) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Series A preferred stock,

(2) if holders of the Series A preferred stock are granted certain
rights or warrants to subscribe for Series A preferred stock or convertible
securities at less than the current market price of the Series A preferred
stock or

(3) upon the distribution to the holder of the Series A preferred
stock of evidences of indebtedness, cash or assets (excluding regular
quarterly cash dividends) or of subscription rights or warrants (other than
those referred to above).

At any time until ten business days following a stock acquisition date,
either (1) 75% of our board of directors or (2) a majority of our board of
directors and a majority of the continuing directors, may redeem the rights in
whole, but not in part, at a nominal price. Immediately upon the action of a
majority of our board of directors ordering the redemption of the rights, the
rights will terminate and the only right

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of the holders of rights will be to receive such redemption price. As used in
the rights agreement, a continuing director means any person (other than a
person attempting to acquire us or an affiliate or associate of such a person or
a representative of such person or of any such affiliate or associate) who was a
director prior to the date of the rights agreement and any person (other than an
acquiring person or an affiliate or associate of an acquiring person or a
representative of an acquiring person or of any such affiliate or associate)
nominated for selection or elected to the board of directors pursuant to the
approval of a majority of the continuing directors.

At its option, either (1) 75% of our board of directors or (2) a majority
of our board of directors and a majority of the continuing directors, may
exchange each right for (a) one unit of Series A preferred stock or (b) such
number of units of Series A preferred stock as will equal the spread between the
market price of each unit to be issued and the purchase price of such unit set
forth in the rights agreement.

Any of the provisions of the rights agreement may be amended without the
approval of either (1) 75% of our board of directors or (2) a majority of our
board of directors and a majority of continuing directors in order to cure any
ambiguity, defect or inconsistency, to make changes which do not adversely
affect the interests of holders of rights (excluding the interests of any
acquiring person), or to shorten or lengthen any time period under the rights
agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the rights are not
redeemable.

Shareholder Rights By-Law. If a fully financed tender offer is made
publicly to purchase all our outstanding shares of common stock for cash or
marketable securities at a price that is at least 40 percent greater than the
average closing price of such shares on the principal exchange on which such
shares are listed during the 30 days prior to the date on which such offer is
first published or sent to security holders and the board of directors opposes
such offer, the holders of more than 50% of the outstanding shares of common
stock may, at any time subsequent to the date that is nine calendar months after
the date of an offer, call a special meeting of the stockholders,
notwithstanding the provisions described in "-- Certain Charter and By-law
Provisions -- No Shareholder Action by Written Consent; Special Meetings," at
which meeting stockholders may be asked to vote upon a proposal to request that
the board of directors amend the rights agreement to exempt such offer from the
terms of the rights agreement; provided, however, if prior to the expiration of
such nine-month period, the board of directors determines that it is in the best
interests of the shareholders to undertake efforts to sell us, such period shall
be extended as long as the board of directors continues its efforts to solicit,
evaluate and negotiate alternative bids to acquire us. If the proposal to amend
the rights agreement is approved by a vote of 70% of the votes cast for or
against such proposal at such meeting of stockholders at which a quorum is
present, the board of directors shall amend the rights agreement to exempt such
offer from its terms no later than 60 days after the date of such stockholders'
meeting.

"Marketable securities" means any securities that are traded on a
nationally recognized exchange and, in the opinion of an independent investment
bank, provide sufficient value and liquidity so that they would be treated as
substantially equivalent to cash consideration.

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SHARES ELIGIBLE FOR FUTURE SALE

As of February 26, 1999, 81,131,491 shares of common stock were outstanding
excluding (v) 14,359,323 shares of common stock that is issuable pursuant to
exercisable warrants of 4,444,443 and GTS' option plans of 9,914,880, of which
4,152,957 is exercisable, (w) 5,880,050 shares into which the 8.75% senior
subordinated bonds are convertible, (x) the 8,481,417 shares into which the
5 3/4% convertible senior subordinated debentures are convertible and (y)
163,795 of additional shares to be issued resulting from the NetSource
acquisition. Further, subject to NetSource meeting certain performance targets
during the first two quarters of 1999, we may issue an additional 1.4 million
shares of unregistered common stock. Following the consummation of the
depositary share offering, the convertible preferred stock represented by the
depositary shares will be convertible into shares of our common stock.

Of the 81,131,491 outstanding shares of our common stock, the 12,765,000
shares registered in the initial public offering and the 14,506,900 shares
registered in the stock offering in July 1998 will be freely tradable without
restriction under the Securities Act. However such shares held by affiliates may
generally be resold only in compliance with applicable provisions of Rule 144
under the Securities Act, as described below. Of the remainder, approximately
20,000,000 additional shares have been resold or may be resold under Rule 144
without restriction under the Securities Act. An additional approximately
12,762,000 shares have been resold or may be resold under Rule 144 subject to
volume and manner limitations. In addition, the 8,481,417 shares into which the
debentures are convertible will be freely tradable without restriction under the
Securities Act. We are obligated to register the common stock issuable on the
conversion of the convertible preferred stock.

In addition, we have filed and the SEC has declared effective three
registration statements. One registration statement covers the resale of the
convertible bonds and the shares of our common stock into which the convertible
bonds are convertible. Two registration statements on Form S-8 cover the resale
of shares of our common stock issued to employees, officers and directors under
our employee benefit plans.

Furthermore, on January 20, 1999 we filed with the SEC a shelf registration
statement, of which this prospectus is a part, covering all of the shares of
common stock (and securities convertible into or exercisable for shares of
common stock) owned by Alan B. Slifka and his affiliates and the Soros
associates that were not sold in the offering in July 1998. We agreed to file
the shelf registration statement in exchange for these shareholders agreeing to
certain restrictions on their ability to resell their shares. These restrictions
apply for specified periods after closing of the offering in July 1998. Under
these restrictions, our affiliates holding our shares cannot, subject to certain
exceptions, sell any such shares during the first six months after the closing
date of the offering in July 1998. They may, however, sell 50% of such shares
six months after the closing date of the offering in July 1998; 75% of such
shares nine months after the closing date offering in July 1998; and 100% of
such shares twelve months after the closing date of the offering in July 1998.
The Soros associates have expressed to us that because the shelf registration
statement was not yet effective as of the date of this registration statement,
the above contractual restrictions may no longer apply and that they are free to
enter into transactions in respect of their shares subject to applicable
provisions of United States securities law. We have expressed to them our view
that such restrictions continue to apply.

Certain former limited partners of partnerships formerly affiliated with
Alan B. Slifka and dissolved in October 1998 may, upon giving us advance notice,
withdraw some or all of their shares of common stock from registration under the
shelf registration statement. By withdrawing their shares, those persons would
no longer be bound by the restrictions on sale. The number of shares of our
common stock that such persons may withdraw is capped at 726,953 shares of
common stock minus the number of shares such persons sold in the July 1998 stock
offering.

We filed a shelf registration statement with the SEC, of which this
prospectus is a part, on January 21, 1999 covering all of the shares of common
stock that may be issued to holders of NetSource stock in connection with the
acquisition of NetSource. Up to a total of 5,437,500 shares, including up to 1.4
million shares issuable contingent on NetSource achieving certain performance
targets during the first two quarters of 1999, may be issued by us in connection
with this acquisition.

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In addition, we amended the shelf registration statement relating to the
NetSource shares to include shares issued to Apax Funds Nominee Limited and
Warburg, Pincus Ventures, L.P., two institutional shareholders of Esprit Telecom
Group plc, upon the closing of our offer for Esprit Telecom. We issued
approximately 6.2 million shares of common stock to these two Esprit Telecom
shareholders when our offer closed.

We cannot predict what effect, if any, that future sales of common stock or
the availability of common stock for sale would have on the market price for
common stock. Sales of large numbers of shares of common stock in the public
market pursuant to Rule 144 or pursuant to an effective registration statement
under the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for common stock. See "Risk
Factors -- Substantial resales of our common stock pursuant to Rule 144 may
depress our stock price and dilute your ownership interest."

In general, under Rule 144 as currently in effect, a person (or persons
whose GTS shares are required to be aggregated) who has been deemed to have
owned shares of an issuer for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding number of shares of such
class or the average weekly trading volume in composite trading in all national
securities exchanges during the four calendar weeks preceding the filing of the
required notice of such sale. A person (or persons whose shares of GTS are
required to be aggregated) who is not deemed an affiliate of an issuer at the
time of the sale and for at least three months prior to the sale and who has
owned shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume limitations described above. Affiliates
continue to be subject to such limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, such issuer.

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SUMMARY OF UNITED STATES FEDERAL TAX CONSEQUENCES

TO NON-UNITED STATES STOCKHOLDERS

The following is a summary of the principal United States federal income
and estate tax considerations with respect to the ownership and disposition of
shares of our common stock by "Non-United States Holders." This summary is based
on the Internal Revenue Code of 1986, as amended, existing and proposed Treasury
regulations thereunder and administrative and judicial interpretations thereof
(all as currently in effect and all of which are subject to change, possibly
with retroactive effect). This summary does not address all United States
federal income and estate tax consequences that may be relevant to a non-United
States Holder in light of its particular circumstances or to certain Non-United
States Holders that may be subject to special treatment under United States
federal income tax laws, such as banks, insurance companies, tax-exempt entities
and certain United States expatriates. Furthermore, the following discussion
does not discuss any aspects of foreign, state or local taxation. As used
herein, the term "Non-United States Holder" means a holder of common stock that
for United States federal income tax purposes is not (i) a citizen or individual
resident of the United States; (ii) a corporation or partnership created or
organized in or under the laws of the United States or any political subdivision
thereof; (iii) an estate the income of which is subject to United States federal
income tax regardless of its source; or (iv) a trust if both: (A) a court within
the United States is able to exercise primary supervision over the
administration of the trust and (B) one or more United States persons have the
authority to control all substantial decisions of the trust. EACH PROSPECTIVE
PURCHASER IS URGED TO CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE UNITED
STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF OWNING AND DISPOSING OF
SHARES OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCAL OR OTHER TAXING JURISDICTION.

DIVIDENDS

Dividends that are paid by a United States corporation to a Non-United
States Holder and that are not effectively connected with a trade or business
carried on by such Non-United States Holder in the United States (or, if one or
more of certain tax treaties apply, are attributable to a permanent
establishment in the United States maintained by the Non-United States Holder)
generally are subject to a 30% United States withholding tax. An exemption from
such withholding exists with respect to dividends paid to Non-United States
Holders by a United States corporation if at least 80% of the gross income
derived by such corporation (either directly or through certain of its
subsidiaries) during the applicable testing period is "active foreign business
income," as defined in section 861 of the Code. Under the provisions of the Code
applicable to these companies, the proportion of such company's dividends equal
to such company's total gross income from foreign sources over its total gross
income is exempt from United States withholding tax. At present, we believe that
we qualify as such a company. However, the 80% active foreign business income
test is applied on a periodic basis, and our operations and business plans may
change in subsequent taxable years. Therefore, we cannot assure you of our
future status as this type of company. If, for any period or periods, we fail to
satisfy the applicable requirements, then, for payments made prior to January 1,
2000, the withholding agent generally would be required to withhold tax from all
distributions paid on the common stock regardless of our earnings and profits.
For payments made after January 1, 2000, a withholding agent may elect not to
withhold on a distribution to the extent it is not paid out of current or
accumulated earnings and profits, based on our reasonable estimate of the extent
to which the distribution will be out of such earnings and profits. Holders
could, however, apply for refunds if such common stock's share of our earnings
and profits is less than the amount of the distributions. Additionally, the rate
of withholding may be reduced to the extent provided by a tax treaty between the
United States and the country of which the Non-United States Holder is a
resident for tax purposes.

In order to claim the benefit of an applicable tax treaty rate, a
Non-United States Holder may have to file with us or our dividend paying agent
an exemption or reduced treaty rate certificate or letter in accordance with the
terms of such treaty. Under United States Treasury regulations currently in
effect, for purposes of determining whether tax is to be withheld at a 30% rate
or at a reduced rate as specified by an

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income tax treaty, we ordinarily will presume that dividends paid to an address
in a foreign country are paid to a resident of such country absent knowledge
that such presumption is not warranted. However, as of January 1, 2000, a
Non-United States Holder seeking a reduced rate of withholding under an income
tax treaty generally would be required to provide to us a valid Internal Revenue
Service Form W-8 certifying that such Non-United States Holder is entitled to
benefits under an income tax treaty. The final regulations also provide special
rules for determining whether, for purposes of assessing the applicability of an
income tax treaty, dividends paid to a Non-United States Holder that is an
entity should be treated as being paid to the entity itself or to the persons
holding an interest in that entity. A Non-United States Holder who is eligible
for a reduced withholding rate may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the Internal Revenue
Service.

In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business with the United States or, if an
income tax treaty applies, attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder
generally will be subject to regular United States income tax in the same manner
as if the Non-United States Holder were a United States resident. A Non-United
States corporation receiving effectively connected dividends also may be subject
to an additional "branch profits tax" which is imposed, under certain
circumstances, at a rate of 30% (or such lower rate as may be specified by an
applicable treaty) of the Non-United States corporation's "effectively connected
earnings and profits," subject to certain adjustments.

GAIN ON DISPOSITION OF OUR COMMON STOCK

A Non-United States Holder generally will not be subject to United States
federal income tax with respect to gain realized on a sale or other disposition
of common stock unless:

(1) the gain is effectively connected with a trade or business of such
Non-United States Holder in the United States or

(2) in the case of certain Non-United States Holders who are
non-resident alien individuals and hold the common stock as a capital
asset, such individuals are present in the United States for 183 or more
days in the taxable year of the disposition and certain other conditions
are met.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

Under the United States Treasury regulations, we must report annually to
the Internal Revenue Service and to each Non-United States Holder the amount of
dividends paid to such holder and any tax withheld with respect to such
dividends. These information reporting requirements apply regardless of whether
withholding is required because the dividends were effectively connected with a
trade or business in the United States of the Non-United States Holder or
withholding was reduced or eliminated by an applicable income tax treaty. Copies
of the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the Non-United
States Holder is a resident under the provisions of an applicable income tax
treaty or agreement.

United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (1) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(2) under current law, dividends paid to a Non-United States Holder at an
address outside of the United States. However, as of January 1, 2000, a Non-
United States Holder will generally be subject to United States withholding tax
at a 31% rate unless certain certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain documentary evidence procedures) are satisfied, directly or through a
foreign intermediary.

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Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of our common
stock to beneficial owners that are not "exempt recipients" and that fail to
provide in the manner required certain identifying information.

The payment of the proceeds of the disposition of common stock to or
through the United States office of a broker is subject to information reporting
unless the disposing holder, under penalty of perjury, certifies its Non-United
States status or otherwise establishes an exemption. Generally, United States
information reporting and backup withholding will not apply to a payment of
disposition proceeds if the payment is made outside the United States through a
Non-United States office of a Non-United States broker. However, information
reporting requirements (but probably, prior to January 1, 2000, not backup
withholding) will apply to a payment of disposition proceeds outside the United
States if:

(A) the payment is made through an office outside the United States of
a broker that is either

(1) a United States person,

(2) a foreign person which derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the
United States,

(3) a "controlled foreign corporation" for United States Federal
income tax purposes, or

(4) effective January 1, 2000, but probably not prior to such date,
a foreign broker that is (a) a foreign partnership, one or more of whose
partners are United States persons who, in the aggregate, hold more than
50% of the income or capital interest in the partnership at any time
during its tax year, or (b) a foreign partnership engaged at any time
during its tax year in the conduct of a trade or business in the United
States, and

(B) the broker fails to maintain documentary evidence that the holder
is a Non-United States Holder and that certain conditions are met, or that
the holder otherwise is entitled to an exemption.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.

FEDERAL ESTATE TAX

An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in our common stock will be
required to include the value thereof in his gross estate for United States
federal estate tax purposes, and may be subject to United States federal estate
tax unless an applicable estate tax treaty provides otherwise. Estates of
non-resident aliens are generally allowed a statutory credit which generally has
the effect of offsetting the United States federal estate tax imposed on the
first $60,000 of the taxable estate.

THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND ESTATE TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE APPLICATION AND
EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX JURISDICTION.

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PLAN OF DISTRIBUTION

The shares may be sold from time to time to purchasers directly by the
selling stockholders. Alternatively, the selling stockholders may from time to
time offer the shares to or through underwriters, broker/dealers or agents, who
may receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of the shares may
be deemed to be "underwriters" within the meaning of the Securities Act and any
profit on the sale of such securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker/dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.

The shares may be sold from time to time in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. Such prices will be
determined by the selling stockholders or by agreement between such selling
stockholders and underwriters or dealers who receive fees or commissions in
connection therewith. The sale of the shares may be effected in transactions
(which may involve crosses, block transactions and borrowings, returns and
reborrowings of the shares pursuant to stock loan agreements to settle short
sales of the common stock) (1) on any national securities exchange or quotation
service on which the shares may be listed or quoted at the time of the sale, (2)
in the over-the-counter markets, (3) in transactions otherwise than on such
exchange or in the over-the-counter market or (4) through the writing of
options. Shares also may be delivered in connection with the issuance of
securities by issuers other than GTS that are exchangeable for (whether optional
or mandatory) or payable in, such shares or pursuant to which such shares may be
distributed. At the time a particular offering of the shares is made, a
Prospectus Supplement, if required, will be distributed which will set forth the
aggregate amount and type of the shares being offered and the terms of the
offering, including the name or names of any underwriter, broker/dealers or
agents, any discounts, commissions and other terms constituting compensation
from the selling stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker/ dealers. This prospectus also may be
used by pledgees, donees and transferees of the selling stockholders or by other
persons acquiring shares, including brokers who borrow the shares to settle
short sales of shares of the common stock. In addition, the shares which qualify
for sale under an applicable exemption from registration under the Securities
Act may be sold pursuant to such exemption rather than this prospectus.

To comply with the securities laws of certain jurisdictions, if applicable,
the shares will be offered or sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain jurisdictions the shares
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or any exemption from registration or qualification
is available and is complied with.

The selling stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provision may limit
the timing of purchases and sales of any of the shares by the selling
stockholders. The foregoing may affect the marketability of such securities.

The selling stockholders will pay all underwriting discounts and selling
commissions, if any. We will indemnify any underwriters in an underwritten
offering against certain civil liabilities, including certain liabilities under
the Securities Act, or we will contribute to payments the underwriters may have
to make in respect thereof.

LEGAL MATTERS

The validity of our common stock offered hereby has been passed upon for us
by Shearman & Sterling, New York, New York.

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WHERE YOU CAN FIND MORE INFORMATION

We file reports, proxy statements and other information with the Securities
and Exchange Commission. In addition, we have filed a Registration Statement on
Form S-3 of which this prospectus is a part. All of the references in this
prospectus to contracts, agreements and other documents are summaries of the
actual documents which are contained as exhibits in the Registration Statement.
Since the prospectus may not contain all the information that you may find
important, you should review the full text of these documents.

You may read and copy these reports, proxy statements and other information
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
at 7 World Trade Center, 13th floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such material at prescribed rates from the Public Reference Section of the
SEC at 450 Fifth Street, Washington, D.C. 20549. You may obtain copies from the
Public Reference Room by calling the SEC at (800) 732-0330. In addition, we are
required to file electronic versions of such material with the SEC through the
SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. Our common stock is listed on Nasdaq and
Easdaq and reports and other information concerning us can also be inspected at
the offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20001-1500 U.S.A. and the Easdaq Market
Authority, Rue des Colonies 56, Brussels 1000, Belgium.

INCORPORATION OF INFORMATION WE FILE WITH THE SEC

The SEC allows us to "incorporate by reference" the information we file
with them, which means that:

- documents incorporated by reference are considered part of the
prospectus;

- we can disclose important information to you by referring you to those
documents; and

- information that we file with the SEC will automatically update and
supersede this prospectus.

We incorporate by reference the documents listed below which were filed
with the SEC under the Exchange Act:

- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998, filed on March 23, 1999; and

- our Current Reports on Form 8-K filed on January 13, 1999 and March 9,
1999 and our Amendment to our Current Reports on Form 8-K/A filed on
January 20, 1999.

We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before all the
common stock offered by this prospectus has been sold:

- reports filed under Sections 13(a) and (c) of the Exchange Act;

- definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting; and

- any reports filed under Section 15(d) of the Exchange Act.

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You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:

Global TeleSystems Group, Inc.

1751 Pinnacle Drive

North Tower - 12th Floor

McLean, VA 22102

(703) 918-4573

EXPERTS

The consolidated financial statements and schedules of Global TeleSystems
Group, Inc. as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998 appearing in this prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing elsewhere herein which is based in part on the
report of PricewaterhouseCoopers, independent auditors. The consolidated
financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.

ADDITIONAL INFORMATION FOR FRANKFURT STOCK EXCHANGE LISTING OF GTS COMMON STOCK

CAPITAL EXPENDITURES IN PREVIOUS THREE FISCAL YEARS

We invested $231.0 million, $58.3 million and $17.9 million in property and
equipment in 1998, 1997 and 1996, respectively. Such capital expenditures
primarily related to telecommunications equipment as well as office furniture
and other equipment. For fiscal year 1999, we have planned capital expenditures
of approximately $720 million, which will be spent primarily for the procurement
of telecommunications equipment. Further, we spent $257.4 million, $2.4 million
and $0.5 million in cash for business acquisitions in 1998, 1997 and 1996,
respectively. As of the date of this prospectus, we have not made specific
business acquisition investment decisions.

SUBSIDIARY INFORMATION

The following is the requested disclosure as to our subsidiaries or
affiliates of which we own directly or indirectly shares of the book value of
which amount to at least 10% of the Company's stated capital or contributes to
our net income in an amount of at least 10%.

SUBSCRIBED CAPITAL,
AMOUNT OF RESERVES,
ANNUAL PROFIT/LOSS &
NAME OF SUBSIDIARY DOMICILE & ACTIVITY SHARE OF CAPITAL AMOUNT OF REVENUES
- ------------------ ------------------- ---------------- --------------------

Hermes Railtel Netherlands & $97,584 $ 108,547
Carriers Carrier (98,651)
(44,971)
85,251
Esprit Telecom United Kingdom & $93,417 $ 93,417
Business Services (145,238)
(106,507)
176,826

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OUR PROSPECTS FOR CURRENT FISCAL YEAR

We are is confident with respect to the development of the current fiscal
year, which began on January 1, 1999. We anticipate that total revenues will
increase in 1999 compared with 1998 as a result of the planned expansion of its
telecommunications network, and its expected growth in its sales, support,
service and marketing organization structures.

Our future operating results will depend on many factors, including the
potential risk of delay in implementing our business plan; the political,
economic and legal aspects of the markets in which we operate; competition; and
our need for additional substantial financing.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

GLOBAL TELESYSTEMS GROUP, INC.

PAGE
----

Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997 ..................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1998................................... F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998................................... F-5
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1998....................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1
122

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Global TeleSystems Group, Inc.

We have audited the accompanying consolidated balance sheets of Global
TeleSystems Group, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the financial
statements or financial statement schedules of Esprit Telecom Group plc, a
subsidiary, which statements reflect total assets of $632,951,000 and
$96,186,000 as of December 31, 1998 and September 30, 1997, respectively, and
total revenues of $176,826,000, $74,473,000 and $38,380,000 for the years ended
December 31, 1998, September 30, 1997 and September 30, 1996, respectively.
Those financial statements and schedules were audited by other auditors whose
report has been furnished to us, and our opinion insofar as it relates to data
included for Esprit Telecom Group plc, is based solely on the report of the
other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Global TeleSystems Group, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, based on our audits and the report of other auditors, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

/s/ ERNST & YOUNG LLP

Vienna, Virginia

March 8, 1999

F-2
123

GLOBAL TELESYSTEMS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

DECEMBER 31,
---------------------
1998 1997
---------- --------

Current Assets
Cash and cash equivalents................................. $ 998,510 $358,384
Accounts receivable, net.................................. 174,430 42,074
Restricted cash........................................... 82,025 30,486
Prepaid expenses.......................................... 21,640 17,038
Other assets.............................................. 16,752 6,846
---------- --------
Total Current Assets.............................. 1,293,357 454,828
Property and equipment, net................................. 643,044 259,971
Investments in and advances to ventures..................... 50,751 76,730
Goodwill and intangible assets, net of accumulated
amortization of $52,465 and $10,627 at December 31, 1998
and 1997, respectively.................................... 543,524 48,634
Restricted cash and other non-current assets................ 83,926 36,484
---------- --------
Total Assets...................................... $2,614,602 $876,647
========== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 279,509 $101,063
Debt maturing within one year............................. 23,859 5,350
Current portion of capital lease obligations.............. 43,102 24,313
Related party debt maturing within one year............... -- 5,708
Unearned revenue.......................................... 36,059 1,435
Other current liabilities................................. 28,530 4,866
---------- --------
Total Current Liabilities......................... 411,059 142,735
Long-term debt, less current portion........................ 1,504,614 407,127
Long-term portion of capital lease obligations.............. 218,139 123,416
Related party long-term debt, less current portion.......... 2,600 79,796
Unearned revenue, less current portion...................... 34,093 --
Taxes and other non-current liabilities..................... 40,784 14,669
---------- --------
Total Liabilities................................. $2,211,289 $767,743
Commitments and Contingencies
Minority interest......................................... $ 37,329 $ 18,766
Common stock, subject to repurchase (288,441 shares and
797,100 shares outstanding at December 31, 1998 and
1997, respectively).................................... 16,081 12,489
Shareholders' Equity
Preferred stock, $0.0001 par value (10,000,000 shares
authorized; none issued and outstanding)............... -- --
Common stock, $0.10 par value (135,000,000, shares
authorized; 80,733,372 and 53,096,611 shares issued and
outstanding, net of 195,528 shares of treasury stock at
December 31, 1997)..................................... 8,073 5,310
Additional paid-in capital................................ 885,057 360,015
Accumulated other comprehensive income (loss)............. 488 (7,294)
Accumulated deficit....................................... (543,715) (280,382)
---------- --------
Total Shareholders' Equity........................ 349,903 77,649
---------- --------
Total Liabilities and Shareholders' Equity........ $2,614,602 $876,647
========== ========

The accompanying notes are an integral part of these financial statements.

F-3
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GLOBAL TELESYSTEMS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------

Revenues................................................... $ 372,392 $ 121,461 $ 62,497
Operating Expenses:
Telecommunications services.............................. 238,106 97,109 44,595
Selling, general and administrative...................... 199,184 97,189 63,618
Depreciation and amortization............................ 78,823 18,532 9,713
Equity in losses of ventures............................. 1,324 14,599 10,150
--------- --------- --------
517,437 227,429 128,076
Loss from operations....................................... (145,045) (105,968) (65,579)
Other Income/(Expense):
Interest income.......................................... 60,029 13,248 3,788
Interest expense......................................... (131,011) (39,835) (11,654)
Foreign currency losses.................................. (23,196) (3,398) (1,427)
--------- --------- --------
(94,178) (29,985) (9,293)
--------- --------- --------
Net loss before income taxes, minority interest and
extraordinary loss....................................... (239,223) (135,953) (74,872)
Income taxes............................................... 7,752 2,485 1,360
--------- --------- --------
Net loss before minority interest and extraordinary loss... (246,975) (138,438) (76,232)
Minority interest.......................................... 3,923 3,677 27
--------- --------- --------
Net loss before extraordinary loss......................... $(243,052) $(134,761) $(76,205)
--------- --------- --------
Extraordinary loss -- debt refinancing..................... (12,704) -- --
--------- --------- --------
Net loss................................................... $(255,756) $(134,761) $(76,205)
========= ========= ========
Net loss per share before extraordinary loss............... $ (3.41) $ (2.74) $ (2.01)
Net loss per share -- extraordinary loss................... (0.18) -- --
--------- --------- --------
Net loss per share......................................... $ (3.59) $ (2.74) $ (2.01)
========= ========= ========
Weighted average common shares outstanding................. 71,282 49,166 37,850
========= ========= ========

The accompanying notes are an integral part of these financial statements.

F-4
125

GLOBAL TELESYSTEMS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------

Operating Activities
Net loss................................................. $(255,756) $(134,761) $(76,205)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Extraordinary loss....................................... 12,704 -- --
Depreciation and amortization............................ 79,406 24,511 13,311
Deferred interest........................................ -- 12,970 6,583
Equity in losses of ventures, net of dividends
received.............................................. 1,324 17,474 11,123
Fair value adjustment for foreign exchange instrument.... 28,650 -- --
Other.................................................... 2,134 7,302 5,139
Changes in assets and liabilities:
Accounts receivable................................... (128,279) (23,065) (12,879)
Accounts payable and accrued expenses................. 115,599 54,058 5,316
Other changes in assets and liabilities............... 23,366 (10,757) 4,849
--------- --------- --------
Net Cash Used in Operating Activities............ (120,852) (52,268) (42,763)
Investing Activities
Acquisitions, net of cash acquired....................... (257,370) (2,396) (487)
Purchases of property and equipment...................... (231,007) (58,269) (17,864)
Restricted cash.......................................... 32,000 (62,924) (13,138)
Investments in and advances to ventures, net of
repayments............................................ 461 5,943 (54,932)
--------- --------- --------
Net Cash Used in Investing Activities............ (455,916) (117,646) (86,421)
Financing Activities
Proceeds from debt....................................... 815,868 409,817 63,599
Net proceeds from issuance of common stock............... 369,990 86,403 119,043
Repayments of debt....................................... (116,085) (149) (973)
Payment of debt issue costs.............................. (28,011) (24,927) (2,777)
Other.................................................... (9,385) (2,805) 106
--------- --------- --------
Net Cash Provided by Financing Activities........ 1,032,377 468,339 178,998
Effect of exchange rate changes on cash and cash
equivalents.............................................. 2,683 (7,968) 209
Net increase in cash and cash equivalents.................. 458,292 290,457 50,023
Cash and cash equivalents at beginning of year............. 540,218 67,927 17,904
--------- --------- --------
Cash and Cash Equivalents At End of Year................... $ 998,510 $ 358,384 $ 67,927
========= ========= ========

The accompanying notes are an integral part of these financial statements.

F-5
126

GLOBAL TELESYSTEMS GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998

(IN THOUSANDS)

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID-IN COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME DEFICIT EQUITY
------ ------ ---------- ------------- ----------- -------------

Balance at December 31, 1995............ 34,555 $3,456 $130,321 $(1,651) $ (69,416) $ 62,710
Proceeds from the sale of common
stock, net of expenses of $3,567.... 10,993 1,099 117,991 -- -- 119,090
Issuance of 7,223 warrants in
connection with debt financing...... -- -- 20,184 -- -- 20,184
Translation adjustment................ -- -- -- 35 -- 35
Net loss.............................. -- -- -- -- (76,205) (76,205)
---------
Total comprehensive income..... (76,170)
Other................................... (613) (61) 2,514 -- -- 2,453
------ ------ -------- ------- --------- ---------
Balance at December 31, 1996............ 44,935 4,494 271,010 (1,616) (145,621) 128,267
Proceeds from the sale of common
stock, net of expenses of $9,850.... 7,647 764 88,426 -- -- 89,190
Translation adjustment................ -- -- -- (5,678) -- (5,678)
Net loss.............................. -- -- -- -- (134,761) (134,761)
---------
Total comprehensive income..... (140,439)
Other................................... 515 52 579 -- -- 631
------ ------ -------- ------- --------- ---------
Balance at December 31, 1997............ 53,097 5,310 360,015 (7,294) (280,382) 77,649
Changes in shareholders' equity for
Esprit Telecom Group plc for the
three months ended December 31,
1997, not presented elsewhere....... 201 20 750 700 (7,577) (6,107)
------ ------ -------- ------- --------- ---------
Adjusted Balance at December 31, 1997... 53,298 5,330 360,765 (6,594) (287,959) 71,542
Proceeds from the sale of common
stock, net of expenses of $22,805... 15,566 1,557 352,335 -- -- 353,892
Exercise of stock options and other
transactions........................ 2,917 291 15,954 -- -- 16,245
Conversion of notes payable........... 2,072 207 40,580 -- -- 40,787
Exercise of common stock warrants..... 2,543 254 (254) -- -- --
Issuance of common stock in connection
with business combinations.......... 4,337 434 115,677 -- -- 116,111
Translation adjustment................ -- -- -- 7,082 -- 7,082
Net loss.............................. -- -- -- -- (255,756) (255,756)
---------
Total comprehensive income..... (248,674)
------ ------ -------- ------- --------- ---------
Balance at December 31, 1998............ 80,733 $8,073 $885,057 $ 488 $(543,715) $ 349,903
====== ====== ======== ======= ========= =========

The accompanying notes are an integral part of these financial statements.

F-6
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GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS OPERATIONS

Global TeleSystems Group, Inc. ("GTS" or "the Company"), is a provider of a
broad range of telecommunications services to businesses, other
telecommunications service providers and consumers through its operation of
voice and data networks, international gateways, local access and cellular
networks and the provision of various value-added services in Western Europe,
Central Europe and the Commonwealth of Independent States ("CIS"), primarily
Russia.

Effective March 4, 1999, the Company completed its business combination
with Esprit Telecom Group plc ("Esprit") which was accounted for as a pooling of
interests. Accordingly, these financial statements have been restated and are
presented as if the companies have been combined since inception (see Note 3,
"Business Combinations and Venture Transactions").

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Wholly-owned subsidiaries and majority-owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned ventures that are accounted for
by the equity method as a result of minority shareholder rights, super majority
voting conditions or other governmentally imposed uncertainties so severe that
they prevent the Company from obtaining unilateral control of the venture. If
the Company has little ability to exercise significant influence over a venture,
the venture is accounted for by the cost method. All significant inter-company
accounts and transactions are eliminated upon consolidation.

The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recognized have been recovered.

Results of subsidiaries acquired and accounted for by the purchase method
have been included in operations from the relevant date of acquisition.

Reclassifications

Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements in order to conform to the 1998 presentation.

Cash and Cash Equivalents

The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $143.4 million and $66.8
million of restricted cash at December 31, 1998 and 1997, respectively. The
restricted cash is primarily related to cash held in escrow for interest
payments associated with the Company's debt obligations.

Property and Equipment

Property and equipment is stated at cost. Depreciation, which includes the
amortization of assets recorded under capital leases, is calculated on a
straight-line basis over the lesser of the estimated lives,

F-7
128
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ranging from five to ten years for telecommunications equipment and three to
five years for furniture, fixtures and equipment and other property, or their
contractual term. Construction in process reflects amounts incurred for the
configuration and build-out of telecommunications equipment and
telecommunications equipment not yet placed into service. Maintenance and
repairs are charged to expense as incurred.

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, "Capitalization of Interest Costs," the Company capitalizes material
interest costs associated with the construction of capital assets for business
operations and amortizes the costs over the assets' useful lives. The Company
has capitalized interest costs of $4.9 million during the year ended December
31, 1998. Prior to 1998, the Company had no capitalized interest.

Goodwill and Intangible Assets

Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses, and is being amortized on a
straight-line basis over their estimated useful lives ranging from three to
fifteen years. Intangible assets, principally telecommunications service
contracts, licenses and deferred financing costs, are amortized on a
straight-line basis over the lesser of their estimated useful lives, generally
three to fifteen years, or their contractual term. In accordance with Accounting
Principles Board ("APB") Opinion No. 17, "Intangible Assets," the Company
continues to evaluate the amortization period to determine whether events or
circumstances warrant revised amortization periods. Additionally, the Company
considers whether the carrying value of such assets should be reduced based on
the future benefits of its intangible assets.

Long-Lived Assets

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets to be held and used by the Company are reviewed to determine whether an
event or change in circumstances indicates that the carrying amount of the asset
may not be recoverable. For long-lived assets to be held and used, the Company
bases its evaluation on such impairment indicators as the nature of the assets,
the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured using
discounted cash flow analysis or other valuation techniques. During the third
quarter of 1997, the Company recorded a write-down of long-lived assets
associated with its investments in the Asia and Central Europe regions (see Note
4, "Investments in and Advances to Ventures"). No impairment expense was
recognized in 1998 or 1996.

Income Taxes

The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign companies, as such earnings are intended to be
reinvested in those operations permanently.

F-8
129
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Splits

On December 1, 1997, the Company filed an amendment to its Certificate of
Incorporation to effect an increase in the authorized common shares from
60,000,000 to 135,000,000; a 3 for 2 common share stock split, 1 1/2 common
shares for every common share issued and outstanding; and an increase in the par
value of its authorized common shares from $0.0001 to $0.10 on a post-split
basis. Accordingly, the Company has presented share and per share data for
issued and outstanding shares as well as options and warrants on a restated
basis to give effect to the increase in authorized common shares, the stock
split and the increase in par value for its capital stock.

Foreign Currency Translation

The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). In most instances, the local currency is considered the
functional currency for the Company's subsidiaries and ventures, except for
operations in the CIS, where the U.S. dollar has been designated as the
functional currency. Assets and liabilities of these subsidiaries and ventures
are translated at the rates of exchange at the balance sheet date. Income and
expense accounts are translated at average monthly rates of exchange. The
resultant translation adjustments are included in other comprehensive income, a
separate component of shareholders' equity. Gains and losses from foreign
currency transactions of these subsidiaries and ventures are included in the
operations of the subsidiary or venture.

For those ventures operating in the CIS, the temporal method for
translating assets and liabilities is used. Accordingly, monetary assets and
liabilities are translated at current exchange rates while non-monetary assets
and liabilities are translated at their historical rates. Income and expense
accounts are translated at average monthly rates of exchange. The resultant
translation adjustments are included in the operations of the subsidiaries and
ventures.

All foreign currency gains and losses recognized in the operations of
consolidated subsidiaries are included in the Company's statement of operations
as "foreign currency gains/losses." The Company's proportionate share of all
foreign currency gains and losses recognized in the operations of ventures
accounted for by the equity method of accounting are recognized in the Company's
statement of operations as "equity in earnings/losses of ventures".

Revenue Recognition

The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that will be neither billed nor collected.
Revenue from service contracts is accounted for when the services are provided.
Billings received in advance of service being performed are deferred and
recognized as revenue as the service is performed.

Net Loss Per Share

During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and diluted earnings per share for all
years presented. The Company's net loss per share calculation (basic and
diluted) is based upon the weighted average common shares issued. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee stock options, warrants, and convertible debt
instruments have been excluded from the net loss per share calculation because
their effect would be anti-dilutive (see Note 6, "Debt Obligations," Note 8,
"Shareholders' Equity" and Note 9, "Stock Option Plans").

F-9
130
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fair Value of Financial Instruments

The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of the
long-term debt is determined based on quoted market prices. At December 31,
1998, the fair value of the Company's fixed rate long-term debt is as follows
(in thousands):

CARRYING
FAIR VALUE VALUE
---------- --------

5.75% Senior Subordinated Convertible Debentures Due 2010... $524,097 $466,902
11.50% Senior Notes Due 2007, USD and DM.................... 311,552 305,051
11.50% Senior Notes Due 2007................................ 285,538 265,000
10.875% and 11.00% Senior Notes Due 2008, USD and DM........ 240,811 240,061
8.75% Senior Subordinated Convertible Bonds Due 2000........ 326,931 117,601
9.875% Senior Notes Due 2005................................ 100,191 105,000

The recorded amounts for all other long-term debt of the Company
approximates fair value.

Off Balance Sheet Risk and Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents, most of which are
maintained in high-quality financial institutions. The Company extends credit to
various customers and establishes an allowance for doubtful accounts for
specific customers that it determines to have significant credit risk. The
Company provides allowances for potential credit losses when necessary.

On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of sovereign securities
was suspended; subsequently, secondary trading therein was halted. Since many
Russian banks had substantial investments in these securities, severe liquidity
problems resulted for the banks. 2) The value of the ruble was allowed to
fluctuate below the ruble/US dollar exchange rate corridor that the government
had previously committed to support; this represented an effective devaluation
of the ruble. 3) A 90-day moratorium on offshore credit repayments was issued.
The 90-day moratorium was not extended when it expired on November 16, 1998 and
it is anticipated that the ruble will continue to be devalued. Due to the
devaluation and the end of the 90-day moratorium, there is an ongoing risk that
many Russian banks may be declared bankrupt. Deposits held at Russian banks,
other than Sberbank, are not insured. The official exchange rate as of December
31, 1998 was 20.65 rubles per US dollar. The last official exchange rate prior
to the suspension of trading on August 17, 1998 was 6.2725 rubles per US dollar.
The Company has taken and intends to continue to take actions that may minimize
the unfavorable effect of a continued ruble devaluation.

Derivative Financial Instruments

The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk and periodically evaluates the
materiality of foreign exchange exposures in different countries and the
financial instruments available to mitigate this exposure. The Company finds it
impractical to hedge all foreign currency exposure and as a result, will
continue to experience foreign currency gains and losses.

The Company currently accounts for its existing derivatives under SFAS No.
52, "Foreign Currency Translation." In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes a reporting standard for derivative instruments which will require

F-10
131
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company to record all derivatives as either assets or liabilities and
requires that those instruments are recorded at their fair value. The Company
plans to adopt SFAS No. 133 for the fiscal year beginning January 1, 2000. The
Company has not yet determined the impact of the adoption of this statement.

The Company enters into foreign currency forward contracts to minimize
foreign exchange risk. The Company utilizes foreign currency agreements that are
short term in duration (generally one week or less). Accordingly, the contract
amount of the forwards at December 31, 1998 approximated fair value.
Additionally, Hermes Railtel maintains one foreign currency swap transaction
agreement (see Note 7, "Foreign Currency Transactions").

Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 generally allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB No. 25, "Accounting for Stock Issued to Employees." The
Company has elected generally to account for its stock-based compensation in
accordance with the provisions of APB No. 25 and presents pro forma disclosures
of net loss as if the fair value method had been adopted.

Uses of Estimates in Preparation of Financial Statements

The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NOTE 3: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

On March 4, 1999, GTS acquired substantially all of the outstanding
ordinary shares and American Depository Shares of Esprit Telecom Group plc. Upon
the completion of the transaction, the number of shares that will be issued for
the outstanding ordinary shares and American Depository Shares of Esprit is
16,027,512. The Company accounted for this combination as a pooling of
interests. Accordingly, the Company restated the accompanying financial
statements and financial data to represent the combined financial results of the
previously separate entities for all periods presented.

Esprit had a fiscal year-end of September 30. The Esprit statements of
operations for the years ended September 30, 1997 and 1996 were combined with
GTS's statements of operations for the calendar years ended December 31, 1997
and 1996, respectively. The Company's consolidated statement of operations for
the year ended December 31, 1998 includes the twelve months then ended of
Esprit. The three months of operations of Esprit from October 1, 1997 to
December 31, 1997 are not included in any of the statements of operations
presented. Accordingly, an adjustment has been made in the consolidated
statement of shareholders' equity for 1997 to include the net income and other
transactions of Esprit for the three months ended December 31, 1997. In
addition, as reflected in the Company's consolidated statements of cash flows,
the "Cash and cash equivalents at the beginning of the year" for 1998 of $540.2
million and "Cash and cash equivalents at the end of year," of $358.4 million,
for the year ended 1997 do not agree. The $181.8 million difference reflects the
cash flow activity of Esprit for the three month period ended December 31, 1997.
The Company's consolidated balance sheet as of December 31, 1997 represents the
audited historical Esprit balance sheet as of September 30, 1997 combined with
GTS's historical balance sheet as of December 31, 1997.

F-11
132
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The table below presents pro forma information on the separate results of
operations for GTS and Esprit for the periods prior to the combination:

FISCAL YEAR ENDED
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)

Revenue:
Global TeleSystems Group......................... $ 197,484 $ 47,098 $ 24,117
Esprit Telecom Group............................. 176,826 74,473 38,380
Pooling adjustments.............................. (1,918) (110) --
--------- --------- --------
Total Revenue............................ $ 372,392 $ 121,461 $ 62,497
========= ========= ========
Net Income (Loss):
Global TeleSystems Group......................... $(152,559) $(116,986) $(67,991)
Esprit Telecom Group............................. (106,507) (17,775) (8,214)
Pooling adjustments.............................. 3,310 -- --
--------- --------- --------
Total Net Loss........................... $(255,756) $(134,761) $(76,205)
========= ========= ========

In conjunction with this business combination, the Company incurred
substantial expenses. The Company may also incur significant charges resulting
from shutdowns due to duplication in the capacity requirements of the combined
network. At the date of the business combination, certain notes were
outstanding. These notes had certain terms and conditions whereas the holders
could put the notes back to Esprit with a premium upon a change in control. As
such, an agreement was reached prior to the business combination to induce the
noteholders to waive their put rights in exchange for a fixed payment of two
percent of the face value of the notes. As such, GTS is obligated to pay and
will incur a one-time charge as payment for the noteholders to negate their
previously existing put rights. This charge will be recorded in conjunction with
the other pooling expenditures discussed herein. The majority of these charges
will be reflected in the quarter ended March 31, 1999.

On November 30, 1998, the Company acquired substantially all of the
outstanding shares of common stock of NetSource Europe ASA, a Norwegian company,
("NetSource") that provides long distance telecommunications services focusing
primarily on small- to medium-sized businesses. The acquisition has been
accounted for under the purchase method of accounting. The initial purchase
price consisted of up to 4,037,500 newly issued shares of the Company's common
stock and $46.1 million in cash for an aggregate initial purchase price of
$145.4 million. The Company has also agreed to make additional payments of up to
$35.0 million in either cash or shares of common stock contingent upon NetSource
achieving certain performance targets during the first two quarters of 1999.
Such payments, if any, will be accounted for as additional purchase price and
will increase the goodwill.

The Company's 1998 financial statements reflect the preliminary allocation
of the purchase price, and as such, the Company has recorded approximately
$137.4 million in goodwill that the Company is amortizing over a 10-year period
using the straight-line method.

On May 1, 1998, the Company acquired all of the outstanding common stock of
Thyssen Festnetz Management GmbH and the whole limited partnership interest in
Thyssen Festnetz GmbH & Co. KG (collectively "Plusnet") for cash consideration
of approximately DM 307.8 million ($173.6 million) before expenses. The
Company's 1998 financial statements reflect the preliminary allocation of the
purchase price, and as such, the Company recorded approximately DM 303.2 million
($171.0 million) of goodwill on that date which the Company is amortizing over a
15-year period using the straight-line method.

F-12
133
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited pro forma combined results of operations for the
Company gives effect to the NetSource and Plusnet business combinations as if
they had occurred at the beginning of each period presented (in thousands,
except per share data). These pro forma amounts are provided for informational
purposes only and do not purport to present the results of operations of the
Company had the transactions assumed therein occurred on or as of the date
indicated, nor is it necessarily indicative of the results of operations which
may be achieved in the future:

FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1998 1997
--------- ---------

Revenues.................................................... $ 425,452 $ 175,838
Loss before extraordinary item.............................. (313,749) (190,842)
Net loss.................................................... (326,453) (190,842)
Loss per common share:
Loss before extraordinary item............................ $ (4.19) $ (3.59)
Net loss.................................................. (4.36) (3.59)

During 1998, the Company increased its ownership interest in several of its
previously existing ventures by either buying out or acquiring part of the
minority shareholders' interest in these ventures. These transactions have
enabled the Company to consolidate certain ventures in 1998 that were previously
accounted for following the equity method of accounting. The Company has
executed these transactions by either paying cash or issuing its shares of
common stock. Further, in 1998, the Company has acquired other less significant
telecommunications companies offering similar or complementary services to those
offered by the Company. Such business combinations have been accomplished
through the purchase of the outstanding stock or assets of the acquired entity
for cash. The cash portion of these transactions and acquisitions has generally
been financed through the Company's equity and debt proceeds. The Company has
accounted for these transactions and business combinations following the
purchase method of accounting, and as such, any purchase price paid over net
tangible assets acquired has been reflected primarily as goodwill as is being
amortized over a 5-year period using the straight-line method.

NOTE 4: INVESTMENTS IN AND ADVANCES TO VENTURES

The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 49% to 75%. The Company has no investments in ventures
that are accounted for by the cost method.

The components of the Company's investments in and advances to ventures are
as follows:

DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)

Equity in net assets acquired............................... $14,844 $31,183
Excess of investment cost over equity in net assets acquired
net of amortization of $3,836 and $4,851 at December 31,
1998 and 1997, respectively............................... 4,108 7,582
Accumulated earnings recognized............................. 12,790 14,659
Dividends................................................... (706) (3,848)
Cash advances and other..................................... 19,715 27,154
------- -------
Total investments in and advances to ventures..... $50,751 $76,730
======= =======

F-13
134
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies."

The Company has financed the operating and investing cash flow requirements
of several of its ventures in the form of cash advances. The Company anticipates
that these ventures will generate sufficient cash inflows for the repayment of
the cash advances as their businesses mature. Also, due to the long-term nature
of the anticipated repayment period and the potential risk associated with the
repatriation of the cash advances, the Company has aggregated its investments in
and cash advances to the ventures.

The Company's share of the ventures' foreign currency translation
adjustments is reflected in the investment accounts.

Investment Recoverability

The Company periodically evaluates the recoverability of its equity
investments, in accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and if circumstances arise where a loss in value
is considered to be other than temporary, the Company will record a write-down
of excess investment cost. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the operating ventures, which is the lowest
level of cash flow information available. During the third quarter of 1997, the
Company recorded a write-off of approximately $5.4 million ($19.8 million,
including the write-off at the venture level), which represented the net balance
of certain investments in and advances to ventures located in Asia (primarily
Beijing Tianmu and V-Tech) and Central Europe (Eurohivo) which were stated in
excess of their net realizable value. The total charge was classified in the
statement of operations as equity in losses of ventures. The Company recorded no
such write-offs during the years ended December 31, 1998 or 1996.

Hermes Europe Railtel B.V. ("Hermes Railtel") Recapitalization

During the year ended December 31, 1997, Hermes Railtel recapitalized its
equity structure and amended its existing shareholder agreement. In connection
with the Hermes Railtel recapitalization the Company contributed approximately
$51.8 million and converted existing note receivables of approximately $28.4
million in exchange for an additional 29% equity interest in Hermes Railtel. As
a result of the recapitalization and amended shareholder agreement, the Company
obtained unilateral control over Hermes Railtel.

F-14
135
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in the Investments in and Advances to Ventures

The changes in the investments in and advances to ventures are as follows:

DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)

Balance, at beginning of period............................. $ 76,730 $104,459
Equity in net assets acquired............................. 14,701 80,054
Excess of investment cost over equity in net assets
acquired............................................... 50,810 10,187
Dividends................................................. (706) (2,875)
Cash advances (repayments) and other...................... 245 (24,171)
Effect of consolidating equity method companies........... (89,705) (76,325)
-------- --------
(24,655) (13,130)
Equity ownership in earnings/(losses)..................... 4,753 (5,552)
Excess losses recognized over amount attributable to
ownership interest..................................... (3,090) (10,610)
Amortization of excess of investment cost over equity in
net assets acquired.................................... (2,987) (3,313)
Loss in value that is other than temporary................ -- (5,354)
Effect of consolidating equity method companies........... -- 10,230
-------- --------
(1,324) (14,599)
-------- --------
Balance, at end of period................................... $ 50,751 $ 76,730
======== ========

As of December 31, 1998, the significant investments accounted for under
the equity method and the percentage interest owned consist of the following:

EQUITY OWNED SUBSIDIARIES OWNERSHIP %
------------------------- -----------

EDN Sovintel................................................ 50%
TeleRoss Ventures -- 14 joint ventures in various regions in
the CIS................................................... 50%
Vostok Ventures -- 13 joint ventures in various regions in
the CIS................................................... 50-70%
PrimTelefone................................................ 50%
Dattel...................................................... 51.03%

The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1998 and 1997.

YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
EQUITY METHOD ENTITIES VENTURES OWNED VENTURES METHOD VENTURES
- ---------------------- -------------- -------------- -----------------
(IN THOUSANDS)

Revenue................................... $ 6,888 $194,184 $201,072
Gross margin.............................. 3,918 78,073 81,991
Net income (loss)......................... (2,851) 2,126 (725)
Equity in net losses...................... (2,714) (1,228) (3,942)
Current assets............................ 4,284 53,723 58,007
Total assets.............................. 22,025 156,365 178,390
Current liabilities....................... 7,277 70,765 78,042
Total liabilities......................... 19,943 94,214 114,157
Net assets................................ 2,082 62,151 64,233
Ownership interest in equity in net
assets.................................. 689 26,237 26,926

F-15
136
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
EQUITY METHOD ENTITIES VENTURES OWNED VENTURES METHOD VENTURES
- ---------------------- -------------- -------------- -----------------
(IN THOUSANDS)

Revenue................................... $ 47,986 $178,174 $226,160
Gross margin.............................. 30,566 79,630 110,196
Net (loss) income......................... (10,370) 14,700 4,330
Equity in net (losses) earnings........... (11,538) 5,131 (6,407)
Current assets............................ 20,841 59,959 80,800
Total assets.............................. 35,090 176,117 211,207
Current liabilities....................... 18,719 68,503 87,222
Total liabilities......................... 27,653 102,758 130,411
Net assets................................ 7,437 73,359 80,796
Ownership interest in equity in net
assets.................................. 9,541 45,638 55,179

NOTE 5: SUPPLEMENTAL BALANCE SHEET INFORMATION

DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)

Accounts receivable consists of:
Trade accounts receivable................................. $153,080 $ 42,689
Value added taxes receivable.............................. 20,873 3,476
Other receivables......................................... 10,010 2,089
-------- --------
183,963 48,254
Less: allowance for doubtful accounts..................... 9,533 6,180
-------- --------
Total accounts receivable, net.................... $174,430 $ 42,074
======== ========
Property and equipment consists of:
Telecommunications equipment.............................. $581,859 $256,552
Furniture, fixtures and equipment......................... 36,388 14,348
Other property............................................ 13,956 3,470
Construction in process................................... 104,608 9,412
-------- --------
736,811 283,782
Less: accumulated depreciation.............................. 93,767 23,811
-------- --------
Total property and equipment, net................. $643,044 $259,971
======== ========
Accounts payable and accrued expenses consists of:
Accounts payable.......................................... $172,921 $ 56,794
Interest payable.......................................... 35,209 17,483
Professional and consulting expense....................... 4,522 2,825
Income taxes.............................................. 9,713 2,530
Accrued compensation...................................... 14,618 7,170
Accrued telecommunications expense........................ 25,046 2,841
Other accrued expenses.................................... 17,480 11,420
-------- --------
Total accounts payable and accrued expenses....... $279,509 $101,063
======== ========

F-16
137
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6: DEBT OBLIGATIONS

Company debt consists of:

DECEMBER 31,
---------------------
1998 1997
---------- --------
(IN THOUSANDS)

Senior subordinated convertible debentures, due July 01,
2010 at 5.75% interest payable semiannually,
(Debentures).............................................. $ 466,902 $ --
Senior notes of Esprit due December 15, 2007 at 11.5%
interest payable semiannually, (Senior Notes 2007)........ 305,051 --
Senior notes of Hermes Railtel, due August 15, 2007 at 11.5%
interest payable semiannually, (Senior Notes)............. 265,000 265,000
Senior notes of Esprit due June 15, 2008 at 10.875% and
11.00% interest payable semiannually, (Senior Notes
2008)..................................................... 240,061 --
Senior subordinated convertible bonds, due June 30, 2000 at
8.75% payable semiannually, (Bonds)....................... 117,601 144,787
Senior notes, due February 15, 2005 at 9.875% interest
payable semiannually, (Notes Offering).................... 105,000 --
Related party debt obligations, with principal payments
beginning April 1, 1998 and maturing on March 31, 2001 at
10% interest, net of unamortized discount................. -- 72,233
Other financing agreements.................................. 31,458 15,961
---------- --------
1,531,073 497,981
Less: debt maturing within one year......................... 23,859 11,058
---------- --------
Total long-term debt.............................. $1,507,214 $486,923
========== ========

In July 1998, the Company issued aggregate principal amount of $466.9
million of 5.75% convertible senior subordinated debentures (the "Debentures")
that mature July 1, 2010 and will be redeemable from July 1, 2001 at the option
of the Company, at redemption prices as set forth in the Debentures agreement.
Net proceeds from the Debentures offering were approximately $450.3 million. The
Debentures are convertible into 8.5 million common shares at any time prior to
maturity or redemption at a conversion price of $55.05 per common share.
Interest on the Debentures will be payable semi-annually on January 1 and July
1, commencing January 1, 1999. The Debentures are subordinated to all existing
and future indebtedness of the Company, except for the Bonds, with which they
rank pari passu in right of payment.

On December 12, 1997, Esprit issued US$230.0 million and DM 125.0 million
aggregate principal amount of senior notes due December 15, 2007 (the "Senior
Notes 2007"). The Senior Notes 2007 rank pari-passu with ordinary creditors with
interest payable semi-annually at a rate of 11.5%. Approximately $72.0 million
and DM 36.0 million of the net proceeds of the offering of the Senior Notes 2007
was initially placed in escrow for the first 6 semi-annual payments commencing
June 15, 1998. The Company may redeem the Senior Notes 2007, in whole or in
part, any time on or after December 15, 2002 at specific redemption prices or
prior to that under certain conditions. The Senior Notes 2007 are structurally
senior to the Company's Debentures, Bonds and Notes Offering.

In 1997, Hermes Railtel issued $265.0 million aggregate principal amount of
senior notes due August 15, 2007 (the "Senior Notes"). The Senior Notes are
general unsecured obligations of the subsidiary with interest payable
semiannually at a rate of 11.5%. Approximately $56.6 million of the net proceeds
of the offering of the Senior Notes was initially placed in escrow for the first
four semiannual interest payments commencing in 1998. Hermes Railtel may redeem
the Senior Notes, in whole or in part,

F-17
138
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

any time on or after August 15, 2002 at specific redemption prices. Hermes
Railtel may also redeem a portion of the Senior Notes at a price equal to 111.5%
of the principal amount prior to August 15, 2000 with net cash proceeds of a
public equity offering of Hermes Railtel with gross proceeds of at least $75.0
million or in certain other circumstances specified in the indenture for the
Senior Notes, provided, however, that at least two-thirds of the principal
amount of the Senior Notes originally issued remain outstanding after each such
redemption. The Senior Notes are structurally senior to the Company's
Debentures, Bonds and Notes Offering.

On June 19, 1998, Esprit issued US$150.0 million and DM150.0 million
aggregate principal amount of Senior Notes due June 15, 2008 (the "Senior Notes
2008"). The Senior Notes 2008 rank pari-passu with ordinary creditors with
interest payable semi-annually at a rate of 10.875% and 11.00% respectively.
Esprit may redeem the Senior Notes 2008, in whole or in part, any time on or
after 5 years or on June 15, 2001, at specific redemption prices. The Senior
Notes 2008 are structurally senior to any and all obligations of the Company.
The notes will be redeemable at the option of the Company at any time on or
after June 15, 2003 or prior to that under certain conditions.

As a result of the completion of the initial public offering (the "Stock
Offering"), see Note 8, "Shareholders' Equity," the interest rate on the 8.75%
senior subordinated convertible bonds due June 2000, which were issued in July
1997 (the "Bonds") will remain at 8.75% until maturity and the approximately
$5.1 million of the 6.25% additional interest that was previously accrued
through the date of the Stock Offering has been reflected as an increase to
additional paid-in capital. Upon completion of the Stock Offering, the Bonds
became convertible into 7.2 million common shares at a conversion price of
$20.00 per share. During the twelve months ended December 31, 1998, a total of
$27.2 million of the Bonds were converted into approximately 1.4 million common
shares of the Company's common stock. The Bonds are subordinated to all existing
and future indebtedness of the Company, except for the Debentures, with which
they rank pari passu in right of payment.

In February 1998, the Company issued $105.0 million aggregate principal
amount of 9.875% senior notes due February 15, 2005 (the "Notes Offering" and
together with the Stock Offering, the "Offerings"). Net proceeds from the Notes
Offering were approximately $100.5 million. Approximately $19.6 million of the
net proceeds were initially placed in escrow for the first four semi-annual
interest payments, commencing August 15, 1998. The Notes Offering are senior in
rank to both the Debentures and the Bonds.

In 1996, the Company entered into long-term obligations ("Debt
Obligations") totaling $70.0 million with lenders that are affiliated with and
are considered related parties to the Company as a result of their ownership of
the Company's common stock. In February 1998, approximately $85.2 million of the
net proceeds of the Offerings were used to repay the Debt Obligations plus
accrued interest. Accordingly, the Company recognized a $12.7 million
extraordinary charge to earnings resulting from the early extinguishment of the
debt obligations. The nature of the charge is comprised of the write-off of
$11.6 million of unamortized debt discount and $1.1 million of unamortized debt
issuance costs that were deferred as financing costs and were being amortized
over the original maturity of the debt.

Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at the prevailing negotiated market rates. Esprit has two revolving
credit lines that were unused at December 31, 1998. One has an available amount
of GBP 1.0 million $(1.7 million), and the other has an available balance of NLG
1.2 million ($0.6 million), for a total available under these facilities of $2.3
million at December 31, 1998.

Aggregate maturities of long-term debt, as of December 31, 1998, are as
follows: 1999 -- $23.9 million, 2000 -- $121.9 million, 2001 -- $3.0 million,
2002 -- $0.1 million and $1,382.2 million thereafter.

F-18
139
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company paid interest of $124.2 million, $2.2 million and $0.4 million
in 1998, 1997, and 1996, respectively.

NOTE 7: FOREIGN CURRENCY TRANSACTIONS

On April 19, 1998, Hermes Railtel entered into a foreign currency swap
transaction agreement (the "Swap") with Rabobank International ("Rabo") in order
to minimize the foreign currency exposure resulting from the issuance in August
1997 of $265.0 million aggregate principal amount 11.5% Senior Notes due 2007
(the "Senior Notes"). Hermes Railtel has marked the Swap to its fair value as of
December 31, 1998 and the resulting adverse change in fair value of $27.8
million has been recorded as a non-current liability on the balance sheet and
recognized as a foreign currency loss in the statement of operations. The
foreign currency loss recognized on marking the Swap to its fair value has been
partially offset in the statement of operations by a $15.3 million foreign
currency gain on the revaluation of the Senior Notes.

NOTE 8: SHAREHOLDERS' EQUITY

Common Stock

The following table summarizes the Company's significant issuances of
common stock as a result of its public and private capital raise efforts for the
periods ending:

SHARES ISSUED SHARE PRICE NET PROCEEDS
------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)

December 31, 1998............................. 15,566,000 $20.00-45.50 $353,892
December 31, 1997............................. 6,728,761 13.49-15.67 86,359
December 31, 1996............................. 8,348,532 13.33 107,744

In February 1998, the Company completed an initial public offering of 12.8
million shares of common stock at $20.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's common stock being
listed in the United States on the National Association of Securities Dealers
Automated Quotation Market and internationally on the European Association of
Securities Dealers Automated Quotation Market. Net proceeds from the Stock
Offering were $235.2 million. As a result of the Stock Offering, the Company was
no longer obligated to repurchase the 797,100 shares of common stock that were
subject to repurchase at December 31, 1997.

In July 1998, the Company completed a secondary public offering of 2.8
million shares of common stock at $45.50 per common share. Net proceeds from the
offering were $118.7 million. In addition, in conjunction with such offering,
shareholders of the Company sold 11.7 million shares of the Company's common
stock. The Company did not realize any of the proceeds of such sale.

Pursuant to a purchase agreement that the Company has with a venture
partner, the Company issued 463,489 of non-registered shares of common stock to
the partner in 1998. In accordance with the purchase agreement, if such entity
is unable to sell these shares, the Company is obligated to assist the seller in
locating a purchaser for 288,441 of non-registered shares, and if the Company is
unable to do so, to repurchase the 288,441 shares of common stock. The shares of
common stock have been classified as common stock subject to repurchase as of
December 31, 1998.

In June 1998, pursuant to the Debt Obligations described in Note 6 "Debt
Obligations," warrants to purchase 3,333,333 common shares were exercised using
a cashless exercise option at an exercise price of $9.33 per common share. In
addition, warrants to purchase 4,444,444 shares of the Company's common stock
expire in the first and second quarters of 2002.

F-19
140
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In February 1997, Esprit completed an initial public offering of 4.75
million American Depositary Shares (ADSs), which represented 33.3 million
ordinary shares of Esprit common stock, at $12.00 per ADS (the "IPO"). The IPO
resulted in Esprit's ADSs being listed on the National Association of Securities
Dealers Automated Quotation Market (NASDAQ) and on the European Association of
Securities Dealers Automated Quotation Market (EASDAQ). Net proceeds from the
IPO were $49.9 million. As a result of the business combination which occurred
on March 4, 1999 (see Note 3, "Business Combinations and Venture Transactions"),
GTS acquired substantially all of the outstanding ADSs and ordinary shares of
Esprit in exchange for new shares of common stock in GTS. Expressed in terms of
the new GTS shares, the February, 1997 offering represented a sale of 4.3
million shares of GTS common stock at $13.49 per share. Upon completion of the
transaction, the Esprit ADSs will be delisted from NASDAQ and EASDAQ.

The Company does not intend to pay dividends on common stock in the
foreseeable future. In addition, certain of the Company's financing agreements
include covenant restrictions precluding the payment of dividends by the
Company.

The Company has reserved 14,332,970 shares of common stock for issuance
upon conversion of the exercise of outstanding and future stock options,
warrants and similar rights.

Preferred Stock

As of December 31, 1998 and 1997, there were 10,000,000 shares of $0.0001
par value preferred stock authorized, with rights and preferences to be
determined by the Board of Directors. As of December 31, 1998 and 1997, no
shares of preferred stock had been issued.

NOTE 9: STOCK OPTION PLANS

The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the years ended December 31, 1998, 1997 and 1996 would have been
approximately $269.8 million, $142.0 million and $77.2 million, respectively.

The fair value of options granted under GTS plans during 1996 and 1997 are
estimated to be between $2.93 and $7.35 per common share, respectively, on the
date of grant using the minimum value option pricing model during 1996 and the
Black Scholes option pricing model for grants in 1997 with the following
assumptions: dividend yield 0%, risk free interest rate of 6.13% for 1996 and
5.74% for 1997, an expected life of five years, and an expected volatility of
.50. The Company determined its volatility factor with the assistance of an
investment banker, based on peer group public companies and the Company's
historic stock performance. The fair value of options granted during 1998 are
estimated to be between $16.51 and $33.72 per common share on the date of grant
using the Black Scholes option valuation model with the following assumptions:
dividend yield 0%, risk free interest rates between 4.19% and 5.64%, an expected
life of five years, and an expected volatility of .75.

The fair value for the Esprit options (which represent rights to GTS
shares), as expressed as equivalent GTS share options, were estimated at the
date of grant using the Black Scholes option pricing model with the following
assumptions for the years ended September 30, 1996, 1997 and December 31, 1998:
dividend yield of 0%; expected volatility of 1.50 for 1996 and 1997 and 1.00 for
1998; risk-free interest rate of 7.3% for 1996 and 1997 and 4.4% for 1998 and
expected lives from three years to eight and a half years. The weighted average
fair value of options granted was $2.44 for grants during the year ended

F-20
141
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

September 30, 1996, between $4.72 and $6.22 for options granted during the year
ended September 30, 1997 and $10.23 for options granted during the year ended
December 31, 1998.

The Company maintains the 1992 Stock Option Plan, the Non-Employee
Directors Stock Option Plan and the GTS Equity Compensation Plan (the "Option
Plans"). As of December 31, 1998, the maximum number of shares of common stock
available for grant under the Option Plans was 14,756,954. Except for the
Company's performance based options granted under the 1992 stock option plan,
options granted under the Option Plans generally vest over a four-year period
from the date of grant and expire ten years from the date of grant. In 1996 and
1998, the Company had granted options with vesting terms that provide for
vesting within five and six years after the date of grant, respectively, unless
certain performance goals are met, in which case vesting could occur over a
shorter period of time.

Additional information with respect to stock option activity, excluding the
Esprit options (which represent rights to GTS shares), is summarized as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- --------

Outstanding at beginning of year... 6,562,171 $ 9.75 4,869,360 $ 7.31 3,422,399 $ 5.56
Options granted.................... 3,868,565 30.00 2,215,296 14.53 1,612,962 11.10
Options exercised.................. (2,374,947) 6.60 (89,312) 6.34 (56,498) 6.70
Options canceled or expired........ (394,715) 17.88 (433,173) 7.38 (109,503) 8.73
---------- --------- ---------
Outstanding at end of year......... 7,661,074 20.53 6,562,171 9.75 4,869,360 7.31
========== ========= =========
Options exercisable at year end.... 2,097,914 $10.26 2,962,110 $ 6.06 1,992,236 $ 4.65

The following table summarizes information about stock options outstanding
excluding the Esprit options (which represent rights to GTS shares):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE PRICE NUMBER LIFE EXERCISE NUMBER EXERCISE
AT DECEMBER 31, 1998: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ----------------------- ----------- ----------- -------- ----------- --------

$0.00 to $5.73 438,500 5.6 $ 2.50 408,500 $ 2.75
5.74 to 11.45 1,323,549 6.8 9.45 982,486 9.16
11.46 to 17.18 2,146,460 8.3 14.44 620,428 14.23
17.19 to 22.90 120,000 9.2 20.00 40,000 20.00
22.91 to 28.63 2,580,140 9.8 25.78 -- --
28.64 to 34.34 85,275 9.3 30.34 -- --
34.35 to 40.07 280,295 9.4 37.80 46,500 37.94
40.08 to 45.80 421,855 9.4 43.58 -- --
48.81 to 51.53 265,000 9.3 46.75 -- --

In addition, prior to the establishment of the Option Plans, certain
options were granted in 1991 to certain key employees and former employees to
purchase 1,172,250 shares of the Company's common stock at an exercise price of
$0.53 per share. All options were granted at an exercise price equal to the fair
value of the underlying common stock at the date of grant. The options vested in
equal increments over a three-year period. During 1993, 603,000 of the options
were canceled, in 1994, 50,250 options were

F-21
142
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exercised, during 1998 243,750 were exercised leaving the remaining 275,250
outstanding and fully exercisable at December 31, 1998.

In the fourth quarter of 1997, Hermes Railtel implemented a stock option
plan for its key officers and employees (the "Hermes Railtel Plan"). The
ownership dilution caused by the Hermes Railtel Plan is not expected to be
significant. As a result of issuing options under the Hermes Railtel Plan,
Hermes Railtel incurred a non-cash charge of approximately $3.7 million, of
which $2.6 million was recorded during 1997 and the remaining $1.1 million was
recorded in 1998.

Employee Stock Option and Incentive Plans for Esprit

Prior to the March 4, 1999 business combination between GTS and Esprit as
discussed in Note 3, "Business Combinations and Venture Transactions," Esprit
maintained various option plans each with its own terms and conditions.
Effective with the completion of this business combination, all of the options
within these plans will be converted to rights to receive GTS shares of common
stock, based on the business combination exchange ratio, with terms
substantially identical to those of the Esprit plans (except that the "market
price" requirement for vesting of the Management Stock Option Plan, described
below, was omitted). Generally, all options granted under the historical Esprit
stock option plans vest immediately or vest one year after the grant date. Of
the 1,599,066 options converted 928,455 were exercisable on March 4, 1999.

On February 26, 1998, the Esprit Board of Directors approved a new sub plan
under the Esprit Executive and Employee Stock Option Plan, The Management Stock
Option Plan ("MSOP"). Eligibility extended to specified persons who were
employed by an Esprit Telecom Group company before February 26, 1999. These
options vested three years from February 26, 1998 or three years from the date
of employment, whichever was later, on the following two conditions: (i) the
specified employees had to have been employed by Esprit, and (ii) in the case of
those persons already employed on February 26, 1998, the market price of Esprit
common stock had to have been at least fifty percent higher than the exercise
price (which was equal to the market price on the date of grant), or in the case
of those persons employed after February 26, 1998, a market price of at least
fifty percent higher than it was on the date of commencement of their
employment.

A summary of all transactions involving Esprit stock options which
represent rights to GTS shares (expressed as equivalent GTS share options) is as
follows:

YEAR ENDED SEPTEMBER 30,
YEAR ENDED -------------------------------------------
DECEMBER 31, 1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------

Outstanding at beginning of
year..................... 1,162,586 $ 0.47 805,896 $0.08 112,261 $0.08
Options granted............ 749,356 10.78 565,482 2.44 701,039 0.08
Options exercised.......... (237,044) 0.94 (90,305) 0.08 (7,404) 0.08
Options canceled or
expired.................. (75,832) 8.97 (13,619) 0.08 -- --
--------- --------- ---------
Outstanding at end of
year..................... 1,599,066 $ 7.71 1,267,454 $0.47 805,896 $0.08
========= ========= =========

NOTE 10: EMPLOYEE BENEFIT PLAN

The Company has a 401(k) retirement savings plan (the "Savings Plan")
covering all U.S. citizen employees. The Savings Plan qualifies under section
401(k) of the Internal Revenue Code and as such,

F-22
143
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

participants may defer pretax income in accordance with federal income tax
limitations. The Company provides a 50% matching contribution on the first 5%
contributed by the employee. The Company may also, at its discretion, make
non-matching contributions. Both matching and non-matching contributions by the
Company vest 100% after three years of service. The Company's expense under the
Savings Plan was approximately $0.2 million, $0.2 million, and $0.2 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company made
no discretionary (non-matching) contributions for the years ended December 31,
1998, 1997 or 1996.

With respect to certain Esprit Telecom UK employees, the Company
contributes a fixed percentage, based upon the salary earned, to the employees'
nominated pension insurance policy or other pension arrangements. During the
years ended December 31, 1998, 1997 and 1996, the Company incurred $1.9 million,
$0.3 million and $0.1 million, respectively of expense related to these pension
arrangements. Esprit has no defined benefit pension plan for its employees.

Hermes Railtel established a pension plan in 1995 that covers all Hermes
Railtel employees upon twenty-five years of age and at least one year of
service. Hermes Railtel has entered into an insurance arrangement (an investment
contract) whereby an insurance provider has undertaken a legal obligation to
provide specific benefits to participants in return for a fixed premium. As
such, Hermes Railtel does not bear significant financial risk for its pension
plan. Hermes Railtel's expense under the pension plan was $1.0 million, $0.7
million and $0.04 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

NOTE 11: INCOME TAXES

The components of loss before extraordinary loss, income taxes and minority
interest were as follows:

YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)

Pretax loss:
Domestic......................................... $ (63,943) $ (64,920) $(41,554)
Foreign.......................................... (175,280) (71,033) (33,318)
--------- --------- --------
$(239,223) $(135,953) $(74,872)
========= ========= ========

For the years ended December 31, 1998, 1997 and 1996, the Company recorded
$7.8 million, $2.5 million, and $1.4 million respectively, in income tax expense
that related exclusively to its current provision for foreign taxes.

The reconciliation of the U.S. statutory federal tax rate of 34.0% to the
Company's effective tax rate is as follows:

YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------

Taxes at U.S. statutory rates............................... 34.0% 34.0% 34.0%
Foreign income taxes........................................ (3.1) (1.8) (1.8)
Foreign operating losses generating no tax benefit.......... (24.9) (17.8) (15.1)
Domestic operating losses generating no tax benefit......... (9.1) (16.2) (18.9)
----- ----- -----
(3.1)% (1.8)% (1.8)%
===== ===== =====

F-23
144
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets and liabilities are recorded based on temporary
differences between earnings as reported in the financial statements and
earnings for income tax purposes. The following table summarizes major
components of the Company's deferred tax assets and liabilities:

DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)

Deferred Tax Assets:
Net operating loss carry-forwards......................... $ 85,337 $ 38,029
Other deferred tax assets................................. 7,702 3,912
-------- --------
Total deferred tax asset.................................... 93,039 41,941
Deferred Tax Liability...................................... 1,186 2,292
-------- --------
Net deferred tax asset...................................... 91,853 39,649
Less: valuation allowance................................. (91,853) (39,649)
-------- --------
Total............................................. $ -- $ --
======== ========

As of December 31, 1998, the Company had net operating loss carry-forwards
for U.S. federal income tax purposes of approximately $251.0 million expiring in
fiscal years 2003 through 2018. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carry-forwards will be subject to an annual limitation.

The Company's investment in EDN Sovintel is treated for U.S. tax purposes
as a partnership and, therefore, the Company's share of EDN Sovintel's income or
loss flows through to the Company's consolidated federal income tax return on a
current basis. Undistributed earnings of the Company's other foreign investments
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes, or foreign withholding taxes has been made.
Upon distribution of those earnings, the Company would be subject to foreign
withholding taxes and U.S. income taxes (subject to reduction for foreign tax
credits).

NOTE 12: COMMITMENTS AND CONTINGENCIES

Leases

The Company has various lease agreements for fiber and equipment. The
obligations extend through 2018. Most of the leases contain renewal options of
one to twelve years. Assets under capital leases are included in the
consolidated balance sheets as follows:

DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)

Telecommunications equipment................................ $312,962 $158,277
Less: accumulated amortization............................ 16,543 1,209
-------- --------
$296,419 $157,068
======== ========

Rental expense for operating leases aggregated $9.9 million, $4.2 million,
and $2.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

F-24
145
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum payments, by year and in the aggregate, under the capital
leases and non-cancelable operating leases with initial or remaining terms in
excess of one year as of December 31, 1998 were as follows:

CAPITAL OPERATING
LEASES LEASES
-------- ---------
(IN THOUSANDS)

December 31, 1999........................................... $ 61,712 $15,379
2000...................................................... 34,854 8,347
2001...................................................... 32,940 7,516
2002...................................................... 31,832 6,317
2003...................................................... 31,502 4,361
Thereafter.................................................. 246,497 11,181
-------- -------
Total minimum lease payments...................... 439,337 $53,101
=======
Less amount representing interest........................... 178,096
--------
Present value of net minimum lease payments................. 261,241
Less current portion of capital lease obligations........... 43,102
--------
Long-term portion of capital lease obligations.............. $218,139
========

Other Commitments and Contingencies

The Company's consolidated and non-consolidated ventures have future
purchase commitments amounting to $66.8 million and $1.2 million, respectively,
as of December 31, 1998.

In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its consolidated
and non-consolidated ventures. The total amounts guaranteed at December 31, 1998
were approximately $2.4 million and $13.7 million, respectively.

Tax Matters

The taxation system in Russia ("Russian Taxes") is evolving as the central
government transforms itself from a command to a market oriented economy. The
Russian Federation has introduced and continues to introduce new tax and royalty
laws and related regulations. These laws and regulations are not always clearly
written and their interpretation is subject to the opinions of the local tax
inspectors, Central Bank officials and the Ministry of Finance. Instances of
inconsistent opinions between local, regional and federal tax authorities and
between the Central Bank and Ministry of Finance are not unusual.

The Company's policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
Russian Taxes, the Company's final Russian Taxes may be in excess of the
estimated amount expensed to date and accrued at December 31, 1998, 1997, and
1996. It is the opinion of management that the ultimate resolution of the
Company's Russian Tax liability, to the extent not previously provided for, will
not have a material effect on the financial condition of the Company. However,
depending on the amount and timing of an unfavorable resolution of this
contingency, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.

In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is

F-25
146
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

obligated to pay additional amounts of VAT. In the opinion of management, any
additional VAT the Company may be obligated to pay would not be material.

Other Matters

In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matter other than
what is discussed above, will not have a material effect upon the financial
condition, results of operations or liquidity of the Company.

NOTE 13: RELATED PARTY TRANSACTIONS

On October 31, 1998, the Company acquired AB Swed Carrier's ownership
interest of 6,551 common shares in Hermes Railtel for approximately $5.8
million. In connection with this purchase, GTS Carrier Services, Inc. paid
approximately $5.3 million to a company, which is affiliated with a board member
of Hermes Railtel, for negotiating with AB Swed Carrier and the remaining
minority shareholder of Hermes Railtel on behalf of GTS Carrier Services, Inc.
to purchase their respective ownership interests in Hermes Railtel.

As discussed within Note 6, "Debt Obligations," the Company issued 8.75%
Senior Subordinated Convertible Bonds due June 30, 2000. An affiliated
shareholder of the Company purchased, on the open market, a portion of the bonds
and as of December 31, 1998 and 1997 held $2.6 million and $3.5 million,
respectively.

Prior to 1998, the Company, in connection with a venture investment,
entered into financing agreements with a shareholder of the Company for a total
of approximately $8.6 million. Subject to certain conditions, the shareholder
had the right to require the repayment of this amount in cash or 0.7 million
shares of the Company's common stock. In June 1998, the Company completed the
restructuring of the capital and ownership of this venture. In conjunction with
this restructuring, the shareholder exercised its right to receive 0.7 million
shares of the Company's common stock. Further, the shareholder contributed an
additional $5.8 million for a 25% interest in the venture (see Note 3, "Business
Combinations and Venture Transactions.")

Prior to October 13, 1997, a shareholder of the Company owned 17% of the
capital stock of Telco Communications Group, Inc. ("Telco"), a long distance
telecommunications company. The Company purchased certain long distance
telecommunications services from, and sells certain services to, Telco. Sales to
and purchases from Telco for 1998, 1997 and 1996 were $1.0 million, $1.0 million
and $3.0 million and $9.6 million, $6.6 million and $3.0 million, respectively.
In addition, the Company engages Tel Labs Inc. ("Tel Labs"), a wholly-owned
subsidiary of Telco, for the final processing of its customer billing records at
Esprit. Purchases from Tel Labs for 1998, 1997 and 1996 were $0.6 million, $0.7
million and $0.5 million, respectively.

As discussed in Note 8, "Shareholders' Equity," the Company issued 463,489
of non-registered shares of common stock to a venture partner in 1998 for their
remaining interest in a business venture within the CIS region. In addition, in
1997, the Company issued 504,600 shares of common stock to the same venture
partner for the Company's original interest in the same business venture.

The Company has entered into certain consulting agreements with directors
of the Company and paid $3.2 million, $0.4 million and $0.2 million in 1998,
1997 and 1996, respectively, pursuant to those agreements.

F-26
147
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company had notes receivable due from employees approximating $4.1
million, less than $0.1 million, and $0.1 million as of December 31, 1998, 1997
and 1996, respectively, with three employees aggregating more than $4.0 million
in 1998.

The Company derived revenue from affiliates of $8.3 million, $4.4 million
and $3.3 million in 1998, 1997 and 1996, respectively. Costs of revenue from
affiliates were $2.3 million, $2.0 million and $0.8 million, respectively for
the years ended December 31, 1998, 1997 and 1996.

NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes non-cash investing and financing activities
for the Company:

YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- ------
(IN THOUSANDS)

Capitalization of leases............................... $149,391 $142,417 $4,003
Purchase of additional interest in Western Europe
region subsidiary with conversion of debt to
equity............................................... -- 9,139 --
Line of credit issued as payment on note payable and
reclassification of restricted cash.................. -- 7,887 --
Exercise of warrants, resulting in treasury shares..... 31,110
Conversion of bonds and notes into common shares....... 40,580 4,250 4,497
Issuance of common shares or notes for interest in
business ventures.................................... 19,522 4,125 4,500
Net accretion in common stock subject to repurchase.... 3,592 8,156 --

In conjunction with the purchases of NetSource and Plusnet during the year
ended December 31, 1998 (see Note 3, "Business Combinations and Venture
Transactions"), assets acquired, liabilities assumed and common stock issued
were as follows (in thousands):

1998
--------

Fair value of assets acquired............................... $ 94,213
Goodwill.................................................... 308,410
Fair value of liabilities assumed........................... (86,009)
Common stock issued......................................... (92,969)
--------
Net cash paid............................................... $223,645
========

NOTE 15: SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA

The Company operates in five segments within the telecommunications
industry. The industry consists of a wide range of telecommunications services
to international business customers, including long distance voice and data
services and electronic messaging services. The Company has adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, or SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information." The following tables present consolidated financial
information segmented by the Company's lines of businesses and geographic areas

F-27
148
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for 1998, 1997 and 1996. Transfers between geographic areas and lines of
businesses were not considered material for disclosure purposes.

GEOGRAPHICAL DATA:

CONSOLIDATED:

NORTHERN AND CORPORATE
WESTERN CENTRAL OFFICE &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------------- -------- -------- -------- ------------ ----------
(IN THOUSANDS)

Year Ended December 31, 1998
Total revenue.............. $ 265,812 $ 85,127 $ 18,911 $ 2,614 $ (72) $ 372,392
Gross margin............... 83,002 42,400 8,404 357 123 134,286
Operating expenses......... 111,735 43,205 7,683 2,293 34,268 199,184
Extraordinary items........ -- -- -- -- ..... (12,704) (12,704)
Net loss................... (156,737) (37,200) (4,587) (1,884) (55,348) (255,756)
Identifiable assets........ 1,456,108 221,163 44,814 4,856 887,661 2,614,602
Liabilities................ 1,450,968 146,008 28,099 9,384 576,830 2,211,289
Net (liabilities)/assets... 5,140 75,155 16,715 (4,528) 310,831 403,313
Year Ended December 31, 1997
Total revenue.............. $ 79,736 $ 27,045 $ 13,513 $ 1,016 $ 151 $ 121,461
Gross margin............... 10,843 6,624 6,747 (14) 152 24,352
Operating expenses......... 42,623 20,010 5,394 7,507 21,655 97,189
Net loss................... (46,839) (9,505) (6,882) (28,043) (43,492) (134,761)
Identifiable assets........ 601,779 99,926 23,840 (6,544) 157,646 876,647
Liabilities................ 496,675 62,862 40,465 19,161 148,580 767,743
Net (liabilities)/assets... 105,104 37,064 (16,625) (25,705) 9,066 108,904
Year Ended December 31, 1996
Total revenue.............. $ 38,380 $ 12,696 $ 9,355 $ 1,561 $ 505 $ 62,497
Gross margin............... 9,447 2,626 4,756 652 421 17,902
Operating expenses......... 15,269 17,753 5,131 3,803 21,662 63,618
Net loss................... (18,914) (15,572) (5,295) (4,951) (31,473) (76,205)
Identifiable assets........ 57,287 96,773 17,339 14,973 88,686 275,058
Liabilities................ 57,756 116,961 33,826 24,753 (93,806) 139,490
Net (liabilities)/assets... (469) (20,188) (16,487) (9,780) 182,492 135,568

F-28
149
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LINE OF BUSINESS DATA:

CONSOLIDATED:

BUSINESS MOBILE CORPORATE,
CARRIER BUSINESS ACCESS SERVICES SERVICES OTHER &
SERVICES SERVICES SERVICES CIS CIS ELIMINATIONS TOTAL
-------- --------- -------- -------- -------- ------------ ----------
(IN THOUSANDS)

Year Ended December 31, 1998
Total revenue................ $ 85,251 $ 180,561 $ 18,911 $ 75,394 $ 9,818 $ 2,457 $ 372,392
Gross margin................. 43,404 39,598 8,404 36,119 6,234 527 134,286
Operating expenses........... 29,463 83,734 9,237 26,075 11,357 39,318 199,184
Extraordinary items.......... -- -- -- -- -- (12,704) (12,704)
Net loss..................... (44,302) (110,878) (6,144) (13,839) (17,595) (62,998) (255,756)
Identifiable assets.......... 741,695 713,531 45,696 169,998 51,659 892,023 2,614,602
Liabilities.................. 688,054 761,745 29,268 89,721 47,571 594,930 2,211,289
Net (liabilities)/assets..... 53,641 (48,214) 16,428 80,277 4,088 297,093 403,313

Year Ended December 31, 1997
Total revenue................ $ 5,373 $ 74,363 $ 13,513 $ 24,732 $ 2,313 $ 1,167 $ 121,461
Gross margin................. (1,470) 12,313 6,747 6,233 351 178 24,352
Operating expenses........... 17,527 25,096 5,394 11,458 3,290 34,424 97,189
Net loss..................... (27,396) (19,442) (6,882) 1,085 (5,953) (76,173) (134,761)
Identifiable assets.......... 504,478 97,301 23,840 69,388 26,719 154,921 876,647
Liabilities.................. 444,765 51,910 40,465 38,022 19,143 173,438 767,743
Net (liabilities)/assets..... 59,713 45,391 (16,625) 31,366 7,576 (18,517) 108,904

Year Ended December 31, 1996
Total revenue................ $ -- $ 38,380 $ 9,355 $ 9,211 $ 3,485 $ 2,066 $ 62,497
Gross margin................. -- 9,447 4,756 817 1,809 1,073 17,902
Operating expenses........... 257 15,012 5,131 8,278 5,992 28,948 63,618
Net loss..................... (9,099) (9,815) (5,295) (3,084) (9,777) (39,135) (76,205)
Identifiable assets.......... 16,492 40,795 17,339 71,138 25,126 104,168 275,058
Liabilities.................. 28,976 28,780 33,826 69,530 41,297 (62,919) 139,490
Net (liabilities)/assets..... (12,484) 12,015 (16,487) 1,608 (16,171) 167,087 135,568

NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)

F-29
150
GLOBAL TELESYSTEMS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized quarterly financial data is as follows:

FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1998
Revenues............................. $ 46,248 $ 65,964 $118,335 $141,845 $ 372,392
Gross Margin......................... 13,069 20,938 45,387 54,892 134,286
Net loss before extraordinary item... (37,114) (47,967) (63,696) (94,275) (243,052)
Extraordinary item..................... (12,704) -- -- -- (12,704)
-------- -------- -------- -------- ---------
Net loss............................. (49,818) (47,967) (63,696) (94,275) (255,756)
======== ======== ======== ======== =========
Net loss per share before
extraordinary item................ (0.60) (0.69) (0.84) (1.21) (3.41)
Extraordinary loss per share........... (0.21) -- -- -- (0.18)
-------- -------- -------- -------- ---------
Net loss per share................... (0.81) (0.69) (0.84) (1.21) (3.59)(a)
======== ======== ======== ======== =========
1997
Revenues............................. $ 22,477 $ 26,324 $ 34,778 $ 37,882 $ 121,461
Gross Margin......................... 5,894 6,478 3,258 8,722 24,352
Net loss............................. (20,813) (25,401) (52,428) (36,119) (134,761)
Net loss per share................... (0.46) (0.54) (1.02) (0.68) (2.74)

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

(a) The sum of earnings per share for the four quarters will not equal earnings
per share for the total year due to changes in the average number of common
shares outstanding.

NOTE 17: SUBSEQUENT EVENTS

On January 4, 1999, Hermes Railtel issued in a private placement $200
million principal amount of 10 3/8% Senior Notes due 2009 and Euro 85,000,000
principal amount of 10 3/8% Senior Notes due 2006. The net proceeds of this
offering, approximately $289.7 million, will be used to finance the cost of
Hermes Railtel network assets, to expand the Hermes Railtel network beyond the
currently contemplated scope by adding transatlantic capacity, enhancing the
speed of the Hermes Railtel network and continuing the build-out of the Hermes
Railtel network. The Company filed an S-4 registration statement with the
Securities and Exchange Commission to exchange registered senior notes, with the
same terms and conditions as the New Senior Notes, for the New Senior Notes,
which became effective in February 1999.

On January 13, 1999, GTS, through its subsidiary GTS Transatlantic Holdings
Ltd., entered into an agreement with FLAG Telecom to form a 50/50 joint venture,
to be known as FLAG Atlantic Limited, that will build and operate a transoceanic
fiber optic link, known as FLAG Atlantic-1 between Europe and the United States.
FLAG Atlantic-1 is designed to carry voice, high-speed data and video traffic at
speeds of 1.28 terabits per second, a 25-fold increase over current
transatlantic cable systems. The joint venture will also provide backhaul links
from the European landing points of the transoceanic link to Paris and London.
By interconnecting to FLAG Atlantic-1, GTS Carrier Services and its subsidiary
Hermes Railtel will be able to provide their carrier and Internet service
provider customers with high-capacity cable access from major European cities to
New York City. GTS's investment in FLAG Atlantic Limited is designed to enable
it to participate in the growth opportunity represented by the rapid increase in
demand by business customers for Internet Protocol-based telecommunications
services. The high-capacity fiber optic link will be based on synchronous
digital hierarchy and use dense wave division multiplexing technology. FLAG
Atlantic Limited is expected to offer service by the end of the year 2000. The
project is subject to financing, the execution of related agreements and other
conditions. The Company has committed to a $100 million equity contribution and
an additional purchase commitment for $150 million worth of capacity.

F-30
151

EXHIBIT A

SUPPLEMENTAL EASDAQ INFORMATION

APPROVAL BY THE BELGIAN COMMISSION FOR BANKING AND FINANCE

This Prospectus will be submitted for approval by the Belgian Banking and
Finance Commission ("Commissie voor bet Banken Financiewezen/Commission Bancaire
et Financiere") ("BFC") in accordance with Article 29ter. sec. 1. par.1 of Royal
Decree No. 185 of July 9, 1935 and Article 11 of the Royal Decree of 31 October,
1991 on the publication of prospectuses in connection with public issues of
securities. The approval of this Prospectus by the BFC does not imply any
judgement as to the appropriateness of the quality of this Offering or the Offer
Shares nor of the situation of the Company.

On December 23, 1997, the Market Authority of EASDAQ approved the admission
to trading of all of the Common Stock on EASDAQ under the symbol "GTSG."
Admission to EASDAQ is subject to certain adequacy and liquidity requirements
determined by the EASDAQ Market Authority. Companies applying for admission to
trading on EASDAQ are required to publish relevant financial and other
information regularly and to keep the public informed of all events likely to
affect the market price of their securities. Price sensitive information is made
available to investors in Europe through the EASDAQ Reuters Regulatory Company
Reporting System and international information vendors.

The documents referred to above will also be made available to Belgian
investors upon prior written request addressed to the principal executive office
of the Company.

PERSONS RESPONSIBLE FOR THE PROSPECTUS AND DECLARATION

The Company, represented by Mr. William H. Seippel, Chief Financial
Officer, takes responsibility for the contents of this Prospectus.

The Company, having made all reasonable inquiries, accepts responsibility
for, and confirms that this Prospectus contains all information with regard to
the Company and the Common Stock that is material in the context of the offering
and sale of the Common Stock, that the information contained in this Prospectus
is true and correct in all material respects and is not misleading, that the
opinions and intentions of the Company expressed herein are honestly held and
that there are no other facts the omission of which makes this Prospectus as a
whole or any of such information or the expression of any such opinions or
intentions materially misleading.

Global TeleSystems Group, Inc.

by William H. Seippel

Chief Financial Officer

THE CLEARING SYSTEMS

INTERSETTLE

Transactions executed on EASDAQ will be settled by delivery through
INTERSETTLE. INTERSETTLE holds securities for its direct participants, which
include banks, securities brokers and dealers, other professional intermediaries
and foreign depositories, and facilitates the clearance and settlement of
securities transactions between INTERSETTLE participants through electronic
book-entry changes in the accounts of INTERSETTLE participants. Book-entry
settlement is mandatory for all financial instruments traded on EASDAQ. Physical
certificates cannot be used to settle a market transaction. Investors must hold
a securities account with a financial institution which directly or indirectly
has access to INTERSETTLE's clearing and settlement system. INTERSETTLE conducts
a real-time gross payment system in connection with its clearance operation,
payments being made simultaneously with the book-entry transfers between
securities accounts.

A-1
152

DTC

DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organization, some of whom (and/or their representatives) own
DTC. Access to the DTC book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. DTC
agrees with and represents to its participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law.

TRANSFERS BETWEEN INTERSETTLE AND DTC PARTICIPANTS

Common Stock will be held through DTC. Common Stock held directly or
indirectly by INTERSETTLE participants will be registered on the books of DTC in
the name of the nominee company of Brown Brothers Harriman, acting as custodian
for INTERSETTLE.

Transfers of Common Stock will be effected in the following manner:

(i) transfers of Common Stock between INTERSETTLE participants will be
effected in accordance with procedures established for this purpose by
INTERSETTLE;

(ii) transfer of Common Stock between DTC participants will be effected in
accordance with procedures established for the purpose by DTC; and

(iii) transfers of Common Stock between INTERSETTLE participants and DTC
participants will be effected by an increase or a reduction of the
quantity of Common Stock held in INTERSETTLE's account at Brown
Brothers Harriman and a corresponding reduction or increase of the
quantity of Common Stock held by the other relevant DTC participant
or participants.

Investors should inquire with the financial intermediary with whom the
investor has opened a securities account for the purpose of holding and trading
Common Stock, as to the cost of such trading as well as the terms and conditions
on which the financial service of the Common Stock will be delivered by such
financial intermediary.

The Common Stock has the following identification number:
CUSIP 379 36 U104, ISIN US379 36 U1043

The clearing costs, if any, will be at the cost of the investors. Investors
are requested to inform themselves about such costs.

POSSIBILITY OF SHARE REPURCHASES

The Company is not prohibited by its Certificate of Incorporation, By-laws
or Delaware General Corporation Law from repurchasing or otherwise acquiring
outstanding shares of Common Stock and, accordingly, the Company may exercise
its right to repurchase Common Stock.

AUTHORIZATION OF INCREASE IN AUTHORIZED CAPITAL OF THE COMPANY; AUTHORIZATION OF
THE ISSUANCE OF COMMON STOCK IN THE STOCK OFFERINGS

Effective December 1, 1997, the Board of Directors and stockholders of the
Company approved amendments to the Certificate of Incorporation which (i)
increased the authorized number of shares of capital stock to 145,000,000 (of
which 135,000,000 shares are Common Stock and 10,000,000 shares are preferred
stock) and (ii) effected a 3-for-2 stock split of all then-outstanding shares of
the Company's

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Common Stock. In addition, the Board of Directors of the Company has adopted a
resolution approving the offering and issuance of 12,765,000 shares of Common
Stock in the IPO and 2,801,000 shares of Common Stock in the Stock Offerings.

TAXATION OF BELGIAN INVESTORS

The following generally summarizes the material Belgian tax consequences of
the sequisition, ownership and disposition of Common Stock. It is based on the
tax laws applicable in Belgium and France as in effect at the date of this
Prospectus, and is subject to changes in Belgium and French law, including
changes that could have retroactive effect. The following summary does not take
into account or discuss the tax laws of any country other than Belgium and
France nor does it take into account the individual circumstances of each
investor. The summary uses the term "Eligible Belgian Holders" to refer to
beneficial owners of Common Stock who hold directly less than 10% of the share
capital of the Company and whose ownership of such Common Stock is not
attributable to a permanent establishment or a fixed base in France, are
considered residents of Belgium for purposes of the income tax convention
between Belgium and France dated March 10, 1964 (the "Belgian-French Treaty")
and are fully entitled to benefits under the Belgian-French Treaty.

There are currently no procedures available for Holders of Common Stock
that are not U.S. residents to claim or receive from the French tax authorities
any tax treaty benefits in respect of dividends (including payment of avoir
fiscal and availability of a reduced withholding tax rate) that a Holder may be
entitled to receive pursuant to the Belgian-French Treaty.

Prospective Belgian Investors in Common Stock are advised to consult their
own tax advisers as to the Belgian and other tax consequences of the
acquisition, ownership and disposition of Common Stock.

TAXATION OF DIVIDENDS ON COMMON STOCK

French tax considerations

Dividends paid to non-residents of France generally are subject to French
withholding tax at a 25% rate and are not eligible for the benefit of the avoir
fiscal (a tax credit available to French residents equal to 50% of the amount of
dividends received from French companies such as the Company). However, under
the Belgian-French Treaty, Eligible Belgian Holders can claim the benefit of a
reduced withholding tax rate on dividends of 15%.

An individual Eligible Belgian Holder generally will also be entitled to
receive a payment of the avoir fiscal, after deduction of withholding tax of
15%. This payment will not be made available to such individual Eligible Belgian
Holder until after the close of the calendar year in which the dividend was paid
and only upon receipt by the French tax authorities of a claim made by the
individual Eligible Belgian Holder for such payment in accordance with the
procedure set forth below.

A Belgian company that is an Eligible Belgian Holder under the
Belgian-French Treaty (a "Belgian Resident Company") will not benefit from the
refund of the avoir fiscal but will be entitled to obtain from the French tax
authorities a refund of any precompte paid in cash in respect of such dividends
less the 15% French withholding tax. Amounts distributed as dividends by French
companies out of profits which have been taxed at the ordinary corporate income
tax rate or which have been earned and taxed more than five years before the
distribution and which give rise to the avoir fiscal are subject to a
"precompte" or prepayment by such companies. The precompte is paid by the
distributing company to the French tax authorities and is equal to one-half of
the nominal dividend distributed.

Dividends paid to an individual Eligible Belgian Holder will be subject to
the reduced withholding tax rate of 15% at the time the dividend is paid if (i)
such holder duly completes and provides the French tax authorities with French
Treasury Form 5200 RFI Belgique (the "Form") duly certified by the Belgian tax
authorities before the date of payment of the relevant dividend, or (ii) if
completion of the Form is not possible prior to the payment of dividends, such
holder duly completes and provides the French tax

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154

authorities with a simplified certificate (the "Certificate") duly certified by
the Belgian tax authorities stating that (a) such holder is a Belgian resident
as defined pursuant to the provisions of the Belgian-French Treaty, (b) such
holder's ownership of the Common Stock is not effectively connected with a
permanent establishment or fixed base in France, and (c) such holder meets all
the requirements of the Belgian-French Treaty for obtaining the benefit of the
reduced rate of withholding tax and the right to payment of the French avoir
fiscal. For example, the Company pays a dividend of 100, an individual Eligible
Belgian Holder will initially receive 85, but will be entitled to an additional
payment of 42.50, consisting of the avoir fiscal of 50, less a 15% withholding
tax on that amount (equal to 7.5). Dividends paid to an individual Eligible
Belgian Holder that has not filed a completed Form or Certificate before the
dividend payment date will be subject to French withholding tax at the rate of
25%. Such a holder may claim a refund of the excess withholding tax and the
avoir fiscal by completing and providing the French tax authorities with the
Form before December 31st of the calendar year following the year during which
the dividend is paid.

Dividends paid to a Belgian Resident Company will be subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if such holder duly
completes and provides the French tax authorities with French Treasury 5207 RF2
Belgique form before the date of payment of the relevant dividend duly certified
by the Belgian tax authorities. Dividends paid to such Belgian Resident Company
that has not filed a completed form before the dividend payment date will be
subject to French withholding tax at the rate of 25%. Such a holder may claim a
refund of the excess withholding tax by completing and providing the French tax
authorities with such 5207 RF2 Belgique form before December 31st of the
calendar year following the year during which the dividend is paid. The claim
for refund of the precompte is made on the form RF 5207 RF2 Belgique referred to
above.

Belgian withholding tax

Dividends distributed on Common Stock are subject in Belgium to a
withholding tax at the rate of 25%, when paid or attributed through a
professional intermediary in Belgium. However, no dividend withholding tax is
due if the Eligible Belgian Holder is a company subject to Belgian corporate
income tax.

In a case where dividends are paid outside Belgium without any intervention
of a paying agent in Belgium, no dividend withholding tax is, in principle, due.
However, where the Eligible Belgian Holder is a Belgian resident entity subject
to the legal entities tax (e.g. a pension fund), the Holder itself has to pay
the dividend withholding tax at the rate of 25%.

In certain cases the above-mentioned 25% rate of dividend withholding tax
will be reduced to 15%. The reduced rate applies in particular to (i) dividends
distributed on shares publicly issued after January 1, 1994 and (ii) dividends
distributed on shares that have been privately issued after January 1, 1994 in
exchange for cash contributions, provided the shares are registered or bearer
shares placed in open custody to a financial institution in Belgium as of the
date of their issuance. This reduced rate should in principle also apply to
dividends on shares issued by the Company. The Company may however irrevocably
reject the application of the reduced withholding tax rate.

Income tax for Belgian resident individuals

In the hands of an Eligible Belgian Holder who is an individual holding
Common Stock as a private investment, the Belgian dividend withholding tax is a
final tax and the dividends need not be reported in the individual's annual
income tax return. If no withholding tax has been levied (i.e. in case of
payment or attribution outside Belgium), the individual has to report the
dividends in his tax return. Such Holder will be taxed at the separate rate of
25%, to be increased with a municipal surcharge (varying, as a rule, from 6% to
9%).

In the hands of an individual Eligible Belgian Holder whose holding of
Common Stock is effectively connected with a business, the dividends are taxable
at the ordinary rates for business income (i.e. varying from 25% to 55% to be
increased with the municipal surcharge and a crisis contribution of 3% of the
tax

A-4
155

due). Any Belgium withholding tax is creditable against the final income tax
due, provided that the Holder has the full ownership of the Common Stock at the
time of payment of the dividends.

Income tax for Belgian Resident Companies

Dividends received by Belgian Resident Companies are, in principle, subject
to corporate income tax at the rate of 40.17% (i.e. the standard rate of 39%
increased by the additional tax of 3% of the corporate income tax due).

However, provided that the dividends benefit from the so-called
"dividend-received deduction", only 5% of the dividends received will be
taxable. In order to benefit from the deduction, the Company must not fall
within one of the categories which are expressly excluded from the "dividend
received deduction" (e.g. tax haven companies) and the beneficiary should hold,
at the time of payment of the dividends, a participation of at least 5% in the
Company or a participation which has a acquisition value of at least BEF 50
million.

Any Belgian dividend withholding tax can, in principle, be credited against
the company's final income tax, provided that the company has the full ownership
of the shares at the time of payment or attribution of the dividends and
provided that the dividend distribution does not entail a reduction in value or
capital loss on the Shares.

Income tax for Belgian resident entities subject to the Belgian legal entities
tax (pension funds, etc.)

The Belgian dividend withholding tax is a final tax.

CAPITAL GAINS TAXATION

French tax considerations

In general, a Belgian holder who is a resident of Belgium under the
Belgian-French Treaty will not be subject to French tax on any capital gain
derived from the sale or exchange of Common Stock, unless the gain is
attributable to a permanent establishment or fixed place of business maintained
by the holder in France.

Belgian tax considerations

Individual Eligible Belgian Holders holding the Common Stock as a private
investment and entities subject to legal entities tax are not subject to the
Belgian capital gains taxation on the disposal of the Common Stock.

Individual Eligible Belgian Holders may, however, be subject to a 33% tax
(to be increased with the municipal surcharge and the crisis contribution) if
the capital gain is deemed to be "speculative."

Individual Eligible Belgian Holders whose holding of Common Stock is
effectively connected with a business are taxable at the ordinary rates on any
capital gains realized on the disposal of Common Stock.

Belgian resident companies are not subject to capital gains taxation
provided that the dividends received on the shares qualify for the "dividend
received deduction" (except for the minimum holding requirement).

FRENCH ESTATE AND GIFT TAX

Under the estate tax convention between Belgium and France, a transfer of
Common Stock by reason of the death of an individual Eligible Belgian Holder
entitled to benefits under that convention will not be subject to French
inheritance tax, unless the decedent was domiciled in France at the time of his
or her death.

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156

FRENCH WEALTH TAX

The French wealth tax (impot de solidare sur la fortune) does not apply to
an Eligible Belgian Holder.

BELGIAN INDIRECT TAXES

Stamp tax on securities transactions

In principle, a stamp tax is levied upon the subscription of shares of
Common Stock and the purchase and sale in Belgium of Common Stock through a
professional intermediary. The rate applicable to subscriptions of new shares of
Common Stock is 0.35% but there is a limit of BEF 10,000 per transaction. The
rate applicable for secondary sales and purchases in Belgium of Common Stock
through a professional intermediary is 0.17% but there is a limit of BEF 10,000
per transaction.

An exemption is available to professional intermediaries (e.g. credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident holder of Common
Stock who is acting for his own account will also be entitled to an exemption
from this stamp tax, provided that he delivers to the issuer or the professional
intermediary in Belgium, as the case may be, an affidavit confirming his
non-resident status in Belgium.

Tax on delivery of bearer securities

A tax is levied upon the physical delivery of Common Stock pursuant to
their subscription or their acquisition for consideration through a professional
intermediary. This tax is also due upon the delivery of Common Stock pursuant to
a withdrawal of these Common Stock from "open custody."

The tax is due, at the rate of 0.2%, on the sums payable by the subscriber
or the acquiror in case of subscription or acquisition or the sales value of the
Common Stock, as estimated by the custodian in case of withdrawal from "open
custody."

However, an exemption is available for deliveries to recognized
professional intermediaries (such as credit institutions) acting for their own
account. An exemption is also available for delivery of Common Stock, which are
held in "open custody", to a non-resident.

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157

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

9,492,972 SHARES

[GLOBAL TELESYSTEMS GROUP, INC. LOGO]

GLOBAL TELESYSTEMS GROUP, INC.

COMMON STOCK

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

PROSPECTUS SUPPLEMENT

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

MERRILL LYNCH & CO.

BEAR, STEARNS & CO. INC.

BT ALEX. BROWN

DONALDSON, LUFKIN & JENRETTE

DRESDNER KLEINWORT BENSON

NORTH AMERICA LLC

LEHMAN BROTHERS

BANCBOSTON ROBERTSON STEPHENS

CIBC WORLD MARKETS

ING BARING FURMAN SELZ LLC

PRUDENTIAL SECURITIES

ABN AMRO ROTHSCHILD

A DIVISION OF ABN AMRO INCORPORATED

ARNHOLD AND S. BLEICHROEDER, INC.

CREDIT SUISSE FIRST BOSTON

, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
158

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the estimated expenses to be borne by GTS in
connection with the offering of the securities being hereby registered.

ITEM
----

SEC Registration Fee........................................ $ 409,121
Accounting Fees and Expenses................................ 90,000
Legal Fees and Expenses..................................... 150,000
Printing Expenses........................................... 600,000
Miscellaneous............................................... 150,879
----------
TOTAL............................................. $1,400,000
==========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.

Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.

GTS' Certificate of Incorporation (the "Certificate") provides that the
GTS' Directors shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director provided, however,
that such exculpation from liabilities is not permitted with respect to
liability arising from items described in clauses (i) through (iv) in the
preceding paragraph. The Certificate and the GTS'

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By-Laws further provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by the DGCL.

The directors and officers of GTS are covered under directors' and
officers' liability insurance policies maintained by GTS.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The foregoing reflects a 3-for-2 common stock split and an increase in the
par value per share of common stock to $0.10 effective December 1997.

Within the past three years the Company issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:

On March 13, 1995, the Company issued 400,000 shares of common stock, par
value $0.10 per share, pursuant to a stock purchase agreement. The shares were
issued to CIBV Liquidating B.V., a closed company with limited liability
organized under the laws of the Netherlands in exchange for the Company's
interest in PrimTelefone. No underwriter or underwriting discount was involved
in the offering. Exemption from registration was claimed under Section 4(2) of
the Securities Act regarding transactions by an issuer not involving any public
offering.

On June 21, 1995, GTS issued 5,090,876 shares of common stock, par value
$0.10 per share, at a purchase price of $9.00 per share, for an aggregate
offering price of $45.8 million, pursuant to a stock purchase agreement. In
addition to (i) certain investment funds and (ii) certain individual private
investors, these shares were issued to certain members of management and various
entities affiliated with certain members of management. No underwriter or
underwriting discount was involved in the offering. Exemption from registration
was claimed under Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering.

On January 19, 1996, and June 6, 1996, GTS granted the Soros associates an
aggregate of 4,444,443 warrants, each warrant to purchase one share of common
stock, par value $0.10 per share, at an exercise price of $10.27 per share. The
exercise price of the warrants was automatically reduced to $9.33 per share as
of December 31, 1996 because the debt obligations remained outstanding. The
warrants were issued in connection with GTS' issuance for cash of $40 million of
notes to the Soros associates, which notes bear interest at a rate of 10% per
annum and mature on March 3, 2001. No underwriter or underwriting discount was
involved in the offering. Exemption from registration was claimed under Section
4(2) of the Securities Act regarding transactions by an issuer not involving any
public offering.

On February 2, 1996, GTS granted affiliates of Capital Research
International an aggregate of 3,333,333 warrants, each warrant to purchase one
share of common stock, par value $0.10 per share, at an exercise price of $10.27
per share. The exercise price of the warrants was automatically reduced to $9.33
per share as of December 31, 1996 because the debt obligations remained
outstanding. The warrants were issued in connection with GTS' issuance for cash
of $30 million of notes to affiliates of Capital Research International, which
notes bear interest at a rate of 10% per annum and mature on March 31, 2001. No
underwriter or underwriting discount was involved in the offering. Exemption
from registration was claimed under Section 4(2) of the Securities Act regarding
transactions by an issuer not involving any public offering.

On July 23, 1996, July 31, 1996, August 8, 1996, August 22, 1996 and
September 12, 1996 GTS issued an aggregate of 8,348,532 shares of common stock,
par value $0.10 per share, at a purchase price of $13.33 per share, for an
aggregate offering price of $111 million, pursuant to a stock purchase
agreement. In addition to (i) certain investment funds and (ii) certain
individual private investors, these shares were issued to certain members of
management and various entities affiliated with certain members of management.
Exemption from registration was claimed under Section 4(2) of the Securities Act
regarding transactions by an issuer not involving any public offering.

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160

On July 14, 1997 and July 31, 1997, GTS issued an aggregate $141,295,000 of
its Senior Subordinated Convertible Bonds due 2000, convertible into the common
stock, par value $0.10 per share, at a purchase price of 100%, pursuant to a
subscription agreement. UBS Securities LLC, Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch & Co. acted as managers in the offering
and the aggregate discount was $5,651,800. The securities were sold to a limited
number of qualified institutional buyers as defined in Rule 144A under the
Securities Act and to non-U.S. persons outside the United States. Exemption from
registration was claimed under Rule 144A and Regulation S of the Securities Act.

On August 15, 1997, August 29, 1997 and September 5, 1997, GTS issued an
aggregate 2,502,686 shares of common stock, par value $0.10 per share, at a
purchase price of $15.67 per share, for an aggregate offering price of $39.2
million, pursuant to a stock purchase agreement. In addition to (i) certain
investment funds and (ii) certain individual private investors, these shares
were issued to certain members of management and various entities affiliated
with certain members of management. Exemption from registration was claimed
under Section 4(2) of the Securities Act regarding transactions by an issuer not
involving any public offering.

On August 29, 1997, GTS issued $3.5 million of its Senior Subordinated
Convertible Bonds due 2000, convertible into the common stock, par value $0.10
per share, at a purchase price of 100%. In addition to (i) certain investment
funds and (ii) certain individual private investors, these shares were issued to
certain members of management and various entities affiliated with certain
members of management. Exemption from registration was claimed under Section
4(2) of the Securities Act regarding transactions by an issuer not involving any
public offering.

In connection with the acquisition of NetSource discussed in Item 2 of this
report on December 31, 1998, GTS issued 3,873,705 shares of its common stock,
par value of $.10 ("Common Shares"), to holders of NetSource stock who accepted,
as of October 30, 1998, GTS' offer to purchase the NetSource stock owned by such
holders. GTS received the NetSource shares tendered as consideration for the
Common Shares. No underwriters were involved in the issuance of the Common
Shares. GTS issued the Common Shares pursuant to Rule 903 under the Securities
Act and GTS' offer was made exclusively to non-U.S. persons, within the meaning
of Rule 902 under the Securities Act, not in the United States. GTS extended its
offer to purchase the NetSource stock to December 15, 1998 and, consequently,
additional shares of the Company's common stock will be issued pursuant to this
transaction. That additional issuance also will be effected in accordance with
Rule 903 of the Securities Act and will be disclosed in a subsequent filing with
the SEC.

ITEM 16. EXHIBITS

(a) Exhibits:

The following is a list of exhibits filed as a part of this registration
statement.

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

II-3
161

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

2.5*** -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
dated as of December 8, 1998
2.6*** -- Irrevocable Undertaking by Sir Robin Biggam dated as of
December 8, 1998
2.7*** -- Irrevocable Undertaking by John McMonigall dated as of
December 8, 1998
2.8*** -- Irrevocable Undertaking by Roy Merritt dated as of
December 8, 1998
2.9*** -- Irrevocable Undertaking by David Oertle dated as of
December 8, 1998
2.10*** -- Irrevocable Undertaking by Michael Potter dated as of
December 8, 1998
2.11*** -- Irrevocable Undertaking by Dominic Shorthouse dated as of
December 8, 1998
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
with the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on February 22, 1995
3.6** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on December 1, 1997
3.9** -- Form of Amended and Restated By-laws of Global
TeleSystems Group, Inc. (supersedes By-laws of SFMT, Inc.
filed as Exhibit 3.7)
3.10+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998
3.11+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12+ -- Certificate of Designation of the Series A Preferred
Stock of the Company
4.1** -- Form of Specimen Stock Certificate for Common Stock of
the Registrant
4.2** -- Indenture dated as of July 14, 1997 between the Company
and The Bank of New York (including the form of Senior
Subordinated Convertible Bond due 2000 as an exhibit
thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
4.4** -- Indenture dated as of August 19, 1997 between Hermes
Europe Railtel B.V. and The Bank of New York (including
the form of 11 1/2% Senior Note due 2007 as an exhibit
thereto)

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162

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

4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin
& Jenrette Securities Corporation, UBS Securities LLC,
and Lehman Brothers, Inc.
4.6** -- Form of Rights Agreement between Global TeleSystems
Group, Inc. and The Bank of New York, as Rights Agent
4.7+ -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto)
4.8++ -- Indenture dated as of July 8, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating
to the Company's 5 3/4% Convertible Senior Debentures due
2010
4.9*** -- Registration Rights Agreement dated as of December 8,
1998 by and among the Registrant, Apax Funds Nominees
Limited and Warburg, Pincus Ventures, L.P.
5.1} -- Opinion of Shearman & Sterling respecting the Securities
registered hereby.
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted

II-5
163

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

10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated December
30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated May 13,
1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 20,
1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 11,
1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 21,
1997
10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated August 14,
1997
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
29, 1997
10.9** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc.

II-6
164

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

10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets
Growth Fund, Inc.
10.11 -- Intentionally Omitted
10.12** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Capital International Emerging Markets Funds
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds
10.14+ -- Restated and Amended Global TeleSystems Group, Inc.
Non-Employee Directors' Stock Option Plan
10.15+ -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option
Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995
10.17** -- Employment Agreement dated as of January 1995 between
SFMT, Inc. and Jan Loeber
10.18** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Louis Toth
10.19** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Gerald W. Thames
10.20** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Raymond J. Marks
10.21** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Henry Radzikowski
10.22** -- SFMT, Inc. Equity Compensation Plan
10.23** -- Form of Non-Statutory Stock Option Agreement
10.24+ -- Third Amended and Restated 1992 Stock Option Plan of
Global TeleSystems Group Inc. dated as of September 25,
1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
10.26** -- Agreement on the Creation and Functions of the Joint
Venture of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997

II-7
165

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

10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement incorporated by reference as
Exhibit 10.31 to this Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
and Microsystem Telecom Rt., dated August 5, 1994
10.35** -- Agreement on the Establishment of Limited Liability
Company between SFMT-Czech, Inc. and B&H s.r.o., dated
July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and
SSTIC, dated April 12, 1995
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications
Technology Co., Ltd, amended, by and between China
International Travel Service Telecom Co., Ltd. and
American China Investment Corporation, dated March 27,
1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc.,
dated March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and
Cesia S.A., dated June 21, 1997
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B.
Slifka, dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group,
Inc. and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
10.43++ -- Master Agreement, dated June , 1998 between Ebone
Holding Association, Ebone A/S, Hermes Europe Railtel
Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
10.44+++ -- Plusnet Acquisition Agreement between Esprit Telecom
Group plc and Plusnet Gesellschaft fur Netzwerk Services
GmbH
10.45**** -- Press Announcement of Esprit Telecom Group plc, dated
December 8, 1998, announcing the signing of a definitive
offer agreement with Global TeleSystems Group, Inc.
10.46++++ -- Form of Undertaking of shareholders of NetSource ASA made
in connection with the acquisition of NetSource ASA by
Global TeleSystems Group, Inc.
10.47++++ -- Form of Amendment Agreement to the Undertaking of
shareholders of NetSource ASA made in connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.48++++ -- Form of Waiver Agreement in made connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.

II-8
166

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

10.49++++ -- Form of Waiver Agreement with certain shareholders of
NetSource ASA made in connection with the acquisition of
NetSource ASA by Global TeleSystems Group, Inc.
10.50+++++ -- Indenture dated as of December 18, 1997 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
2007 and 11 1/2% DM Senior Notes due 2007
10.51+++ -- Indenture dated as of June 24, 1998 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
2008 and 11% DM Senior Notes due 2008
10.52*** -- Supplemental Indenture, dated December 23, 1998 of
$230,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.53*** -- Supplemental Indenture, dated December 23, 1998 of DM
125,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.54*** -- Supplemental Indenture, dated December 23, 1998 of DM
150,000,000 11% Senior Notes due 2008, supplementing the
indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer and The Bank of New York, as
Trustee, Registrar and Paying Agent
10.55*** -- Supplemental Indenture, dated December 23, 1998 of
$150,000,000 10 7/8% Senior Notes due 2008, supplementing
the indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent

10.56## -- Purchase Agreement, dated April , 1999 between Global
TeleSystems Group, Inc., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and each of
the other Underwriters named in Schedule A thereto and
the other persons listed in Schedule B thereto
21.1* -- List of Subsidiaries of the Registrant

23.1# -- Consent of Ernst & Young LLP, Independent Auditors

23.2# -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1)

24.1### -- Powers of Attorney (included on signature page to this
registration statement)

27.1# -- Financial Data Schedule extracted from our December 31,
1998 audited financial statements

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

# Filed herewith.

## To be filed by amendment.

### Previously filed.

* Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1998, filed on March
23, 1999.

** Incorporated by reference to the corresponding exhibit to our Registration
Statement on Form S-1 (File No. 333-36555), filed on September 26, 1997.

*** Incorporated by reference to the corresponding exhibit to our Registration
Statement on Form S-4 (File No. 333-68511), filed on December 8, 1998.

II-9
167

**** Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Annual Report on Form 20-F for the year ended September
30, 1998, filed on December 24, 1998.

+ Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1997, filed on March
31, 1998.

++ Incorporated by reference to the corresponding exhibit to our Registration
Statement on Form S-1 (File No. 333-52733), filed on May 14, 1998.

+++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-4 (File No. 333-9292),
filed on August 13, 1998.

++++ Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.

+++++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-1 (File No. 333-8012),
filed on December 10, 1997.

(b) Financial Statements and Schedules:

(1) Financial Statements

The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.

(2) Schedules

The Company has furnished Schedule II -- Valuation and Qualifying Accounts
on page S-1 of the Registration Statement. The other financial statement
schedules of the Company have been omitted because the information required to
be set forth therein is not applicable or is shown in the Financial Statements
or Notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the forms of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
forms of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-10
168

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

II-11
169

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of McLean, Commonwealth of Virginia, on this 16th day of April, 1999.

GLOBAL TELESYSTEMS GROUP, INC.

By: /s/ WILLIAM H. SEIPPEL

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

Name: William H. Seippel

Title: Executive Vice President

and Chief Financial
Officer

We, the undersigned officers and directors of Global Telesystems Group,
Inc. hereby severally constitute and appoint, H. Brian Thompson, William H.
Seippel, Alan Krenek and Grier C. Raclin, and each of them, with full power of
substitution, our true and lawful attorney with full power to him singly to sign
for us and in our names in the capacities indicated below the Registration
Statement on Form S-1 filed herewith and any and all pre-effective and
post-effective amendments to said Registration Statement, and, in connection
with any registration of additional securities pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, to sign any abbreviated registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, in each case, with
the Securities and Exchange Commission, and generally to do all such things in
our names and on our behalf in our capacities as officers and directors to
enable Global TeleSystems Group, Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to said Registration Statement and any and all
amendments thereto.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 16th day of April, 1999.

SIGNATURE TITLE
--------- -----

* Chairman and Chief Executive
- ----------------------------------------------------- Officer (principal executive
H. Brian Thompson officer)

President and Director
- -----------------------------------------------------
Robert J. Amman

* Executive Vice President --
- ----------------------------------------------------- Finance and Chief Financial
William H. Seippel Officer (principal financial and
accounting officer)

* Executive Vice Chairman of the
- ----------------------------------------------------- Board of Directors, President,
Gerald W. Thames Chief Executive Officer
(principal executive officer)

II-12
170

SIGNATURE TITLE
--------- -----

* Executive Vice Chairman of the
- ----------------------------------------------------- Board of Directors
Alan B. Slifka

* Director
- -----------------------------------------------------
David Dey

* Director
- -----------------------------------------------------
Roger Hale

* Director
- -----------------------------------------------------
Bernard McFadden

* Director
- -----------------------------------------------------
Stewart J. Paperin

Director
- -----------------------------------------------------
W. James Peet

* Director
- -----------------------------------------------------
Jean Salmona

* Director
- -----------------------------------------------------
Joel Schatz

Director
- -----------------------------------------------------
Frank V. Sica

* Director
- -----------------------------------------------------
Adam Solomon

By: /s/ WILLIAM H. SEIPPEL
-------------------------------------------------
William H. Seippel
Attorney-in-Fact
for the Directors

II-13
171

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------- ---------- ----------------------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------- ---------- ---------- ---------- ---------- ----------

Allowance for doubtful accounts at
12/31/98.................................. $6,474 $7,474 -- $(4,415) $9,533
Allowance for doubtful accounts at
12/31/97.................................. 1,040 5,318 -- (178) 6,180
Allowance for doubtful accounts at
12/31/96.................................. 100 960 -- (20) 1,040

The beginning balance for 1998 does not match the ending balance for 1997;
the difference reflects the activity of Esprit for the three month period ended
December 31, 1997. The Company's consolidated balance sheet as of December 31,
1997 represents the audited historical balance sheet of Esprit as of September
30, 1997 combined with GTS's historical balance sheet as of December 31, 1997.

S-1
172

EXHIBIT INDEX

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

2.1*** -- Offer Agreement dated as of December 8, 1998 between the
Registrant and Esprit Telecom Telecom Group plc
2.2*** -- Irrevocable Undertaking by Walter Anderson dated as of
December 8, 1998
2.3*** -- Irrevocable Undertaking by Apax Funds Nominees Limited
dated as of December 8, 1998
2.3(a)*** -- Amendment to the Irrevocable Undertaking by Apax Funds
Nominees Limited dated as of December 8, 1998, dated
December 12, 1998
2.4*** -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
dated as of December 8, 1998
2.5*** -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
dated as of December 8, 1998
2.6*** -- Irrevocable Undertaking by Sir Robin Biggam dated as of
December 8, 1998
2.7*** -- Irrevocable Undertaking by John McMonigall dated as of
December 8, 1998
2.8*** -- Irrevocable Undertaking by Roy Merritt dated as of
December 8, 1998
2.9*** -- Irrevocable Undertaking by David Oertle dated as of
December 8, 1998
2.10*** -- Irrevocable Undertaking by Michael Potter dated as of
December 8, 1998
2.11*** -- Irrevocable Undertaking by Dominic Shorthouse dated as of
December 8, 1998
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
with the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on February 22, 1995
3.6** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on December 1, 1997
3.9** -- Form of Amended and Restated By-laws of Global
TeleSystems Group, Inc. (supersedes By-laws of SFMT, Inc.
filed as Exhibit 3.7)
3.10+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998
3.11+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12+ -- Certificate of Designation of the Series A Preferred
Stock of the Company

173

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

4.1** -- Form of Specimen Stock Certificate for Common Stock of
the Registrant
4.2** -- Indenture dated as of July 14, 1997 between the Company
and The Bank of New York (including the form of Senior
Subordinated Convertible Bond due 2000 as an exhibit
thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
4.4** -- Indenture dated as of August 19, 1997 between Hermes
Europe Railtel B.V. and The Bank of New York (including
the form of 11 1/2% Senior Note due 2007 as an exhibit
thereto)
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin
& Jenrette Securities Corporation, UBS Securities LLC,
and Lehman Brothers, Inc.
4.6** -- Form of Rights Agreement between Global TeleSystems
Group, Inc. and The Bank of New York, as Rights Agent
4.7+ -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto)
4.8++ -- Indenture dated as of July 8, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating
to the Company's 5 3/4% Convertible Senior Debentures due
2010
4.9*** -- Registration Rights Agreement dated as of December 8,
1998 by and among the Registrant, Apax Funds Nominees
Limited and Warburg, Pincus Ventures, L.P.
5.1} -- Opinion of Shearman & Sterling respecting the Securities
registered hereby.
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997

174

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

10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated December
30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated May 13,
1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 20,
1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 11,
1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 21,
1997

175

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

10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated August 14,
1997
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
29, 1997
10.9** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc.
10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets
Growth Fund, Inc.
10.11 -- Intentionally Omitted
10.12** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Capital International Emerging Markets Funds
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds
10.14+ -- Restated and Amended Global TeleSystems Group, Inc.
Non-Employee Directors' Stock Option Plan
10.15+ -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option
Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995
10.17** -- Employment Agreement dated as of January 1995 between
SFMT, Inc. and Jan Loeber
10.18** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Louis Toth
10.19** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Gerald W. Thames
10.20** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Raymond J. Marks
10.21** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Henry Radzikowski
10.22** -- SFMT, Inc. Equity Compensation Plan
10.23** -- Form of Non-Statutory Stock Option Agreement
10.24+ -- Third Amended and Restated 1992 Stock Option Plan of
Global TeleSystems Group Inc. dated as of September 25,
1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
10.26** -- Agreement on the Creation and Functions of the Joint
Venture of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995

176

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

10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement incorporated by reference as
Exhibit 10.31 to this Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
and Microsystem Telecom Rt., dated August 5, 1994
10.35** -- Agreement on the Establishment of Limited Liability
Company between SFMT-Czech, Inc. and B&H s.r.o., dated
July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and
SSTIC, dated April 12, 1995
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications
Technology Co., Ltd, amended, by and between China
International Travel Service Telecom Co., Ltd. and
American China Investment Corporation, dated March 27,
1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc.,
dated March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and
Cesia S.A., dated June 21, 1997
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B.
Slifka, dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group,
Inc. and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
10.43++ -- Master Agreement, dated June , 1998 between Ebone
Holding Association, Ebone A/S, Hermes Europe Railtel
Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
10.44+++ -- Plusnet Acquisition Agreement between Esprit Telecom
Group plc and Plusnet Gesellschaft fur Netzwerk Services
GmbH
10.45**** -- Press Announcement of Esprit Telecom Group plc, dated
December 8, 1998, announcing the signing of a definitive
offer agreement with Global TeleSystems Group, Inc.
10.46++++ -- Form of Undertaking of shareholders of NetSource ASA made
in connection with the acquisition of NetSource ASA by
Global TeleSystems Group, Inc.
10.47++++ -- Form of Amendment Agreement to the Undertaking of
shareholders of NetSource ASA made in connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.

177

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

10.48++++ -- Form of Waiver Agreement in made connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.49++++ -- Form of Waiver Agreement with certain shareholders of
NetSource ASA made in connection with the acquisition of
NetSource ASA by Global TeleSystems Group, Inc.
10.50+++++ -- Indenture dated as of December 18, 1997 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
2007 and 11 1/2% DM Senior Notes due 2007
10.51+++ -- Indenture dated as of June 24, 1998 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
2008 and 11% DM Senior Notes due 2008
10.52*** -- Supplemental Indenture, dated December 23, 1998 of
$230,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.53*** -- Supplemental Indenture, dated December 23, 1998 of DM
125,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.54*** -- Supplemental Indenture, dated December 23, 1998 of DM
150,000,000 11% Senior Notes due 2008, supplementing the
indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer and The Bank of New York, as
Trustee, Registrar and Paying Agent
10.55*** -- Supplemental Indenture, dated December 23, 1998 of
$150,000,000 10 7/8% Senior Notes due 2008, supplementing
the indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent

23.1# -- Consent of Ernst & Young LLP, Independent Auditors

23.2# -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1)

24.1### -- Powers of Attorney (included on signature page to this
registration statement)

27.1# -- Financial Data Schedule extracted from our December 31,
1998 audited financial statements

178