TELEGROUP INC, 424B5, 1997-07-09

TELEGROUP INC
424B5, 1997-07-09
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

Filed Pursuant To Rule 424 (b)(5)
Registration No. 333-25065

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS
4,000,000 SHARES

[LOGO OF TELEGROUP APPEARS HERE]

COMMON STOCK

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Of the 4,000,000 shares of Common Stock, no par value (the "Common Stock"),
offered hereby, 3,200,000 shares are being offered in the United States and
Canada (the "U.S. Offering") by the U.S. Underwriters (as defined) and 800,000
shares are being offered in a concurrent international offering (the
"International Offering" and, together with the U.S. Offering, the "Offering")
outside the United States and Canada by the Managers (as defined). The initial
public offering price and the aggregate underwriting discount per share are
identical for both offerings. All of the shares offered hereby are being issued
and sold by Telegroup, Inc. (the "Company").

Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. The shares of Common Stock have
been approved for quotation on The Nasdaq National Market under the symbol
"TGRP."

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SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.

--------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------
<S> <C> <C> <C>
Per Share $10.00 $0.70 $9.30
- --------------------------------------------------
Total(3) $40,000,000 $2,800,000 $37,200,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the U.S. Underwriters and the
Managers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,600,000, all of which will be
paid by the Company.
(3) The Company has granted the U.S. Underwriters and the Managers a 30-day
option to purchase up to an additional 600,000 shares of Common Stock on
the same terms as set forth above solely to cover over-allotments, if
any. See "Underwriting." If all such shares are purchased, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $46,000,000, $3,220,000, and $42,780,000, respectively.
See "Underwriting."

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The shares of Common Stock are being offered by the several U.S. Underwriters
and the several Managers named herein, subject to prior sale, when, as and if
received and accepted by them and subject to certain conditions. It is expected
that certificates for shares of Common Stock will be available for delivery on
or about July 14, 1997 at the offices of Smith Barney Inc., 333 W. 34th Street,
New York, New York 10001.

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SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
July 9, 1997
<PAGE>

[LOGO OF TELEGROUP GLOBAL SERVICE WITH A PERSONAL TOUCH APPEARS HERE]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including risk factors, the Company's consolidated financial
statements and other financial data, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus (i) assumes that
the "over-allotment" option is not exercised and (ii) has been adjusted to give
effect to the "Reclassification" and the approximately 5.48-for-1 "Stock
Split," each as defined and described in "Description of Capital Stock."
References in this Prospectus to the "Company" and "Telegroup" refer to
Telegroup, Inc. and its subsidiaries, except where the context otherwise
requires. See "Glossary of Terms" for definitions of certain technical and
other terms used in this Prospectus.

THE COMPANY

Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small- and medium-
sized business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network (the "Telegroup Intelligent Global Network" or
"TIGN") to deliver its services in a reliable, flexible and cost-effective
manner to approximately 204,000 active customers worldwide. According to
Federal Communications Commission ("FCC") statistics, Telegroup was the sixth
largest U.S. carrier of outbound international traffic in 1995.

Telegroup provides an extensive range of telecommunications services on a
global basis under the Spectra, Global Access and other brand names. The
Company's services are typically priced competitively with other alternative
telecommunications providers and below the prices offered by the incumbent
telecommunications operators ("ITOs"), which are often government-owned or
protected telephone companies. While the Company offers a broad range of
telecommunications services, the services offered in a particular market vary
depending upon regulatory constraints and local market demands. Telegroup
historically has offered traditional call-reorigination service (also known as
"callback") to penetrate international markets having regulatory constraints.
As major markets continue to deregulate, the Company intends to migrate an
increasing portion of its customer base to "call-through" service, which
includes conventional international long distance service and a "transparent"
form of call-reorigination. The Company markets its call-through service under
the brand name Global Access Direct and its traditional call-reorigination
service under the brand name Global Access CallBack. Currently, the Company
offers both international and national long distance service, prepaid and
postpaid calling cards, toll-free service and enhanced services such as fax
store and forward, fax-mail, voice-mail and call conferencing. The Company
believes its broad array of basic and enhanced services enables the Company to
offer a comprehensive solution to its customers' telecommunications needs. The
Company also resells switched minutes on a wholesale basis to other
telecommunications providers and carriers. See "Business--Services."

3
<PAGE>

customer service and independent agent support, in 63 countries. In addition,
the Company has 30 internal sales personnel in the United States and one each
in France, Germany and the United Kingdom, and intends to establish additional
internal sales departments in selected core markets. The Company believes that
its comprehensive global sales, marketing and customer service organization
will enable the Company to increase its market share and position itself as the
leading alternative international long distance provider in each of its target
markets. The Company believes that it is the largest alternative international
long distance provider in three of the largest international telecommunications
markets in the world--France, the Netherlands and Switzerland. See "Business--
Sales, Marketing and Customer Service."

The Telegroup Intelligent Global Network includes a central Network
Operations Center ("Network Operations Center") in Iowa City, Iowa, as well as
switches, owned and leased transmission capacity and a proprietary distributed
intelligent network architecture. The TIGN is designed to allow customer-
specific information, such as credit limits, language selection, waiting voice-
mail and faxes, and speed dial numbers to be distributed efficiently over a
parallel data network wherever Telegroup has installed a TIGN switch. In
addition, the open, programmable architecture of the TIGN allows the Company to
rapidly deploy new features, improve service quality, and reduce costs through
least cost routing. As of April 30, 1997, the TIGN consisted of (i) the Network
Operations Center, (ii) 13 Excel, NorTel or Harris switches in Fairfield, Iowa,
New York City, London, Paris, Amsterdam, Hong Kong, Sydney and Tokyo, (iii) two
enhanced services platforms in New York and Hong Kong, (iv) two trans-oceanic
fiber-optic cable links connecting its New York switches to its switches in
London and Sydney, and (v) leased parallel data transmission capacity
connecting Telegroup's switches to each other and to the networks of other
international and national carriers. The Company intends to further develop the
TIGN by upgrading existing facilities and by adding switches and transmission
capacity principally in and between major markets where the Company has
established a substantial customer base. See "Business--Network and
Operations."

MARKET OPPORTUNITY

The global market for international telecommunications services is undergoing
significant deregulation and reform. The industry is being shaped by the
following trends: (i) deregulation and privatization of telecommunications
markets worldwide; (ii) diversification of services through technological
innovation; and (iii) globalization of major carriers through market expansion,
consolidation and strategic alliances. As a result of these factors, it is
anticipated that the industry will experience considerable growth in the
foreseeable future, both in terms of traffic volume and revenue. According to
the International Telecommunications Union ("ITU"), a worldwide
telecommunications organization under the auspices of the United Nations, the
international telecommunications industry accounted for $52.8 billion in
revenues and 60.3 billion minutes of use in 1995, increasing from $21.7 billion
in revenues and 16.7 billion minutes of use in 1986, which represents compound
annual growth rates of 10% and 15%, respectively. The ITU projects that
international telecommunications revenues will approach $76.0 billion by the
year 2000 with the volume of traffic expanding to 107.0 billion minutes of use,
representing compound annual growth rates of 7% and 12%, respectively, from
1995. See "The International Telecommunications Industry."

BUSINESS STRATEGY

Telegroup's objective is to become the leading alternative provider of
telecommunications services to small- and medium-sized business and high-volume
residential customers in its existing core markets and in selected target
markets. Telegroup's strategy for achieving this objective is to deliver
additional services to customers in its markets through the continued
deployment of the TIGN and to expand its sales and marketing organization into
new target markets. The Company's business strategy includes the following key
elements:

4
<PAGE>

Expand the Telegroup Intelligent Global Network. Telegroup is currently
expanding the TIGN by installing switches, purchasing ownership in additional
fiber-optic cable and leasing additional dedicated transmission capacity in
strategically located areas of customer concentration in Western Europe and the
Pacific Rim. During the next 18 months, the Company has scheduled the
installation of additional switches in New Jersey, Los Angeles, Chicago, Miami,
Denmark, Germany, Switzerland, Italy and Brazil, and additional nodes in
Sweden, Norway, Belgium, Italy, New Zealand, Germany, Switzerland and Japan.
Telegroup also anticipates purchasing ownership in additional fiber-optic
cables and leasing additional dedicated transmission capacity to reduce the
Company's per minute transmission costs. The Company's ability to achieve these
goals is dependent upon, among other things, its ability to raise additional
capital. The Company believes that the expansion of the TIGN will enable
Telegroup to migrate customers from traditional call-reorigination services to
Global Access Direct. In order to maximize the Company's return on invested
capital, the Company employs a success-based approach to capital expenditures,
locating new switching facilities in markets where the Company has established
a customer base by marketing its call-reorigination services.

Maximize Operating Efficiencies. Telegroup intends to reduce its costs of
providing telecommunications services by strategically deploying switching
facilities, adding leased and owned fiber-optic capacity and entering into
additional alternative "transit/termination agreements." This expansion of the
TIGN will enable the Company to originate, transport and terminate a larger
portion of its traffic over its own network, thereby reducing its overall
telecommunications costs. The Company believes that through least cost routing
and its cost effective Excel LNX switches, Telegroup will be able to further
reduce the overall cost of its services.

Expand Global Sales, Marketing and Customer Service Organization. The Company
believes that its experience in establishing one of the most comprehensive
global sales, marketing and customer service organizations in the international
telecommunications industry provides it with a competitive advantage. The
Company intends to expand its global sales, marketing and customer service
organization in new and existing markets. In new target markets, the Company
relies primarily on independent agents to develop a customer base while
minimizing its capital investment and management requirements. As the customer
base in a particular market develops, the Company intends to selectively
acquire the operations of its Country Coordinator serving such market and
recruit and train additional internal sales personnel and independent agents.
The Company believes that a direct sales and marketing organization complements
its existing independent agents by enabling Telegroup to conduct test marketing
and quickly implement new marketing strategies. In addition to its sales
offices in France, Germany and the United Kingdom, the Company intends to open
or acquire additional offices in target markets in Europe and the Pacific Rim
during 1997 and 1998.

Position Telegroup as a Local Provider of Global Telecommunications
Services. Telegroup is one of the only alternative telecommunications providers
that offers in-country and regional customer service offices in major markets
on a global basis. The Company has 30 Country Coordinators providing customer
service in 63 countries. Telegroup believes this local presence provides an
important competitive advantage, allowing the Company to tailor customer
service and marketing to meet the specific needs of its customers in a
particular market. Customer service representatives speak the local languages
and are aware of the cultural norms in the countries in which they operate. The
Company continually monitors changes in the local market and seeks to quickly
modify service and sales strategies in response to such changes. In many
instances, this type of dedicated customer service and marketing is not
available to the Company's target customer base from the ITOs.

5
<PAGE>

services to Global Access Direct, and to address the telecommunications needs
of a wider base of small- and medium-sized business customers. Telegroup
believes that, with its direct, face-to-face sales force and dedicated customer
service, it can more effectively attract and serve these business customers.

Broaden Market Penetration through Enhanced Service Offerings. The Company
believes that offering a broad array of enhanced services is essential to
retain existing customers and to attract new customers. The TIGN's enhanced
services platform and its distributed intelligent network architecture permit
the Company to provide a broad array of voice, data and enhanced services and
to efficiently distribute customer information, such as language selection,
waiting voice-mail and faxes and speed dial numbers throughout the TIGN. The
Company offers a comprehensive solution to its customers' telecommunications
needs by providing enhanced services, including fax store and forward, fax-
mail, voice-mail and call conferencing and intends to introduce e-mail-to-
voice-mail translation and voice recognition services. Telegroup believes that
its provision of such enhanced services will enable it to increase its revenue
from existing customers and to attract a broader base of small- and medium-
sized business customers.

Pursue Acquisitions, Investments and Strategic Alliances. In addition to
selective acquisitions of its Country Coordinators' operations, the Company
intends to expand its current operations and service offerings through
selective acquisitions of, and investments in, businesses that complement the
Company's current operations and service offerings. The Company also intends to
enter into strategic alliances with selective business partners that can
complement the Company's service offerings. The Company is continuously
reviewing opportunities and believes that such acquisitions, investments and
strategic alliances are an important means of increasing network traffic volume
and achieving economies of scale. The Company believes that its management's
extensive entrepreneurial, operational, technical and financial expertise will
enable the Company to identify and rapidly take advantage of such
opportunities.

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The Company was incorporated in Iowa in 1989. The address of the Company's
principal place of business is 2098 Nutmeg Avenue, Fairfield, Iowa 52556, and
its telephone number is (515) 472-5000.

6
<PAGE>

THE OFFERING

Total number of shares of Common Stockoffered by the Company:
<TABLE>
<S> <C>
U.S. Offering................ 3,200,000 shares
International Offering ...... 800,000 shares
----------------
Total....................... 4,000,000 shares
Common Stock to be outstanding
after the Offering............. 30,211,578 shares*
Use of proceeds ................ Of the estimated $35.6 million in net
proceeds to the Company, approximately $25.8
million will be used to expand the Telegroup
Intelligent Global Network and the balance of
approximately $9.8 million will be used for
general corporate purposes, including further
expansion of the TIGN, working capital
and/or, subject to the Company's ability to
raise additional capital of approximately
$12.4 million, prepayment of the Company's
outstanding 12% Senior Subordinated Notes
(the "Senior Subordinated Notes"). See "Use
of Proceeds."
Dividend policy ................ The Company does not expect to pay dividends
on the Common Stock in the foreseeable
future. See "Dividend Policy."
Nasdaq National Market Symbol .. TGRP
</TABLE>
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* Excludes (i) 1,960,922 shares of Common Stock issuable upon the exercise of
options granted under the Stock Option Plan (as defined); (ii) 2,039,078
shares of Common Stock issuable upon the exercise of options available for
grant under the Stock Option Plan; and (iii) 1,327,500 shares of Common
Stock issuable upon the exercise of the Warrants (as defined). See
"Management--Amended and Restated Stock Option Plan" and "Description of
Capital Stock--Warrants."

7
<PAGE>

SUMMARY FINANCIAL DATA

The following table sets forth certain consolidated financial information for
the Company for (i) the years ended December 31, 1994, 1995 and 1996, which
have been derived from the Company's audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus, (ii) the year ended
December 31, 1993, which has been derived from audited consolidated financial
statements of the Company which are not included herein, and (iii) the year
ended December 31, 1992, which has been derived from unaudited consolidated
financial statements which are not included herein. The summary financial data
as of March 31, 1997 and for the three months ended March 31, 1996 and 1997 has
been derived from the unaudited consolidated financial statements for the
Company included elsewhere in this Prospectus. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. The following financial information should be read in
conjunction with "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
(UNAUDITED) (UNAUDITED)
1992 1993 1994 1995 1996 1996 1997
----------- ------- ------- -------- -------- ------- --------
(in thousands, except per share
and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Retail................ $23,846 $29,790 $68,714 $128,139 $179,147 $41,440 $ 56,909
Wholesale............. -- -- -- 980 34,061 1,911 17,187
------- ------- ------- -------- -------- ------- --------
Total revenues...... 23,846 29,790 68,714 129,119 213,208 43,351 74,096
Cost of revenues........ 18,411 22,727 49,513 83,101 150,537 27,742 53,283
------- ------- ------- -------- -------- ------- --------
Gross profit.......... 5,435 7,063 19,201 46,018 62,671 15,609 20,813
Operating expenses:
Selling, general and
administrative....... 3,935 7,341 19,914 39,222 59,652 13,161 19,455
Depreciation and amor-
tization............. 61 172 301 655 1,882 261 807
Stock option based
compensation......... -- -- -- -- 1,032 -- 85
------- ------- ------- -------- -------- ------- --------
Total operating ex-
penses............. 3,996 7,513 20,215 39,877 62,566 13,422 20,347
Operating income
(loss)............. 1,439 (450) (1,014) 6,141 105 2,187 466
Net earnings
(loss)............. 1,386 (707) (538) 3,821 (118) 1,388 (277)
Net earnings (loss) per
share (1).............. $ .05 $ (.02) $ (.02) $ .13 $ (.00) $ .05 $ (.01)
======= ======= ======= ======== ======== ======= ========
Weighted average number
of common and common
share equivalents
(in thousands)......... 28,795 28,795 28,795 28,795 28,795 28,795 28,795
OTHER FINANCIAL DATA:
EBITDA (2).............. $ 1,510 $ (278) $ (577) $ 6,994 $ 2,990 $ 2,372 $ 1,022
Net cash provided by op-
erating activities..... 820 924 1,364 5,561 4,904 3,825 6,194
Net cash (used in) in-
vesting activities..... (667) (765) (700) (2,818) (11,262) (2,473) (3,529)
Net cash (used in) pro-
vided by financing ac-
tivities............... 21 (10) 957 (115) 15,924 (1,112) (430)
Capital expenditures.... 291 449 1,056 2,652 9,068 1,891 3,285
Dividends declared per
common share........... -- -- -- .02 .02 .02 --
OTHER OPERATING DATA (AT
PERIOD END):
Retail customers (3):
Domestic (U.S.)....... 8,261 7,021 16,733 17,464 34,294 39,200
International......... 0 5,301 28,325 56,156 109,922 117,716
Wholesale customers
(4).................... 0 0 0 4 18 22
Number of employees..... 54 97 217 296 444 472
Number of switches...... 0 1 2 3 7 13
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------
(UNAUDITED)
ACTUAL AS ADJUSTED (5)
------- ---------------
(in thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $16,327 $41,507
Working capital................................ 6,054 32,034
Property & equipment, net...................... 13,840 13,840
Total assets................................... 74,570 98,985
Long term debt, less current portion........... 11,098 12,476
Total shareholders' equity..................... 13,108 36,944
</TABLE>
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(1) Net earnings (loss) per share for the years ended December 31, 1992, 1993,
1994 1995 and 1996 and for the three months ended March 31, 1996 and 1997
is based on the weighted average number of common shares outstanding. For
all periods presented, per share information was computed pursuant to the
rules of the Securities and Exchange Commission (the "Commission"), which
require that common shares issued by the Company during the twelve months
immediately preceding the Company's initial public offering plus the number
of common shares issuable pursuant to the grant of options and warrants
issued during the same period (which have an exercise price less than the
initial public offering price), be included in the calculation of the
shares outstanding using the treasury stock method from the beginning of
all periods presented.
(2) EBITDA represents net earnings (loss) plus net interest expense (income),
income taxes, depreciation and amortization and non-cash stock option based
compensation. While EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be construed
as a substitute for net earnings (loss) as a measure of performance, or
cash flow as a measure of liquidity, it is included herein because it is a
measure commonly used in the telecommunications industry.
(3) Consists of retail customers who received invoices for the last month of
the period indicated. Does not include active international customers who
incurred charges in such month but who had outstanding balances as of the
last day of such month of less than $50, as the Company does not render
invoices in such instances.
(4) Consists of wholesale customers who received invoices for the last month of
the period indicated.
(5) Adjusted to give effect to the Offering, the prepayment of the Senior
Subordinated Notes and the issuance of additional indebtedness of $12.4
million to partially fund such prepayment. The issuance of $12.4 million of
additional indebtedness is subject to the Company's ability to raise
additional capital and represents a portion of the Anticipated Financings
(as defined). See "Risk Factors--Need for Additional Financing" and "Use of
Proceeds."

9
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RISK FACTORS

In addition to the other information in this Prospectus, including "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Company's consolidated financial
statements and notes thereto included elsewhere herein, the following risk
factors should be considered carefully by prospective investors prior to
making an investment in the Common Stock.

EXPANSION AND OPERATION OF THE TIGN

Historically, a significant portion of the Company's revenue has been
derived from the provision of traditional call-reorigination services to
retail customers on a global basis. The Company believes that as deregulation
occurs and competition increases in various markets around the world, the
pricing advantage of traditional call-reorigination relative to conventional
international long distance service will diminish or disappear in those
markets. The Company believes that, in general, in order to maintain its
existing customer base and to attract new customers in such markets, it will
need to be able to offer call-through services at prices at or below the
current prices charged for traditional call-reorigination. The Company seeks
to achieve this objective by expanding the TIGN in core and selected target
markets, thereby enabling it to offer call-through international long distance
services in deregulated markets. The Company will seek to migrate its existing
call-reorigination customers and to attract new customers in core and selected
target markets to the Global Access Direct service. There can be no assurance
that the Company will be successful in its efforts to expand the TIGN or in
its attempt to migrate existing customers and attract new customers to Global
Access Direct service. Failure to accomplish this objective could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company has only recently begun operating the TIGN. The long-term
success of the Company is dependent upon its ability to operate, expand,
manage and maintain the TIGN, activities in which the Company has limited
experience. The continued expansion, operation and development of the TIGN
will depend on, among other factors, the Company's ability to raise additional
capital through debt and/or equity financing and to accomplish the following:
(i) acquire switching hardware and peripheral equipment; (ii) program the
switches with proprietary TIGN software; (iii) transport the hardware and
peripherals to the switch installation sites; (iv) obtain a switch co-location
site in each country; (v) obtain access and egress circuit capacity connecting
the switches to the Public Switched Telephone Network ("PSTN") and/or other
carriers; (vi) obtain necessary licenses permitting termination and
origination of traffic; (vii) load switches with customer data; and (viii)
obtain access to or ownership of transmission facilities linking a switch to
other TIGN switches. The failure to raise such additional capital or to
accomplish any of these tasks could cause a significant delay in the
deployment of the TIGN. Moreover, there can be no assurance that the Company
has obtained all licenses or approvals necessary to import equipment for use
in its telecommunications network. Significant delays in the deployment of the
TIGN could have a material adverse effect on the Company's business, financial
condition and results of operations.

The successful implementation of the Company's expansion strategy will be
subject to a variety of risks, including operating and technical problems,
regulatory uncertainties, possible delays in the full implementation of
liberalization initiatives, competition and the availability of capital. In
expanding the TIGN, the Company may encounter technical difficulties because
of the existence of multiple local technical standards. These difficulties
could involve a delay in programming new switches with proprietary TIGN
software or otherwise integrating such switches into the TIGN. In addition, in
expanding the TIGN, the Company may incur substantial capital expenditures and
additional fixed operating costs. There can be no assurance that the TIGN will
grow and develop as planned or, if developed, that such growth or development
will be completed on schedule, at a commercially reasonable cost or within the
Company's specifications.

In deploying the TIGN, the Company must obtain reasonably priced access to
transmission facilities and interconnection with one or more carriers that
provide access and egress into and from the PSTN. Although the Company has
been successful to date in this regard, there can be no assurance that this
will be the case in the

10
<PAGE>

future. See "--Dependence on Telecommunications Facilities Providers," "--
Intense International and National Competition" and "Business--Competition."

In addition, concurrently with its anticipated expansion, the Company may
from time to time experience general problems affecting the quality of the
voice and data transmission of some calls transmitted over the TIGN, which
could result in poor quality transmission and interruptions in service. To
provide redundancy in the event of technical difficulties with the TIGN and to
the extent the Company resells transit and termination capacity from other
carriers, the Company relies upon other carriers' networks. Whenever the
Company is required to route traffic over a non-primary choice carrier due to
technical difficulties or capacity shortages with the TIGN or the primary
choice carrier, these calls will be more costly to the Company. Any failure by
the Company to properly operate, expand, manage or maintain the TIGN could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and "Business."

NEED FOR ADDITIONAL FINANCING

The development and expansion of the TIGN, the upgrade or replacement of the
Company's management information systems, the opening of new offices, the
introduction of new telecommunications services and the prepayment of the
Senior Subordinated Notes, as well as the funding of anticipated operating
losses and net cash outflows, will require substantial additional capital. The
Company expects that the net proceeds from the Offering will provide the
Company with sufficient capital to fund planned capital expenditures and
anticipated operating losses through December 1997. The Company is in
discussions to obtain additional financing in the form of bank debt and/or
equity, equity-linked or debt securities providing aggregate gross proceeds of
at least $40 million (the "Anticipated Financings") which, together with the
net proceeds from the Offering, is expected to provide sufficient funds for
the Company to expand its business as planned and to fund anticipated
operating losses and net cash outflows for the next 18 to 24 months. There can
be no assurance that the Company will be able to obtain the Anticipated
Financings or, if obtained, that it will be able to do so on a timely basis or
on terms favorable to the Company. In addition, the amount of the Company's
actual future capital requirements will depend upon many factors, including
the performance of the Company's business, the rate and manner in which it
expands the TIGN, increases staffing levels and customer growth, upgrades or
replaces management information systems and opens new offices, as well as
other factors that are not within the Company's control, including competitive
conditions and regulatory or other government actions. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the net
proceeds of the Offering, together with internally generated funds and funds
from other financings, including the Anticipated Financings, if obtained,
prove to be insufficient to fund the Company's growth and operations, then
some or all of the Company's development and expansion plans could be delayed
or abandoned, or the Company may be required to seek additional funds earlier
than currently anticipated. Issuances of additional equity securities,
including pursuant to the Anticipated Financings, could result in dilution to
the purchasers of the Common Stock offered hereby. See "--Shares Eligible for
Future Sale."

HISTORICAL AND ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

For the three months ended March 31, 1997, the Company had operating income
of $465,948 and a net loss of $277,012, compared to operating income and net
earnings of $2.2 million and $1.4 million, respectively, for the three months
ended March 31, 1996. For the year ended December 31, 1996, the Company had
operating income of $104,528 and a net loss of $118,322, compared to operating
income and net income of $6.1 million and $3.8 million for the year ended
December 31, 1995. The Company expects to incur lower gross margins, negative
EBITDA and significant operating losses and net losses for the near term as it
incurs additional costs associated with the development and expansion of the
TIGN, the expansion of its marketing and sales organization, and the
introduction of new telecommunications services. Furthermore, the Company
expects that operations in new target markets will sustain negative cash flows
until an adequate customer base and related revenue stream have been
established. There can be no assurance that the Company will achieve or, if
achieved, will sustain profitability or positive cash flow from operating
activities in the future. If the Company cannot achieve and sustain
profitability or positive cash flow, it is likely that it will not be able to
meet its working capital requirements without additional financing. See "--
Need for Additional Financing" and "--Potential Fluctuations in Quarterly
Operating Results."

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<PAGE>

In addition, the Company intends to expand its operations in or enter
markets where it has limited or no operating experience. Furthermore, in many
of the Company's target markets, the Company intends to offer new services or
services that have previously been provided only by the local ITOs.
Accordingly, there can be no assurance that such operations will generate
operating or net income, and the Company's prospects must therefore be
considered in light of the risks, expenses, problems and delays inherent in
establishing a new business in a rapidly changing industry.

DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS

The Company believes that, based on its current business plan, its
management information systems will be sufficient for the next 12 to 18
months, but will require substantial enhancements, replacements and additional
investments to continue their effectiveness after such time as the Company
continues to expand the TIGN and process a higher volume of calls. The failure
to successfully implement such enhancements, replacements and investments in a
timely fashion could result in a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, even if
the Company is successful in implementing such enhancements, replacements and
investments in a timely fashion there can be no assurance that the Company's
management information systems will not require further enhancements,
replacements or investments.

Historically, the Company has experienced some difficulties in reconciling
certain carrier accounts or, in some cases, accurately estimating monthly
carrier costs on a timely basis. These difficulties have affected the
Company's ability to complete its financial statements on a timely basis. To
address these issues, the Company has substantially upgraded and continues to
improve its accounting and billing systems. In addition, the Company has
developed a call costing and reconciliation system, which was substantially
implemented in June 1997. While there can be no assurance, the Company
believes that such improved and newly developed systems will enable the
Company to prepare its financial statements on a timely basis. Notwithstanding
such recent developments and upgrades, the Company anticipates that its Small
Business Technologies ("SBT") accounting, commissions, billing and possibly
other systems will be required to be upgraded or replaced in the next 12 to 18
months. Expansion and/or replacement of the Company's management information
systems will require substantial additional capital. See "--Need for
Additional Financing." Failure to successfully operate existing systems,
implement the call costing and reconciliation system or upgrade or replace
such SBT accounting, commissions, billing and possibly other systems, all in a
timely fashion, could affect the Company's ability to meet required financial
reporting deadlines and management's ability to manage the Company efficiently
and, therefore, could result in a material adverse effect on the Company's
business, financial condition or results of operations. See "Business--Network
and Operations."

RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH

The Company's ability to continue to grow may be affected by various
factors, many of which are not within the Company's control, including
governmental regulation of the telecommunications industry in the United
States and in other countries, competition, and the transmission capacity.
Although the Company has experienced significant growth in a relatively short
period of time and intends to continue to grow rapidly, there can be no
assurance that the growth experienced by the Company will continue or that the
Company will be able to achieve the growth contemplated by its business
strategy. The Company has experienced significant revenue growth and has
expanded the number of its employees and the geographic scope of its
operations. These factors have resulted in increased responsibilities for
management personnel. The Company's ability to continue to manage its growth
successfully will require it to further expand its network and infrastructure,
enhance its management, financial and information systems and controls and to
effectively expand, train and manage its employee base. In addition, as the
Company increases its service offerings and expands its target markets, there
will be additional demands on its customer service support and sales,
marketing and administrative resources. There can be no assurance that the
Company will be able to successfully manage its expanding operations. If the
Company's management is unable to manage growth effectively, the Company's
business, financial condition and results of operations could be materially
and adversely affected. See "--Dependence on Effective Management Information
Systems" and "Business."

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<PAGE>

SUBSTANTIAL GOVERNMENT REGULATION

General. The international telecommunications industry is subject to
international treaties and agreements, and to laws and regulations which vary
from country to country. Enforcement and interpretation of these treaties,
agreements, laws and regulations can be unpredictable and are often subject to
informal views of government officials and ministries that regulate
telecommunications in each country. In certain countries, such government
officials and ministries are subject to influence by the local ITO.

The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes, upon consultation
with counsel, to be permissible under applicable laws and regulations. To the
extent that the interpretation or enforcement of applicable laws and
regulations is uncertain or unclear, the Company's aggressive strategy may
result in the Company (i) providing services or using transmission methods
that are found to violate local laws or regulations or (ii) failing to obtain
approvals or make filings subsequently found to be required under such laws or
regulations. Where the Company is found to be or otherwise discovers that it
is in violation of local laws and regulations and believes that it is subject
to enforcement actions by the FCC or the local authority, it typically seeks
to modify its operations or discontinue operations so as to comply with such
laws and regulations. There can be no assurance, however, that the Company
will not be subject to fines, penalties or other sanctions as a result of
violations regardless of whether such violations are corrected. If the
Company's interpretation of applicable laws and regulations proves incorrect,
it could lose, or be unable to obtain, regulatory approvals necessary to
provide certain of its services or to use certain of its transmission methods.
The Company also could have substantial monetary fines and penalties imposed
against it. Except as set forth in this "Substantial Government Regulation"
and in "Business--Government Regulation," the Company believes that it is
currently in compliance with all applicable material domestic and
international regulatory requirements. To the Company's knowledge, it is not
currently subject to any material regulatory inquiry or investigation.

In numerous countries where the Company operates or plans to operate, local
laws or regulations limit the ability of telecommunication companies to
provide basic international telecommunications service in competition with
state-owned or state-sanctioned monopoly carriers. There can be no assurance
that future regulatory, judicial, legislative or political changes will permit
the Company to offer to residents of such countries all or any of its
services, that regulators or third parties will not raise material issues
regarding the Company's compliance with applicable laws or regulations, or
that such regulatory, judicial, legislative or political decisions will not
have a material adverse effect on the Company. If the Company is unable to
provide the services which it presently provides or intends to provide or to
use its existing or contemplated transmission methods due to its inability to
obtain or retain the requisite governmental approvals for such services or
transmission methods, or for any other reason related to regulatory compliance
or lack thereof, such developments could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company provides a substantial portion of its customers with access to
its services through the use of call-reorigination. Revenues attributable to
call-reorigination represented 76.6% of the Company's revenues in fiscal year
1996 and 72.8% of the Company's revenues for the three months ended March 31,
1997, and are expected to continue to represent a significant but decreasing
portion of the Company's revenues. A substantial number of countries have
prohibited certain forms of call-reorigination as a mechanism to access
telecommunications services. This has caused the Company to cease providing
call-reorigination services in Bermuda, the Bahamas and the Cayman Islands,
and may require it to do so in other jurisdictions in the future. As of May 1,
1997, reports had been filed with the ITU and/or the FCC claiming that the
laws in 63 countries prohibit call-reorigination. While the Company provides
call-reorigination services in substantially all of these countries, no single
country within this group accounted for more than 2% of the total revenues of
the Company for the 12 months ended March 31, 1997. There can be no assurance
that other countries where the Company derives material revenue will not
prohibit call-reorigination in the future. To the extent that a country with
an express prohibition against call-reorigination is unable to enforce its
laws against a provider of such services, it can request that the FCC enforce
such laws in the United States, by, for example, requiring a provider of such
services to cease providing call-reorigination services to such country or by
revoking such provider's FCC authorizations. Twenty-eight countries have
formally notified the FCC that they expressly prohibit call-

13
<PAGE>

reorigination. See "--United States--The FCC's Policies on Call-
reorigination." There can be no assurance that the Company's call-
reorigination services will not continue to be, or will not become, prohibited
in certain jurisdictions, including jurisdictions in which the Company
currently provides call-reorigination services, and, depending on the
jurisdictions, services and transmission methods affected, there could be a
material adverse effect on the Company's business, financial condition and
results of operations.

On February 15, 1997, the United States and more than 60 members of the
World Trade Organization ("WTO") agreed to open their respective
telecommunications markets to competition and foreign ownership and to adopt
regulatory measures to protect market entrants against anticompetitive
behavior by dominant telephone companies (the "WTO Agreement"). Although the
Company believes that the WTO Agreement could provide the Company with
significant opportunities to compete in markets that were not previously
accessible, reduce its costs and provide more reliable services, it could also
provide similar opportunities to the Company's competitors. There can be no
assurance that the pro-competitive effects of the WTO Agreement will not have
a material adverse effect on the Company's business, financial condition and
results of operations or that members of the WTO will implement the terms of
the WTO Agreement.

United States. In the United States, the provision of the Company's services
is subject to the provisions of the Communications Act of 1934, as amended
(the "Communications Act"), the 1996 Telecommunications Act (the "1996
Telecommunications Act") and the FCC regulations thereunder. While the recent
trend in federal regulation of nondominant telecommunication service
providers, such as the Company, has been in the direction of reduced
regulation, this trend has also given AT&T Corp. ("AT&T"), the largest long
distance carrier in the U.S., increased pricing flexibility that has permitted
it to compete more effectively with smaller long distance carriers such as
Telegroup. In addition, the 1996 Telecommunications Act has opened the U.S.
market to increased competition by allowing the Regional Bell Operating
Companies ("RBOCs") to provide interexchange service for the first time. There
can be no assurance that future regulatory, judicial and legislative changes
will not have a material adverse effect on the Company's business, financial
condition and results of operations.

U.S. International Long Distance Services. The Company is subject to FCC
rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules which also regulate the manner in
which the Company's international services may be provided, including the
circumstances under which the Company may provide international switched
services by using private lines or route traffic through third countries. FCC
rules also require prior authorization before transferring control of or
assigning FCC authorizations, and impose various reporting and filing
requirements on companies providing international services under an FCC
authorization. Failure to comply with the FCC's rules could result in fines,
penalties or forfeiture of the Company's FCC authorizations, each of which
could have a material adverse effect on the Company business, financial
condition and results of operations.

The FCC's Policies on Call-reorigination. The Company offers service by
means of call-reorigination pursuant to an FCC authorization ("Section 214
Switched Voice Authorization") under Section 214 of the Communications Act
and certain relevant FCC decisions. The FCC has determined that call-
reorigination service using uncompleted call signaling does not violate
United States or international law, but has held that United States
companies providing such services must comply with the laws of the
countries in which they operate as a condition of such companies' Section
214 Switched Voice Authorizations. The FCC reserves the right to condition,
modify or revoke any Section 214 Authorizations and impose fines for
violations of the Communications Act or the FCC's regulations, rules or
policies promulgated thereunder, or for violations of the clear and
explicit telecommunications laws of other countries that are unable to
enforce their laws against U.S. carriers. FCC policy provides that foreign
governments that satisfy certain conditions may request FCC assistance in
enforcing their laws against call-reorigination providers based in the
United States that are violating the laws of these jurisdictions. Twenty-
eight countries have formally notified the FCC that call-reorigination
services violate their laws. The Company provides call-reorigination in all
of these countries, which accounted for 7.3% of the Company's total
revenues for the 12 months ended March 31, 1997. Two of

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<PAGE>

the 28 countries have requested assistance from the FCC in enforcing their
prohibitions on call-reorigination within their respective jurisdictions.
Neither of these two countries accounted for more than 2% of the Company's
total revenues for the 12 months ended March 31, 1997. The FCC has held
that it would consider enforcement action against companies based in the
United States engaged in call-reorigination by means of uncompleted call
signalling in countries where this activity is expressly prohibited. While
the FCC has not initiated any action to date to limit the provision of
call-reorigination services, there can be no assurance that it will not
take action in the future. Enforcement action could include an order to
cease providing call-reorigination services in such country, the imposition
of one or more restrictions on the Company, monetary fines or, ultimately,
the revocation of the Company's Section 214 Switched Voice Authorization,
and could have a material adverse effect on the Company's business,
financial condition and results of operations.

The FCC's Private Line Resale Policy. The FCC's private line resale
policy prohibits a carrier from reselling international private leased
circuits to provide switched services (known as "ISR") to or from a country
unless the FCC has found that the country affords U.S. carriers equivalent
opportunities to engage in similar activities in that country. Thus far,
the FCC has found that Canada, the United Kingdom, Sweden and New Zealand
afford such opportunities to U.S. carriers. In separate proceedings, the
FCC is considering equivalency determinations for Australia, Chile,
Denmark, Finland and Mexico. The Company has entered into an arrangement
with a wholly owned subsidiary in Australia that involves the transmission
over private lines of switched services to or from Australia. The FCC has
not yet made a determination as to whether resale opportunities in
Australia can be deemed equivalent pursuant to the FCC's rules and
policies. However, the FCC has granted the Company's request for a waiver
allowing the Company to deviate from the existing FCC approved $0.22 per
minute settlement rate and to contract at $0.05 per minute, pursuant to an
agreement with its subsidiary in Australia. Although the Company has not
initiated service pursuant to this agreement, it plans to begin providing
such services in the near future. The FCC may consider modifying its policy
on private line resale since the WTO Agreement prohibits the United States
from denying market entry based on the national origin of the carrier or
the traffic. There can be no assurance, however, that the FCC or any other
country's regulatory authority will change their policies in a way that
would have a beneficial impact on the Company or that would not have a
material adverse effect on the Company's business, financial condition and
results of operations.

The FCC's Policies on Transit and Refile. The FCC is currently
considering a 1995 request ("1995 Request") to limit or prohibit the
practice whereby a carrier routes, through its facilities in a third
country, traffic originating from one country and destined for another
country. The FCC has permitted third country calling where all countries
involved consent to the routing arrangements (referred to as "transiting").
Under certain arrangements referred to as "refiling," the carrier in the
destination country does not consent to receiving traffic from the
originating country and does not realize the traffic it receives from the
third country is actually originating from a different country. While the
Company's revenues attributable to refiling arrangements are minimal,
refiling may constitute a larger portion of the Company's operations in the
future. The FCC to date has made no pronouncement as to whether refiling
arrangements are inconsistent with U.S. or ITU regulations, although it is
considering these issues in connection with the 1995 Request. It is
possible that the FCC will determine that refiling violates U.S. and/or
international law, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

The FCC's International Settlements Policy. The Company is also required
to conduct its facilities-based international business in compliance with
the FCC's international settlements policy (the "ISP"). The ISP establishes
the permissible arrangements for U.S. based facilities-based carriers and
their foreign counterparts to settle the cost of terminating each other's
traffic over their respective networks. One of the Company's arrangements
with foreign carriers is subject to the ISP and it is possible that the FCC
could take the view that this arrangement does not comply with the existing
ISP rules. See "The International Telecommunications Industry--
International Switched Long Distance Services--Operating Agreements." If
the FCC, on its own motion or in response to a challenge filed by a third
party, determines that the Company's foreign carrier arrangements do not
comply with FCC rules, among other measures, it may issue

15
<PAGE>

a cease and desist order, impose fines on the Company or revoke or suspend
its FCC authorizations. See "--Recent and Potential FCC Actions." Such
action could have a material adverse effect on the Company's business,
financial condition and results of operations.

The FCC's Tariff Requirements for International Long Distance
Services. The Company is also required to file and has filed with the FCC a
tariff containing the rates, terms and conditions applicable to its
international telecommunications services. The Company is also required to
file with the FCC any agreements with customers containing rates, terms,
and conditions for international telecommunications services, if those
rates, terms, or conditions are different than those contained in the
Company's tariff. Notwithstanding the foregoing requirements, to date, the
Company has not filed with the FCC certain commercially sensitive carrier-
to-carrier customer contracts. If the Company charges rates other than
those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, or fails to file with the FCC carrier-to-
carrier agreements, the FCC or a third party could bring an action against
the Company, which could result in a fine, a judgment or other penalties
against the Company. Such action could have a material adverse effect on
the Company's business, financial condition and results of operations.

Recent and Potential FCC Actions. Regulatory action that has been and may
be taken in the future by the FCC may enhance the intense competition faced
by the Company. The FCC recently enacted certain changes in its rules
designed to permit alternative arrangements outside of its ISP as a means
of encouraging competition and achieving lower, cost-based accounting and
collection rates as more facilities-based competition is permitted in
foreign markets. Specifically, the FCC has decided to allow U.S. carriers,
subject to certain competitive safeguards, to propose methods to pay for
international call termination that deviate from traditional bilateral
accounting rates and the ISP. The FCC has also proposed to establish lower
ceilings ("benchmarks") for the rates that U.S. carriers will pay foreign
carriers for the termination of international services. Moreover, the FCC
is examining whether, and if so, how to change its rules to implement the
WTO Agreement. While these rule changes may provide the Company with more
flexibility to respond more rapidly to changes in the global
telecommunications market, it will also provide similar flexibility to the
Company's competitors. The resolution of these proceedings could have a
material adverse effect on the Company's business, financial condition and
results of operations.

U.S. Domestic Long Distance Services. The Company's ability to provide
domestic long distance service in the United States is subject to
regulation by the FCC and relevant state Public Service Commissions
("PSCs") which regulate interstate and intrastate rates, respectively,
ownership of transmission facilities, and the terms and conditions under
which the Company's domestic U.S. services are provided. In general,
neither the FCC nor the relevant state PSCs exercise direct oversight over
prices charged for the Company's services or the Company's profit levels,
but either or both may do so in the future. The Company, however, is
required by federal and state law and regulations to file tariffs listing
the rates, terms and conditions of services provided. The Company has filed
domestic long distance tariffs with the FCC. The FCC adopted an order on
October 29, 1996 (the "October 29, 1996 Order") eliminating the requirement
that non-dominant interstate carriers, such as the Company, maintain FCC
tariffs. However, on February 13, 1997, the United States Court of Appeals
for the DC Circuit stayed the October 29, 1996 Order, pending judicial
review of the Order. Elimination of tariffs will require that the Company
secure contractual agreements with its customers regarding many of the
terms of its existing tariffs or face possible claims over the respective
rights of the parties once these rights are no longer clearly defined in
tariffs. The Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service.
Telegroup has the authorizations required to provide service in 47 states,
and has filed or is in the process of filing required tariffs in each such
state. The Company has complied, or is in the process of complying, with
reporting requirements imposed by state PSCs in each state in which it
conducts business. Any failure to maintain proper federal and state
tariffing or certification or file required reports, or any difficulties or
delays in obtaining required authorizations, could have a material adverse
effect on the Company's business, financial condition and results of
operations. The FCC also imposes some requirements for marketing of
telephone services and for obtaining customer authorization for changes in
the customer's primary long distance carrier. If these requirements are not
met, the Company may be subject to fines and penalties.

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<PAGE>

To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from local exchange carriers ("LECs") or competitive local
exchange carriers ("CLECs"). Access charges represent a significant portion
of the Company's cost of U.S. domestic long distance services and,
generally, such access charges are regulated by the FCC for interstate
services and by PSCs for intrastate services. The FCC has undertaken a
comprehensive review of its regulation of LEC access charges to better
account for increasing levels of local competition. Under alternative
access charge rate structures being considered by the FCC, LECs would be
permitted to allow volume discounts in the pricing of access charges. While
the outcome of these proceedings is uncertain, if these rate structures are
adopted, many long distance carriers, including the Company, could be
placed at a significant cost disadvantage to larger competitors. In
addition, the FCC has adopted certain measures to implement the 1996
Telecommunications Act that will impose new regulatory requirements,
including the requirement that the Company contribute some portion of its
telecommunications revenues to a "universal service fund" designated to
fund affordable telephone service for consumers, schools, libraries and
rural healthcare providers. On May 16, 1997, the FCC released an order
making significant changes in the access service rate structure. Some of
the changes may result in increased costs to the Company for the
"transport" component of access services, although other revisions of the
order likely will reduce other access costs. Some issues in the FCC
proceeding have not yet been resolved, including a proposal under which
LECs would be permitted to allow volume discounts in the pricing of access
charges.

In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of certain U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to
the implementation of such tax software and against which it has no
corresponding customer compensation. While the Company believes that any such
liability will not be significant, there can be no assurance that such tax
liability, if any, will not have a material adverse effect on the Company's
business, financial condition and results of operations.

In November 1996, the FCC adopted rules that would require that
interexchange companies offering toll-free access through payphones compensate
certain payphone operators for customers' use of the payphone. This decision
is currently on appeal to the United States Circuit Court for the District of
Columbia. Although the Company cannot predict the outcome of the appeal or the
effect of the FCC's decision on the Company's business, it is possible that
the decision could have a material adverse effect on the Company's business,
financial condition and results of operations.

The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control (without
public notice), and corporate reorganizations, and assignments of regulatory
authorizations. Such requirements may delay, prevent or deter a change in
control of the Company.

European Union. Historically, European countries have prohibited the direct
transport and switching of speech in real-time between switched network
termination points ("Voice Telephony") except by the ITO. Although the
regulation of the telecommunications industry is governed at a supra-national
level by the European Union ("EU"), the Company's provision of services in the
EU is subject to the laws and regulations of each EU member state in which it
provides services. The Full Competition Directive 96/19 (the "Full Competition
Directive") was adopted on March 13, 1996 and requires the liberalization of
Voice Telephony and the freedom to create alternative telecommunications
infrastructures within EU member states (Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the United Kingdom). While the Full Competition
Directive sets January 1, 1998 as the deadline for each EU member state to
enact its own laws to implement such directive, subject to extensions granted
to Spain (December 1998), Ireland (January 1, 2000), Greece (2003) and
Portugal (2000), there can be no assurance that each EU member state will
enact laws that implement the Full Competition Directive within the allotted
time frame or at all. To the extent the Full Competition Directive is not
implemented, or not properly or fully implemented, in a particular member
state, the Company will not be able to offer its full range of services or
utilize certain transmission or access methods in that country.

Each EU member state in which the Company currently conducts business has a
different national regulatory scheme and regulatory variations among the
member states are expected to continue for the

17
<PAGE>

foreseeable future. In the EU, the Company currently owns and operates
switching facilities in the United Kingdom, the Netherlands and France and
provides other telecommunications services in certain other member countries.
The requirements for the Company to obtain necessary approvals to offer the
full range of telecommunications services, including Voice Telephony, vary
considerably from country to country. In the U.K., the Company provides Voice
Telephony pursuant to a class license and holds a license under Section 7 of
the Telecommunications Act of 1984 to engage in ISR. Other than in the U.K.,
the Company has not obtained approvals necessary to provide Voice Telephony in
any EU member country. There can be no assurance that the Company has received
all necessary approvals, filed applications for such approvals, received
comfort letters or obtained all necessary licenses from the applicable
regulatory authorities to offer telecommunications services in the EU, or that
it will do so in the future. The Company's failure to obtain, or retain
necessary approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.

Liberalization in EU member states is proceeding rapidly and the Company is
seeking to keep pace with competition even where ITOs retain a legally
mandated monopoly on Voice Telephony. In the Netherlands, the Company has
begun to provide a range of enhanced telecommunications services and switched
voice services to business users, including closed user groups ("CUGs"), by
routing traffic via the international switched network of a competitor to the
ITO. To date, the Dutch telecommunications authority has not taken regulatory
action to prevent the provision by the Company of certain of these services
which could be regarded as prohibited services under the Dutch
telecommunications laws, and the Company is not aware of any action taken by
the Dutch ITO and/or PTT Telecom B.V. (a wholly owned subsidiary of the Dutch
ITO) in such regard. While the Company believes that the Dutch regulatory
authority will not seek to prevent the Company or other carriers from
competing with the ITO before full liberalization, which is expected on or
after July 1, 1997, there can be no guarantee that this will continue to be
the case or that the Company's services will be found not to constitute
providing Voice Telephony in the Netherlands while the ITO's monopoly on such
services is still in effect. If the Dutch telecommunications authority were to
commence regulatory action to prevent such competition and/or if the Dutch ITO
and/or PTT Telecom B.V. were to claim damages, the Company's operations in the
Netherlands would be adversely and materially affected. It is also possible
that the Company can be fined, or its application to provide services in the
future rejected, if the Company were found to be providing Voice Telephony and
such actions would have a material adverse impact on the Company's business,
financial condition and results of operations.

In France, Germany and Switzerland, the Company is currently providing
traditional or transparent call-reorigination services, but anticipates that
it will migrate CUGs and other customers to forms of call-through other than
transparent call-reorigination prior to January 1, 1998, the date on which
full competition with the ITOs will be permitted. The Company anticipates
providing a range of enhanced telecommunications services and switched voice
services in France, Germany and Switzerland to business users, including to
CUGs, prior to January 1, 1998, by routing traffic via the international
switched networks of competitors to the French, German or Swiss ITOs,
respectively. While the Company believes that it will not be found to be
offering Voice Telephony in these countries prior to the expiration of the
ITO's monopoly on such services, the Company has received no assurance from
the respective ITOs or from the respective regulating authorities that this
will be the case. It is possible that the Company could be fined, or that the
Company would not be allowed to provide specific services in these countries,
if the Company were found to be providing Voice Telephony before January 1,
1998, or after that date without obtaining a proper license. Such actions
could have a material adverse impact on the Company's business, financial
condition and results of operations.

Moreover, the Company may be incorrect in its assumption that (i) each EU
member state will abolish, on a timely basis, the respective ITO's monopoly to
provide Voice Telephony within and between member states and other countries,
as required by the Full Competition Directive, (ii) deregulation will continue
to occur and (iii) the Company will be allowed to continue to provide and to
expand its services in the EU member countries. There can be no assurance that
an EU member state will not adopt laws or regulatory requirements that will
adversely affect the Company. Additionally, there can be no assurance that
future EU regulatory, judicial or legislative changes will not have a material
adverse effect on the Company or that regulators or third parties will not
raise material issues with regard to the Company's compliance with applicable
laws or regulations. If the Company is unable to provide the services it is
presently providing or intends to provide or to use its existing or
contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such

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<PAGE>

services or transmission methods, or for any other reason related to
regulatory compliance or the lack thereof, such events could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."

The Pacific Rim. Regulation of the Company's activities varies in the
Pacific Rim depending upon the particular country involved. The Company's
ability to provide voice telephony services is restricted in all countries
where the Company provides services except Australia and New Zealand, although
service between Australia or New Zealand and other countries may be
constrained by restrictions in the other countries. In Australia and New
Zealand, regulation of the Company's provision of telecommunications services
is relatively permissive, although enrollment (in Australia) or registration
(in New Zealand) with the regulator is required for ISR. The Company's
Australian subsidiary is enrolled in Australia as a "Supplier of Eligible
International Services." Additionally, in Japan, the Company provides call-
reorigination services but may not provide basic switched voice services to
the public. The Company may, with a license, provide a broad array of value-
added services, as well as limited switched voice services to CUGs. The
Japanese government has indicated that it will permit carriers such as the
Company to apply for ISR authority some time in 1997. There can be no
assurance that the Company will be permitted to apply for ISR authority, or
(if it is permitted to apply) that ISR authority will be granted, and the
failure to obtain such authority could have an adverse effect on the Company's
plans to expand its services in Japan.

Call-reorigination services have been expressly permitted by the regulator
in Hong Kong. In Hong Kong, the Company has been issued a Public Non-Exclusive
Telecommunications Services ("PNETS") license which permits the provision of
personal identification number validation and call routing service and
facsimile communication service, and which, in general, has been interpreted
to permit the provision of call-reorigination services. A range of
international telephone services, including the operation of an international
gateway for all incoming and outgoing international calls, is provided in Hong
Kong solely by Hong Kong Telecommunications International Limited ("HKTI"),
the Hong Kong ITO, pursuant to an exclusive license which will expire on
October 1, 2006. The regulator in Hong Kong has sought to encourage
competition in international services consistent with HKTI's exclusivities.
For example, the Company may, with a license, provide a broad array of value-
added services, as well as limited basic switched voice services to CUGs. In
addition, the Hong Kong government has entered into discussions with HKTI
concerning a possible early termination of its exclusive license. In
developing a competitive position in Hong Kong, the Company has sought to
provide international services to and from Hong Kong to the maximum extent
permitted under the current Hong Kong regulatory regime, through, for example,
agreements with providers within Hong Kong. There can be no guarantee that the
Hong Kong regulator will not change its regulations or policy or, where the
Company has interpreted laws and/or regulations that are unclear, not find
that the Company is in violation of existing laws or that such change or
finding will not require the Company to cease providing certain services to
and from Hong Kong.

There can be no assurance that, upon resuming sovereignty over Hong Kong,
the People's Republic of China ("China") will continue the existing licensing
regime with respect to the Hong Kong telecommunications industry. There is
also no assurance that China will continue to implement the existing policies
of the Hong Kong government with respect to promoting the liberalization of
the Hong Kong telecommunications industry in general, including the policy
allowing call-reorigination, which is currently prohibited in China. For the
three months ended March 31, 1997, one wholesale customer in Hong Kong, New
T&T Hong Kong Limited (the "Hong Kong Customer"), accounted for approximately
12% of the Company's total revenues. Substantially all of the services
provided by the Company to this customer consists of call-reorigination
services. The initial term of the Company's agreement with the Hong Kong
Customer expires in October 1998, automatically renews for one-year periods,
and may be terminated by the Hong Kong Customer if it determines in good faith
that the services provided pursuant to the agreement are no longer
commercially viable in Hong Kong. If the Company loses its rights under its
PNETS license and/or if it is unable to provide call-reorigination services in
Hong Kong on either a retail or wholesale basis, such action could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, a material reduction in the level of
services provided by the Company to the Hong Kong Customer or a termination of
the Company's agreement with the Hong Kong Customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In all other Pacific Rim countries, the Company is strictly limited in its
provision of public voice and value added services. While some countries in
the Pacific Rim oppose call-reorigination, the Company generally has

19
<PAGE>

not faced significant regulatory impediments. China has specifically informed
the FCC that call-reorigination is illegal in that country. Australia, New
Zealand, Japan and Hong Kong do not prohibit call-reorigination. If the
Company is unable to provide the services it is presently providing or intends
to provide or to use its existing or contemplated transmission methods due to
its inability to receive or retain formal or informal approvals for such
services or transmission methods, or for any other reason related to
regulatory compliance or the lack thereof, such events could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."

Other Non-U.S. Markets. To the extent that it seeks to provide
telecommunications services in other non-U.S. markets, the Company will be
subject to the developing laws and regulations governing the competitive
provision of telecommunications services in those markets. The Company
currently plans to provide a limited range of services in South Africa and
certain Latin American countries, as permitted by regulatory conditions in
those markets, and to expand its operations as these markets implement
liberalization to permit competition in the full range of telecommunications
services. The nature, extent and timing of the opportunity for the Company to
compete in these markets will be determined, in part, by the actions taken by
the governments in these countries to implement competition and the response
of incumbent carriers to these efforts. There can be no assurance that any of
these countries will implement competition in the near future or at all, that
the Company will be able to take advantage of any such liberalization in a
timely manner, or that the Company's operations in any such country will be
successful. See "Business--Government Regulation."

DEPENDENCE ON INDEPENDENT AGENTS; CONCENTRATION OF MARKETING RESOURCES

The Company's success depends in significant part on its ability to recruit,
maintain and motivate a network of independent agents, including its Country
Coordinators. Telegroup's international market penetration has resulted
primarily from the sales activities of independent agents compensated on a
commission basis. As of March 31, 1997, Telegroup had approximately 1,300
agents located in over 97 countries. The Company is subject to competition in
the recruitment of independent agents from other organizations that use
independent agents to market their products and services, including those that
market telecommunications services. The motivation of the independent agents,
which can be affected by general economic conditions and a number of
intangible factors, may impact the effectiveness of the independent agents'
ability to recruit customers for the Company's services. Because of the number
of factors that affect the recruiting of independent agents, the Company
cannot predict when or to what extent such increases or decreases in the level
of independent agent activity will occur. There can be no assurance that the
Company will be able to continue to effectively recruit, maintain and motivate
independent agents and, to the extent the Company is not able to do so, the
Company's business, results of operations and financial condition could be
materially and adversely affected.

As of March 31, 1997, approximately one-third of the Company's retail
revenues were derived from customers enrolled by agents who are contractually
prohibited from offering telecommunications services of the Company's
competitors to their customers during the term of their contract and typically
for a period of two years thereafter. Contracts with independent agents
entered into by the Company after July 1996 typically provide for such
exclusivity. As earlier agreements expire, the Company has generally required
its independent agents to enter into such new agreements. In the past, certain
independent agents have elected to terminate their relationship with the
Company in lieu of entering into new independent agent agreements. In the
event that independent agents transfer a significant number of customers to
other service providers or that a significant number of agents decline to
renew their contracts under the new terms and move their customers to another
carrier, this would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Business
Strategy" and "Business--Sales, Marketing and Customer Service."

While the Company has an extensive marketing and sales organization
consisting of a worldwide network of independent agents and an internal sales
force, a significant portion of the Company's revenues are generated from a
limited number of these individuals. In fiscal year 1996, and for the three
months ended March 31, 1997, the Company's internal sales force was
responsible for approximately half of the Company's U.S. domestic long
distance retail service revenues, and approximately 9.5% of the Company's
total revenues. For the three months ended March 31, 1997, 10 independent
agents and/or Country Coordinators were responsible for generating 28.0% of
the Company's international long distance service billings and 50 independent
agents and/or Country

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<PAGE>

Coordinators were responsible for generating 50.6% of the Company's
international long distance service billings. Any loss of the Company's
internal sales force or certain of the Company's more productive independent
agents or Country Coordinators could have a material adverse effect on the
Company's business, financial condition and results of operations.

In connection with the Company's efforts to market its Global Access Direct
service, the Company anticipates that commission rates paid to its independent
agents for customer usage of Global Access Direct service may in some cases be
lower than those paid for marketing call-reorigination services. While the
Company does not believe that a lower commission rate will have a material
adverse effect on the Company's ability to market its Global Access Direct
service or to retain its independent agents, there can be no assurance that
this will be the case. In the event that the Company is unable to effectively
market its Global Access Direct service or retain its independent agents, such
events would have a material adverse effect on the Company's business,
financial condition and results of operations.

INTENSE INTERNATIONAL AND NATIONAL COMPETITION

The international and national telecommunications industry is highly
competitive. The Company's success depends upon its ability to compete with a
variety of other telecommunications providers in each of its markets,
including the respective ITO in each country in which the Company operates and
global alliances among some of the world's largest telecommunications
carriers. Other potential competitors include cable television companies,
wireless telephone companies, Internet access providers, electric and other
utilities with rights of way, railways, microwave carriers and large end users
which have private networks. The intensity of such competition has recently
increased and the Company believes that such competition will continue to
intensify as the number of new entrants increases. If the Company's
competitors devote significant additional resources to the provision of
international or national long distance telecommunications services to the
Company's target customer base of high-volume residential consumers and small-
and medium-sized businesses, such action could have a material adverse effect
on the Company's business, financial condition and results of operations, and
there can be no assurance that the Company will be able to compete
successfully against such new or existing competitors.

Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and "brand" loyalty, long-
standing relationships with the Company's target customers, and economies of
scale which can result in a lower relative cost structure for transmission and
related costs. These competitors include, among others, AT&T, MCI
Telecommunications Corporation ("MCI"), Sprint Communications, Inc.
("Sprint"), WorldCom, Inc. ("WorldCom"), Cable & Wireless, Inc., Frontier
Corp. ("Frontier") and LCI International, Inc. ("LCI") and RBOCs outside their
exchange territories providing long distance services in the United States;
France Telecom in France, PTT Telecom B.V. in the Netherlands, Cable &
Wireless plc, British Telecommunications plc ("BT"), Mercury Communications
Ltd. ("Mercury"), AT&T, WorldCom, Sprint and ACC Corp. in the United Kingdom;
Deutsche Telecom AG ("Deutsche Telecom") in Germany; Swiss PTT in Switzerland;
Telia AB and Tele-2 in Sweden; HKTI in Hong Kong, Telstra and Optus in
Australia; and Kokusan Denshin, Denwa ("KDD"), International Telecom Japan
("ITJ") and International Digital Communications ("IDC") in Japan. The Company
competes with numerous other long distance providers, some of which focus
their efforts on the same customers targeted by the Company. In addition to
these competitors, recent and pending deregulation in various countries may
encourage new entrants. For example, as a result of the recently enacted 1996
Telecommunication Act in the United States, once certain conditions are met,
RBOCs will be allowed to enter the domestic long distance market, AT&T, MCI
and other long distance carriers will be allowed to enter the local telephone
services market, and any entity (including cable television companies and
utilities) will be allowed to enter both the local service and long distance
telecommunications markets. Moreover, while the recently completed WTO
Agreement could create opportunities for the Company to enter new foreign
markets, implementation of the accord by the United States could result in new
competition from ITOs previously banned or limited from providing services in
the United States. Increased competition in the United States as a result of
the foregoing, and other competitive developments, including entry by Internet
service providers into the long-distance market,

21
<PAGE>

could have an adverse effect on the Company's business, financial condition
and results of operations. In addition, many smaller carriers have emerged,
most of which specialize in offering international telephone services
utilizing dial-up access methods, some of which have begun to build networks
similar to the TIGN. See "The International Telecommunications Industry."

The Company believes that ITOs generally have certain competitive advantages
due to their control over local connectivity and close ties with national
regulatory authorities. The Company also believes that, in certain instances,
some regulators have shown a reluctance to adopt policies and grant regulatory
approvals that would result in increased competition for the local ITO. If an
ITO were to successfully pressure national regulators to prevent the Company
from providing its services, the Company could be denied regulatory approval
in certain jurisdictions in which its services would otherwise be permitted,
thereby requiring the Company to seek judicial or other legal enforcement of
its right to provide services. Any delay in obtaining approval, or failure to
obtain approval, could have a material adverse effect on the Company's
business, financial condition and results of operations. If the Company
encounters anti-competitive behavior in countries in which it operates or if
the ITO in any country in which the Company operates uses its competitive
advantages to the fullest extent, the Company's business, financial condition
and results of operations could be materially adversely affected. See
"Business--Competition" and "Business--Government Regulation."

The long distance telecommunications industry is intensely competitive and
is significantly influenced by the pricing and marketing decisions of the
larger industry participants. In the United States, the industry has
relatively limited barriers to entry with numerous entities competing for the
same customers. Customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. Generally, the Company's domestic customers can switch carriers
at any time. The Company believes that competition in all of its markets is
likely to increase and that competition in non-United States markets is likely
to become more similar to competition in the United States market over time as
such non-United States markets continue to experience deregulatory influences.
In each of the countries where the Company markets its services, the Company
competes primarily on the basis of price (particularly with respect to its
sales to other carriers), and also on the basis of customer service and its
ability to provide a variety of telecommunications products and services.
There can be no assurance that the Company will be able to compete
successfully in the future. The Company anticipates that deregulation and
increased competition will result in decreasing customer prices for
telecommunications services. The Company believes that the effects of such
decreases will be at least partially offset by increased telecommunications
usage and decreased costs as the percentage of its traffic transmitted over
the TIGN increases. There can be no assurance that this will be the case. To
the extent this is not the case, there could be an adverse effect on the
Company's margins and financial profits, and the Company's business, financial
condition and results of operations could be materially and adversely
effected.

The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems,
such as the proposed Iridium and GlobalStar systems, utilization of the
Internet for international voice and data communications and digital wireless
communication systems such as personal communications services ("PCS"). The
Company is unable to predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and
services.

RISK OF NETWORK FAILURE

The success of the Company is largely dependent upon its ability to deliver
high quality, uninterrupted telecommunication services and on its ability to
protect its software and hardware against damage from fire, earthquake, power
loss, telecommunications failure, natural disaster and similar events. Any
failure of the TIGN or other systems or hardware that causes interruptions in
the Company's operations could have a material adverse effect on the Company.
As the Company expands the TIGN and call traffic grows, there will be
increased stress on hardware, circuit capacity and traffic management systems.
There can be no assurance that the Company will

22
<PAGE>

not experience system failures. The Company's operations are also dependent on
its ability to successfully expand the TIGN and integrate new and emerging
technologies and equipment into the TIGN, which could increase the risk of
system failure and result in further strains upon the TIGN. The Company
attempts to minimize customer inconvenience in the event of a system
disruption by routing traffic to other circuits and switches which may be
owned by other carriers. However, significant or prolonged system failures, or
difficulties for customers in accessing, and maintaining connection with, the
TIGN could damage the reputation of the Company and result in customer
attrition and financial losses. Additionally, any damage to the Company's
Network Operations Center could have a negative impact on the Company's
ability to monitor the operations of the TIGN and generate accurate call
detail reports.

DEPENDENCE ON TELECOMMUNICATIONS FACILITIES PROVIDERS

The Company's success will continue to depend, in part, on its ability to
obtain and utilize transmission capacity on a cost-effective basis. The
Company currently owns only a limited amount of telecommunications
transmission infrastructure. Telephone calls made by the Company's customers
may be transmitted via one or more of the following types of circuit capacity:
(i) capacity purchased from another carrier on a per minute basis under a
simple resale agreement; (ii) capacity leased from another carrier; or (iii)
capacity owned by Telegroup on an IRU basis. In addition, the Company requires
leased circuit capacity to provide access and egress between its switches and
the local PSTN in each country.

The Company obtains most of its transmission capacity under a variety of
volume-based resale arrangements with facilities-based and other carriers
including ITOs. The Company has entered into resale agreements with more than
20 carriers in the U.S., U.K., Canada, the Netherlands, Denmark, Australia,
Hong Kong and Switzerland. Under these arrangements, the Company is subject to
the risk of unanticipated price fluctuations and service restrictions or
cancellations. The Company generally has not experienced sudden or
unanticipated price fluctuations, service restrictions or cancellations
imposed by such facilities-based carriers but there can be no assurance that
this will be the case in the future. The Company has entered into a resale
agreement with Sprint which contains a net monthly usage commitment of
$1,500,000, with the Company liable for 25% of any shortfall below such
commitment level. The Sprint agreement terminates in December 1997 and is
cancelable by the Company or Sprint on 90 days' notice, subject to the payment
of an early termination fee. The failure of the Company to meet the net
monthly usage commitments contained in this agreement could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company believes that its arrangements and
relationships with such carriers generally are satisfactory, the deterioration
or termination of the Company's arrangements and relationships, or the
Company's inability to enter into new arrangements and relationships with one
or more of such carriers could have a material adverse effect upon the
Company's cost structure, service quality, network coverage, results of
operations and financial condition.

In addition, the Company leases circuit capacity at fixed terms ranging up
to 12 months under arrangements with facilities-based long distance carriers.
As a result, the Company depends upon facilities-based carriers such as the
ITOs in each of the countries in which the Company operates to supply the
Company with high capacity transmission links. Some of these carriers are or
may become competitors of the Company. The Company has periodically
experienced difficulties with the quality of the services provided by such
carriers. In addition, the Company has experienced delays in obtaining access
and egress transmission lines supplied by ITOs and other facilities-based
carriers. While the Company seeks to minimize the impact of such difficulties,
there can be no assurance that difficulties with circuit access and quality of
service will not arise in the future and constitute a material adverse effect.
See "--Intense International and National Competition," "Business--
Competition" and "Business--Regulation." Moreover, minimum volume contracts
may result in relatively high fixed costs to the extent that the Company does
not generate the requisite traffic volume over the particular route. See
"Business--Network and Operations."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

A key component of the Company's strategy is its expansion in international
markets. In many international markets, the ITO controls access to the local
networks, enjoys better brand recognition and brand and customer

23
<PAGE>

loyalty, and possesses significant operational economies, including a larger
backbone network and operating agreements with other ITOs. Moreover, an ITO
may take many months before allowing competitors, including the Company, to
interconnect to its switches within the target market. Pursuit of
international growth opportunities may require significant investments for
extended periods of time before returns, if any, on such investments are
realized. In addition, there can be no assurance that the Company will be able
to obtain the permits and operating licenses required for it to operate,
obtain access to local transmission facilities or market, sell and deliver
competitive services in these markets.

In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks in conducting business
internationally, which could have a material adverse effect on the Company's
international operations, including its strategy to open additional offices in
foreign countries and its ability to repatriate net income from foreign
markets. Such risks may include unexpected changes in regulatory requirements,
VAT, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, problems in collecting accounts
receivable, political risks, fluctuations in currency exchange rates, foreign
exchange controls which restrict or prohibit repatriation of funds, technology
export and import restrictions or prohibitions, delays from customs brokers or
government agencies, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world, and potentially
adverse tax consequences resulting from operating in multiple jurisdictions
with different tax laws. In addition, the Company's business could be
adversely affected by a reversal in the current trend toward deregulation of
telecommunications carriers. In certain countries into which the Company may
choose to expand in the future, the Company may need to enter into a joint
venture or other strategic relationship with one or more third parties in
order to successfully conduct its operations (possibly with an ITO or other
dominant carrier). There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations and, consequently,
on the Company's business, results of operations and financial condition, or
that the Company will not have to modify its current business practices. In
addition, there can be no assurance that laws or administrative practices
relating to taxation, foreign exchange or other matters of countries within
which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition, and
results of operations.

Foreign Corrupt Practices Act. As a result of the Offering, the Company will
become subject to the Foreign Corrupt Practices Act ("FCPA"), which generally
prohibits U.S. companies and their intermediaries from bribing foreign
officials for the purpose of obtaining or keeping business. The Company may be
exposed to liability under the FCPA as a result of past or future actions
taken without the Company's knowledge by agents, strategic partners and other
intermediaries. Such liability could have a material adverse effect on the
Company's business, financial condition and results of operations.

FOREIGN EXCHANGE RATE RISKS; REPATRIATION RISKS

Although the Company and its subsidiaries attempt to match costs and
revenues in terms of local currencies, the Company anticipates that as it
continues its expansion of the TIGN on a global basis, there will be many
instances in which costs and revenues will not be matched with respect to
currency denomination. As a result, the Company anticipates that increasing
portions of its revenues, costs, assets and liabilities will be subject to
fluctuations in foreign currency valuations, and that such changes in exchange
rates may have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company may utilize foreign
currency forward contracts or other currency hedging mechanisms to minimize
exposure to currency fluctuation, there can be no assurance that such hedges
will be implemented, or if implemented, will achieve the desired effect. The
Company may experience economic loss and a negative impact on earnings solely
as a result of foreign currency exchange rate fluctuations. The markets in
which the Company's subsidiaries now conduct business, except for South
Africa, generally do not restrict the removal or conversion of the local or
foreign currency; however, there can be no assurance that this situation will
continue. The Company has formed a subsidiary in South Africa which is
authorized to handle such repatriation functions on the Company's behalf in
accordance with applicable laws. See "--Risks Associated with International
Operations."

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<PAGE>

FAILURE TO COLLECT RECEIVABLES (BAD DEBT RISK)

Many of the countries in which the Company operates do not have established
credit bureaus, thereby making it more difficult for the Company to ascertain
the creditworthiness of potential customers. In addition, the Company expends
considerable resources to collect receivables from customers who fail to make
payment in a timely manner. While the Company continually seeks to minimize
bad debt, the Company's experience indicates that a certain portion of past
due receivables will never be collected and that such bad debt is a necessary
cost of conducting business in the telecommunications industry. Expenses
attributable to the write-off of bad debt, including an estimate of accounts
receivable expected to be written off, represented approximately 1.5%, 3.1%
and 2.4% of revenues for the years ended December 31, 1994, 1995 and 1996,
respectively, and 3.3% for the three months ended March 31, 1997. There can be
no assurance, however, that, with regard to any particular time period or
periods or a particular geographic location or locations, bad debt expense
will not rise significantly above historical or anticipated levels. Any
significant increase in bad debt levels could have a material adverse effect
on the Company's business, financial condition and results of operations.

The telecommunications industry has historically been a victim of fraud.
Although the Company has implemented anti-fraud measures to minimize losses
relating to fraudulent practices, there can be no assurance that the Company
can effectively control fraud when operating in the international or national
telecommunications arena. The Company's failure to effectively control fraud
could have a material adverse effect on the Company's business, financial
condition and results of operations.

RISKS ASSOCIATED WITH IMPOSITION OF VAT ON COMPANY'S SERVICES

The EU imposes value-added taxes ("VAT") upon the sale of goods and services
within the EU. The rate of VAT varies among EU members, but ranges from 15% to
25% of the sales price of goods and services. Under VAT rules, businesses are
required to collect VAT from their customers upon the sale to such customers
of goods and services and remit such amounts to the VAT authorities.

In the case of services, VAT is imposed only where services are deemed to
have been provided within an EU member state. Pursuant to the Sixth VAT
Directive adopted in 1977 (the "Sixth Directive"), telecommunications services
were deemed to be provided where the supplier of such services is located.
Under the Sixth Directive, therefore, telecommunications services provided by
U.S. telecommunications companies in the United States were deemed to be
performed outside the EU and were exempt from VAT. Because telecommunications
providers based in the EU must charge VAT on telecommunications services they
provided, U.S.-based and other non-EU based telecommunications providers
historically enjoyed a competitive advantage over their EU counterparts under
the Sixth Directive.

Derogation to the Sixth Directive. In March 1997, the EU issued a derogation
to the Sixth Directive (the "Derogation") that, as of January 1, 1997,
authorized individual EU states to amend their laws so as to change the locus
of telecommunications services provided by non-EU based firms, treating such
services as being provided where the customer is located rather than where the
telecommunications provider is established. In the case of sales by non-EU
based telecommunications companies to non-VAT-registered (usually residential)
customers in an EU member state, the Derogation provides that the non-EU based
companies will be required to collect and remit VAT. In the case of sales by
non-EU based telecommunications companies to VAT-registered (usually business)
customers in an EU member state, however, the Derogation provides that the
VAT-registered business will be required to collect and remit VAT. It is
expected that non-EU based telecommunications providers will be required to
appoint a VAT agent and register for VAT in every EU member state in which it
has individual customers.

Germany and France have adopted rules that, as of January 1, 1997, deem
telecommunications services provided by non-EU based firms to be provided
where the customer is located, thereby subjecting telecommunications services
provided to customers in the EU by non-EU based companies to VAT. The German
and French rules impose VAT on both individual and business customers of non-
EU based telecommunications companies. In the case of sales to non-VAT-
registered customers, German and French rules require that the non-

25
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EU based telecommunications carriers collect and remit the VAT. In the case of
sales by such providers to German VAT-registered customers, the German rules
generally require that such customers collect and remit the VAT. Under the so-
called "Nullregelung" doctrine, however, certain business customers that are
required to charge VAT on goods and services provided to their customers
(generally, companies other than banks and insurance companies) are entitled
to an exemption from VAT on telecommunications services either by receiving an
invoice without VAT ("Nullregelung" zero-rule) or by recovering the invoiced
VAT. In the case of sales by such providers to French VAT-registered
customers, the French rules require that such business customers collect and
remit the VAT.

Effective April 1, 1997, Austria and Italy also began to impose VAT on
telecommunications services provided by non-EU based companies. The other
members of the EU are expected to implement similar legislation effective July
1, 1997. The rules adopted by Italy and Austria are generally similar to those
adopted by France and Germany in that they impose VAT on both individuals and
businesses, with non-EU based telecommunications providers required to collect
and remit the VAT in the case of sales to non-VAT-registered customers and the
customer required to collect and remit VAT in the case of sales to VAT-
registered customers.

Proposed Amendment to the Sixth Directive. The EU has adopted a proposed
amendment to the Sixth Directive that, if adopted in present form, would
require all EU members to adopt legislation to impose VAT on non-EU based
telecommunications services provided to customers in the EU by non-EU based
companies, beginning as early as December 31, 1998. Under the proposed
amendment, non-EU based telecommunications companies would be required to
collect and remit VAT on telecommunications services provided to EU businesses
as well as to individuals.

To the extent that the Company's services are, and in the future become,
subject to VAT, the Company's competitive price advantage with respect to
those EU businesses and other customers required to pay VAT will be reduced.
Such reduction could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company historically has
collected, and will continue to collect, VAT on Global Access Direct services
where it is offered in a VAT country. The Company believes that whatever
negative impact the Derogation and the Amendment will have on its operations
as a result of the imposition of VAT on traditional call-reorigination, such
impact will be partially mitigated by the customer migration towards and the
higher gross margins associated with call-through services.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to various factors, including
the timing of investments made to expand the TIGN and the opening of new
offices, general economic conditions, specific economic conditions in the
telecommunications industry, the effects of governmental regulation and
regulatory changes, user demand, capital expenditures and other costs relating
to the expansion of operations, the introduction of new services by the
Company or its competitors, the mix of services sold and the mix of channels
through which those services are sold, pricing changes and new service
introductions by the Company and its competitors and prices charged by the
Company's facilities-based transmission line suppliers. Many of these factors
are outside of the Company's control, and any combination of such factors, or
any one of such factors, may in the future cause fluctuations in quarterly
operating results. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant degree upon the continued
contributions of its management team, as well as its technical, marketing and
sales personnel. While certain of the Company's employees have entered into
employment agreements with the Company, the Company's employees may
voluntarily terminate their employment with the Company at any time. The
Company has obtained a $5 million key man life insurance policy covering Mr.
Cliff Rees, the Company's Chief Executive Officer and President, but there can
be no assurance that the coverage provided by such policy will be sufficient
to compensate the Company for the loss

26
<PAGE>

of Mr. Rees' services. The Company's success also will depend on its ability
to continue to attract and retain qualified management, marketing, technical
and sales personnel. The process of locating such personnel with the
combination of skills and attributes required to carry out the Company's
strategies is often lengthy. Competition for qualified employees and personnel
in the telecommunications industry is intense. There can be no assurance that
the Company will be successful in attracting and retaining such executives and
personnel. The loss of the services of key personnel, including Mr. Rees, or
the inability to attract additional qualified personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management."

PROTECTION OF PROPRIETARY TECHNOLOGY AND INFORMATION

The Company relies on trade secrets, know-how and continuing technological
advancements to maintain its competitive position. The Company also relies on
unpatented proprietary technology and there can be no assurance that third
parties may not independently develop the same or similar technology or
otherwise obtain access to the Company's unpatented technology, trade-secrets
and know-how. Although the Company has entered into confidentiality and
invention agreements with certain of its employees and consultants, no
assurance can be given that such agreements will be honored or that the
Company will be able to protect effectively its rights to its unpatented
technology, trade secrets and know-how. Moreover, no assurance can be given
that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets and know-how. If the Company is unable to maintain the
proprietary nature of its technologies, the Company could be materially
adversely affected.

Competitors in both the United States and foreign countries, many of which
have substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or otherwise interfere
with the Company's ability to sell its services. The Company has not conducted
an independent review of patents issued to third parties. Although the Company
believes that its products do not infringe on the patents or other proprietary
rights of third parties, there can be no assurance that other parties will not
assert infringement claims against the Company or that such claims will not be
successful. An adverse outcome in the defense of a patent suit could subject
the Company to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require the Company to cease
selling its services.

CONTROL OF COMPANY BY PRINCIPAL SHAREHOLDERS

After completion of the Offering, Fred Gratzon, the Chairman of the Board,
and Clifford Rees, the Chief Executive Officer, will collectively beneficially
own in the aggregate approximately 77.9% of the then outstanding Common Stock
(approximately 76.3% if the over-allotment option is exercised in full).
Accordingly, if they choose to do so, Messrs. Gratzon and Rees acting together
will have the power to amend the Company's Second Restated Articles of
Incorporation, elect all of the directors, effect fundamental corporate
transactions such as mergers, asset sales and the sale of the Company and
otherwise direct the Company's business and affairs, without the approval of
any other shareholder. See "Management" and "Principal Shareholders."

RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

In furtherance of its business strategy, the Company may enter into
strategic alliances with, acquire assets or businesses from, or make
investments in, companies that are complementary to its current operations.
While the Company is currently engaged in negotiations to acquire the
operations and customer base of its Country Coordinators in Australia, the
Netherlands and New Zealand, the Company has no present agreements with
respect to any such strategic alliance, investment or acquisition. Any such
future strategic alliances, investments or acquisitions would be accompanied
by the risks commonly encountered in such transactions. Such risks include,
among other things, the difficulty of assimilating the operations and
personnel of the companies, the potential disruption of the Company's ongoing
business, costs associated with the development and integration of such
operations, the inability of management to maximize the financial and
strategic position of the Company

27
<PAGE>

by the successful incorporation of licensed or acquired technology into the
Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies, the impairment of relationships with employees and
customers as a result of changes in management, and higher customer attrition
with respect to customers obtained through acquisitions.

ANTITAKEOVER CONSIDERATIONS

The Company's Second Restated Articles of Incorporation and its Amended and
Restated Bylaws include certain provisions which may have the effect of
delaying, deterring or preventing a future takeover or change in control of
the Company without the approval of the Company's Board of Directors. Such
provisions may also render the removal of directors and management more
difficult. Among other things, the Company's Second Articles of Incorporation,
its Amended and Restated Bylaws, and/or the Iowa Business Corporation Act: (i)
provide for a classified Board of Directors serving staggered three-year
terms, (ii) impose restrictions on who may call a special meeting of
shareholders, (iii) include a requirement that shareholder action be taken
only at shareholder meetings or with the written consent of the holders of at
least 90% of the outstanding shares of Common Stock and (iv) specify certain
advance notice requirements for shareholder nominations of candidates for
election to the Board of Directors and certain other shareholder proposals. In
addition, the Board of Directors, without further action by the shareholders,
may cause the Company to issue 10,000,000 shares of Preferred Stock on such
terms and with such rights, preferences and designations as the Board of
Directors may determine. Issuance of such Preferred Stock, depending upon the
rights, preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, the Iowa
Business Corporation Act and certain provisions of the Second Restated
Articles of Incorporation impose restrictions on the ability of a third party
to effect a change in control of the Company and may be considered
disadvantageous by a shareholder. See "Description of Capital Stock--Preferred
Stock" and "Description of Capital Stock--Certain Provisions of the Company's
Articles and Bylaws," and "Description of Capital Stock--Iowa Business
Corporation Act; Antitakeover Effects." Certain federal and state laws and
regulations concerning telecommunications providers require prior approval of
transfers of control and may also have the effect of delaying, deterring or
preventing a change in control of the Company. See "--Substantial Government
Regulation--United States" and "Business--Government Regulation."

ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active trading market will
develop or be maintained after the Offering. The initial public offering price
of the Common Stock offered hereby will be determined by negotiations among
the Company and the representatives of the Underwriters and may not be
indicative of the market price of the Common Stock after the Offering. For a
description of the factors considered in determining the initial public
offering price, see "Underwriting." The market price of the Common Stock may
be highly volatile. Factors such as fluctuation in the Company's operating
results, announcements of technological innovations or new products or
services by the Company or its competitors, changes in the regulatory
framework or in the cost of long distance service or other operating costs and
changes in general market conditions may have a significant effect on the
market price of the Common Stock.

NO DIVIDENDS

While the Company has in the past paid dividends on its capital stock, it
does not anticipate paying any dividends to its shareholders in the
foreseeable future. The declaration and payment of any dividends in the future
will be determined by the Board of Directors, in its discretion, and will
depend upon the Company's earnings, capital requirements, financial condition
and other relevant factors. The Company's $7.5 million revolving credit
facility with American National Bank and Trust Company of Chicago (the "Credit
Facility") restricts the Company's ability to declare any dividends on its
capital stock. In addition, any future bank or other financing may restrict
the Company's ability to declare and pay dividends. See "--Need for Additional
Financing" and "Dividend Policy."

28
<PAGE>

DILUTION TO PURCHASERS OF COMMON STOCK

Investors purchasing shares of Common Stock in the Offering will experience
an immediate dilution in net tangible book value of their shares of Common
Stock. In addition, issuances of equity securities pursuant to the Anticipated
Financings or other financings would result in dilution to the purchasers of
Common Stock offered hereby. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial numbers of shares of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock and make it more difficult for the
Company to raise funds through equity offerings in the future. Several of the
Company's principal shareholders hold a significant portion of the Company's
outstanding Common Stock and a decision by one or more of these shareholders
to sell their shares pursuant to the exercise of registration rights, pursuant
to Rule 144 under the Securities Act of 1933 (the "Securities Act") or
otherwise, could materially adversely affect the market price of the Common
Stock. In addition, certain of such shareholders, as well as holders of
outstanding Warrants, have registration rights with respect to shares of
Common Stock. See "Principal Shareholders" and "Description of Capital Stock--
Registration Rights."

Upon completion of the Offering, the Company will have 33,500,000 shares of
Common Stock outstanding, assuming the exercise of options to acquire
1,960,922 shares and warrants to acquire 1,327,500 shares. Of the Common Stock
outstanding upon completion of the Offering, the 4,000,000 shares of Common
Stock sold in the Offering will be freely tradeable without restriction or
further registration under the Securities Act, except for any shares held by
"affiliates" of the Company or persons who have been affiliates within the
preceding three months. In addition, approximately 25,949,462 outstanding
shares of Common Stock are currently eligible for sale under Rule 144, subject
to restrictions on the timing, manner and volume of sales of such shares.

Promptly following the Offering, the Company intends to register on Form S-8
under the Securities Act 4,000,000 shares of Common Stock issuable under
options granted or to be granted under the Company's Stock Option Plan. See
"Shares Eligible for Future Sale."

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward- looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or the global long distance telecommunications
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; prospects for the global long distance telecommunications
industry; competition; changes in business strategy or development plans; the
loss of key personnel; the availability of capital; regulatory developments
and other factors referenced in this Prospectus, including, without
limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.

29
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $35.6 million ($41.2 million if the over-allotment option is
exercised in full). The Company expects that approximately $25.8 million of
such net proceeds will be used to expand the Telegroup Intelligent Global
Network and the balance of approximately $9.8 million will be used for general
corporate purposes, including further expansion of the TIGN, working capital
and/or, subject to the Company's ability to raise additional capital of
approximately $12.4 million, prepayment of all of the outstanding 12% Senior
Subordinated Notes due November 27, 2003. See "Certain Transactions--
Subordinated Note Private Placement." The net proceeds of the issuance of
Senior Subordinated Notes were used to fund costs associated with the
deployment of the TIGN and to repay outstanding bank indebtedness. Pending
application, net proceeds from the Offering may be invested in short-term,
marketable securities. For a discussion of the Company's future capital
requirements and the sources of funds therefor over the next three years, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

DIVIDEND POLICY

The Company declared a $525,000 cash dividend in December 1995 and a
$425,000 cash dividend in March 1996, both of which were paid in November 1996
to the Company's shareholders. The Company currently intends to retain all
future earnings for use in the operation of its business and, therefore, does
not anticipate paying any cash dividends in the foreseeable future. The
declaration and payment in the future of any cash dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among
other things, the earnings, capital requirements and financial position of the
Company, existing and/or future loan covenants and general economic
conditions. Under the terms of the Credit Facility, the Company is restricted
from declaring, making or paying any distributions unless certain financial
covenants are met. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

30
<PAGE>

DILUTION

The Company's pro forma net tangible book value as of March 31, 1997 was
$8,665,570, or $0.30 per share. "Pro forma net tangible book value" per share
represents the total amount of tangible assets of the Company, less the total
amount of liabilities of the Company, divided by the number of shares of
Common Stock outstanding on a fully diluted basis, as adjusted to give effect
to the Recapitalization. After giving effect to the sale by the Company of the
4,000,000 shares of Common Stock offered hereby, less estimated underwriting
discounts and commissions and the other estimated expenses of the Offering
payable by the Company, the Company's pro forma net tangible book value as of
March 31, 1997 would have been $44.3 million, or $1.35 per share. This
represents an immediate increase in net tangible book value of $1.05 per share
to existing shareholders and an immediate dilution in net tangible book value
of $8.65 per share to new investors purchasing shares of Common Stock in the
Offering. The following table illustrates this dilution on a per share basis
to the new investors:

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $10.00
Pro forma net tangible book value per share at March
31, 1997................................................... 0.30
Increase in net tangible book value per share attributable
to new investors........................................... 1.05
----
Pro forma net tangible book value per share after giving
effect to the Offering..................................... 1.35
------
Dilution per share to new investors......................... $ 8.65
======
</TABLE>

The following table sets forth, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the weighted average price per share
paid by existing shareholders and by new investors before deducting the
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company:

<TABLE>
<CAPTION>
TOTAL WEIGHTED
SHARES PURCHASED CONSIDERATION(1) AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 26,211,578 86.8% $ -- 0.0% $ 0.00
New investors.................. 4,000,000 13.2% 40,000,000 100.0% 10.00
---------- ----- ----------- ----- ------
Total........................ 30,211,578 100.0% $40,000,000 100.0% $ 1.32
========== ===== =========== ===== ======
</TABLE>
- --------
(1) The Common Stock held by existing stockholders has been issued over time
for various consideration and, for purposes of this comparison is assumed
to have been issued for nominal consideration.

The information in the table above excludes the effect of options to
purchase 1,626,921 shares of Common Stock outstanding at March 31, 1997, at an
exercise price of $1.31 per share, or warrants to purchase 1,160,107 shares of
Common Stock outstanding at March 31, 1997 at a conversion price of $.002 per
share. The exercise of any of these outstanding options or warrants would
result in additional dilution to new investors. See "Management--Executive
Compensation," "Management--Amended and Restated Stock Option Plan" and
"Principal Shareholders."

31
<PAGE>

CAPITALIZATION

The following table sets forth the cash and cash equivalents and
capitalization of the Company, as adjusted to give effect to the
Recapitalization (i) as of March 31, 1997, and (ii) as adjusted to give effect
to the issuance and sale by the Company of 4,000,000 shares of Common Stock in
the Offering and the application of the estimated net proceeds therefrom. See
"Use of Proceeds," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
Cash and cash equivalents............................... $16,327 $41,507
======= =======
Current portion of long term debt and capital lease
obligations............................................ 228 228
======= =======
Long-term debt, net of current portion:
Senior subordinated notes and other long term debt.... 11,098 76
Additional long-term debt............................. -- 12,400
Capital lease obligations............................. 261 261
------- -------
Total long-term debt................................ 11,359 12,737
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued or outstanding.......... -- --
Common stock, no par value; 150,000,000 shares
authorized; 26,211,578 shares issued and outstanding;
30,211,578 issued and outstanding as adjusted (1).... -- --
Additional paid-in capital.............................. 10,851 46,451
Retained earnings....................................... 2,257 (9,507)
------- -------
Total shareholders' equity.............................. 13,108 36,944
------- -------
Total capitalization................................ $24,467 $49,681
======= =======
</TABLE>
- --------
(1) Excludes (i) 1,626,921 shares of Common Stock issuable upon the exercise
of options granted under the Stock Option Plan as of March 31, 1997; (ii)
2,373,079 shares of Common Stock issuable upon the exercise of options
available for grant under the Stock Option Plan as of March 31, 1997; and
(iii) 1,160,107 shares of Common Stock issuable upon the exercise of the
Warrants as of March 31, 1997. See "Management--Amended and Restated Stock
Option Plan" and "Description of Capital Stock--Warrants."
(2) Reflects the prepayment of the Senior Subordinated Notes for $20.0
million, a prepayment fee of $1.4 million, loss on the retirement of the
Senior Subordinated Notes of $9.0 million, the write-off of debt issuance
costs of $1.4 million, the payment of accrued interest of $.8 million and
additional indebtedness of $12.4 million to partially fund the prepayment
of the Senior Subordinated Notes. The issuance of $12.4 million of
additional indebtedness is subject to the Company's ability to raise
additional capital and represents a portion of the Anticipated Financings.
See "Risk Factors--Need for Additional Financing" and "Use of Proceeds."

32
<PAGE>

SELECTED FINANCIAL DATA

The following table sets forth certain consolidated financial information
for the Company for the years ended December 31, 1994, 1995 and 1996, which
have been derived from the Company's audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus, for the year ended
December 31, 1993, which has been derived from audited consolidated financial
statements of the Company which are not included herein, and for the period
ended December 31, 1992, which has been derived from unaudited consolidated
financial statements which are not included herein. The selected financial
data as of March 31, 1997 and for the three months ended March 31, 1996 and
1997 has been derived from the unaudited consolidated financial statements for
the Company included elsewhere in this Prospectus. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments, which consist only of normal recurring adjustments, necessary
for a fair presentation of the financial position and the results of
operations for these periods. The following financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ----------------
(UNAUDITED)
(UNAUDITED)
1992 1993 1994 1995 1996 1996 1997
----------- ------- ------- -------- -------- ------- ------------
(in thousands, except per share and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Retail................. $23,846 $29,790 $68,714 $128,139 $179,147 $41,440 $56,909
Wholesale.............. -- -- -- 980 34,061 1,911 17,187
------- ------- ------- -------- -------- ------- -------
Total revenues....... 23,846 29,790 68,714 129,119 213,208 43,351 74,096
Cost of revenues........ 18,411 22,727 49,513 83,101 150,537 27,742 53,283
------- ------- ------- -------- -------- ------- -------
Gross profit........... 5,435 7,063 19,201 46,018 62,671 15,609 20,813
Operating expenses:
Selling, general and
administrative......... 3,935 7,341 19,914 39,222 59,652 13,161 19,455
Depreciation and
amortization........... 61 172 301 655 1,882 261 807
Stock option based
compensation........... -- -- -- -- 1,032 -- 85
------- ------- ------- -------- -------- ------- -------
Total operating
expenses........... 3,996 7,513 20,215 39,877 62,566 13,422 20,347
Operating income
(loss).............. 1,439 (450) (1,014) 6,141 105 2,187 466
Net earnings (loss).. 1,386 (707) (538) 3,821 (118) 1,388 (277)
Net earnings (loss) per
share (1).............. $ .05 $ (.02) $ (.02) $ .13 $ (.00) $ .05 $ (.01)
======= ======= ======= ======== ======== ======= =======
Weighted average number
of common and common
share equivalents (in
thousands) 28,795 28,795 28,795 28,795 28,795 28,795 28,795
OTHER FINANCIAL DATA:
EBITDA (2).............. $ 1,510 $ (278) $ (577) $ 6,994 $ 2,990 $ 2,372 $1,022
Net cash provided by
operating activities... 820 924 1,364 5,561 4,904 3,825 6,194
Net cash (used in)
investing activities... (667) (765) (700) (2,818) (11,262) (2,473) (3,529)
Net cash (used in)
provided by financing
activities............. 21 (10) 957 (115) 15,924 (1,112) (430)
Capital expenditures.... 291 449 1,056 2,652 9,068 1,891 3,285
Dividends declared per
common share........... -- -- -- .02 .02 .02 --
OTHER OPERATING DATA:
Retail customers (3):
Domestic (U.S.)....... 8,261 7,021 16,733 17,464 34,294 39,200
International......... 0 5,301 28,325 56,156 109,922 117,716
Wholesale customers
(4).................... 0 0 0 4 18 22
Number of employees..... 54 97 217 296 444 472
Number of switches...... 0 1 2 3 7 13
</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AS OF MARCH 31, 1997
---------------------------------------------- -----------------------
(UNAUDITED) (UNAUDITED)
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED (5)
----------- ------ ------- ------- -------- ------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Cash and cash
equivalents..... $ 194 $ 342 $ 1,963 $ 4,591 $ 14,155 $16,327 $ 41,507
Working capital.. 59 (629) (2,171) (478) 9,659 6,054 32,034
Property &
equipment, net.. 546 948 2,165 3,979 11,256 13,840 13,840
Total assets..... 5,760 7,677 17,537 33,576 65,956 74,570 98,985
Long term debt,
less current
portion......... -- -- -- -- 11,217 11,098 12,476
Total
shareholders'
equity
(deficit)....... 1,097 389 (149) 3,147 13,363 13,108 36,944
</TABLE>
- --------
(1) Net earnings (loss) per common share for the years ended December 31,
1992, 1993, 1994 1995 and 1996 and for the three months ended March 31,
1996 and 1997 is based on the weighted average number of common shares
outstanding. For all periods presented, per share information was computed
pursuant to the rules of the Commission, which require that common shares
issued by the Company during the twelve months immediately preceding the
Company's initial public offering plus the number of common shares
issuable pursuant to the grant of options and warrants issued during the
same period (which have an exercise price less than the initial public
offering price), be included in the calculation of the shares outstanding
using the treasury stock method from the beginning of all periods
presented.
(2) EBITDA represents net earnings (loss) plus net interest expense (income),
income taxes, depreciation and amortization and non-cash stock option
based compensation. While EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be construed as a substitute for net earnings (loss) as a measure of
performance, or cash flow as a measure of liquidity, it is included herein
because it is a measure commonly used in the telecommunications industry.
(3) Consists of retail customers who received invoices for the last month of
the period indicated. Does not include active international customers who
incurred charges in such month but who had outstanding balances as of the
last day of such month of less than $50, as the Company does not render
invoices in such instances.
(4) Consists of wholesale customers who received invoices for the last month
of the applicable period indicated.
(5) Adjusted to give effect to the Offering, the prepayment of the 12% Senior
Subordinated Notes and the issuance of additional indebtedness of $12.4
million to partially fund such prepayment. The issuance of $12.4 million
of additional indebtedness is subject to the Company's ability to raise
additional capital and represents a portion of the Anticipated Financings.
See "Risk Factors--Need for Additional Financing" and "Use of Proceeds."

34
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of the financial condition and performance of the
Company should be read in conjunction with the consolidated financial
statements and related notes and other detailed information regarding the
Company included elsewhere in this Prospectus. Certain information contained
below and elsewhere in this Prospectus, including information with respect to
the Company's plans and strategy for its business, are forward-looking
statements. See "Risk Factors" for a discussion of important factors which
could cause actual results to differ materially from the forward-looking
statements contained herein.

OVERVIEW

Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small- and medium-
sized business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network, the Telegroup Intelligent Global Network or the
TIGN, to deliver its services in a reliable, flexible and cost-effective
manner to approximately 204,000 active customers worldwide (those that
incurred charges during March 1997). According to FCC statistics, Telegroup
was the sixth largest U.S. carrier of outbound international traffic in 1995.
Telegroup's revenues have increased from $29.8 million in 1993 to $213.2
million in 1996. In 1993, the Company had an operating loss of $450,000 and a
net loss of $707,000, compared to operating income of $105,000 and a net loss
of $118,000 in 1996.

Incorporated in 1989, Telegroup was one of the first resellers of AT&T's
Software Defined Network and Distributed Network Service long distance
services. The Company derived its initial growth by aggregating long distance
services to individuals and small businesses in the U.S. in order to fulfill
large volume commitments to AT&T. In early 1993, Telegroup initiated call
reorigination service in certain countries in Western Europe and the Pacific
Rim. By 1994, more than one half of Telegroup's retail customers were located
outside the United States. At March 31, 1997, the Company had approximately
45,000 active retail customers within the United States and approximately
159,000 active retail customers outside the United States. The Company's
network currently includes switches located in Australia, France, Hong Kong,
Japan, the Netherlands, the U.K. and the U.S. and leased and owned
transmission facilities, and enables the Company to offer a variety of
enhanced telecommunications services.

The Company has attained positive EBITDA (as defined in "Selected Financial
Data") and net earnings in only two of the last five years--1992 and 1995. The
Company expects to incur lower gross margins, negative EBITDA and significant
operating losses and net losses for the near term as it incurs additional
costs associated with the development and expansion of the TIGN, the expansion
of its marketing and sales organization, and the introduction of new
telecommunications services. As the development and expansion of the TIGN
continues and the Company's customers migrate from Global Access CallBack to
Global Access Direct service, the Company expects that its gross margins,
EBITDA, and operating and net income will improve. However there can be no
assurance that this will be the case. See "Risk Factors--Historical and
Anticipated Losses; Uncertainty of Future Profitability."

Telegroup's revenues are derived from the sale of telecommunications
services to retail customers, typically residential users and small- to
medium-sized businesses in over 170 countries worldwide and to wholesale
customers, typically other U.S. and non-U.S. telecommunications carriers. The
Company's revenues from retail and wholesale customers represented 84% and
16%, respectively, of the Company's total revenues for the year ended December
31, 1996 and 77% and 23%, respectively, for the three months ended March 31,
1997. The Company's retail customer base is diversified both geographically
and by customer type. No single retail customer accounted for more than 1% of
the Company's total revenues for the year ended December 31, 1996 and for the
three months ended March 31, 1997. Revenues from the Company's wholesale
customers have grown from $1.0 million in 1995, the first year in which the
Company derived revenues from wholesale

35
<PAGE>

customers, to $34.1 million for the year ended December 31, 1996. For the
three months ended March 31, 1997, one wholesale customer in Hong Kong, New
T&T Hong Kong Limited, accounted for approximately 12% of the Company's total
revenues. See "Business--Customers." The Company expects that wholesale
revenues will continue to grow as a percentage of total telecommunications
revenue in the near term.

The following chart sets forth the Company's combined retail and wholesale
revenues for the year ended December 31, 1996 for each of the Company's eight
largest markets, determined by customers' billing addresses:

<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY 1996 REVENUES TOTAL REVENUES
------- ------------- --------------
(MILLIONS)
<S> <C> <C>
United States................................ $60.4 28.3%
Netherlands.................................. 23.0 10.8
Hong Kong.................................... 15.6 7.3
France....................................... 15.4 7.2
Switzerland.................................. 13.5 6.3
Australia.................................... 8.7 4.1
Japan........................................ 8.0 3.8
Germany...................................... 7.8 3.7
</TABLE>

During fiscal year 1996, the geographic origin of the Company's revenues was
as follows: United States--28.3%; Europe--38.1%; Pacific Rim--19.8%; Other--
13.8%. During fiscal year 1995, revenues were derived as follows: U.S.--27.2%;
Europe--31.9%; Pacific Rim--17.5%; Other--23.4%. The most significant shift in
composition of revenue was the increase in revenue derived from Europe and the
decrease from the "other" countries category, primarily in Latin America,
Africa and the Middle East. The Company has developed its wholesale carrier
business, which accounted for 16% of revenues in 1996 compared to 0.8% in
1995, primarily by serving wholesale customers in the U.S. and the Pacific
Rim. In addition, the Company has expanded its Country Coordinator offices and
retail marketing activities primarily in its core markets, six of which are
located in Western Europe, and three in the Pacific Rim. The Company believes
that, because its core markets comprise approximately 64% of the total global
long distance telecommunications market, according to TeleGeography, the U.S.,
Europe, and Pacific Rim regions will continue to comprise the bulk of the
Company's revenues.

The Company believes its retail services are typically competitively priced
below those of the ITO in each country in which the Company offers its
services. Prices for telecommunications services in many of the Company's core
markets have declined in recent years as a result of deregulation and
increased competition. The Company believes that worldwide deregulation and
increased competition are likely to continue to reduce the Company's retail
revenues per billable minute. The Company believes, however, that any decrease
in retail revenues per minute will be at least partially offset by an increase
in billable minutes by the Company's customers, and by a decreased cost per
billable minute as a result of the expansion of the TIGN and the Company's
ability to use least cost routing in additional markets. See "Risk Factors--
Expansion and Operation of the TIGN."

For the year ended December 31, 1996 and the three months ended March 31,
1997, 83.8% and 80.0%, respectively, of the Company's retail revenues were
derived from Telegroup's Global Access CallBack services. As the Company's
Global Access Direct service is provided to customers currently using
traditional call-reorigination services, the Company anticipates that revenue
derived from Global Access Direct will increase as a percentage of retail
revenues. However, the Company expects to continue to aggressively market its
Global Access CallBack service in markets not served by the TIGN and to use
transparent call-reorigination as a possible routing methodology for its
Global Access Direct customers where appropriate. Accordingly, the Company
believes that call-reorigination will continue to be a significant source of
revenue.

Historically, the Company has not been required to collect VAT (typically
15% to 25% of the sales price) on call-reorigination services provided to
customers in the EU because prior laws deemed such services to be provided
from the U.S. However, Germany and France have adopted rules whereby, as of
January 1, 1997,

36
<PAGE>

telecommunications services provided by non-EU based firms are deemed to be
provided where the customer is located. Austria and Italy adopted similar
rules effective April 1, 1997, and the other members of the EU are expected to
adopt similar legislation effective July 1, 1997. The Company is currently
analyzing the effect of this legislation on its service offerings. The Company
may have no alternative but to reduce prices of particular services offered to
certain customer segments in order to remain competitive in light of the
imposition of VAT on its services in certain EU member states. Such price
reduction could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that
whatever negative impact the imposition of VAT will have on its operations,
such impact will be partially mitigated by the migration of customers towards
and the higher gross margins associated with call-through services. See "Risk
Factors--Risks Associated With Imposition of VAT on Company's Services."

Cost of retail and wholesale revenues is comprised of (i) variable costs
associated with the origination, transmission and termination of voice and
data telecommunications services by other carriers, and (ii) costs associated
with owning or leasing and maintaining switching facilities and circuits. The
Company also includes as a cost of revenues payments resulting from traffic
imbalances under its operating agreement with AT&T Canada. Currently, a
significant portion of the Company's cost of revenues is variable, based on
the number of minutes of use transmitted and terminated over other carriers'
facilities. The Company's gross profitability is driven mainly by the
difference between revenues and the cost of transmission and termination
capacity.

The Company seeks to lower the variable portion of its cost of services by
originating, transporting and terminating a higher portion of its traffic over
the TIGN. However, in the near term, the Company expects that its cost of
revenues as a percentage of revenues will increase as the Company continues
the development and expansion of the TIGN and introduces new
telecommunications services. Subsequently, as the Company increases the volume
and percentage of traffic transmitted over the TIGN, cost of revenues will
increasingly consist of fixed costs associated with leased and owned lines and
the ownership and maintenance of the TIGN, and the Company expects that the
cost of revenues as a percentage of revenues will decline. The Company seeks
to lower its cost of revenues by: (i) expanding and upgrading the TIGN by
acquiring owned and leased facilities and increasing volume on these
facilities, thereby replacing a variable cost with a fixed cost and spreading
fixed costs over a larger number of minutes; (ii) negotiating lower cost of
transmission over the facilities owned by other national and international
carriers; and (iii) expanding the Company's least cost routing choices and
capabilities.

The Company generally realizes higher gross margins from its retail services
than from its wholesale services. Wholesale services, however, provide a
source of additional revenue and add significant minutes originating and
terminating on the TIGN, thus enhancing the Company's purchasing power for
leased lines and switched minutes and enabling it to take advantage of volume
discounts. The Company also generally realizes higher gross margins from
direct access services than from call-reorigination. The Company expects its
gross margins to continue to decline in the near term as a result of increased
wholesale revenues as a percentage of total revenues. In addition, the Company
intends to reduce prices in advance of corresponding reductions in
transmission costs in order to maintain market share while migrating customers
from traditional call-reorigination to Global Access Direct. The Company then
expects gross margins to improve as the volume and percentage of traffic
originated, transmitted and terminated on the TIGN increases and cost of
revenues is reduced. The Company's overall gross margins may fluctuate in the
future based on its mix of wholesale and retail long distance services and the
percentage of calls using direct access as compared to call-reorigination, any
significant long distance rate reductions imposed by ITOs to counter external
competition, and any risks associated with the Company agreeing to minimum
volume contracts and not achieving the volume necessary to meet the
commitments.

Operating expenses include: (i) selling, general and administrative; (ii)
depreciation and amortization; and (iii) stock option based compensation.

Selling, general and administrative expenses include: (i) selling expenses;
(ii) general and administrative expenses; and (iii) bad debt expense. Selling
expenses are primarily sales commissions paid to internal salespersons and
independent agents, the primary cost associated with the acquisition of
customers by the

37
<PAGE>

Company. The Company's decision to use independent agents to date has been
primarily driven by the low initial fixed costs associated with this
distribution channel, and the agents' familiarity with local business and
marketing practices. The Company strives to reduce its customer acquisition
costs where possible by acquiring successful independent agents and by
developing its internal sales and customer service operations in countries
where there is sufficient market penetration. Sales commissions have increased
over the past three years as the Company's business has expanded. The Company
anticipates that, as revenues from the Company's Global Access Direct,
Spectra, and wholesale carrier services increase relative to its existing
services, selling expense will decline as a percentage of revenue, because of
the generally lower commission structure associated with these services. See
"Risk Factors--Dependence on Independent Agents; Concentration of Marketing
Resources."

The general and administrative expense component includes salaries and
benefits, other corporate overhead costs and costs associated with the
operation and maintenance of the TIGN. These costs have increased due to the
development and expansion of the TIGN and corporate infrastructure. The
Company expects that general and administrative expenses may increase as a
percentage of revenues in the near term as the Company incurs additional costs
associated with the development and expansion of the TIGN, the expansion of
its marketing and sales organization, and the introduction of new
telecommunications services.

The Company spends considerable resources to collect receivables from
customers who fail to make payment in a timely manner. While the Company
continually seeks to minimize bad debt, the Company's experience indicates
that a certain portion of past due receivables will never be collected, and
that such bad debt is a necessary cost of conducting business in the
telecommunications industry. Expenses attributable to the write-off of bad
debt represented approximately 1.5%, 3.1% and 2.4% of revenues for the years
ended December 31, 1994, 1995 and 1996, respectively, and 3.3% for the three
months ended March 31, 1997. See "Risk Factors--Failure to Collect Receivables
(Bad Debt Risk)." In addition to uncollectible receivables, the
telecommunications industry has historically been exposed to a variety of
forms of customer fraud. The TIGN and the Company's billing systems are
designed to detect and minimize fraud, where practicable, and the Company
continuously seeks to enhance and upgrade its systems in an effort to minimize
losses as it expands into new markets. See "Risk Factors--Dependence on
Effective Management Information Systems."

As the Company begins to integrate its distribution network in selected
strategic locations by acquiring Country Coordinators and independent agents
or by establishing internal sales organizations, it may incur added selling,
general and administrative expenses associated with the transition which may
result, initially, in an increase in selling, general and administrative
expenses as a percentage of revenues. The Company anticipates, however, that
as sales networks become fully integrated, new service offerings are
implemented, and economies of scale are realized, selling, general and
administrative expenses will decline as a percentage of revenue. See
"Business--Market Opportunity" and "--Business Strategy."

Depreciation and amortization expense primarily consists of expenses
associated with the depreciation of assets, amortization of goodwill derived
from business combinations and the amortization of debt issuance costs
associated with the private placement of the Company's Senior Subordinated
Notes in November 1996.

Stock option based compensation expense results from the granting of certain
unqualified and performance based options to employees at exercise prices
below that of fair market value at the date of grant or when specified
performance criteria have been met. As a result of certain non-qualified stock
option grants during 1996, the Company will incur stock option based
compensation expense of $342,000 in 1997 and 1998, and $283,000 in 1999.

38
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
data as a percentage of revenues.

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 72.0 64.4 70.6 64.0 71.9
Gross profit.................. 28.0 35.6 29.4 36.0 28.1
Operating expenses:
Selling, general and
administrative.............. 29.0 30.4 28.0 30.4 26.3
Depreciation and
amortization................ 0.5 0.5 0.8 0.6 1.1
Stock option based
compensation................ -- -- 0.5 -- 0.1
Total operating expenses...... 29.5 30.9 29.3 31.0 27.5
Operating income (loss)....... (1.5) 4.7 0.1 5.0 0.6
Earnings (loss) before income
taxes........................ (1.3) 5.0 (0.1) 4.9 (0.6)
Income tax benefit (expense).. 0.5 (2.0) 0.0 (1.7) 0.2
Net earnings (loss)........... (0.8) 3.0 (0.1) 3.2 (0.4)
</TABLE>

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996

Revenues. Revenues increased 70.7%, or $30.7 million, from $43.4 million in
the three months ended March 31, 1996 to $74.1 in the three months ended March
31, 1997. This increase was primarily due to growth in international and
domestic retail sales and international wholesale revenues. Wholesale revenues
increased from $1.9 million, or 4.4% of total revenues in the three months
ended March 31, 1996, to $17.2 million or 23.2% of revenues for the three
months ended March 31, 1997.

Cost of Revenues. Cost of revenues increased 92.4%, or $25.6 million, from
approximately $27.7 million to approximately $53.3 million. As a percentage of
revenues, cost of revenues increased from 64.0% to 71.9%, primarily as a
result of a larger percentage of lower margin wholesale revenues.

Gross Profits. Gross profit increased 33.3%, or $5.2 million, from $15.6
million in the three months ended March 31, 1996, to $20.8 million in the
three months ended March 31, 1997. As a percentage of revenues, gross profit
decreased from 36.0% to 28.1%, due to the increase in the relative cost of
revenues as a percentage of overall revenues.

Operating Expenses. Operating expenses increased 51.5%, or $6.9 million,
from $13.4 million in the three months ended 1996 to $20.3 million in the
three months ended March 31, 1997, primarily as a result of increased sales
commissions related to revenue growth, as well as an increase in the number of
employees necessary to provide customer service, billing and collection and
accounting support. As a percentage of revenues, operating expenses decreased
3.5% from 31.0% in the three months ended March 31, 1996 to 27.5% in the three
months ended March 31, 1997. The number of full and part-time employees grew
from 333 in the three months ended March 31, 1996 to 472 in the three months
ended March 31, 1997, representing a 41.7% increase.

Bad debt expense increased from $1.2 million, or 2.8% of revenues in the
three months ended March 31, 1996 to $2.5 million, or 3.3% of revenues, in the
three months ended March 31, 1997. The increase in bad debt expense as a
percentage of revenues in the three months ended March 31, 1997 was due
primarily to the write-off of accounts receivable for services rendered to a
single domestic customer during such period. Services to such customer have
been discontinued.

Depreciation and amortization increased from $261,000 in the three months
ended March 31, 1996 to $806,500 in the three months ended March 31, 1997,
primarily due to increased capital expenditures incurred in connection with
the development and expansion of the TIGN.

39
<PAGE>

Operating Income. Operating income decreased by $1.7 million, from $2.2
million in the three months ended March 31, 1996, to $0.5 million in the three
months ended March 31, 1997, as a result of increases in sales commissions and
general administration expenses which were greater than increases in gross
profit.

Net Earnings (Loss). Net earnings (loss) decreased approximately $1.7
million, from $1.4 million in the three months ended March 31, 1996, to $(0.3)
million in the three months ended March 31, 1997, as a result of lower
operating income, a $0.7 million increase in interest expense and a $0.2
million increase in foreign currency transaction losses. The foreign currency
transaction losses were attributable primarily to a strengthening of the U.S.
Dollar in such period versus foreign currencies in which the company had
unhedged positions.

EBITDA. EBITDA decreased from $2.4 million in the three months ended March
31, 1996, to $1.0 million in the three months ended March 31, 1997.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues. Revenues increased 65.1%, or $84.1 million, from $129.1 million in
1995 to $213.2 million in 1996. The increase in revenues was due primarily to
an increase in billed customer minutes from the domestic and international
call-reorigination distribution channels and the first full year of wholesale
carrier operations. Revenues from international and domestic retail call
service usage increased by 39.8%, or $51.0 million, from $128.1 million in
1995 to $179.1 million in 1996. Revenues from wholesale carrier service usage
increased by $33.1 million, from $1.0 million in 1995 to $34.1 million in
1996. The wholesale revenue growth is largely the result of a significant
increase in traffic utilization from one international carrier, using bulk
call-reorigination to service its market more competitively.

Cost of Revenues. Cost of revenues increased 81.1%, or $67.4 million, from
$83.1 million in 1995, to $150.5 million in 1996. The increase in cost of
revenues was attributable primarily to increased traffic being handled by the
Company and increased costs associated with the expansion of the TIGN. The
increase in cost of revenues as a percent of revenues was attributable
primarily to the greater increase in the wholesale business as a percentage of
revenues. Other factors contributing to the increase in cost of revenues as a
percent of revenues included volume discounts to one large wholesale customer
in the fourth quarter of 1996, traffic rerouting penalties associated with
certain wholesale carrier traffic that exceeded the capacity of the Company's
network in the first two months of the fourth quarter; certain rate reductions
to customers in the U.S., Japan and France ahead of corresponding carrier cost
declines and the addition of fixed access costs associated with the expansion
of the TIGN.

The cost of revenues as a percentage of total revenues increased from 64.4%
in 1995 to 70.6% in 1996. Of the contributing factors identified above,
increases in wholesale business accounted for 3.0%, volume discounts being
offered accounted for 1.0% and rate reductions to customers in advance of
corresponding rate decreases from carriers and other factors accounted for the
additional 2.2% of the difference.

Gross Profit. Gross profit increased 36.3%, or $16.7 million, from $46.0
million in 1995 to $62.7 million in 1996. As a percentage of revenues, gross
profit decreased from 35.6% in 1995 to 29.4% in 1996.

Operating Expenses. Operating expenses increased 56.9%, or $22.7 million,
from $39.9 million in 1995 to $62.6 million in 1996. This increase was
primarily due to greater employee and contract employee costs, professional
fees for network and operating systems developers and legal, financial and
accounting costs associated with the development of the TIGN and the
supporting information and financial systems. From 1995 to 1996, the Company's
staff levels grew from 296 full and part time positions to 444 full and part
time positions, representing a 50.0% increase in the number of employees.
Growth was mainly in the professional category, with the hiring of additional
telecommunications technicians and programmers, and finance and accounting
professionals.

Bad debt expense increased $1.1 million, from $4.0 million in 1995, to $5.1
million in 1996. As a percentage of revenues, bad debt expense decreased from
3.1% in 1995 to 2.4% in 1996, primarily as a result of improvements in the
Company's collections systems and procedures.

40
<PAGE>

Depreciation and amortization increased $1.2 million, from $0.7 million in
1995, to $1.9 million in 1996. The increase in depreciation and amortization
is primarily attributable to increased capital expenditures incurred in
connection with the development and expansion of the TIGN and amortization of
goodwill associated with: (i) the acquisition of the operations of the
Company's Country Coordinator in France in August 1996; and (ii) expenses
incurred by the Company in connection with the private placement of its Senior
Subordinated Notes in November 1996.

The Company also incurred a non-cash stock option based compensation expense
of $1.0 million in the fourth quarter of 1996, resulting from the grant of
non-qualified and performance base stock options to certain employees.

As a percentage of revenues, operating expenses decreased from 30.9% in 1995
to 29.3% in 1996, as the additional costs and expenses were more than offset
by increased revenues during the period.

Operating Income. Operating income decreased by $6.0 million, from $6.1
million in 1995 to $0.1 million in 1996. As a percentage of revenues,
operating income decreased from 4.7% in 1995 to 0.1% in 1996, for the reasons
discussed above.

Interest Expense. Interest expense increased from $0.1 million for 1995 to
$0.6 million for 1996, an increase of $0.5 million. The increase is directly
attributable to the increase in long-term indebtedness during 1996.

Net Earnings (Loss). Net earnings decreased $3.9 million from $3.8 million
in 1995 to $(0.1) million in 1996.

EBITDA. EBITDA decreased from $7.0 million in 1995, to $3.0 million in 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenues. Revenues increased 87.9%, or $60.4 million, from $68.7 million in
1994 to $129.1 million in 1995. This increase was due primarily to an increase
in billed customer minutes of use from call-reorigination customers in Western
Europe, especially in France and the Netherlands.

Cost of Revenues. Cost of revenues increased 67.9%, or $33.6 million, from
approximately $49.5 million in 1994 to approximately $83.1 million in 1995. As
a percentage of revenues, cost of revenues declined from 72.0% to 64.4%,
primarily as a result of volume discounts under fixed-price lease agreements
and a reduction in rates charged by the Company's carrier suppliers.

Gross Profits. Gross profit increased 139.6%, or $26.8 million, from $19.2
million in 1994 to $46.0 million in 1995. As a percentage of revenues, gross
profit increased from 28.0% in 1994 to 35.6% in 1995, due to the decline in
the relative cost of revenues as a percentage of overall revenues.

Operating Expenses. Operating expenses increased 97.5%, or $19.7 million,
from $20.2 million in 1994 to $39.9 million in 1995, primarily as a result of
increases in commissions to independent agents and Country Coordinators
directly relating to the Company's increased revenues and to growth in sales,
customer service, billing, collections and accounting staff required to
support this growth. As a percentage of revenues, operating expenses increased
1.4% from 29.5% in 1994 to 30.9% in 1995, primarily due to the growth in staff
needed to accommodate the Company's growth in business volume and complexity.
Staff levels grew from 217 full and part time employees in 1994 to 296 in
1995, representing a 36.4% increase in the staff compliment.

Bad debt expense increased from $1.1 million, or 1.5% of revenues in 1994,
to $4.0 million, or 3.1% of revenues, in 1995, due to a rapid increase in
international sales, which outpaced the Company's collection abilities.

41
<PAGE>

Depreciation and amortization increased from $0.3 million in 1994, to $0.7
million in 1995, primarily due to increased capital expenditures incurred in
connection with the development and expansion of the Company's network.

Operating Income. Operating income increased by $7.1 million, from $(1.0)
million in 1994 to $6.1 million in 1995, as a result of increased sales and
gross profit with commensurate costs and expenses.

Net Earnings (Loss). Net earnings increased $4.3 million from $(0.5) million
in 1994 to $3.8 million in 1995, as a result of improved operating income.

EBITDA. EBITDA increased from $(0.6) million in 1994, to $7.0 million in
1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital investments consist of capital expenditures in
connection with the acquisition and maintenance of switching capacity and
funding of accounts receivable and other working capital requirements.
Historically, the Company's capital requirements have been funded primarily by
funds provided by operations, term loans and revolving credit facilities from
commercial banks, and by capital leases. The Company expects to require
substantial additional capital to develop and expand the TIGN, open new
offices, introduce new telecommunications services, upgrade and/or replace its
management information systems, prepay the outstanding Senior Subordinated
Notes and fund its anticipated operating losses and net cash outflows in the
near term.

The net proceeds to the Company from the Offering are estimated to be
approximately $35.6 million. The Company expects that approximately $25.8
million of such net proceeds will be used to expand the Telegroup Intelligent
Global Network and the balance of approximately $9.8 million will be used for
general corporate purposes, including further expansion of the TIGN, working
capital and/or, subject to the Company's ability to raise additional capital
of approximately $12.4 million, prepayment of all of the outstanding Senior
Subordinated Notes.

Net cash provided by operating activities was $3.8 million in the three
months ended March 31, 1996 and $6.2 million in the three months ended March
31, 1997. The net cash provided by operating activities in the three months
ended March 31, 1996 was primarily due to net earnings and a greater increase
in accounts payable to carriers relative to the increase in accounts
receivable from customers. The net cash provided by operating activities in
the three months ended March 31, 1997 was primarily due to a greater increase
in accounts payable to carriers relative to the increase in accounts
receivable from customers and an increase in the provision for credit losses
on accounts receivable. The $(0.7) million decreases in deposits and other
assets in the three months ended March 31, 1997 was due primarily to a deposit
to one vendor for card platform switch equipment.

Net cash provided by operating activities was $1.4 million in 1994, $5.6
million in 1995 and $4.9 million in 1996. The net cash provided by operating
activities in 1996 and 1995 was mainly a result of a greater increase in
accounts payable to carriers relative to the increase in accounts receivable
from customers. In 1995, net cash provided by operating activities was mainly
due to net earnings, changes in operating activities and off-setting increases
in current assets and liabilities for the year.

Net cash used in investing activities was $(2.5) million in the three months
ended March 31, 1996 and $(3.5) million in the three months ended March 31,
1997. The net cash used in the three month ended March 31, 1996 and March 31,
1997 were primarily due to increases in equipment purchases.

Net cash used in investing activities was $0.7 million in 1994, $2.8 million
in 1995 and $11.3 million in 1996. The net cash used in investing activities
in 1996, 1995 and 1994 was mainly due to an increase in equipment purchases,
and in 1996, the expenditure of $1.8 million in capitalized software
development costs.

Net cash used in financing activities was $(1.1) million in the three months
ended March 31, 1996 and $(0.4) million in the three months ended March 31,
1997. The net cash used in the three months ended March 31, 1996 was primarily
due to the paydown of a revolving operating line of credit. The net cash used
in the three months ended March 31, 1997 was primarily due to payments of long
term borrowings.

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<PAGE>

Net cash provided by (used in) financing activities was $1.0 million in
1994, $(0.1 million) in 1995 and $15.9 million in 1996. In November 1996, the
Company completed a private placement of its Senior Subordinated Notes for net
proceeds of $18.5 million.

In March, 1997, the Company entered into its $7.5 million Credit Facility.
The Credit Facility expires on June 30, 1998, is unsecured and contains
certain covenants relating to the tangible net worth, cash flow coverage,
total indebtedness and the current ratio of the Company. The interest rate
under the Credit Facility is LIBOR plus 1.25%. As of March 31, 1997 no
indebtedness was outstanding under the Credit Facility.

The development and expansion of the TIGN, the upgrade and/or replacement of
the Company's management information systems, the opening of new offices, the
introduction of new telecommunications services and the prepayment of the
Senior Subordinated Notes, as well as the funding of anticipated losses and
net cash outflows, will require substantial additional capital. At March 31,
1997, the Company had $7.3 million in commitments for capital expenditures.
The Company has identified an additional $53.4 million of capital expenditures
which the Company intends to undertake in 1997 and 1998 and approximately
$50.0 million of additional capital expenditures during the period from 1999
through 2001, subject to the ability to obtain additional financing.

The Company expects that the net proceeds from the Offering will provide the
Company with sufficient capital to fund planned capital expenditures and
anticipated operating losses through December 1997. The Company is in
discussions to obtain additional financing in the form of bank debt and/or
equity, equity-linked or debt securities providing aggregate gross proceeds of
at least $40 million (the "Anticipated Financings"), which, together with the
net proceeds from the Offering, is expected to provide sufficient funds for
the Company to expand its business as planned and to fund anticipated
operating losses and net cash outflows for the next 18 to 24 months. There can
be no assurance that the Company will be able to obtain the Anticipated
Financings or, if obtained, that it will be able to do so on a timely basis or
on terms favorable to the Company. In addition, the amount of the Company's
actual future capital requirements will depend upon many factors, including
the performance of the Company's business, the rate and manner in which it
expands the TIGN, increases staffing levels and customer growth, upgrades or
replaces management information systems and opens new offices, as well as
other factors that are not within the Company's control, including competitive
conditions and regulatory or other government actions. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the net
proceeds of the Offering, together with internally generated funds and funds
from other financings, including the Anticipated Financings, if obtained,
prove to be insufficient to fund the Company's growth and operations, then
some or all of the Company's development and expansion plans could be delayed
or abandoned, or the Company may be required to seek additional funds earlier
than currently anticipated. There can be no assurance that any such sources of
financing would be available to the Company in the future or, if available,
that they could be obtained on terms acceptable to the Company.

The Company continuously reviews opportunities to further its strategy
through strategic alliances with, investments in, or acquisitions of companies
that are complementary to the Company's operations. The Company may finance
such a venture with cash flow from operations or through additional bank debt
or one or more public offerings or private placements of securities. The
Company, however, has no present understanding, commitment or agreement with
respect to any such venture, and there can be no assurance that any such
venture will occur, or that the funds to finance such venture will be
available on reasonable terms, or at all.

FOREIGN CURRENCY

Although the Company's functional currency is the U.S. Dollar, the Company
derives a substantial percentage of its telecommunications revenues from
international sales. In countries where the local currency is freely
exchangeable and the Company is able to hedge its exposure, the Company bills
for its services in the local currency. In cases where the Company bills in a
local currency, the Company is exposed to the risk that the local currency
will depreciate between the date of billing and the date payment is received.
In certain countries in Europe, the Company purchases foreign exchange
contracts through its fiscal agent to hedge against this foreign exchange
risk. For the twelve months ended December 31, 1996, approximately $54.0
million (U.S.

43
<PAGE>

Dollar equivalent) or 25.3% of the Company's billings for telecommunications
services were billed in local currencies.

The Company's financial position and results of operations for the year
ended December 31, 1996, were not significantly affected by foreign currency
exchange rate fluctuation. As the Company continues to expand the TIGN and
increase its customer base in its targeted markets, an increasing proportion
of costs associated with operating and maintaining the TIGN, as well as local
selling expenses, will be billed in foreign currencies. Although the Company
and its subsidiaries attempt to match costs and revenues and borrowings and
repayments in terms of local currencies, there will be many instances in which
costs and revenues and borrowings and repayments will not be matched with
respect to currency denominations. The Company may choose to limit any
additional exposure to foreign exchange rate fluctuations by the purchase of
foreign forward exchange contracts or similar hedging strategies. There can be
no assurance that any currency hedging strategy would be successful in
avoiding exchange-related losses. See "Risk Factors--Foreign Exchange Rate
Risks; Repatriation Risks."

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal year
ending December 31, 1997. Retroactive application will be required. The
Company believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.

EFFECTS OF INFLATION

Inflation is not a material factor affecting the Company's business and has
not had a significant effect on the Company's operations to date.

SEASONAL FLUCTUATIONS

The Company has historically experienced, and expects to continue to
experience, reduced growth rates in revenues in the months of August and
December due to extended vacation time typically taken by Americans and
Europeans during these months.

44
<PAGE>

THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY

OVERVIEW

The international telecommunications industry provides voice and data
transmission from one national telephone network to another. The industry has
experienced dramatic changes during the past decade that have resulted in
significant growth in the use of services and in enhancements to technology.
The industry is expecting similar growth in revenue and traffic volume in the
foreseeable future. According to the ITU, the international telecommunications
industry accounted for $52.8 billion in revenues and 60.3 billion minutes of
use in 1995, increasing from $21.7 billion in revenues and 16.7 billion
minutes of use in 1986, which represents compound annual growth rates of 10%
and 15%, respectively. The ITU projects that revenues will approach $76
billion by the year 2000 with the volume of traffic expanding to 107 billion
minutes of use, representing compound annual growth rates of 7% and 12%,
respectively, from 1995. The market for telecommunications services is highly
concentrated, with Europe and the United States accounting for approximately
43% and 25%, respectively, of the industry's worldwide minutes of use in 1995.
AT&T, Deutsche Telecom, MCI, France Telecom and BT originated approximately
40% of the aggregate international long distance traffic minutes in 1995. The
Company's core markets accounted for approximately 60% of all international
long distance traffic minutes in 1995, with each market contributing as
follows: U.S. (25.9%), Germany (8.7%), the United Kingdom (6.7%), France
(4.7%), Switzerland (2.9%), Hong Kong (2.8%), Japan (2.7%), the Netherlands
(2.4%), Australia (1.7%), and Sweden (1.5%),

Growth and change in the international telecommunications industry have been
fueled by a number of factors, including greater consumer demand,
globalization of the industry, increases in international business travel,
privatization of ITOs, and growth of computerized transmission of voice and
data information. These trends have sharply increased the use of, and reliance
upon, telecommunications services throughout the world. The Company believes
that despite these trends, a high percentage of the world's businesses and
residential consumers continue to be subject to high prices with poor quality
of service which have been characteristic of many ITOs. Demand for improved
service and lower prices has created opportunities for private industry to
compete in the international telecommunications market. Increased competition,
in turn, has spurred a broadening of products and services, and new
technologies have contributed to improved quality and increased transmission
capacity and speed.

Consumer demand and competitive initiatives have also acted as catalysts for
government deregulation, especially in developed countries. Deregulation
accelerated in the United States in 1984 with the divestiture by AT&T of the
RBOCs. Today, there are over 500 U.S. long distance companies, most of which
are small- or medium-sized companies. In order to be successful, these small-
and medium-sized companies have to offer their customers a full range of
services, including international long distance. However, most of these
carriers do not have the critical mass of customers to receive volume
discounts on international traffic from the larger facilities-based carriers
such as AT&T, MCI and Sprint. In addition, these small- and medium-sized
companies have only a limited ability to invest in international facilities.
Alternative international carriers such as the Company have capitalized on
this demand for less expensive international transmission facilities. These
emerging international carriers are able to take advantage of larger traffic
volumes to obtain volume discounts on international routes (resale traffic)
and/or invest in facilities when volume on particular routes justify such
investments. As these emerging international carriers have become established,
they have also begun to carry overflow traffic from the larger long distance
providers that own overseas transmission facilities.

Deregulation in the United Kingdom began in 1981 when Mercury, a subsidiary
of Cable & Wireless plc, was granted a license to operate a facilities-based
network and compete with BT. Deregulation and privatization have also allowed
new long distance providers to emerge in other foreign markets. Deregulation
spread to Europe with the adoption of the "Directive on Competition in the
Markets for Telecommunication Services" in 1990. A series of subsequent EU
Directives, reports and actions are expected to result in substantial
deregulation of the telecommunications industries in most EU member states by
1998. A similar movement toward deregulation has already taken place in
Australia and New Zealand and is taking place in Japan, Mexico, Hong Kong and
other

45
<PAGE>

markets. Other governments have begun to allow competition for value-added and
other selected telecommunications services and features, including data and
facsimile services and certain restricted voice services. Many governments
also permit or tolerate the provision of international call-reorganization
services to customers in their territories. In many countries, however, the
rate of change and emergence of competition remain slow and the timing and
extent of future deregulation is uncertain.

On February 15, 1997, pursuant to the WTO Agreement, the United States and
more than 60 members of the WTO agreed to open their respective
telecommunications markets to competition and foreign ownership and adopted
regulatory measures to protect market entrants against anticompetitive
behavior by dominant telephone companies. Although the Company believes that
the WTO Agreement could provide the Company with significant opportunities to
compete in markets that were not previously accessible, reduce its costs and
provide more reliable services, the WTO Agreement could also provide similar
opportunities to the Company's competitors. In some countries, for example,
the Company will be allowed to own facilities or to interconnect to the public
switched network on reasonable and non-discriminatory terms. There can be no
assurance, however, that the pro-competitive effects of the WTO Agreement will
not have a material adverse effect on the Company's business, financial
condition and results of operations or that members of the WTO will implement
the terms of the WTO Agreement.

By eroding the traditional monopolies held by ITOs, many of which are wholly
or partially government owned, deregulation is providing U.S.-based providers
the opportunity to negotiate more favorable agreements with both the
traditional ITOs and emerging foreign providers. In addition, deregulation in
certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities in order to terminate their own traffic
and begin to carry international long distance traffic originated in those
countries.

INTERNATIONAL SWITCHED LONG DISTANCE SERVICES

International switched long distance services are provided through switching
and transmission facilities that automatically route calls to circuits based
upon a predetermined set of routing criteria. In the U.S., an international
long distance call typically originates on a LEC's network and is switched to
the caller's domestic long distance carrier. The domestic long distance
provider then carries the call to its own or another carrier's international
gateway switch. From there it is carried to a corresponding gateway switch
operated in the country of destination by the ITO of that country and then is
routed to the party being called though that country's domestic telephone
network.

International long distance providers can generally be categorized by the
extent, if any, of their ownership and use of their own switches and
transmission facilities. The largest U.S. carriers, AT&T, MCI, Sprint, and
WorldCom primarily utilize owned U.S. transmission facilities and generally
use other long distance providers to carry their overflow traffic. Only the
largest U.S. carriers have operating agreements with, and own transmission
facilities that carry traffic to, the over 200 countries to which major long
distance providers generally offer service. A significantly larger group of
long distance providers own and operate their own switches but either rely
solely on resale agreements with other long distance carriers to terminate
their traffic or use a combination of resale agreements and leased or owned
facilities in order to terminate their traffic, as discussed below.

Switched Resale Arrangements. A switched resale arrangement typically
involves the wholesale purchase of termination services by one long distance
provider from another on a variable, per minute basis. Such resale, which was
first permitted with the deregulation of the U.S. market, enables the
emergence of alternative international providers that rely at least in part on
transmission services acquired on a wholesale basis from other long distance
providers. A single international call may pass through the facilities of
multiple long distance resellers before it reaches the foreign facilities-
based carrier that ultimately terminates the call. Resale arrangements set per
minute prices for different routes, which may be guaranteed for a set time
period or subject to fluctuation following notice. The resale market for
international transmission is constantly changing, as new long distance
resellers emerge and existing providers respond to fluctuating costs and
competitive pressures. In order to effectively manage costs when utilizing
resale arrangements, long distance providers need timely access

46
<PAGE>

to changing market data and must quickly react to changes in costs through
pricing adjustments or routing decisions. The Company has entered into resale
agreements with more than 20 carriers in the U.S., U.K., Canada, the
Netherlands, Denmark, Australia, Hong Kong and Switzerland, four of which
accounted for approximately 60% of the Company's cost of revenues for the year
ended December 31, 1996 and 63% for the three months ended March 31, 1997.

Transit Arrangements. In addition to utilizing an operating agreement to
terminate traffic delivered from one country directly to another, an
international long distance provider may enter into transit arrangements
pursuant to which a long distance provider in an intermediate country carries
the traffic to the country of destination.

Alternative Transit/Termination Arrangements. As the international long
distance market began to deregulate, long distance providers developed
alternative transit/termination arrangements in an effort to decrease their
costs of terminating international traffic. Some of the more significant of
these arrangements include refiling, ISR and ownership of switching facilities
in foreign countries. Refiling of traffic, which takes advantage of
disparities in settlement rates between different countries, allows traffic to
a destination country to be treated as if it originated in another country
that enjoys lower settlement rates with the destination country, thereby
resulting in a lower overall termination cost. The difference between transit
and refiling is that, with respect to transit, the long distance provider in
the destination country has a direct relationship with the originating long
distance provider and is aware of the arrangement, while with refiling, it is
likely that the long distance provider in the destination country is not aware
of the country in which the traffic originated or of the originating carrier.
To date, the FCC has made no pronouncement as to whether refiling complies
with either U.S. or ITU regulations, although it is considering such issues in
an existing proceeding. While the Company's revenues attributable to refiling
arrangements are minimal, refiling may constitute a larger portion of the
Company's operations in the future.

With ISR, a long distance provider completely bypasses the accounting rates
system by connecting an international leased private line (i) to the PSTN of
two countries or (ii) directly to the premises of a customer or partner in one
country and the PSTN in the other country. While ISR currently is only
sanctioned by applicable regulatory authorities on a limited number of routes,
including U.S.-U.K., U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.K.-
worldwide and Canada-U.K., it is increasing in use and is expected to expand
significantly as deregulation of the international telecommunications market
continues. In addition, deregulation has made it possible for U.S.-based long
distance providers to establish their own switching facilities in certain
foreign countries, enabling them to directly terminate traffic. See
"Business--Government Regulation." The Company has been granted a license by
the FCC to engage in ISR in the U.S. It also has direct leased capacity into
Canada and is preparing to activate such links into Australia and New Zealand,
consistent with applicable laws. In the U.K., ISR is permitted with any
country, provided the U.K. based carrier has been granted the appropriate
license. The Company's wholly owned U.K. subsidiary, Telegroup UK Limited, has
been granted its U.K. ISR license. The Company anticipates that the FCC will
soon approve ISR with Australia, Denmark and Finland, with Japan and,
possibly, Hong Kong to follow in the near future.

Operating Agreements. Under traditional operating agreements, international
long distance traffic is exchanged under bilateral agreements between
international long distance providers that have rights in facilities in
different countries. Operating agreements provide for the termination of
traffic in, and return traffic from, the international long distance
providers' respective countries at a negotiated "accounting rate." Under a
traditional operating agreement, the international long distance provider that
originates more traffic compensates the long distance provider in the other
country by paying an amount determined by multiplying the net traffic
imbalance by the latter's share of the accounting rate.

The Company currently has an operating agreement with AT&T Canada (formerly
Unitel), Canada's second largest carrier. This agreement is used primarily to
transit/terminate traffic between the U.S. and Canada. Also, the Company has
purchased capacity on the CANTAT-3 cable system as a means of linking its
switching facilities in the U.S. and the U.K. In addition, the Company both
leases transmission facilities and resells

47
<PAGE>

switched minutes from carriers that have operating agreements. By aggressively
negotiating resale agreements with carriers who have entered into operating
agreements, the Company takes advantage of such carrier's economic incentive
to increase outgoing traffic to a particular country. The resold call volume
increases the market share for that carrier to a particular country, thereby
increasing such carrier's proportionate return traffic from the correspondent
under the accounting rate process. The Company may in the future enter into
additional operating agreements if such agreements would improve the Company's
profitability over these routes.

Under a typical operating agreement each carrier has a right in its portion
of the transmission facilities between two countries. A carrier gains
ownership rights in a digital fiber-optic cable by purchasing direct ownership
in a particular cable (usually prior to the time the cable is placed in
service), by acquiring an "Indefeasible Right of Use" ("IRU") in a previously
installed cable, or by leasing or obtaining capacity from another long
distance provider that either has direct ownership or IRU rights in the cable.
In situations where a long distance provider has sufficiently high traffic
volume, routing calls across leased or IRU cable capacity is generally more
cost-effective on a per call basis than the use of resale arrangements with
other long distance providers. However, leased capacity and acquisition of IRU
rights require a company to make a substantial initial investment of its
capital based on the amount of capacity being acquired. Telegroup's interest
in the CANTAT-3 Trans-Atlantic cable between New York and the U.K. is 50% IRU
and 50% leased. The Company intends to acquire 100% IRU ownership.

The rapidly changing international telecommunications market has created a
significant opportunity for carriers that can offer high quality, low cost
international long distance service. Deregulation, privatization, the
expansion of the resale market and other trends influencing the international
telecommunications market are resulting in decreased termination costs, a
proliferation of routing options, and increased competition. To be successful,
both the alternative and established international long distance companies
will need to aggregate enough traffic to maximize the use of both facilities-
based and resale opportunities, maintain systems which enable analysis of
multiple routing options, invest in facilities and switches and remain
flexible enough to locate and route traffic through the most advantageous
routes.

COMPETITIVE OPPORTUNITIES AND ADVANCES IN TECHNOLOGY

The combination of a continually expanding global telecommunications market,
consumer demand for lower prices with improved quality and service, and
ongoing deregulation has created competitive opportunities in many countries.
Further, as more small- and medium-sized businesses and residential customers
have come to rely on international telecommunications services for their
business and personal needs, an increasingly diverse and sophisticated
customer base has generated demand for a greater variety of services.
Increased competition has also resulted in improved quality of service at
lower prices. Similarly, new technologies, including fiber-optic cable and
improvements in digital compression, have improved quality and increased
transmission capacities and speed, with transmission costs decreasing as a
result.

Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. These
include customer-paid local access, international and national toll-free
access, direct digital access through a dedicated line, equal access through
automated routing from the PSTN and call-reorigination. The type of access
offered depends on the proximity of switching facilities to the customer, the
needs of the customer, and the regulatory environment in which the carrier
competes. Overall, these changes have resulted in a trend towards bypassing
traditional international long distance operating agreements as international
long distance companies seek to operate more efficiently.

In a deregulated country such as the United States, carriers can establish
switching facilities, own or lease fiber-optic cable, enter into operating
agreements with foreign carriers and, accordingly, provide direct access
service. In markets that have not deregulated or are slow in implementing
deregulation, such as South Africa, international long distance carriers have
used advances in technology to develop innovative alternative access methods,
such as call-reorigination. In other countries, such as Japan and most EU
member states, where deregulation is imminent but not complete, carriers are
permitted to offer facilities-based data and facsimile

48
<PAGE>

services, as well as limited voice services including those to CUGs, but are
as yet precluded from offering full voice telephony. As countries deregulate,
the demand for alternative access methods typically decreases as carriers are
permitted to offer a wider range of facilities-based services on a transparent
basis.

The most common form of alternative international access, traditional call-
reorigination, avoids the high international rates offered by the ITO in a
particular regulated country by providing dial tone from a deregulated
country, typically the United States. To place a call using traditional call-
reorigination, a user dials a unique phone number to an international
carrier's switching center and then hangs up after it rings. The user then
receives an automated callback providing dial tone from the U.S. which enables
the user to complete the call. Technical innovations, ranging from inexpensive
dialers to sophisticated in-country switching platforms, have enabled
telecommunications carriers to offer a "transparent" form of call-
reorigination. The customer dials into the local switch, and then dials the
international number in the usual fashion, without the "hang-up" and
"callback," and the international call is automatically and swiftly processed.

Historically, a significant portion of the Company's revenue and operating
income has been derived from the provision of international traditional call-
reorigination services to retail customers on a global basis. The Company
believes that as deregulation occurs and competition increases in various
markets around the world, the pricing advantage of traditional call-
reorigination to most destinations relative to conventional call-through
international long distance service will diminish in those markets. The
Company believes that, in order to maintain its existing customer base and to
attract new customers in such markets, it will need to be able to offer call-
through services at prices significantly below the current prices charged for
call-reorigination. See "Risk Factors--Expansion and Operation of the TIGN."

The worldwide telecommunications market is increasingly served by a wide
range of telecommunications providers, many of which seek to focus on only a
limited segment of the overall market. ITOs and major global carriers
typically concentrate their efforts on multinational companies and other high
volume long distance telephone users that demand high quality and customized
services. Many alternative carriers, such as the Company, concentrate on
serving the international long distance needs of small- and medium-sized
business and high-volume residential customers who in the aggregate have
significant international long distance traffic.

The following table provides an overview of the Company's core international
telecommunications markets:

<TABLE>
<CAPTION>
1995
ORIGINATED
MINUTES OF
INT'L TRAFFIC DEREGULATION
COUNTRY (IN BILLIONS)(1) DATE ITO(S)
------- ---------------- ------------ ---------------------------
<S> <C> <C> <C>
United States... 15.6 1984(2) AT&T, MCI, Sprint, WorldCom
Netherlands..... 1.5 7/1/1997(3)(4) KPN
France.......... 2.8 1/1/1998(3) France Telecom
United Kingdom.. 4.0 1981(5) BT, Mercury
Germany......... 5.2 1/1/1998(3) Deutsche Telecom
Switzerland..... 1.8 1/1/1998(3) Swiss PTT
Sweden.......... 0.9 1980(6) Telia AB, Tele-2
Hong Kong....... 1.7 1995(7) HKTI
Australia....... 1.0 1991(8) Telstra, OPTUS
Japan........... 1.6 1998 KDD, IDC, ITJ
</TABLE>
- --------
(1) Source: TeleGeography 1996/97.
(2) Deregulation accelerated in the United States in 1984 with the divestiture
by AT&T of the RBOCs.
(3) Date set for complete liberalization of the telecommunications market
established by the EU Full Competition Directive.
(4) Current law prohibits competition with the ITO in Voice Telephony until
July 1, 1997. It is possible, but not expected, that this prohibition will
be extended until later in 1997.
(5) The deregulation of the United Kingdom telecommunications market began in
1981, when a second national carrier, Mercury, was proposed.
(6) Although Sweden is subject to the EU deadline for complete liberalization,
it began permitting competition in 1980.
(7) To date, Hong Kong has not officially deregulated its telecommunications
market. However, in 1995, the Hong Kong regulator granted local FTNS
licenses to three carriers, and has since permitted the provision of
value-added and data services. In addition, it has recently announced that
it will grant licenses for the provision of virtual private network
services. China is scheduled to assume sovereignty of Hong Kong on July 1,
1997. See "Risk Factors--Substantial Government Regulation--The Pacific
Rim."
(8) Liberalization began in Australia in 1991, when a second facilities-based
carrier, OPTUS, was authorized to begin operation. Under Australian law,
competitors to the ITO may own international facilities beginning on July
1, 1997.

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<PAGE>

United States. The U.S. long distance market, with 1995 revenue of
approximately $70.0 billion, is the largest and most competitive in the world.
The international segment of this market was 15.6 billion minutes of usage in
1995. According to TeleGeography, a leading industry publication, five of the
top six international calling routes originate or terminate in the U.S. The
U.S. domestic long distance market is largely dominated by the four major
carriers: AT&T (54.3%), MCI (28.5%), Sprint (11.3%), and WorldCom (3.5%),
which collectively control approximately 97% of the market. Several second and
third tier carriers, such as Frontier, LCI, Excel Communications, Inc., Tel-
Save Holdings, Inc. and Telco Communications Group, Inc., have made inroads in
both the high-volume residential and small- and medium-sized business sectors.
The second and third tier providers have largely employed a strategy of
switched resale targeted at the national long distance market. The
international long distance market for small- and medium-sized businesses,
which is the Company's primary focus, has been largely ignored by the major
carriers as well as the second and third tier national long distance
providers.

The Company believes that the U.S. long distance market will become more
competitive in the near future as the 1996 Telecommunications Act permits RBOC
entry into long distance. The Company believes that the RBOCs will focus their
marketing efforts on the high-end of the long distance market, where they will
be able to offer the greatest savings on local access charges to large
business customers, and on the low-end of the market, where they will be able
to provide small residential users with the convenience of a single bill.

Netherlands. The market for international telecommunications in the
Netherlands has historically been dominated by the Dutch ITO, KPN. The Company
believes it is the largest alternative provider of international
telecommunications services in this market. Two alternative carriers, Telfort
and Enertel, are currently building out networks to provide competitive
national and international services. The Company believes that new entrants
will drive down transmission costs and potentially open up opportunities in
the national long distance and wholesale sectors of the market.

France. The market for international telecommunications in France has
historically been dominated by the French ITO, France Telecom. The Company
believes it is the largest alternative provider of international
telecommunications services in this market. Telecom Developpement, a
consortium led by SNCF, the French National Railways Company, and Compagnie
Generale des Eaux, the leading French telecommunications group, has commenced
construction of a facilities-based, digital long distance network to offer a
broad range of voice and data services beginning in July 1997. In addition,
other competitors have entered the market, including WorldCom which has begun
a build-out of local fiber loops in the Paris region and Unisource which has
installed switches connected by leased lines throughout France.

United Kingdom. The deregulation of the U.K. telecommunications industry
began in 1981 when Mercury, a subsidiary of Cable & Wireless plc, was granted
a license to operate a facilities-based network and compete with BT. This
duopoly over all public voice telecommunication services continued until 1991
when the government further liberated the U.K. national telecommunications
market by stating it would license new national and regional public
telecommunications operators.

The U.K. international telecommunications market was not fully liberalized
until 1996. Competition was introduced into this market from 1993 onwards
through licensing of international simple resellers and other public operators
which were allowed to buy international private leased circuits by means of
which they could provide services to the public. In addition to BT and Mercury
there are over 40 other companies in the U.K. which presently hold licenses
authorizing the operation of systems which may be connected to foreign
systems. Some of these other new international licensees such as Energis and
WorldCom have commenced installing new international cables. The Company
believes that new market entrants will drive down costs and potentially extend
opportunities not only in the U.K. national long distance and wholesale
sectors but also in the U.K. international markets.

Germany. The market for international telecommunications in Germany has
historically been dominated by the German ITO, Deutsche Telecom. Mannesmann
Arcor, Viag Interkom, as well as o.tel.o GmbH a consortium of German utilities
companies, have commenced construction of a facilities-based digital long

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distance networks that are expected to offer a broad range of voice and data
services in competition with Deutsche Telecom. In addition, other competitors
have entered the market, including WorldCom which has begun build-out of local
fiber loops in the Frankfurt region.

Switzerland. The international telecommunications market in Switzerland has
been historically dominated by the ITO, Swiss PTT. Although Switzerland is not
a member of the EU, its government has announced that it will voluntarily
conform to the EU objective of deregulating telecommunications markets and
allowing cross border competition. Swiss PTT is a member of the Unisource
consortium. Global One has established a presence in Switzerland and is
currently offering private network services to large, corporate and
institutional customers. The Company believes that it is the primary
competitor to Swiss PTT for international voice services in Switzerland.

Sweden. The telecommunications market in Sweden is among the most
deregulated in the world. Sweden has liberalized its telecommunications market
so that competitors, led by Tele-2, accounted for approximately 30% of the
market in 1995. Telia is a member of the Unisource consortium and is also
authorized to provide facilities-based and resold services between the United
States and Sweden. The Company believes it will have opportunities to enter
into resale agreements with one or more companies in Sweden which will allow
it to offer fully transparent access to the TIGN and possibly national long
distance service as well.

Hong Kong. HKTI currently holds an exclusive license until September 30,
2006 to provide a variety of international services including the right to
operate an international gateway for the handling of all outgoing and incoming
international calls. There are four local fixed telephone network operators,
including the former monopoly, Hong Kong Telephone Company, that have been
licensed by the Office of the Telecommunications Authority ("OFTA"), the Hong
Kong regulator. Despite the fact that HKTI has the exclusive right under its
license to provide international telephone services, all three of the new
local fixed network operators have in recent years gained a significant share
of the international long distance call market by utilizing U.S. and Canada-
based call-reorigination services. Effective July 1, 1997, control of Hong
Kong will revert back to China, and it is unclear what effect, if any, this
will have on the Company's operations in Hong Kong. See "Risk Factors--
Substantial Government Regulation" and "Business--Government Regulation."

Australia. The market for international telecommunications services in
Australia has historically been dominated by Telstra. A smaller share of the
market is held by a new carrier, OPTUS. In the last two years, switched and
switchless service providers have increased their market share of
international telecommunications in Australia from 3.4% to 14%, largely at the
expense of Telstra. Recently, AAPT and Axicorp, a division of Primus, have
leased nationwide network capacity to compete with the two ITOs. Current
legislation prohibits service providers from installing and maintaining line
links between specific locations in Australia, but open competition will
commence on July 1, 1997, under the 1997 Australian Telecommunications Act.

Japan. The market for international long distance telecommunications
services in Japan has historically been dominated by the Japanese ITO, KDD. In
recent years, IDC and ITJ have grown rapidly and each have captured
approximately 17% of the market. Recently, it was announced that NTT, the
dominant provider of local and long distance services in Japan that was
prohibited from entering the international market, would be split into three
companies, including one international service provider. It was also announced
that ITJ will merge with a domestic Japanese carrier, Japan Telecom, Inc.
Additionally, several smaller companies have entered the Japanese market in
the last few years offering call-reorigination services.

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BUSINESS

OVERVIEW

Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small- and medium-
sized business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network, the Telegroup Intelligent Global Network, to
deliver its services in a reliable, flexible and cost-effective manner to
approximately 204,000 active customers worldwide. According to FCC statistics,
Telegroup was the sixth largest U.S. carrier of outbound international traffic
in 1995. Telegroup's revenues have increased from $29.8 million in 1993 to
$213.2 million in 1996. In 1993, the Company had an operating loss of $450,000
and a net loss of $707,000, compared to operating income of $105,000 and a net
loss of $118,000 in 1996.

Telegroup provides an extensive range of telecommunications services on a
global basis under the Spectra, Global Access and other brand names. The
Company's services are typically priced competitively with the services of
other alternative telecommunications providers and below the prices offered by
the ITOs, which are often government-owned or protected telephone companies.
While the Company offers a broad range of telecommunications services, the
services offered in a particular market vary depending upon regulatory
constraints and local market demands. Telegroup historically has offered
traditional call-reorigination service (also known as callback) to penetrate
international markets having regulatory constraints. As major markets continue
to deregulate, the Company intends to migrate an increasing portion of its
customer base to "call-through" service, which includes conventional
international long distance service and a "transparent" form of call-
reorigination. The Company markets its call-through service under the brand
name Global Access Direct and its traditional call-reorigination service under
the brand name Global Access CallBack. Currently, the Company offers both
international and national long distance service, prepaid and postpaid calling
cards, toll-free service and enhanced services such as fax store and forward,
fax-mail, voice-mail and call conferencing. The Company believes its broad
array of basic and enhanced services enables the Company to offer a
comprehensive solution to its customers' telecommunications needs. The Company
also resells switched minutes on a wholesale basis to other telecommunications
providers and carriers. See "--Services."

Telegroup's extensive sales, marketing and customer service organization
consists of a worldwide network of independent agents and an internal sales
force who market Telegroup's services and provide customer service, typically
in local languages and in accordance with the cultural norms of the countries
and regions in which they operate. The Company's local sales, marketing and
customer service organization permits the Company to continually monitor
changes in each market and quickly modify service and sales strategies in
response to changes in particular markets. In addition, the Company believes
that it can leverage its global sales and marketing organization to quickly
and efficiently market new and innovative service offerings. As of April 30,
1997, the Company had approximately 1,300 independent agents worldwide. Thirty
Country Coordinators are responsible for coordinating Telegroup's operations,
including sales, marketing, customer service and independent agent support, in
63 countries. In addition, the Company has 30 internal sales personnel in the
United States and one each in France, Germany and the United Kingdom, and
intends to establish additional internal sales departments in selected core
markets. The Company believes that its comprehensive global sales, marketing
and customer service organization will enable the Company to increase its
market share and position itself as the leading alternative international long
distance provider in each of its target markets. The Company believes that it
is the largest alternative international long distance provider in three of
the largest international telecommunications markets in the world--France, the
Netherlands and Switzerland. See "--Sales, Marketing and Customer Service."

The Telegroup Intelligent Global Network includes a central Network
Operations Center in Iowa City, Iowa, as well as switches, owned and leased
transmission capacity and a proprietary distributed intelligent network

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architecture. The TIGN is designed to allow customer-specific information,
such as credit limits, language selection, waiting voice-mail and faxes, and
speed dial numbers to be distributed efficiently over a parallel data network
wherever Telegroup has installed a TIGN switch. In addition, the open,
programmable architecture of the TIGN allows the Company to rapidly deploy new
features, improve service quality, and reduce costs through least cost
routing. As of April 30, 1997, the TIGN consisted of (i) the Network
Operations Center, (ii) 13 Excel, NorTel or Harris switches in Fairfield,
Iowa, New York City, London, Paris, Amsterdam, Hong Kong, Sydney and Tokyo,
(iii) two enhanced services platforms in New York and Hong Kong, (iv) two
trans-oceanic fiber-optic cable links connecting its New York switches to its
switches in London and Sydney, and (v) leased parallel data transmission
capacity connecting Telegroup's switches to each other and to the networks of
other international and national carriers. The Company intends to further
develop the TIGN by upgrading existing facilities and by adding switches and
transmission capacity principally in and between major markets where the
Company has established a substantial customer base. See "--Network and
Operations."

MARKET OPPORTUNITY

The global market for international telecommunications services is
undergoing significant deregulation and reform. The industry is being shaped
by the following trends: (i) deregulation and privatization of
telecommunications markets worldwide; (ii) diversification of services through
technological innovation; and (iii) globalization of major carriers through
market expansion, consolidation and strategic alliances. As a result of these
factors, it is anticipated that the industry will experience considerable
growth in the foreseeable future, both in terms of traffic volume and revenue.
According to the ITU, the international telecommunications industry accounted
for $52.8 billion in revenues and 60.3 billion minutes of use in 1995,
increasing from $21.7 billion in revenues and 16.7 billion minutes of use in
1986, which represents compound annual growth rates of 10% and 15%,
respectively. The ITU projects that international telecommunications revenues
will approach $76.0 billion by the year 2000 with the volume of traffic
expanding to 107.0 billion minutes of use, representing compound annual growth
rates of 7% and 12%, respectively, from 1995.

Deregulation and Privatization of Telecommunications Markets
Worldwide. Significant legislation and agreements have been adopted since the
beginning of 1996 which are expected to lead to the liberalization of the
majority of the world's telecommunication markets, including:

. The U.S. Telecommunications Act, signed in February 1996, establishes
parameters for the implementation of full competition in the U.S.
national long distance market.

. The EU Full Competition Directive, adopted in March 1996, abolishes
exclusive rights for the provision of Voice Telephony services
throughout the EU and the PSTNs of any member country of the EU by
January 1, 1998, subject to extension by certain EU member countries.

. The World Trade Organization Agreement, signed in February 1997, creates
a framework under which more than 60 countries have committed to
liberalize their telecommunications laws in order to permit increased
competition and, in most cases, foreign ownership in their
telecommunications markets, beginning in 1998.

. The 1997 Australian Telecommunications Act, adopted in March 1997, opens
the Australian market for the provision of telecommunications services
over a company's own telephone lines.

The Company believes that the foregoing initiatives, as well as other
proposed legislation and agreements, will result in reduced restrictions on
the ability of alternative carriers such as Telegroup to provide
telecommunications services in the subject markets. In many markets, Telegroup
believes that long distance callers have been charged relatively high,
uncompetitive prices by the ITOs in exchange for limited services. The ITU's
projections for substantially increased international minutes of use and
revenue by the year 2000 are based in part on the belief that reduced pricing
as a result of deregulation and competition will result in a substantial
increase in the demand for telecommunications services in most markets.
Telegroup believes that its

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comprehensive global sales, marketing and customer service organization
uniquely positions it among alternative telecommunications providers to
capitalize on the opportunities presented by these reduced restrictions.
Telegroup also believes that such global regulatory reform will expand the
availability of transmission capacity, enabling Telegroup to strategically add
transmission capacity to its network in order to reduce its cost of sales
through least cost routing.

Diversification of Services through Technological Innovation. The
deregulation of telecommunications markets throughout the world has coincided
with substantial technological innovation. The proliferation of digital fiber-
optic cable in and between major markets has significantly increased
transmission capacity, speed and flexibility. Improvements in computer
software and processing technology have enabled telecommunications providers
to offer a broad range of enhanced voice and data services. Unlike many
established telecommunications providers, the Company is not encumbered by
large, inflexible legacy switching systems. The TIGN uses primarily open-
architecture Excel switches which can be programmed to meet the specifications
of new enhanced service platforms. The Company believes that expansion of the
TIGN will enable it to deliver a flexible, comprehensive set of enhanced
telecommunications services to meet the evolving needs of its global customer
base.

Globalization of Major Carriers through Market Expansion, Consolidation and
Strategic Alliances. Faced with the prospect of declining market share in
their respective markets, AT&T and several of the European ITOs have sought
out alternative sources of revenue by expanding into new markets.
Additionally, certain ITOs have pursued mergers, acquisitions and other
strategic alliances, such as the proposed BT/MCI merger and the formation of
the Global One and Unisource consortia, to provide telecommunications services
in additional markets. Telegroup believes that it is uniquely positioned to
take advantage of these trends in the global telecommunications marketplace.
As telecommunications markets are deregulated, the Company believes that its
global sales, marketing and customer service organization and the design of
the TIGN will enable the Company to expand its customer base and its service
offerings in existing and new markets, and to reduce its cost of transmission
service obtained from other carriers. The Company believes that it will be
better able to negotiate favorable alternative transit/termination agreements
with facilities-based carriers or consortia in multiple markets because of its
large, globally distributed customer base and substantial traffic volumes.

BUSINESS STRATEGY

Telegroup's objective is to become the leading alternative provider of
telecommunications services to small- and medium-sized business and high-
volume residential customers in its existing core markets and in selected
target markets. Telegroup's strategy for achieving this objective is to
deliver additional services to customers in its markets through the continued
deployment of the TIGN and to expand its sales and marketing organization into
new target markets. The Company's business strategy includes the following key
elements:

Expand the Telegroup Intelligent Global Network. Telegroup is currently
expanding the TIGN by installing switches, purchasing ownership in additional
fiber-optic cable and leasing additional dedicated transmission capacity in
strategically located areas of customer concentration in Western Europe and
the Pacific Rim. During the next 18 months, the Company has scheduled the
installation of additional switches in New Jersey, Los Angeles, Chicago,
Miami, Denmark, Germany, Switzerland, Italy, and Brazil and additional nodes
in Sweden, Norway, Belgium, Italy, New Zealand, Germany, Switzerland and
Japan. Telegroup also anticipates purchasing ownership in additional fiber-
optic cables and leasing additional dedicated transmission capacity to reduce
the Company's per minute transmission costs. The Company's ability to achieve
these goals is dependent upon, among other things, its ability to raise
additional financing. See "Risk Factors--Need for Additional Financing." The
Company believes the expansion of the TIGN will enable Telegroup to migrate
customers from traditional call-reorigination services to Global Access
Direct. In order to maximize the Company's return on invested capital, the
Company employs a success-based approach to capital expenditures, locating new
switching facilities in markets where the Company has established a customer
base by marketing its call-reorigination services.

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Expand Global Sales, Marketing and Customer Service Organization. The
Company believes that its experience in establishing one of the most
comprehensive global sales, marketing and customer service organizations in
the international telecommunications industry provides it with a competitive
advantage. The Company intends to expand its global sales, marketing and
customer service organization in new and existing markets. In new target
markets, the Company relies primarily on independent agents to develop a
customer base while minimizing its capital investment and management
requirements. As the customer base in a particular market develops, the
Company intends to selectively acquire the operations of its Country
Coordinator serving such market and recruit and train additional internal
sales personnel and independent agents. The Company believes that a direct
sales and marketing organization complements its existing independent agents
by enabling Telegroup to conduct test marketing and quickly implement new
marketing strategies. In addition to its sales offices in France, Germany and
the United Kingdom, the Company intends to open or acquire additional offices
in target markets in Europe and the Pacific Rim during 1997 and 1998.

Position Telegroup as a Local Provider of Global Telecommunications
Services. Telegroup is one of the only alternative telecommunications
providers that offers in-country and regional customer service offices in
major markets on a global basis. The Company has 30 Country Coordinators
providing customer service in 63 countries. Telegroup believes this local
presence provides an important competitive advantage, allowing the Company to
tailor customer service and marketing to meet the specific needs of its
customers in a particular market. Customer service representatives speak the
local languages and are aware of the cultural norms in the countries in which
they operate. The Company continually monitors changes in the local market and
seeks to quickly modify service and sales strategies in response to such
changes. In many instances, this type of dedicated customer service and
marketing is not available to the Company's target customer base from the
ITOs.

Target Small- and Medium-Sized Business Customers. The Company believes that
small- and medium-sized business customers focus principally on obtaining
quality and breadth of service at low prices and have historically been
underserved by the ITOs and the major global telecommunications carriers.
Through the deployment of the TIGN, the Company expects to migrate existing
customers from traditional call-reorigination services to Global Access
Direct, thereby addressing the telecommunications needs of a wider base of
small- and medium-sized business customers. Telegroup believes that, with its
direct, face-to-face sales force and dedicated customer service, it can more
effectively attract and serve these business customers.

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business partners that can complement the Company's service offerings. The
Company is continuously reviewing opportunities and believes that such
acquisitions, investments and strategic alliances are an important means of
increasing network traffic volume and achieving economies of scale. The
Company believes that its management's extensive entrepreneurial, operational,
technical and financial expertise will enable the Company to identify and
rapidly take advantage of such opportunities.

CUSTOMERS

Telegroup's worldwide retail customer base is comprised of residential
customers and small- to medium-sized businesses with monthly bills averaging
between $50 and $5,000. At March 31, 1997, Telegroup had approximately 204,000
active retail customers (those that incurred charges during March 1997),
consisting of approximately 45,000 U.S. domestic and approximately 159,000
international customers. In addition, Telegroup markets its wholesale services
to both facilities-based carriers and switched-based long distance providers
that purchase the Company's service for resale to their own customers. As of
March 31, 1997, Telegroup had 22 active wholesale carrier customers.

The following chart sets forth the Company's 1996 combined retail and
wholesale revenues in its eight largest markets, determined by customers'
billing addresses:

<TABLE>
<CAPTION>
PERCENTAGE
COUNTRY 1996 REVENUES OF TOTAL REVENUES
------- ------------- -----------------
(IN MILLIONS)
<S> <C> <C>
United States............................. $60.4 28.3%
Netherlands............................... 23.0 10.8
Hong Kong................................. 15.6 7.3
France.................................... 15.4 7.2
Switzerland............................... 13.5 6.3
Australia................................. 8.7 4.1
Japan..................................... 8.0 3.8
Germany................................... 7.8 3.7
</TABLE>

For the year ended December 31, 1996, the Company's revenues from retail and
wholesale customers represented 84% and 16%, respectively, of the Company's
total revenues. For the three months ended March 31, 1997, the Company's
revenues from retail and wholesale customers represented 77% and 23%,
respectively, of the Company's total revenues.

Retail Customers. The Company's retail customer base is diversified both
geographically and by customer type. No single retail customer accounted for
more than 1% of the Company's total revenues for the year ended December 31,
1996 or for the three months ended March 31, 1997. The Company's sales and
marketing efforts target high-volume residential consumers and small- and
medium-sized businesses. The Company believes that high-volume residential
consumers are attracted to Telegroup's services because of its significant
price savings as compared to first-tier carriers, its simplified price
structure and its variety of service offerings. The Company believes that
small- and medium-sized businesses are attracted to Telegroup's services
because of significant price savings compared to first-tier carriers, and
because of its personalized approach to customer service and support,
including its local presence, customized billing and enhanced service
offerings.

Wholesale Customers. Telegroup's wholesale marketing targets second- and
third-tier international and telecommunications providers. The Company
currently provides wholesale services to a total of 21 customers, of which 19
are U.S.-based providers and two are international providers. The Company
believes that long distance services, when sold to telecommunications carriers
and other resellers, are generally a commodity product with the purchase
decision based primarily on price. Sales to these other carriers and resellers
help the Company maximize the use of its network and thereby minimize fixed
costs per minute of use.

For the three months ended March 31, 1997, one wholesale customer in Hong
Kong, the Hong Kong Customer, accounted for approximately 12% of the Company's
total revenues. Substantially all of the services

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<PAGE>

provided by the Company to this customer consist of call-reorigination
services. The initial term of the Company's agreement with the Hong Kong
Customer expires in October 1998, automatically renews for one year periods,
and may be terminated by the Hong Kong Customer if it determines in good faith
that the services provided pursuant to the agreement are no longer
commercially viable in Hong Kong. If the Company loses its rights under its
PNETS license and/or if it is unable to provide call-reorigination services in
Hong Kong on either a retail or wholesale basis, such action could have a
material adverse effect on the Company's business, financial condition and
results of operations. Similarly, a material reduction in the level of
services provided by the Company to the Hong Kong Customer or a termination of
the Company's agreement with the Hong Kong Customer could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, China is scheduled to resume sovereignty over Hong
Kong as of July 1, 1997. See "Risk Factors--Substantial Government
Regulation--The Pacific Rim."

SALES, MARKETING AND CUSTOMER SERVICE

Telegroup's global sales, marketing and customer service organization
consists of Country Coordinators, independent agents and an internal sales
force who market Telegroup's services and provide customer service in local
languages and in accordance with the cultural norms of the countries in which
they operate. The Company's local sales, marketing and customer service
organization allows the Company to continually monitor changes in each market
and quickly modify service and sales procedures in response to market changes.
Since its inception, Telegroup's sales, marketing and customer service
strategy has been based on providing its network of agents and salespeople
with the systems, technology and infrastructure to attract and support
customers as efficiently as possible.

Global Independent Agent Network. Telegroup's international market
penetration has resulted primarily from the sales activities of independent
agents compensated on a commission-only basis. As of March 31, 1997, Telegroup
had approximately 1,300 active agents (those agents whose customers incurred
charges during March 1997) located in over 97 countries. The use of
independent agents has allowed the Company to limit marketing expenses and
customer acquisition costs. See "Risk Factors--Dependence on Independent
Agents; Concentration of Marketing Resources."

The Company's agreements with its independent agents typically provide for a
two-year term and require the agents to offer the Company's services at rates
prescribed by the Company and to abide by the Company's marketing and sales
policies and rules. Independent agent compensation is paid directly by the
Company and is based exclusively upon payment for the Company's services by
customers obtained for Telegroup by the independent agents. The commission
paid to independent agents ranges between five to twelve percent of revenues
received by the Company and varies depending on individual contracts, the
exclusivity of the agent and the type of service sold. Independent agents are
responsible for up to 40% of bad debt attributable to customers they enroll.
The Company's agreements with its independent agents typically provide that
the agents have no authority to bind Telegroup or to enter into any contract
on the Company's behalf.

Country Coordinators. In significant international markets, Telegroup
appoints Country Coordinators. Country Coordinators are typically self-
financed, independent agents, with contracts that bind them exclusively to
Telegroup. Country Coordinators also have additional duties beyond marketing
Telegroup services, including the responsibility in a country or region to
coordinate the activities of Telegroup independent agents, including training
and recruitment, customer service and collections. As of April 30, 1997,
Telegroup had 30 Country Coordinators who were responsible for sales,
marketing, customer service and collections in 63 countries. Telegroup has
begun to vertically integrate its sales, marketing and customer service
operations by opening offices in Germany and the U.K. which provide the
services of a Country Coordinator and, in August 1996, acquired the business
operations of its Country Coordinator in France.

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<PAGE>

or advertising material submitted to them by the independent agents operating
in their country or region and ensure such agents' compliance with the
Company's standards and policies. The Company's agreements with its
independent Country Coordinators typically have a two-year term and include an
exclusivity provision restricting the Country Coordinator's ability to offer
competing telecommunication services. Such agreements typically entitle the
Country Coordinator to an override based on a percentage of revenues collected
by Telegroup from customers within the Country Coordinator's country or
region, as well as a commission similar to the commission paid to independent
agents with respect to customers obtained directly by the Country Coordinator.
The Company's agreements with its Country Coordinators typically provide that
the agents have no right to enter into any contract on Telegroup's behalf or
to bind Telegroup in any manner not expressly authorized in writing. See "Risk
Factors--Dependence on Independent Agents" and "--Agreements with Independent
Agents."

Internal Sales Department. In early 1993, Telegroup began the development of
an internal sales force which, as of March 31, 1997, numbered 33 persons,
including 30 in the U.S. and one each in Germany, France and the United
Kingdom. The internal sales department, which is fully dedicated to marketing
Telegroup's services, provides increased control over existing customers and
enables the Company to quickly test new products and implement special
marketing campaigns. For the year ended December 31, 1996 and for the three
months ended March 31, 1997, Telegroup's internal sales department was
responsible for generating approximately one-half of the Company's revenues
from U.S. retail customers, with the balance being generated by independent
agents in the U.S. Internal sales representatives are compensated by means of
a base salary and a commission which varies depending upon the type of
services sold.

The Internet. In March 1995, Telegroup implemented an aggressive program to
use the World Wide Web as a marketing, order entry, and information
distribution tool. The Company currently processes approximately 90% of orders
submitted by its independent agents through its Web-based RepLink order entry
system. RepLink allows for customer provisioning in approximately 30 minutes
and provides agents with real-time access to customer information. In
addition, the Company's World Wide Web site provides a central source of
information about Telegroup, easily accessible to Telegroup's agents and
prospective customers around the world.

Customer Service. Telegroup is committed to providing its customers with
high-quality customer service, provided in the local language and in
accordance with local cultural norms. Telegroup currently has 30 Country
Coordinators, each of whom maintains a customer service office. These offices
provide customer support to Telegroup's customers in 63 countries. In
addition, Telegroup directly provides customer service to customers in an
additional 107 countries, 24 hours a day, 365 days a year, from its
headquarters in Fairfield, Iowa.

Customer service offices are equipped with Telegroup customer service and
sales support systems for use in the country or region. Customer service
representatives can access the Company's "RepLink" order entry system and
Integrated Databases ("IDB"), a customer information database. See "--
Management Information Systems." These systems facilitate and expedite
customer provisioning and changes to customer account information. In
addition, selected customer service offices are connected to Telegroup's
Fairfield, Iowa headquarters by high-speed frame relay data links which
provide real-time access to the Company's central databases.

SERVICES

Telegroup offers a broad array of telecommunications services through the
TIGN and through interconnections with the networks of other carriers. While
the Company offers a broad range of telecommunications services in each of its
markets, the services offered in a particular market vary depending upon
regulatory constraints and local market demands. In order to create a global
brand identity, the Company markets its products primarily under the Spectra
or Global Access brands in virtually all of its markets. The Company currently
offers the following services:

International Long Distance. The Company provides international voice
services to its customers in over 170 countries. On a market-by-market
basis, access methods required to originate a call vary according to
regulatory requirements and the existing national telecommunications
infrastructure. The Company's call-

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<PAGE>

reorigination services are available in all of its markets, generally under
the brand name Global Access CallBack. Telegroup is actively migrating
customers to Global Access Direct service, which is currently available
through TIGN switches located in Hong Kong, France, the U.K. and the
Netherlands. Global Access Direct provides Telegroup customers call-through
service, which includes the provision of long distance service through
conventional international long distance or through a "transparent" form of
call-reorigination.

National Long Distance. The Company currently provides national long
distance service in the United States and is preparing to launch its
national long distance service in Australia. The Company also expects to
provide national long distance service in New Zealand and the U.K. by the
end of 1997.

Prepaid (Debit) and Postpaid Calling Cards. The Company's prepaid (debit)
and postpaid Global Access Telecard may be used by customers for
international telephone calls from more than 60 countries to substantially
all other countries in the world. These calling cards also enable the
Company's customers to access Telegroup's enhanced services.

Toll-free Services. The Company currently provides domestic toll-free
services within the United States under its Spectra 800 brand, and toll-
free services for calls to overseas businesses which are originated in the
United States and Canada, under its Global Access 800 brand.

Enhanced Services. Telegroup's enhanced services include fax store and
forward, fax-mail, voice-mail, and call conferencing.

Wholesale Services. In addition to retail services, the Company provides
international and national call termination services and enhanced services
on a wholesale basis to switch-based telecommunications carriers in the
United States, the Pacific Rim and Europe. Such wholesale arrangements
typically involve the purchase of transmission services on a per-minute
basis, with rates varying according to the destination country and the time
of day the call is placed.

Telegroup constantly evaluates potential new service offerings in order to
increase customer retention and loyalty, and increase usage of the Company's
services. New services the Company expects to introduce in selected markets in
1997 include:

Internet Access Services. The Company intends to offer switched and
dedicated access to the Internet for use by commercial and residential
customers. These services may be offered on a direct connection to the
Internet or on a resale basis. Once connected to the Internet, customers
will be able to access services provided by others, such as World Wide Web
browsing, electronic mail, news feeds and bulletin boards.

Resold Local Switched and Switchless Service. The Company intends to
provide local service on a resale basis in the United States, subject to
commercial feasibility and regulatory limitations.

Mobile Resale. The Company intends to offer its customers resold mobile
telecommunications services in the United States and other selected
markets.

Integrated Voice-Mail, E-Mail and Fax-Mail. Integrated services enable
customers to convert e-mail and facsimile data to audio text and to receive
voice-mail messages in writing. The Company intends to offer its customers
integrated voice-mail, e-mail and fax-mail through the TIGN in all
countries where the Company's international telecommunications services are
available.

There can be no assurance that the Company will be able to launch such
services or that, if launched, such services will be successful.

NETWORK AND OPERATIONS

The TIGN employs digital switching and fiber-optic technologies, runs on
proprietary software developed by Telegroup and is supported by comprehensive
monitoring and technical services at the Company's Network Operations Center
in Iowa City, Iowa. The TIGN also employs Telegroup's proprietary distributed
intelligent network architecture, enabling Telegroup to transmit customer-
specific information among its switches almost instantaneously over redundant
high-speed frame relay data networks.

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Through the TIGN, Telegroup is able to deliver an expanded set of enhanced
services which may not be available from the ITO in a particular country. The
availability of these enhanced services enables Telegroup to attract a wider
base of small- to medium-sized business customers. In addition, the network
provides the Company with more efficient call routing and cost savings by
means of reduced circuit charges.

History of the TIGN. Since 1992, Telegroup has invested substantial
resources in developing the TIGN and related business operations. In 1992, the
Company installed its first Harris switch at its main office in Fairfield,
Iowa primarily to serve as a PBX for internal Company purposes. In 1993, the
Company installed a switch in New York City to handle call-reorigination
service for retail customers. In 1994, the Company installed a Harris switch
in London to provide call-reorigination services for intra-European calls and
leased a private data line for call setup and to transfer call detail reports
from the U.K. switch to the New York switch. In February 1995, Telegroup
entered into an operating agreement with AT&T-Canada (formerly Unitel)
providing for correspondent traffic termination rights.

In July 1995, the Company installed its first enhanced services switch at
the New York switch site to provide post-paid card services for domestic and
international customers in 40 countries. Also in 1995, Telegroup opened a new
office in Iowa City, Iowa to house the Network Operations Center and switch
development and deployment teams.

In February 1996, the Company installed its first Excel switch in Hong Kong
in addition to an identical mated switch in New York to provide Global Access
Direct service to Hong Kong customers using transparent call-reorigination. In
May 1996, Telegroup began to utilize the existing Harris switch at the main
office to receive incoming call-reorigination calls from international
customers. In September 1996, the Company installed a DMS-250 switch in New
York. The DMS-250 switch was connected via T-1 lines to other carriers whereby
wholesale traffic was brought in to the DMS-250 switch and then routed to
other carriers for international termination. In August 1996, the Company
installed a Harris switch in Amsterdam incorporating proprietary software
developed by the Telegroup Intelligent Network Department to provide Global
Access Direct service to international customers.

In January 1997, the Company installed a pair of Excel switches in Hong Kong
and New York, linked by the existing data network. Shortly thereafter, TIGN
switches were installed in France and Australia, opening those markets to
Global Access Direct services. At the same time, the Company acquired an
interest in the CANTAT-3 Trans-Atlantic circuit between New York and London.

Current Network Architecture. As of April 30, 1997, the TIGN consisted of
(i) the central NOC, (ii) 13 operational Excel, NorTel or Harris switches in
Fairfield, Iowa, New York City, London, Paris, Amsterdam, Hong Kong, Sydney
and Tokyo, (iii) two enhanced services platforms in New York and Hong Kong,
(iv) two trans-oceanic fiber-optic cable links connecting its New York
switches to its switches in London and Sydney, and (v) leased parallel data
transmission capacity connecting Telegroup's switches to each other and to the
networks of other international and national carriers. The Company intends to
further develop the TIGN by upgrading existing facilities and by adding
switches and transmission capacity principally in and between major markets
where the Company has already established a substantial customer base. See "--
Business Strategy."

In markets in which the Company believes it is not optimal to own or lease
network facilities, the Company typically enters into agreements to resell the
facilities of other carriers. The Company purchases switched minute capacity
from various carriers and depends on such agreements for termination of
traffic from the TIGN. The Company is also a reseller of other carriers'
national long distance services. In 1997, as a result of the Company's
strategic relationship with AAPT, the Company will be a reseller of Australian
national long distance services. In other markets, the Company works with
multiple national long distance carriers in an effort to ensure that the
pricing and service on each route are the best available and that the Company
can provide an integrated long distance service to its customers. The Company
believes that the opportunities for resale will become increasingly attractive
as countries deregulate and grant additional carrier licenses, and competitive
pressures

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force carriers to find alternative sources of distribution. See "Risk
Factors--Dependence on Telecommunications Facilities Providers."

In general, the Company relies upon other carriers' networks to provide
redundancy in the event of technical difficulties on the TIGN. The Company
believes that the strategy of using other carriers' networks for redundancy is
currently more cost-effective than purchasing or leasing its own redundant
capacity. To the extent that the traffic over the TIGN exceeds the Company's
transmission capacity, the Company typically routes overflow traffic over
other carriers' networks, which may result in reduced margins on such calls.

The TIGN's Distributed Intelligent Network Architecture. Most
telecommunications companies operate their networks using software developed
by switch manufacturers. Consequently, switch software typically cannot be
modified or improved except by the switch manufacturer, which can result in
significant expense and delay. Through its Intelligent Network Department,
consisting of approximately 80 full-time employees, Telegroup develops and
continuously refines its proprietary TIGN software, enabling the Company to
purchase flexible, open-architecture switching hardware into which it
incorporates such software.

TIGN Competitive Advantages. The TIGN platform is designed to provide a
highly reliable, flexible and cost-effective network for processing calls and
delivering enhanced services. The design of the TIGN achieves the principles
established for Advanced Intelligent Networks ("AIN") specified by the ITU.
The TIGN platform provides significant competitive advantages over voice
networks of other providers. These advantages include:

. Distributed intelligence. The TIGN voice network is configured in
parallel with a frame relay data network for call setup and the sharing
of customer data among the TIGN switches. All customer information such
as current usage, credit limits, language selections, waiting voice-mail
and faxes, and speed numbers are distributed and available throughout
the TIGN.

. Rapid deployment of new services and features. The TIGN software allows
enhancements to existing services and new services to be quickly
developed and tested with minimal impact to existing software.
Enhancements to existing services can be added in days rather than
months and new services can be developed and tested in a few weeks
rather than many months or even years required by other network designs.

. Cost benefits versus conventional switching platforms. The switching
matrix employed within the TIGN platform consists of two redundant Excel
LNX switches, each with 2000 voice ports--one actively controlling call
processing and one in hot standby mode. This latest generation in
switching equipment from Excel provides a cost-per-port which is less
expensive than that found on larger, traditional switching equipment
used by conventional voice service providers.

. Flexible and adaptive signaling. Because of the many national and
carrier-specific variants on the international signaling protocol such
as ISDN and CCS7, one of the largest problems faced by international
carriers and voice service providers has been interconnecting to the
national ITOs. The TIGN software has been designed to take advantage of
the open architecture on the Excel LNX switches to facilitate
compatibility with various international signaling protocols.

MANAGEMENT INFORMATION SYSTEMS

Telegroup believes that reliable, sophisticated and flexible billing and
information systems are essential to remain competitive in the global
telecommunications market. Accordingly, the Company has invested substantial
resources to develop and implement information systems. As the Company
continues to grow, it will need to invest additional capital to enhance and
upgrade its operating systems in order to meet its provisioning, billing,
costing and collection requirements. See "Risk Factors--Dependence on
Effective Management Information Systems."

The Company's information systems include (i) RepLink, an Internet Web-based
global order entry system; (ii) the IDB which stores client information using
client server architecture; (iii) a Small Business Technologies ("SBT")
accounting system; (iv) a proprietary customer billing system; and (v) a
proprietary call costing and

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reconciliation system which was substantially implemented in June 1997. The
Company anticipates that its SBT accounting, commissions, billing and possibly
other systems will be required to be upgraded or replaced in the next 12 to 18
months. See "Risk Factors--Need for Additional Financing."

RepLink Order Entry System. The Company has developed RepLink, a unique
World Wide Web interface, primarily for its independent agents to send
customer information to the Company for fully automated provisioning. First
implemented in 1995, RepLink has reduced the average interval required to
provision a new customer from most countries to an average of 30 minutes or
less. Customer information is entered by the agent and screened during the
provisioning process to ensure data quality and accuracy. Agents can also
receive monthly usage reports, commission reports, and reports on new products
and features through RepLink.

IDB Customer Database. The IDB is the Company's integrated database for all
customer and service information. The IDB can be accessed through the IDB
custom user interface, which allows the Company's customer service and sales
support staff to maintain customer records and provide customer service. The
IDB interface also allows limited access to a customer's financial information
which is stored in the Company's SBT accounting system. Customer order
information is transferred directly from RepLink into the IDB. After final
data is reviewed, the customer is provisioned for the services requested by
the agent. Each hour, all provisioning information for Global Access services
flows automatically to the Company's switches. Several times each day,
provisioning information for Spectra services is transferred electronically to
the Company's underlying carriers.

SBT Accounting System. SBT, a modifiable, multi-user database accounting
software, provides the Company with the flexibility to create custom
accounting modules to support various accounting needs. All of SBT's
accounting products perform real-time posting and provide custom file
browsers. The IDB and SBT systems are linked by use of an open server through
which information is freely exchanged. Since the Company's new billing system
software is compatible with SBT, financial information is able to flow easily
between the two systems without manual intervention.

Billing System. The Company's new billing system streamlines and automates a
number of billing processes, including worldwide call detail data collection.
A call detail report ("CDR"), an itemized record of the activity which occurs
at a particular switch location, is downloaded and used in the generation of
customer invoices. The entire process of CDR import, matching and rating is
now combined into a single process, eliminating manual intervention. The
Company is able to review and analyze the CDR to ensure the accuracy of
customer bills and detect errors. Monthly customer invoices are created,
printed and mailed from the Company's facilities in Fairfield, Iowa.

Call Costing and Reconciliation System. To ensure that costs charged to the
Company by its carriers are accurate, the Company has developed a call costing
and reconciliation system which was substantially implemented in June 1997.
This system is designed to reconcile the Company's CDRs against invoices that
the Company receives from its underlying carriers. Each carrier invoice will
be compared for total calls, total duration, total cost, and the Telegroup
rated cost. All discrepancies will be logged and an audit for the carrier/day
combinations that show discrepancies will be scheduled to examine the details
of the discrepancies between the Company's data and the carrier's data. See
"Risk Factors--Dependence on Effective Management Information Systems."

The Company believes that this suite of management information systems,
coupled with continued enhancements and additions, will enable the Company to
effectively provision and bill customers, produce accurate financial reports
and control costs.

COMPETITION

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of the world's largest telecommunications carriers. Other potential
competitors include cable television companies, wireless telephone companies,
Internet access providers, electric and other utilities with rights of way,
railways, microwave carriers and large end users which have private networks.
The intensity of such competition has recently increased and the Company
believes that such competition will continue to intensify as the number of new
entrants increases. If the Company's competitors devote significant additional
resources to the provision of international or national long distance
telecommunications services to the Company's target customer base of high-
volume residential consumers and small- and medium-sized businesses, such
action could have a material adverse effect on the Company's business,
financial condition and results of operations, and there can be no assurance
that the Company will be able to compete successfully against such new or
existing competitors.

The Company's larger competitor's include AT&T, MCI, Sprint, WorldCom,
Frontier and LCI in the United States; France Telecom in France; PTT Telecom
B.V. in the Netherlands; Cable & Wireless plc, BT, Mercury, AT&T, WorldCom,
Sprint and ACC Corp. in the United Kingdom; Deutsche Telecom in Germany; Swiss
PTT in Switzerland; Telia AB and Tele-2 in Sweden; HKTI in Hong Kong, Telstra
and Optus in Australia; and KDD, IDC and ITJ in Japan. The Company competes
with numerous other long distance providers, some of which focus their efforts
on the same customers targeted by the Company. In addition to these
competitors, recent and pending deregulation in various countries may
encourage new entrants. For example, as a result of the recently enacted 1996
Telecommunication Act in the United States, once certain conditions are met,
RBOCs will be allowed to enter the domestic long distance market in their
exchange territories as well as outside of such territories, AT&T, MCI and
other long distance carriers will be allowed to enter the local telephone
services market, and any entity (including cable television companies and
utilities) will be allowed to enter both the local service and long distance
telecommunications markets. Moreover, while the recently completed WTO
Agreement could create opportunities for the Company to enter new foreign
markets, implementation of the accord by the United States could result in new
competition from ITOs previously banned or limited from providing services in
the United States. Increased competition in the United States as a result of
the foregoing, and other competitive developments, including entry by Internet
service providers into the long-distance market, could have an adverse effect
on the Company's business, financial condition and results of operations. In
addition, many smaller carriers have emerged, most of which specialize in
offering international telephone services utilizing dial up access methods,
some of which have begun to build networks similar to the TIGN. See "The
International Telecommunications Industry."

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provided by the Company. Such technologies include satellite-based systems,
such as the proposed Iridium and GlobalStar systems, utilization of the
Internet for international voice and data communications and digital wireless
communication systems such as PCS. The Company is unable to predict which of
many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.

GOVERNMENT REGULATION

Overview. The Company's provision of international and national long
distance telecommunications services is heavily regulated. Many of the
countries in which the Company provides, or intends to provide, services
prohibit or limit the services which the Company can provide, or intends to
provide and the transmission methods by which it can provide such services.
For example, in the United States, the Company plans to engage in the resale
of international private lines for the provision of switched communications
services pursuant to an authorization ("Section 214 Private Line
Authorization") under Section 214 of the Communications Act. Certain rules of
the FCC prohibit the Company from (i) transmitting calls routed over the
Company's leased line between the United States and the United Kingdom onward
over international leased lines (other than to countries which the FCC deems
to be "equivalent," currently the United Kingdom, Canada, Sweden and New
Zealand) or (ii) transmitting calls from European countries (other than those
deemed to be equivalent) over international leased lines and then onward over
its leased line between the United States and the United Kingdom. If a
violation of FCC rules concerning resale of international private line service
were found to exist, the FCC could impose sanctions and penalties, including
revocation of the Section 214 Private Line Authorization. FCC restrictions
thus materially limit the optimal and most profitable use of the Company's
leased line between the United States and the United Kingdom.

In addition, the Company provides a substantial portion of its customers
with access to its services through the use of call-reorigination. Revenues
attributable to call-reorigination represented 76.6% of the Company's revenues
in fiscal year 1996 and 72.8% of the Company's revenues for the three months
ended March 31, 1997, and are expected to continue to represent a significant
but decreasing portion of the Company's revenues. A substantial number of
countries have prohibited certain forms of call-reorigination as a mechanism
to access telecommunications services. This has caused the Company to cease
providing call-reorigination services in Bermuda, the Bahamas and the Cayman
Islands, and may require it to do so in other jurisdictions in the future. As
of May 1, 1997, reports had been filed with the ITU and/or the FCC claiming
that the laws in 63 countries prohibit call-reorigination. While the Company
provides call-reorigination services in substantially all of these countries,
no single country within this group accounts for more than 2% of the total
revenues of the Company for the 12 months ended March 31, 1997. There can be
no assurance that other countries where the Company derives material revenue
will not prohibit call-reorigination in the future. To the extent that a
country with an express prohibition against call-reorigination is unable to
enforce its laws against a provider of such services, it can request that the
FCC enforce such laws in the United States, by, for example, requiring a
provider of such services to cease providing call-reorigination services to
such country or by revoking such provider's FCC authorizations. Twenty-eight
countries have formally notified the FCC that call-reorigination services
violate their laws. The Company provides call-reorigination in all of these
countries, which countries accounted for 7.3% of the Company's total revenues
for the 12 months ended March 31, 1997. Two of the 28 countries have requested
assistance from the FCC in enforcing their prohibition on call-reorigination.
Neither of these two countries accounted for more than 2% of the Company's
consolidated revenues for the 12 months ended March 31, 1997. The FCC has held
that it would consider enforcement action against companies based in the
United States engaged in call-reorigination by means of uncompleted call
signalling in countries where this activity is expressly prohibited. While the
FCC has not initiated any action to date to limit the provisions of call-
reorganization services, there can be no assurance that it will not take
action in the future. Enforcement action could include an order to cease
providing call-reorigination services in such country, the imposition of one
or more restrictions on the Company, monetary fines or, ultimately, the
revocation of the Company's Section 214 Switched Voice Authorization, and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Substantial Government
Regulation--United States."

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Local laws and regulations differ significantly among the jurisdictions in
which the Company operates, and, within such jurisdictions, the interpretation
and enforcement of such laws and regulations can be unpredictable. For
example, EU member states have inconsistently and, in some instances,
unclearly implemented the Full Competition Directive under which the Company
provides certain voice services in Western Europe. As a result, some EU member
states may limit, constrain or otherwise adversely affect the Company's
ability to provide certain services. There can be no assurance that certain EU
member states will implement, or will implement consistently, the Full
Competition Directive, and either the failure to implement or inconsistent
implementation of such directives could have a material adverse effect on the
Company's business, financial condition and results of operations.

Additionally, there can be no assurance that future United States or foreign
regulatory, judicial or legislative changes will not have a material adverse
effect on the Company or that regulators or third parties will not raise
material issues with regard to the Company's compliance with applicable laws
or regulations. If the Company is unable to provide the services it is
presently providing or intends to provide or to use its existing or
contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such services or transmission methods, or for
any other reason related to regulatory compliance or the lack thereof, such
events could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Substantial
Government Regulation."

The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes, upon consultation
with counsel, to be permissible under applicable laws and regulations. To the
extent that the interpretation or enforcement of applicable laws and
regulations is uncertain or unclear, the Company's strategy may result in the
Company's (i) providing services or using transmission methods that are found
to violate local laws or regulations or (ii) failing to obtain approvals or
make filings subsequently found to be required under such laws or regulations.
Where the Company is found to be or otherwise discovers that it is in
violation of local laws and regulations and believes that it is subject to
enforcement actions by the FCC or the local authority, it typically seeks to
modify its operations or discontinue operation so as to comply with such laws
and regulations. There can be no assurance, however, that the Company will not
be subject to fines, penalties or other sanctions as a result of violations
regardless of whether such violations are corrected. If the Company's
interpretation of applicable laws and regulations proves incorrect, it could
lose, or be unable to obtain, regulatory approvals necessary to provide
certain of its services or to use certain of its transmission methods. The
Company also could have substantial monetary fines and penalties imposed
against it.

A summary discussion of the regulatory frameworks in certain geographic
regions in which the Company operates or has targeted for penetration is set
forth below. This discussion is intended to provide a general outline of the
more relevant regulations and current regulatory posture of the various
jurisdictions and is not intended as a comprehensive discussion of such
regulations or regulatory posture.

United States. The Company's provision of international service to, from,
and through the United States is subject to regulation by the FCC. Section 214
of the Communications Act requires a company to make application to, and
receive authorization from, the FCC to, among other things, resell
telecommunications services of other U.S. carriers with regard to
international calls. In May 1994, the FCC authorized the Company, pursuant to
the Section 214 Switched Voice Authorization, to resell public switched
telecommunications services of other U.S. carriers. The Section 214 Switched
Voice Authorization requires, among other things, that services be provided in
a manner that is consistent with the laws of countries in which the Company
operates. As described above, the Company's aggressive regulatory strategy
could result in the Company's providing services that ultimately may be
considered to be provided in a manner that is inconsistent with local law. If
the FCC finds that the Company has violated the terms of the Section 214
Switched Voice Authorization, it could impose a variety of sanctions on the
Company, including fines, additional conditions on the Section 214 Switched
Voice Authorization, cease and desist or show cause orders, or the revocation
of the Section 214 Switched Voice Authorization, the latter of which is
usually imposed only in the case of serious violations. Depending upon the

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sanction imposed, such sanction could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Substantial Government Regulation."

In order to conduct a portion of its business involving the origination and
termination of calls in the United States, the Company uses leased lines. The
Company's Section 214 Private Line Authorization permits the Company to resell
international private lines interconnected to the PSTNs in the United States
and the United Kingdom, for the purpose of providing switched
telecommunications services. However, the FCC imposes certain restrictions
upon the use of the Company's private line between the United States and the
United Kingdom. The Company may route over the private line traffic
originating in the United States or in the United Kingdom and terminating in
the United States or the United Kingdom. The Company may also route over the
private line traffic originating in the United States or the United Kingdom
and sent to third countries via the tariffed switched services of a carrier in
the United States or the United Kingdom. Similarly, the Company may route over
the private line calls that originate in a third country over an ITO's
tariffed switched services and terminate in the United States or the United
Kingdom. The Company may not route traffic to or from the United States over
the private line between the United States and the United Kingdom if such
traffic originates or terminates in a third country over a private line
between the United Kingdom and such third country, if the third country has
not been found by the FCC to offer "equivalent" resale opportunities. The
Company is currently not routing U.S.-originated traffic to or U.S. terminated
traffic to or from non-"equivalent" countries via private lines. To date, the
FCC has found that only Canada, the United Kingdom, Sweden and New Zealand
offer such opportunities. Following implementation of the Full Competition
Directive by EU member states, the FCC may authorize the Company to originate
and terminate traffic over its private line between the United States and the
United Kingdom and over an additional private line pursuant to ISR authority
to additional member states if the FCC finds that such additional member
states provide equivalent resale opportunities. However, there can be no
assurance that the FCC will find such equivalence.

The Company also owns capacity in international facilities to provide some
services, and may in the future acquire additional interests in international
facilities. The Company has a Section 214 facilities authorization to provide
services over international facilities between the United States and all
countries other than Cuba. The Company is also required to conduct its
facilities-based international business in compliance with the FCC's ISP. The
ISP establishes the permissible arrangements for U.S. based facilities-based
carriers and their foreign counterparts to settle the cost of terminating each
other's traffic over their respective networks. One of the Company's
arrangements with foreign carriers is subject to the ISP and it is possible
that the FCC could take the view that this arrangement does not comply with
the existing ISP rules. See "The International Telecommunications Industry--
International Switched Long Distance Services--Operating Agreements." If the
FCC, on its own motion or in response to a challenge filed by a third party,
determines that the Company's foreign carrier arrangements do not comply with
FCC rules, among other measures, it may issue a cease and desist order, impose
fines on the Company or revoke or suspend its FCC authorizations. See "Risk
Factors--Recent and Potential FCC Actions." Such action could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company is required to file and has filed with the FCC a tariff
containing the rates, terms and conditions applicable to its international
telecommunications services. The Company is also required to file with the FCC
any agreements with customers containing rates, terms, and conditions for
international telecommunications services, if those rates, terms, or
conditions are different than those contained in the Company's tariff.
Notwithstanding the foregoing requirements, to date, the Company has not filed
with the FCC certain commercially sensitive carrier-to-carrier customer
contracts. If the Company charges rates other than those set forth in, or
otherwise violates, its tariff or a customer agreement filed with the FCC, or
fails to file with the FCC carrier-to-carrier agreements, the FCC or a third
party could bring an action against the Company, which could result in a fine,
a judgment or other penalties against the Company. Such action could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's provision of domestic long distance service in the United
States is subject to regulation by the FCC and relevant state PSCs, which
regulate interstate and intrastate rates, respectively, ownership of

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transmission facilities, and the terms and conditions under which the
Company's domestic services are provided. In general, neither the FCC nor the
relevant state PSCs exercise direct oversight over cost justification for the
Company's services or the Company's profit levels, but either or both may do
so in the future. The Company, however, is required by federal and state law
and regulations to file tariffs listing the rates, terms and conditions of
services provided. The Company has filed domestic long distance tariffs with
the FCC. The October 29, 1996 Order eliminated the requirement that non-
dominant interstate carriers, such as the Company, maintain FCC tariffs.
However, on February 13, 1997, the DC Circuit ruled that the FCC's order will
be stayed pending judicial review of the appeals. Should the appeals fail and
the FCC's order become effective, the Company may benefit from the elimination
of FCC tariffs by gaining more flexibility and speed in dealing with
marketplace changes. However, the absence of tariffs will also require that
the Company secure contractual agreements with its customers regarding many of
the terms of its existing tariffs or face possible claims arising because the
rights of the parties are no longer clearly defined. The Company generally is
also required to obtain certification from the relevant state PSC prior to the
initiation of intrastate service. Telegroup has the authorizations required to
provide service in 47 states, and has filed or is in the process of filing
required tariffs in each such state. The Company has complied or is in the
process of complying with certain reporting requirements imposed by state PSCs
in each state in which it conducts business. Any failure to maintain proper
federal and state tariffing or certification or file required reports any
difficulties or delays in obtaining required authorizations could have a
material adverse effect on the Company's business, financial condition and
results of operations. The FCC also imposes some requirements for marketing of
telephone services and for obtaining customer authorization for changes in the
customer's primary long distance carrier.

To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from LECs or CLECs. Access charges represent a significant portion
of the Company's cost of U.S. domestic long distance services and, generally,
such access charges are regulated by the FCC for interstate services and by
PSCs for intrastate services. The FCC has undertaken a comprehensive review of
its regulation of LEC access charges to better account for increasing levels
of local competition. On May 16, 1997, the FCC released an order making
significant changes in the access service rate structure. Some of the changes
may result in increased costs to the Company for the "transport" component of
access services, although other revisions of the order likely will reduce
other access costs. Some issues in the FCC proceeding have not yet been
resolved, including a proposal under which LECs would be permitted to allow
volume discounts in the pricing of access charges. While the outcome of these
proceedings is uncertain, if these rate structures are adopted many long
distance carriers, including the Company, could be placed at a significant
cost disadvantage to larger competitors. In addition, the FCC has recently
announced actions to implement the 1996 Telecommunications Act that will
impose new regulatory requirements including the requirement that all
telecommunications service providers, including the Company, contribute some
portion of their telecommunications revenues to a "universal service fund"
designated to fund affordable telephone service for consumers, schools,
libraries and rural health care providers.

In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of certain U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to
the implementation of such tax software and not be able to collect
reimbursement for such liability from its customers. While the Company
believes that any such liability will not be significant, there can be no
assurance that such tax liability, if any, will not have a material adverse
effect on the Company's business, financial condition or results of
operations.

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The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may delay, prevent or deter a change in control of the Company.

Europe. In Europe, the regulation of the telecommunications industry is
governed at a supra-national level by the EU (consisting of the following
member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the
United Kingdom), which is responsible for creating pan-European policies and,
through legislation, has developed a regulatory framework to ensure an open,
competitive telecommunications market. The EU was established by the Treaty of
Rome and subsequent conventions and is authorized by such treaties to issue EC
"directives." EU member states are required to implement these directives
through national legislation. If an EU member state fails to adopt such
directives, the European Commission may take action, including referral to the
European Court of Justice, to enforce the directives.

In 1990, the EU issued the Services Directive requiring each EU member state
to abolish existing monopolies in telecommunications services, with the
exception of Voice Telephony. The intended effect of the Services Directive
was to permit the competitive provision of all services other than Voice
Telephony, including value-added services and voice services to CUGs. However,
as a consequence of local implementation of the Services Directive through the
adoption of national legislation, there are differing interpretations of the
definition of prohibited Voice Telephony and permitted value-added and CUG
services. Voice services accessed by customers through leased lines are
permissible in all EU member states. The European Commission has generally
taken a narrow view of the services classified as Voice Telephony, declaring
that voice services may not be reserved to the ITOs if (i) dedicated customer
access is used to provide the service, (ii) the service confers new value-
added benefits on users (such as alternative billing methods) or (iii) calling
is limited by a service provider to a group having legal, economic or
professional ties.

In March 1996, the EU adopted the Full Competition Directive containing two
provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligation of EU member states to abolish the ITOs' monopolies
in Voice Telephony by 1998. The Full Competition Directive encouraged EU
member states to accelerate liberalization of Voice Telephony. To date,
Sweden, Finland, Denmark and the United Kingdom have liberalized facilities-
based services to all routes. Certain EU countries may delay the abolition of
the Voice Telephony monopoly based on exemptions established in the Full
Competition Directive. These countries include Spain (1998), Portugal and
Ireland (January 1, 2000) and Greece (2003).

Each EU member state in which the Company currently conducts its business
has a different regulatory regime and such differences are expected to
continue beyond January 1998. The requirements for the Company to obtain
necessary approvals vary considerably from country to country and are likely
to change as competition is permitted in new service sectors. Except with
respect to Voice Telephony and call-reorigination, the Company believes that,
to the extent required, it has either filed applications, received comfort
letters or obtained licenses from the applicable regulatory authorities.

The Company may be incorrect in its assumptions that (i) each EU member
state will abolish, on a timely basis, the respective ITO's monopoly to
provide Voice Telephony within and between member states and other countries,
as required by the Services Directive and the Full Competition Directive, (ii)
deregulation will continue to occur and (iii) the Company will be allowed to
continue to provide and to expand its services in the EU member countries. The
Company's provision of services in Western Europe may also be affected if any
EU member state imposes greater restrictions on non-EU international service
than on such service within the EU. There can be no assurance that EU member
states will not adopt laws or regulatory requirements that will adversely
affect the Company.

United Kingdom. The Company owns and operates a switching facility in
London that is connected to the UK international gateway by private line
circuits leased by the Company from third parties. In the

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United Kingdom, the Company offers direct access and call-reorigination, as
well as customized calling card and prepaid debit calling card services,
and provides international call termination services to other
telecommunications carriers and resellers on a wholesale switched minute
basis. The Company's services are subject to the Telecommunications Act of
1984 (the "UK Telecommunications Act"). The Secretary of State for Trade
and Industry (the "TI Secretary") is responsible for granting
telecommunications licenses and the Director General of Telecommunications
("DGT") and his staff, known as the Office of Telecommunications ("Oftel"),
the United Kingdom's telecommunications regulatory authority, are
responsible for enforcing the conditions of such licenses. On May 6, 1997,
the TI Secretary granted the Company an ISR license, which allows the
Company to offer certain international and national long distance services
via connection to the PSTN by leased lines. The loss of the Company's
license or the placement of significant restrictions thereon could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Substantial Government
Regulation."

To reduce transmission costs associated with leasing IPLCs owned by third
parties and to provide additional capacity between the United States and
United Kingdom, the Company has the option to acquire capacity on an IRU
basis in a digital undersea fiber-optic cable for the transmission of
traffic between its London switching facility and its international gateway
switching center in New York. Before providing service over this capacity,
the Company is required to apply to the TI Secretary to obtain an
International Facilities License ("IF License") that would permit it to run
international voice services over submarine cables in which it has an IRU
interest. The British government has not placed any limit on the number of
IF Licenses it will issue, but there can be no assurance that the Company
will be granted an IF License. The Company's failure to obtain an IF
License would prevent the Company from providing facilities-based services
to and from the United Kingdom through its own facilities (e.g., by IRU),
would adversely affect the Company's plans and ability to expand its
operations, and could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Netherlands. The regulation of telecommunications is currently
controlled by the Ministry of Transport, Public Works and Water Management,
Telecommunications and Post Department ("HDTP"). However, legislation is
pending in the Dutch parliament to transfer part of this authority to an
independent administrative authority. The Company presently owns and
operates a switching facility in Amsterdam, which the Company intends in
the future to connect by leased lines to its international gateway
switching center in New York, subject to Dutch and FCC rules. To keep pace
with competitors, the Company presently offers call-through services in the
Netherlands. In particular, the Company has begun to provide a range of
enhanced telecommunications services and switched voice services to
business users, including to CUGs, by routing traffic via the switched
networks of a competitor of the ITO. To date, the Dutch telecommunications
authority has not taken regulatory action to prevent the provision by the
Company of certain services, which might be regarded as prohibited services
under the Dutch telecommunications laws, and the Company is not aware of
any action taken in such regard by the Dutch ITO and/or PTT Telecom B.V. (a
wholly owned subsidiary of the Dutch ITO), in such regard. While the
Company believes that the Dutch regulatory authority will not seek to
prevent the Company and other carriers from competing with the ITO before
full liberalization which is expected on or after July 1, 1997, it is
possible that the Company's services may be regarded as prohibited
services. Should the Dutch telecommunications authority commence regulatory
action to prevent such competition, and/or if the Dutch ITO and/or PTT
Telecom B.V. were to claim damages, the Company's business in the
Netherlands would be adversely and materially affected. It is also possible
that the Company can be fined, or its application to provide services in
the future rejected, if the Company were found to be providing Voice
Telephony, and such actions could have a material adverse effect on the
Company. See "Risk Factors--Substantial Government Regulation--European
Union." Current Dutch law prohibits competition with the ITO until July 1,
1997, although it is possible that such competition will not be permitted
until later in 1997.

Germany. The regulation of the telecommunications industry in Germany is
governed by Telekommunikations-gesetz, the Telecommunications Act of 1996
("TKG"), which, with respect to most of its provisions, became effective in
August 1996. Under the TKG, a license ("TKG License") is generally

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required by any person that: (i) operates transmission facilities for the
provision of telecommunications services to the public; or (ii) offers
Voice Telephony services to the public through telecommunications networks
operated by such provider. While the TKG represents the final phase of the
reform of the German telecommunications industry, the law will continue to
protect the monopoly rights of Deutsche Telecom over the provision of Voice
Telephony until January 1, 1998.

In Germany, the Company is currently providing calling card services as
well as traditional call-reorigination services (through answered or
unanswered call signaling), but anticipates that it will migrate CUGs and
other customers to call-reorigination services provided through
Internet/X.25 data link signaling, to transparent call-reorigination and/or
to forms of call-through other than transparent call-reorigination prior to
January 1, 1998, the date on which full competition with the ITO will be
permitted. The Company anticipates providing a range of enhanced
telecommunications services and switched voice services to business users,
including to CUGs, by routing traffic via the international switched
networks of competitors to the ITO. While the Company believes that it will
not be found to be offering Voice Telephony prior to the expiration of the
ITO's monopoly on such services, the Company has received no assurance from
the ITO or from the respective regulatory authorities that this will be the
case. It is possible that the Company could be fined, or that the Company
would not be allowed to provide specific services, if the Company were
found to be providing Voice Telephony before January 1, 1998, or after that
date without obtaining a proper license, such actions could have a material
adverse effect on the Company's business, financial condition and results
of operations.

In order to provide the Voice Telephony services to the public that the
Company intends to provide after January 1, 1998, and expand its network
switching facilities in Germany, the Company will be required to obtain a
TKG License. Under the TKG, an applicant is entitled to the grant of a
license subject to certain public policy considerations set forth in the
statute. A license may be revoked if, among other things, continued
effectiveness would be contrary to statutory public policy considerations.
There can be no assurance that the Company will be able to obtain, or, if
granted, thereafter maintain, a TKG License. The failure to obtain, or the
loss of, a TKG License or the placement of significant restrictions thereon
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance
that any future changes in, or additions to, any existing or future German
laws, regulations, government policy, court or administrative rulings
regarding telecommunications will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Risk Factors--Substantial Government Regulation--European Union."

France. The Company currently provides call-reorigination services,
including transparent call-reorigination. The Company is permitted to
provide call-reorigination over the ITO's network in France without a
license. Although it does not currently provide such services, under
current law, the Company may lease circuits and provide switched voice
services to CUGs in France without a license. UntilJanuary 1, 1998, the
Company may not provide Voice Telephony to the public in France. The
Company anticipates that it will migrate CUGs and other customers to forms
of call-through other than call-reorigination prior to January 1, 1998. The
Company anticipates providing a range of enhanced telecommunications
services and switched voice services to business users, including to CUGs,
by routing traffic via the international switched networks of competitors
to the ITO. While the Company believes that it will not be found to be
offering Voice Telephony prior to the expiration of the ITO's monopoly on
such services, the Company has received no assurance from the ITO or from
the respective regulatory authorities that this will be the case. It is
possible that the Company could be fined, or that the Company would not be
allowed to provide certain services, if the Company were found to be
providing Voice Telephony before January 1, 1998, or after that date
without obtaining a proper license. Such actions could have a material
adverse effect on the Company's business, financial condition and results
of operations.

A new telecommunications law, passed in 1996 to implement the Full
Competition Directive, establishes a licensing regime and an independent
regulator and imposes various interconnection and other requirements
designed to facilitate competition. Depending on the establishment of rules
to implement this new law, the Company expects to be in a position to
expand its services to include, for example, all forms

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of call-through services in France which the Company expects to provide on
a facilities-based or on a resale basis. After January 1, 1998, if it
decides to provide switched voice services to the public, including call-
through services, or to own facilities, the Company will have to apply for
a license from the Minister of Telecommunications. There can be no
guarantee, however, that the Company will be able to obtain necessary
licenses, permits, or interconnection arrangements to fully take advantage
of such liberalization. The lack of timely liberalization or the Company's
inability to take advantage of such liberalization could have a material
adverse impact on the Company's ability to expand its services as planned.

Switzerland. In Switzerland, the Company is currently providing call-
reorigination services, but anticipates that it will migrate CUGs and other
customers to forms of call-through other than call-reorigination prior to
January 1, 1998, the date on which full competition with the ITO will be
permitted. The Company anticipates providing a range of enhanced
telecommunications services and switched voice services to business users,
including to CUGs, by routing traffic via the international switched
networks of competitors to the ITO. While the Company believes that it will
not be found to be offering Voice Telephony prior to the expiration of the
ITO's monopoly on such services, the Company has received no assurance from
the ITO or from the respective regulatory authorities that this will be the
case. It is possible that the Company could be fined, or that the Company
would not be allowed to provide specific services, if the Company were
found to be providing Voice Telephony before January 1, 1998, or after that
date without obtaining a proper license, such actions could have a material
adverse effect on the Company's business, financial condition and results
of operations. The Company's existing services are subject to the Federal
Law on Telecommunications of June 21, 1991 ("LTC"). Although Switzerland is
not an EU member state, the Swiss government has expressed its intention to
maintain Swiss telecommunications regulations in line with EU directed
liberalization. Towards that end, on October 1, 1996, the Swiss federal
government published a draft law (the "Draft Law") designed to increase
competition in the telecommunications industry and to guarantee "universal"
services for the entire Swiss population at reasonable prices. Upon
deregulation of the Swiss telecommunications market and subject to FCC
rules, the Company plans to expand operations in Switzerland through the
installation of additional switching facilities in Zurich and other
metropolitan areas of Switzerland connected via international private
leased circuits ("IPLCs") to its international gateway switching center to
provide international and national long distance services with switched and
dedicated access. Under the Draft Law, the Company would not be required to
obtain a license unless it controls the infrastructure over which its
services are carried. Accordingly, the Company's provision of its existing
and intended services would require the Company only to deliver
notification of such services to the government. There can be no assurance
that the Draft Law as currently proposed will be adopted. See "Risk
Factors--Substantial Government Regulation."

Pacific Rim. Regulation of the Company varies in the Pacific Rim, depending
upon the particular country involved. The Company's ability to provide voice
telephony services is restricted in all countries where the Company provides
service except Australia and New Zealand, although service between Australia
or New Zealand and other countries may be constrained by restrictions in the
other countries. In Australia and New Zealand, regulation of the Company's
provision of telecommunications services is relatively permissive, although
enrollment (in Australia) or registration (in New Zealand) with the regulator
is required for ISR. The Company's Australian subsidiary has enrolled in
Australia as a Supplier of Eligible International Services and its subsidiary
in New Zealand has registered with the Ministry of Commerce as an
International Service Operator under the Telecommunications International
Services Regulations of 1995. Additionally, in Japan, the Company provides
call-reorigination services but may not provide basic switched voice services
to the public. The Company may, with a license, provide a broad array of
value-added services, as well as limited switched voice services to CUGs. The
Japanese government has indicated that it will permit carriers such as the
Company to apply for ISR authority some time in 1997. In Hong Kong, the
Company may provide call-reorigination under its existing license. A range of
international telephone services, including the operation of an international
gateway for all incoming and outgoing international calls, is provided in Hong
Kong solely by HKTI, the ITO, pursuant to an exclusive license which will
expire on October 1, 2006. However, the Hong Kong government has entered into
discussions with HKTI concerning a possible early termination of its exclusive
license. In all other Pacific Rim countries, the Company is strictly limited
in its provision of public voice and value added services.

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While some countries in the Pacific Rim oppose call-reorigination, the
Company generally has not faced significant regulatory impediments. China,
Indonesia, and the Philippines have specifically informed the FCC that call-
reorigination using uncompleted call signaling is illegal in those countries.
Australia, New Zealand, Japan and Hong Kong permit call-reorigination.

Australia. In Australia, the provision of the Company's services is
currently subject to federal regulation pursuant to the Telecommunications
Act of 1991 of Australia (the "Telecom Act") and federal regulation of
anticompetitive practices pursuant to the Trade Practices Act 1974. In
addition, other federal legislation, various regulations pursuant to
delegated authority and legislation, ministerial declarations, codes,
directions, licenses, statements of Commonwealth Government policy and
court decisions affecting telecommunications carriers also apply to the
Company. There can be no assurance that future declarations, codes,
directions, licenses, regulations, and judicial and legislative changes
will not have a material adverse effect on the Company's business,
financial condition and results of operations.

The Australian Telecommunications Authority ("AUSTEL"), Australia's
federal telecommunications regulatory authority, currently has control over
a broad range of issues affecting the operation of the Australian
telecommunications industry, including the licensing of carriers, the
promotion of competition, consumer protection and technical matters. Under
the 1997 Act, AUSTEL's authority will be divided between the Australian
Communications Authority and the Australian Competition and Consumer
Commission.

The Company owns and operates a switch in Sydney that is connected to the
New York international gateway switch via leased lines. On December 9,
1996, the Company's subsidiary, Telegroup Network Services pty Limited, was
enrolled as a Supplier of Eligible International Services ("Class License")
under Section 226 of the Telecom Act, which allows the Company to resell
national, local and long distance service, cellular service, and
international service, including to engage an ISR. Under the Telecom Act,
the Company's Australian subsidiary must comply with the conditions of the
ISP's Class License until the 1997 Act comes into effect on July 1, 1997.
Under the 1997 Act, the Company's subsidiary will be subject to certain
service provider rules, including an obligation to provide certain operator
services, directory assistance services and itemized billing for customers
of the subsidiary. It is currently expected that the Australian Government
will allow additional carriers, including the Company, to own transmission
facilities in July 1997. The Company intends to become a carriage service
provider which would entitle the Company to purchase IRUs for the
Australian portion of the underseas fiber-optic cable between Sydney and
New York, as well as Auckland, New Zealand. The Company will be required to
comply with the rules applicable to carriage service providers. If the
Company or its affiliate purchases or constructs a link between places in
Australia (e.g., to provide an extension to its international services), it
will be required to apply with AUSTEL for a carrier license. It would then
be subject to the terms of its own license and would be subject to greater
regulatory controls such as in areas of regulation of connectivity,
provision of access to service providers, land access and contributions to
the net cost of universal service throughout Australia (to provide
telecommunications services at reasonable prices to remote sections of that
country) applicable to licensed facilities-based carriers.

Since Australia is not recognized by the FCC as an "equivalent" country,
the Company is not authorized by the FCC to use the Australian ISR license
between the U.S. and Australia, as is allowed in the United Kingdom.
Although the Company anticipates that such authorization will be
forthcoming in the near future, especially given the passage of the 1997
Act, there is no guarantee that the FCC will find Australia to be
"equivalent." The FCC has granted the Company's request for a waiver
allowing the Company to deviate from the existing FCC approved $0.22 per
minute settlement rate and to contract at $0.05 per minute, pursuant to an
agreement with its subsidiary in Australia. Although the Company has not
initiated service pursuant to this agreement, it plans to begin providing
such services in the near future.

There can be no assurance that a change in government, in government
policy in relation to telecommunications or competition, or in AUSTEL's
enforcement of the Telecom Act or in the enforcement of the 1997 Act, will
not have a material adverse effect on the Company's business, financial
condition and

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results of operations. For example, both Telstra and Optus have requested
that the Australian government defer such date, and there can be no
assurance that the deregulatory process will proceed in accordance with the
government's announced timetable. Any delay in such deregulatory process or
in the granting of licenses to other entities interested in developing
their own transmission facilities in Australia could delay potential price
reductions anticipated in a more competitive marketplace, thereby delaying
the Company's access to potentially less expensive transmission and access
facilities.

Hong Kong. The Company acts as a wholesale carrier in Hong Kong,
utilizing its switch colocated at the business premises of one or more of
the local carriers licensed at Fixed Telecommunications Network Service
("FTNS") operators in Hong Kong to provide international services to such
FTNS providers. The Company carries a substantial amount of such FTNS
operators' international traffic on a transparent call-reorigination basis.
The Company operates under a PNETS license granted in 1995 and renewable on
an annual basis. The Company's PNETS license was most recently renewed in
March 1997. The Company's PNETS license will likely be renewed unless there
has been a material breach of one of the license conditions.

The telecommunications market in Hong Kong for the provision of public
telephone services can be categorized into two primary areas: international
long distance services and local telephone services. HKTI currently holds
an exclusive license until September 30, 2006 to provide a variety of
international services including the right to operate an international
gateway for the handling of all outgoing and incoming international calls.
However, there have been reports in the Hong Kong press in recent months of
talks between the Hong Kong Government and HKTI over the possibility of
HKTI relinquishing its monopoly on a range of international
telecommunications services (including public international long distance
calls) by terminating its existing exclusive license, which is not due to
expire until October 1, 2006.

Prior to June 1995, the Hong Kong Telephone Company Limited was the sole
operator of local fixed network telephone services. Subsequently, the
market was liberalized and the Hong Kong government granted licenses to
Hutchison, New World and New T&T Hong Kong Limited to provide fixed local
telephone network services. Each of the four fixed local telephone network
operators each currently hold a FTNS license issued by the Hong Kong
government. The Company plans to apply for a FTNS license if and when the
Hong Kong government decides to grant additional FTNS licenses, which, the
Hong Kong government has indicated, will be no earlier than 1998. Despite
the fact that HKTI has the exclusive right under its license to provide
international telephone services, all three of the other local fixed
network operators have in recent years gained a significant share of the
international long distance call market (approximately 30% to 40% according
to the Company's estimates) by utilizing U.S. and Canada-based call-
reorigination services. See "Risk Factors--Substantial Government
Regulation" and "The International Telecommunications Industry--Competitive
Opportunities and Advances in Technology."

There can be no assurance that, upon resuming sovereignty over Hong Kong,
China will continue the existing licensing regime with respect to the Hong
Kong telecommunications industry. There is also no assurance that China
will continue to implement the existing policies of the Hong Kong
government with respect to promoting the liberalization of the Hong Kong
telecommunications industry in general, including the policy allowing call-
reorigination, which is currently prohibited in China. For the three months
ended March 31, 1997, one wholesale customer in Hong Kong, the Hong Kong
Customer, accounted for approximately 12% of the Company's total revenues.
Substantially all of the services provided by the Company to this customer
consist of call-reorigination services. The initial term of the Company's
agreement with the Hong Kong Customer expires in October 1998,
automatically renews for one-year periods, and may be terminated by the
Hong Kong Customer if it determines in good faith that the services
provided pursuant to the agreement are no longer commercially viable in
Hong Kong. If the Company loses its rights under its PNETS license and/or
if it is unable to provide international telecommunications services in
Hong Kong on a wholesale basis, such action could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, a material reduction in the level of services
provided by the Company to the Hong Kong Customer, or a termination of the
Company's agreement with the Hong Kong Customer, could have a material
adverse effect on the Company's business, financial condition and results
of operations.

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Japan. The Company owns and operates a switch in Tokyo. In Japan, the
Company offers traditional call-reorigination services, and anticipates
offering call-through as well as customized calling card and debit calling
card services. The Company's services in Japan are subject to regulation by
the Ministry of Post and Telecommunications (the "Japanese Ministry") under
the Telecommunications Business Law (the "Japanese Law"). The Company has
filed notice with the Japanese Ministry as a General Type II carrier which
permits it to provide its current services. The Company is in the process
of seeking a Special Type II registration which will permit the Company to
provide additional services in Japan. There can be no assurance that the
Company will be able to register with the Japanese Ministry as a Special
Type II carrier. The Company's failure to obtain rights as a Special Type
II carrier, could have a material adverse effect on the Company's ability
to expand its operations in Japan and could materially adversely effect the
Company's business, financial condition and results of operations.

EMPLOYEES

As of March 31, 1997, the Company had 372 full-time and 100 part-time
employees. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that the Company's relationship with
its employees is satisfactory.

AGREEMENTS WITH INDEPENDENT AGENTS

Independent Agents. The Company's agreements with its independent agents
(other than Country Coordinators) typically provide for a two-year term and
require the agents to offer the Company's services at rates prescribed by the
Company and to abide by the Company's marketing and sales policies and rules.
Independent agent compensation is paid directly by the Company and is based
exclusively upon payment for the Company's services by customers obtained for
Telegroup by the independent agents. The commission paid to independent agents
ranges between five to twelve percent of revenues received by the Company and
varies depending on individual contracts, the exclusivity of the agent and the
type of service sold. Commissions are paid each month based on payments
received during the prior month from customers obtained by independent agents.
Independent agents are held accountable for customer collections and are
responsible for up to 40% of bad debt attributable to customers they enroll.
The Company may change commissions on any of its services with 30 days written
notice to the independent agent.

As of March 31, 1997, approximately one-third of the Company's retail
revenues was derived from customers enrolled by agents who are contractually
prohibited from offering competitive telecommunications services to their
customers during the term of their contract and typically for a period of two
years thereafter. Contracts with independent agents entered into by the
Company after July 1996 typically provide for such exclusivity. As earlier
agreements expire, the Company has generally required its independent agents
to enter into such new agreements. In the past, certain independent agents
have elected to terminate their relationships with the Company in lieu of
entering into new independent agent agreements. In the event that independent
agents transfer a significant number of customers to other service providers
or that a significant number of agents decline to renew their contracts under
the new terms and move their customers to another carrier, either of such
events may have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's agreements with its
independent agents typically provide that the agents have no authority to bind
Telegroup or to enter into any contract on the Company's behalf.

Country Coordinators. In significant international markets, Telegroup
appoints Country Coordinators. Country Coordinators are typically self-
financed, independent agents, with contracts that bind them exclusively to
Telegroup. Country Coordinators also have additional duties beyond marketing
Telegroup services, including the responsibility in a country or region to
coordinate the activities of Telegroup independent agents including training
and recruitment, customer service and collections. As of March 31, 1997,
Telegroup had 30 Country Coordinators who were responsible for sales,
marketing, customer service and collections in 63 countries. Telegroup has
begun to vertically integrate its operations by opening offices in Germany and
the U.K. which provide Country Coordinator services and, in August 1996,
acquired the business operations of its Country Coordinator in France.

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Country Coordinators offer the Company's services at rates prescribed by the
Company, and enforce standards for all advertising, promotional, and customer
training materials relating to Telegroup's services that are used or
distributed in the applicable country or region. Country Coordinators review
all proposed marketing or advertising material submitted to them by the
independent agents operating in their country or region and ensure such
agents' compliance with the Company's standards and policies. The Company's
agreements with its independent Country Coordinators typically have a two-year
term and include an exclusivity provision restricting the County Coordinator's
ability to offer competing telecommunication services. Such agreements
typically entitle the Country Coordinator to an override based on a percentage
of revenues collected by Telegroup from customers within the Country
Coordinator's country or region, as well as a commission similar to the
commission paid to independent agents with respect to customers obtained
directly by the Country Coordinator. The Company's agreements with its Country
Coordinators typically provide that the agents have no right to enter into any
contract on Telegroup's behalf or to bind Telegroup in any manner not
expressly authorized in writing. See "Risk Factors--Dependence on Independent
Agents; Concentration of Marketing Resources."

LEGAL MATTERS

The Company makes routine filings and is a party to customary regulatory
proceedings with the FCC relating to its operations. The Company is not a
party to any lawsuit or proceeding which, in the opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition and results of operations.

In June 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a former
Country Coordinator for South Africa, filed a complaint (the "Complaint")
against the Company in the United States District Court for the Southern
District of Iowa (the "Action") alleging, among other things, breach of
contract, wrongful termination and intentional interference with contractual
relations. The Complaint requests compensatory and exemplary damages. Although
the Company is vigorously defending the Action, management believes that the
Company will ultimately prevail and does not believe the outcome of the
Action, if unfavorable, will have a material adverse effect on the Company's
business, financial condition or results of operations, there can be no
assurance that this will be the case.

On June 19, 1997, the Company received notice of a threatened lawsuit from
counsel to Richard DeAngelis, a former Vice President--Sales and Marketing of
the Company employed from 1993 until May 30, 1997. The notice alleges claims
for breach of contract, wrongful termination, wrongful discharge and
defamation. The Company believes that the threatened claims are without merit.
If an action is filed, the Company intends to vigorously contest any of such
claims. Although management believes that if an action were filed the Company
would ultimately prevail and does not believe that the outcome of such action,
if unfavorable, would have a material adverse effect on the Company's
business, financial condition or results of operations, there can be no
assurance that this will be the case.

INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION

Intellectual Property. The Company owns U.S. registration number 1,922,458,
for the mark TELEGROUP GLOBAL ACCESS(R) for international long distance
telecommunications services. The Company also owns a U.S. application for
registration of its service mark TELEGROUP (SM) No. 74/692,511, for domestic
and international long distance telephone telecommunications services and
electronic transmission of messages and data. In addition, the Company owns
several foreign applications and registrations for the marks TELEGROUP,
TELEGROUP TECHNOLOGIES, INTELLIGENT GLOBAL NETWORK, TELEGROUP INTELLIGENT
GLOBAL NETWORK, SPECTRA, GLOBAL ACCESS, TELEGROUP GLOBAL ACCESS, TELECARD, and
the TELEGROUP logo. The Company relies primarily on common law rights to
establish and protect its intellectual property, its name, products, and long
distance services. There can be no assurance that the Company's measures to
protect its intellectual property will deter or prevent the unauthorized use
of the Company's intellectual property. If the Company is unable to protect
its intellectual property rights, including existing trademarks and service
marks, it could have a material adverse effect upon the Company's business,
financial condition and results of operations.

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Proprietary Information. To protect rights to its proprietary know-how and
technology, the Company requires certain of its employees and consultants to
execute confidentiality and invention agreements that prohibit the disclosure
of confidential information to anyone outside the Company. These agreements
also require disclosure and assignment to the Company of discoveries and
inventions made by such persons while employed by the Company. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for any such breach, or that the Company's confidential
information will not otherwise become known or be independently developed by
competitors or others.

PROPERTY

The Company leases certain office space under operating leases and subleases
that expire at various dates through October 31, 2001, including the Company's
principal headquarters in Fairfield, Iowa. The principal offices currently
leased or subleased by the Company are as follows:

<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- -------- -------------- ----------------
<S> <C> <C>
Fairfield, Iowa (Corporate Headquarters)...... 31,632 January 2001
Fairfield, Iowa (Various Offices)............. 35,000 Various
Coralville, Iowa (Network Operations Center).. 7,200 October 2001
Dusseldorf, Germany (Sales and Customer 2,100
Service Office).............................. April 1999
London, England (Sales and Customer Service 1,200
Office)...................................... April 2001
Paris, France (Sales and Customer Service 1,600
Office)...................................... September 1999
</TABLE>

The Company's switches in New York City, Australia, France, Japan, Hong
Kong, the Netherlands and the U.K. are located in various facilities pursuant
to separate colocation agreements. The Company's aggregate rent expense for
its domestic and international operations, excluding costs relating to
colocation agreements, was $682,630 in 1996.

The Company recently purchased 39 acres in Fairfield, Iowa, on which it
intends to build its new corporate headquarters. The Company also has an
option to purchase an adjacent 26 acres.

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<PAGE>

MANAGEMENT

The following table sets forth certain information regarding the Company's
directors, executive officers and certain other officers.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred Gratzon............. 51 Chairman of the Board and Director
Clifford Rees ........... 45 President, Chief Executive Officer and Director
John P. Lass............. 46 Senior Vice President and Chief Operating Officer
Ronald B. Stakland....... 44 Senior Vice President--International Marketing and
Operations and Director
Douglas A. Neish......... 41 Vice President--Finance, Chief Financial Officer,
Treasurer and Director
Stanley Crowe............ 51 Vice President--North America
Michael Lackman.......... 46 Vice President--Intelligent Networks
Eric E. Stakland......... 45 Vice President--Global Carrier Services
Ronald L. Jackenthal..... 33 Vice President--North American Carrier Sales
Robert E. Steinberg...... 42 Vice President and General Counsel
</TABLE>

Within 90 days following completion of the Offering, the Company intends to
elect two additional persons to the Company's Board of Directors who will be
independent directors. Such independent directors will not be employees of the
Company. Richard P. DeAngelis, formerly Vice President--Sales and Marketing of
the Company, was employed by the Company from 1993 until May 30, 1997.

Fred Gratzon, a co-founder of the Company, has served as Chairman of the
Company's Board of Directors and a Director since its formation in 1989. Mr.
Gratzon founded The Great Midwestern Ice Cream Company in Fairfield, Iowa, in
1979 and served as its Chairman from 1979 to 1988. Mr. Gratzon received a BA
in fine arts from Rutgers University in 1968.

Clifford Rees, a co-founder of the Company, has served as President, Chief
Executive Officer and a Director of the Company since its formation in 1989.
Prior to co-founding Telegroup, Mr. Rees was a co-founder of Amerex Petroleum
Corporation, a multinational oil brokerage company. Mr. Rees has been a member
of the Board of Directors of the Telecommunications Resellers Association
("TRA") since its inception, and was the founding chairman of the TRA's
International Resale Council, which advises the TRA Board of Directors on
issues concerning the expansion of telecommunications resale throughout the
world. Mr. Rees received a BA, summa cum laude, in biochemistry from Michigan
State University in 1974.

John P. Lass has served as Senior Vice President and Chief Operating Officer
of the Company since January 1, 1997. Prior to joining the Company, from
November 1987 through December 1996, Mr. Lass served as Director and President
of Capital Management Partners, Inc., an NASD-registered broker-dealer firm.
During the same period, Mr. Lass was also Director and President of Everest
Asset Management, Inc., an investment management firm. From 1983 to 1987, Mr.
Lass served as Investment Manager for the Zimmerman Capital Group and from
1982 to 1983, Mr. Lass was a consultant with the Boston Consulting Group. Mr.
Lass received an MBA from Harvard Business School in 1982, where he graduated
as a Baker Scholar. Mr. Lass received a BA from the University of Washington
in 1972.

Ronald B. Stakland has served as Senior Vice President of International
Marketing and Operations of the Company since 1992 and as a Director since
April 1997. Prior to joining the Company, Mr. Stakland was a broker for Prime
Energy, Inc., an oil brokerage company from January 1988 to August 1992. Mr.
Stakland received a BFA from the University of Minnesota in 1975.

Douglas A. Neish has served as Vice President of Finance of the Company
since November 1995, Treasurer since October 1996 and Chief Financial Officer
and a Director since April 1997. From 1990 to 1995, Mr. Neish served as Deputy
Treasurer for Canada Mortgage and Housing Corporation and from 1988 to 1990 as
Vice President of Canada Development Investment Corporation ("CDIC"). Prior to
his position with CDIC, from

77
<PAGE>

1979 to 1988, Mr. Neish was employed by Export Development Corporation where
he served in a number of positions including Senior Treasury Officer and
Manager of Marketing. Mr. Neish received a BA from Acadia University, Nova
Scotia, Canada in 1976 and an MBA from Dalhousie University, Nova Scotia,
Canada in 1979.

Stanley Crowe has served as Vice President of North America of the Company
since 1993. Prior to joining the Company, Mr. Crowe was a manager for Mall
Network Services, a telecommunications consulting and management firm from
1990 to 1993. Prior to his position with Mall Network Services, Mr. Crowe
served as Vice President of Marketing of Guild Investment Management, a
national investment management firm, from 1988 to 1990 and President of
Stanley Crowe & Associates (predecessor to Oakwood Corp.), a real estate
development and brokerage firm, from 1979 to 1986. Mr. Crowe received a BA
from the University of California in 1968.

Michael Lackman has served as Vice President of Intelligent Networks of the
Company since 1994. Mr. Lackman served as Senior Manager at MCI from 1991 to
1994, where he was responsible for managing global development projects for
MCI and its alliance partners. From 1988 to 1991, Mr. Lackman was development
manager for Computer Associates, Inc. From 1980 to 1988, Mr. Lackman was a
consultant with the Resource Consulting Group. From 1978 to 1980, he served as
a system administrator with the California Institute of Technology. He
received his BS in Computer Science from the University of Oregon in 1975.

Eric E. Stakland has served as Vice President of Global Carrier Services
since 1995. Prior to joining the Company, Mr. Stakland was Chief Executive
Officer of Impact Solutions, Inc. (also known as Fiberflex, Inc.), a golf club
manufacturing and marketing company based in Fairfield, Iowa, from July 1993
to October 1994. Prior to May 1993, Mr. Stakland was Chief Operating Officer
of USA Global Link, a telecommunications company. Mr. Stakland received a BSCI
from Maharishi European Research University in 1983 and an MBA from Maharishi
University of Management in 1985.

Ronald L. Jackenthal has served as Vice President of North American Carrier
Sales since May 1997. Prior to joining the Company, Mr. Jackenthal served as
National Director, Carrier Sales for Cable & Wireless, Inc., the U.S.
subsidiary of Cable & Wireless, PLC. Beginning in 1987, Mr. Jackenthal held
various positions at Cable & Wireless, including Manager Carrier Sales from
1993 to 1995 and National Manager, Major Accounts, from 1990 to 1993. Mr.
Jackenthal received a B.A. from the University of Florida in 1987.

Robert E. Steinberg has served as Vice President and General Counsel of the
Company since June 9, 1997. Prior to joining the Company, Mr. Steinberg served
from 1988 to May 1997 as Managing Partner of the Washington, D.C. office of
Porter, Wright, Morris & Arthur (a 250 attorney law firm based in Ohio). Mr.
Steinberg served from 1983 to 1986 as Special Assistant to U.S. Attorney
General William French Smith and as Special Litigation Counsel at the U.S.
Department of Justice. Mr. Steinberg is the author of five books and thirty
articles on regulatory and litigation topics, including in law journals at
Yale and Columbia law schools. Mr. Steinberg received a B.A. in 1976 and J.D.
in 1979 from Washington University.

All directors of the Company currently hold office until the next annual
meeting of the Company's shareholders or until their successors are elected
and qualified. Immediately prior to completion of the Offering, the Company's
Board of Directors will be divided into three classes serving staggered three-
year terms. See "Risk Factors--Antitakeover Considerations." At each annual
meeting of the Company's shareholders, successors to the class of directors
whose term expires at such meeting will be elected to serve for three-year
terms and until their successors are elected and qualified. Officers are
elected by, and serve at the discretion of, the Board of Directors. See
"Description of Capital Stock--Certain Provisions of the Company's Articles
and Bylaws."

Except for Eric E. Stakland and Ronald B. Stakland, who are brothers, there
are no family relationships among any of the directors and executive officers
of the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee. After completion of the Offering, the Board of Directors
will establish an Audit Committee. The Audit Committee will be comprised
solely of independent directors and will be charged with

78
<PAGE>

recommending the engagement of independent accountants to audit the Company's
financial statements, discussing the scope and results of the audit with the
independent accountants, reviewing the functions of the Company's management
and independent accountants pertaining to the Company's financial statements
and performing such other related duties and functions as are deemed
appropriate by the Audit Committee and the Board of Directors.

Compensation Committee. After completion of the Offering, the Board of
Directors will establish a Compensation Committee. The Compensation Committee
will be comprised of "disinterested persons" or "Non-Employee Directors" as
such term is used in Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and "outside directors" as such term
is used in Treasury Regulation Section 1.162-27(c)(3) promulgated under the
Internal Revenue Code of 1986, as amended (the "Code"). The Compensation
Committee will be responsible for reviewing general policy matters relating to
compensation and benefits of employees and officers, determining the total
compensation of the officers and directors of the Company and administering
the Company's Stock Option Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors did not have a Compensation Committee during fiscal
year 1996. As a result, Messrs. Gratzon and Rees, executive officers and the
only members of the Board of Directors in 1996, participated in deliberations
concerning executive officer compensation, including their own compensation.
After completion of the Offering, the Board of Directors will establish a
Compensation Committee comprised of directors who are not executive officers
or employees of the Company.

DIRECTOR REMUNERATION

After completion of the Offering, directors who are not employees of the
Company will receive an annual fee, a meeting fee for every board meeting
attended and each committee meeting held separately and a fee for each
telephonic board meeting or telephonic committee meeting held separately. The
Company is in the process of determining such fees. All directors will be
reimbursed for out-of-pocket expenses incurred in connection with attendance
at board and committee meetings. The Company may, from time to time and in the
sole discretion of the Company's Board of Directors, grant options to
directors under the Company's Stock Option Plan.

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<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named
Officers"), with respect to the year ended December 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
SECURITIES
NAME OF INDIVIDUAL AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
---------------------- ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Clifford Rees........... $690,000 $250,000 -- -- --
Chief Executive Officer
Fred Gratzon............ 600,000 250,000 -- -- --
Chairman of the Board
Ronald B. Stakland...... 250,000 71,417 -- -- --
Senior Vice President-
International Services
Michael Lackman......... 111,000 38,000 -- -- --
Vice President-
Intelligent Networks
Richard P. 44,418 85,147 -- 147,958 $183,732(2)
DeAngelis(1)...........
Vice President-Sales &
Marketing
</TABLE>
- --------
(1)Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.
(2)Represents payments by the Company for earned commissions.

STOCK OPTION GRANTS

The following table sets forth certain information regarding grants of
options to purchase Common Stock made by the Company during the fiscal year
ended December 31, 1996, to each of the Named Officers. No stock appreciation
rights were granted during 1996.

OPTION GRANTS IN 1996
INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($) (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED 1996 (%) (1) ($/SHARE) DATE (5%) (10%)
---- ---------- ------------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard P.
DeAngelis(3)........... 147,958(4) 9.07% $1.31 1/1/06 $ 122,257 $ 309,823
</TABLE>
- --------
(1) The Company granted options to purchase a total of 1,631,031 shares of
Common Stock in 1996.
(2) Represents amounts that may be realized upon exercise of options
immediately prior to the expiration of their term assuming the specified
compounded rates of appreciation (5% and 10%) on the Common Stock over the
terms of the options. These assumptions do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the option holder.
(3)Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.
(4) One half, or 73,979 shares, are performance based options conditioned upon
reaching certain sales objectives. Such sales objectives were met during
the fourth quarter of 1996.

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<PAGE>

OPTION EXERCISES AND HOLDINGS

The following table sets forth certain information as of December 31, 1996,
regarding options to purchase Common Stock held by each of the Named Officers.
None of the Named Officers exercised any stock options or stock appreciation
rights during fiscal year 1996.

FISCAL 1996 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- "IN-THE-MONEY" OPTIONS AT
END (#) FISCAL YEAR-END ($) (1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard P.
DeAngelis(2)........... 147,958 -- 973,078 --
</TABLE>
- --------
(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set
forth represent the difference between $7.89 per share, the market value
of the Common Stock issuable upon exercise of options at December 31, 1996
(as determined by the Board of Directors), and the exercise price of the
option, multiplied by the applicable number of shares underlying the
options.
(2)Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.

EMPLOYMENT AGREEMENTS

On April 7, 1997, the Company entered into employment agreements (the
"Employment Agreements") with each of Mr. Gratzon and Mr. Rees pursuant to
which Mr. Gratzon has agreed to serve as Chairman of the Board and Mr. Rees
has agreed to serve as President and Chief Executive Officer of the Company.
The Employment Agreements provide for an annual base salary for each of Mr.
Gratzon and Mr. Rees of $500,000 and incentive compensation of up to $500,000.
The incentive compensation component of the Employment Agreements will be
calculated and shared equally between Mr. Gratzon and Mr. Rees as follows: (i)
a total of $1 million if EBT (as defined below) for the immediately preceding
year is $2 million or more and; (ii) the excess of EBT over $1 million if EBT
for the immediately preceding year is between $1 million and $2 million. As
defined more particularly in the Employment Agreements "EBT" is equal to the
sum of net income of the Company and its subsidiaries, plus any provision for
income taxes deducted in computing net income. The Employment Agreements
provide that any additional annual base salary and incentive compensation will
be at the discretion of the Compensation Committee, will be commensurate with
bonuses paid to other employees of the Company and will take into account
total compensation paid to executives of competitors of the Company.

The Employment Agreements expire on December 31, 2000, unless earlier
terminated in accordance with their terms. In addition, the Employment
Agreements contain a non-competition covenant which prohibits Mr. Rees and Mr.
Gratzon from, during the term of their employment with the Company and for a
period of one year following the termination of the Employment Agreements in
most circumstances, working for any company that competes with the Company as
of the date of termination, without the written consent of the Company.

Prior to the completion of the Offering, the Company anticipates entering
into additional employment agreements with certain executive officers.

INDEMNIFICATION AGREEMENTS

Prior to completion of the Offering, the Company intends to enter into
indemnification agreements with certain of its executive officers and
directors (collectively, the "Indemnification Agreements"). Pursuant to the
terms of the Indemnification Agreements, each of the executive officers and
directors who are parties thereto will be indemnified by the Company to the
full extent provided by law in the event such officer or director is made or
threatened to be made a party to a claim arising out of such person acting in
his capacity as an officer or director of the Company. The Company has further
agreed that, upon a change in control, as defined in the Indemnification
Agreements, the rights of such officers and directors to indemnification
payments and expense advances will be determined in accordance with the
provisions of the Iowa Business Corporation Act and that, upon a potential
change of control, as defined in the Indemnification Agreements, it will
create a trust in an

81
<PAGE>

amount sufficient to satisfy all indemnity expenses reasonably anticipated at
the time a written request to create such a trust is submitted by an officer
or director.

AMENDED AND RESTATED STOCK OPTION PLAN

On April 9, 1997, the Board of Directors of the Company adopted and the
shareholders of the Company approved the Amended and Restated 1996 Stock
Option Plan (the "Stock Option Plan"), which provides for the grant to
officers, key employees and directors of the Company and its subsidiaries of
both "incentive stock options" within the meaning of Section 422 of the Code,
and stock options that are non-qualified for federal income tax purposes. The
total number of shares for which options may be granted pursuant to the Stock
Option Plan is 4,000,000 and the maximum number of shares for which options
may be granted to any person is 1,875,000 shares, subject to certain
adjustments to reflect changes in the Company's capitalization. The Stock
Option Plan is currently administered by the Company's Board of Directors.
Upon the completion of the Offering, the Stock Option Plan will be
administered by the Compensation Committee. The Compensation Committee will
determine, among other things, which officers, employees and directors will
receive options under the plan, the time when options will be granted, the
type of option (incentive stock options, non-qualified stock options, or both)
to be granted, the number of shares subject to each option, the time or times
when the options will become exercisable, and, subject to certain conditions
discussed below, the option price and duration of the options. Members of the
Compensation Committee are not eligible to receive options under the Stock
Option Plan, but are entitled to receive options as directors.

The exercise price of incentive stock options are determined by the
Compensation Committee, but may not be less than the initial public offering
price if granted prior to the Offering or the fair market value of the Common
Stock on the date of grant if granted after the Offering and the term of any
such option may not exceed ten years from the date of grant. With respect to
any participant in the Stock Option Plan who owns stock representing more than
10% of the voting power of all classes of the outstanding capital stock of the
Company or of its subsidiaries, the exercise price of any incentive stock
option may not be less than 110% of the fair market value of such shares on
the date of grant and the term of such option may not exceed five years from
the date of grant.

The exercise price of non-qualified stock options are determined by the
Compensation Committee on the date of grant. In the case of non-qualified
stock options granted on or before the earliest of (i) the expiration or
termination of the Stock Option Plan; (ii) the material modification of the
Stock Option Plan; (iii) the issuance of all options under the Stock Option
Plan; or (iv) the first meeting of shareholders at which Directors are elected
occurring after the year 2000 (the "Reliance Period"), the exercise price of
such options may not be less than the initial public offering price if granted
prior to the Offering or the fair market value of the Common Stock on the date
of grant if granted after the Offering. In the case of non-qualified stock
options granted after the Reliance Period, the exercise price of such options
may not be less than the fair market value of the Common Stock on the date of
grant. In either case, the term of such options may not exceed ten years from
the date of grant.

Payment of the option price may be made in cash or, with the approval of the
Compensation Committee, in shares of Common Stock having a fair market value
in the aggregate equal to the option price. Options granted pursuant to the
Stock Option Plan are not transferable, except by will or the laws of descent
and distribution. During an optionee's lifetime, the option is exercisable
only by the optionee.

The Compensation Committee has the right at any time and from time to time
to amend or modify the Stock Option Plan, without the consent of the Company's
shareholders or optionees; provided, that no such action may adversely affect
options previously granted without the optionee's consent, and provided
further that no such action, without the approval of a majority of the
shareholders of the Company, may increase the total number of shares of Common
Stock which may be purchased pursuant to options under the Stock Option Plan,
increase the total number of shares of Common Stock which may be purchased
pursuant to options under the Stock Option Plan by any person, expand the
class of persons eligible to receive grants of options under the Stock Option
Plan, decrease the minimum option price, extend the maximum term of options
granted under the Stock Option

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<PAGE>

Plan, extend the term of the Stock Option Plan or change the performance
criteria on which the granting of options is based. The expiration date of the
Stock Option Plan after which no option may be granted thereunder, is April 1,
2007.

Promptly after the completion of the Offering, the Company expects to file
with the Commission a registration statement on Form S-8 covering the shares
of Common Stock underlying options granted under the Stock Option Plan.

As of December 31, 1996, options to purchase an aggregate of 1,631,031
shares of Common Stock were granted under the original 1996 Stock Option Plan.
The outstanding options were held by 320 individuals and were exercisable at
$1.31 per share. During 1996, certain stock options were granted with exercise
prices below the estimated fair market value of such shares. As a result, the
Company recognized stock option based compensation of $1,032,646 during the
year ended December 31, 1996. Shares subject to options granted under the plan
that have lapsed or terminated may again be subject to options granted under
the plan.

Certain Federal Income Tax Consequences. The following discussion is a
summary of the principal United States federal income tax consequences under
current federal income tax laws relating to option grants to employees under
the Stock Option Plan. This summary is not intended to be exhaustive and,
among other things, does not describe state, local or foreign income and other
tax consequences.

An optionee will not recognize any taxable income upon the grant of a non-
qualified option and the Company will not be entitled to a tax deduction with
respect to such grant. Generally, upon exercise of a non-qualified option, the
excess of the fair market value of the Common Stock on the exercise date over
the exercise price will be taxable as compensation income to the optionee.
Subject to the discussion below with respect to Section 162(m) of the Code and
the optionee including such compensation in income or the Company satisfying
applicable reporting requirements, the Company will be entitled to a tax
deduction in the amount of such compensation income. The optionee's tax basis
for the Common Stock received pursuant to such exercise will equal the sum of
the compensation income recognized and the exercise price. Special rules may
apply in the case of an optionee who is subject to Section 16 of the Exchange
Act.

In the event of a sale of Common Stock received upon the exercise of a non-
qualified option, any appreciation or depreciation after the exercise date
generally will be taxed to the optionee as capital gain or loss and will be
long-term capital gain or loss if the holding period for such Common Stock was
more than one year.

Subject to the discussion below, an optionee will not recognize taxable
income at the time of grant or exercise of an "incentive stock option" and the
Company will not be entitled to a tax deduction with respect to such grant or
exercise. The exercise of an "incentive stock option" generally will give rise
to an item of tax preference that may result in alternative minimum tax
liability for the optionee.

Generally, a sale or other disposition by an optionee of shares acquired
upon the exercise of an "incentive stock option" more than one year after the
transfer of the shares to such optionee and more than two years after the date
of grant of the "incentive stock option" will result in any difference between
the amount realized and the exercise price being treated as long-term capital
gain or loss to the optionee, with no deduction being allowed to the Company.
Generally, upon a sale or other disposition of shares acquired upon the
exercise of an "incentive stock option" within one year after the transfer of
the shares to the optionee or within two years after the date of grant of the
"incentive stock option," any excess of (i) the lesser of (a) the fair market
value of the shares at the time of exercise of the option and (b) the amount
realized on such sale or other disposition over (ii) the exercise price of
such option will constitute compensation income to the optionee. Subject to
the discussion below with respect to Section 162(m) of the Code and the
optionee including such compensation in income or the Company satisfying
applicable reporting requirements, the Company will be entitled to a deduction
in the amount of such compensation income. The excess of the amount realized
on such sale or disposition over the fair market value

83
<PAGE>

of the shares at the time of the exercise of the option generally will
constitute short-term or long-term capital gain and will not be deductible by
the Company.

Section 162(m) of the Code disallows a federal income tax deduction to any
publicly held corporation for compensation paid in excess of $1,000,000 in any
taxable year to the chief executive officer or any of the four other most
highly compensated executive officers who are employed by the corporation on
the last day of the taxable year. Under regulations promulgated under Section
162(m), the deduction limitation of Section 162(m) does not apply to any
compensation paid pursuant to a plan that existed during the period in which
the corporation was not publicly held, to the extent the prospectus
accompanying the initial public offering disclosed information concerning such
plan that satisfied all applicable securities laws. However, the foregoing
exception may be relied upon only for awards made before the earliest of (i)
the expiration of the plan; (ii) the material modification of the plan; (iii)
the issuance of all stock allocated under the plan; or (iv) the first meeting
of shareholders at which directors are elected occurring after the close of
the third calendar year following the calendar year in which the initial
public offering occurs (the "Reliance Period"). The compensation attributable
to awards granted under the Company's Stock Option Plan during the Reliance
Period is not subject to the deduction limitation of Section 162(m). The
Company has structured and implemented the Stock Option Plan in a manner so
that compensation attributable to awards made after the Reliance Period will
not be subject to the deduction limitation.

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<PAGE>

CERTAIN TRANSACTIONS

SUBORDINATED NOTE PRIVATE PLACEMENT

On November 27, 1996, Telegroup issued $20 million in aggregate principal
amount of 12% Senior Subordinated Notes to Greenwich Street Capital Partners,
L.P. and its affiliated funds. The Company intends to use a portion of the net
proceeds of the Offering and/or the Anticipated Financings to prepay in full
the Senior Subordinated Notes. The Company may prepay the Senior Subordinated
Notes at a redemption price equal to 107% of the principal amount thereof,
plus accrued interest, within sixty days following completion of the Offering.

In connection with the Senior Subordinated Note private placement (the
"Subordinated Note Private Placement"), the Company also issued warrants (the
"Warrants") to the holders of the Senior Subordinated Notes to purchase 4.0%
of the issued and outstanding shares of Common Stock on a fully diluted basis,
exercisable at a nominal exercise price at any time prior to November 28,
2003. Pursuant to their terms, the Warrants were adjusted on July 2, 1997 to
increase the number of shares issuable upon exercise of the Warrants to 4.5%
of the issued and outstanding shares of Common Stock on such date, less any
excluded shares. In the event that the Company does not complete the Offering
prior to January 2, 1998, the holders of the Warrants will have the right to
acquire up to an additional 0.5%, of the issued and outstanding shares of
Common Stock on a fully diluted basis on such date, less certain excluded
shares. The Warrants provide that excluded shares include the following: (i)
shares of Common Stock issued in a qualified public offering; (ii) shares of
Common Stock issued, other than in a qualified public offering, at fair market
value; (iii) shares of Common Stock that are (a) issued or issuable pursuant
to options that have fair market value exercise prices and (b) granted to
employees of the Company (other than to Messrs. Gratzon or Rees), but only up
to 7.5% of the sum of shares issued in (i) and (ii) above; and (iv) shares of
Common Stock that are (a) issued or issuable pursuant to options that have
fair market value exercise prices, (b) granted to employees of the Company
(other than to Messrs. Gratzon or Rees) and (c) issued after a qualified
public offering, but only up to the excess of 493,879 over the number of
shares of Common Stock granted to employees in respect of options prior to the
closing of a qualified initial public offering.

The Warrants contain certain customary antidilution protection in the event
of stock splits, stock dividends, reorganizations and other similar events.

Pursuant to a registration rights agreement with the Company (the "Warrant
Shares Registration Rights Agreement"), a majority of the holders of the
Warrants are entitled to demand registration of their shares once in each of
the two years following the Offering, provided that any exercise must include
at least twenty percent (20%) of the shares into which the Warrants are
exercisable (the "Warrant Shares").

The holders of the Warrants also have piggyback registration rights with
respect to all registrations by the Company (other than a registration
statement filed on Form S-4 or S-8), including the Offering, pursuant to the
following priority rules: (i) in the case of the Offering, the Company has
first priority, the holders of the Warrants have second priority (with respect
to up to fifty percent (50%) of the outstanding Warrant Shares), other
shareholders have third priority (up to 4.5% of the issued and outstanding
shares of Common Stock prior to the Offering), and thereafter the holders of
the Warrants and other shareholders share on a one-third and two-thirds basis,
respectively; (ii) in the case of all other underwritten offerings the Company
has first priority, and the holders of the Warrants and other shareholders
(with rights to participate in the offering) have second priority, pro rata
with their holdings; and (iii) in all other offerings, the Company has first
priority, other shareholders with demand registration rights have second
priority, and the holders of the Warrants and all holders of piggyback
registration rights have third priority, pro rata with their holdings.

Pursuant to the terms of the Warrant Shares Registration Rights Agreement,
the Company has agreed to (i) pay all fees and expenses incurred with any
registration, except for all underwriting discounts and commissions relating
to the Common Stock sold on behalf of such holders which will be borne by the
holders thereof, and (ii) indemnify the holders of the Warrants in connection
with any registration effected pursuant to the Warrant Shares Registration
Rights Agreement, including liabilities under the Securities Act.

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<PAGE>

PRINCIPAL SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT

Prior to completion of the Offering, the Company and each of Clifford Rees,
Fred Gratzon, Shelly Levin-Gratzon and Ronald Stakland (the "Principal
Shareholders") will enter into a registration rights agreement (the "Principal
Shareholders Registration Rights Agreement") granting the Principal
Shareholders and certain other shareholders demand and incidental registration
rights in connection with their ownership of shares of Common Stock. See
"Description of Capital Stock--Registration Rights--Principal Shareholders."

ACQUISITION OF COUNTRY COORDINATOR'S OPERATIONS

The Company acquired substantially all of the assets of Telegroup South
Europe, Inc., a Pennsylvania corporation ("TGSE") and Telecontinent, S.A., a
French company ("Telecontinent"). George Apple, the Company's Country
Coordinator in France, owned all of the issued and outstanding shares of TGSE
and substantially all of the shares of Telecontinent. Pursuant to separate
agreements, the Company paid Mr. Apple aggregate consideration of $1,031,547
in cash and 262,116 shares of the Company's Common Stock for TGSE and
Telecontinent.

LOANS TO CERTAIN EXECUTIVE OFFICERS

The Company has from time to time made various personal loans to Messrs.
Gratzon and Rees, the Chairman of the Board and President, respectively. Mr.
Gratzon received loans from the Company, during 1996, in the aggregate amount
of $162,318, at an interest rate equal to 12% per annum, all of which were
repaid in full by Mr. Gratzon in November 1996. The largest aggregate amount
of indebtedness owed by Mr. Gratzon to the Company at any time during 1996 was
$162,318.

Mr. Rees received loans from the Company during 1994 and 1995, and in
October 1996 in the aggregate amount of $135,878, at interest rates equal to
12% per annum. These loans were repaid in full by Mr. Rees in November 1996.
The largest aggregate amount of indebtedness owed by Mr. Rees to the Company
at any time during 1996 was $135,878.

MANAGEMENT AGREEMENT

During 1994, 1995 and a portion of 1996, the Company had a management
agreement with an affiliate of the Company owned by Messrs. Gratzon and Rees
pursuant to which it paid a management fee, determined annually, plus an
incentive fee based upon performance, to Messrs. Gratzon and Rees. Amounts
paid to Messrs. Gratzon and Rees under this agreement totaled $1,155,000,
$1,334,000 and $415,000 during 1994, 1995 and 1996, respectively. The
management agreement was terminated on May 15, 1996.

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PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 23, 1997 (assuming the
Recapitalization had occurred as of the dates presented, except as otherwise
indicated), as adjusted to reflect the sale of Common Stock being offered
hereby, by (i) each person known by the Company to beneficially own five
percent or more of any class of the Company's capital stock, (ii) each
director of the Company, (iii) each executive officer of the Company that is a
Named Officer and (iv) all directors and executive officers of the Company as
a group. All information with respect to beneficial ownership has been
furnished to the Company by the respective shareholders of the Company.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT PRIOR
COMMON STOCK TO THIS PERCENT AFTER
BENEFICIAL OWNER BENEFICIALLY OWNED (1) OFFERING(2) THIS OFFERING(3)(4)
- ---------------- ---------------------- ------------- -------------------
<S> <C> <C> <C>
Fred Gratzon and Shelley
Levin-Gratzon.......... 11,836,653(5) 45.2% 39.2%
Clifford Rees........... 11,683,215(6) 44.6% 38.7%
Ronald B. Stakland...... 773,004(7) 2.9% 2.6%
Michael Lackman......... 518,988 2.0% 1.7%
Douglas A. Neish........ 120,559 * *
Richard P. DeAngelis.... 154,052 * *
All directors and
executive officers as a
group
(11 persons)........... 25,123,278(8) 95.8% 83.2%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of Common
Stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of June 23, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage of ownership of any other
person. Except as otherwise indicated, and subject to community property
laws where applicable, the persons named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as owned by them. The address of each of the persons in this table
is as follows: c/o Telegroup, Inc., 2098 Nutmeg Avenue, Fairfield, Iowa
52556.
(2) Assumes 26,211,578 shares of Common Stock outstanding prior to the
Offering, exercisable Warrants of 1,327,500 shares of Common Stock, and
exercisable options to purchase a total of 1,960,922 shares of Common
Stock.
(3) Assumes no exercise of the over-allotment option.
(4) Assumes 30,211,578 shares of Common Stock outstanding after the Offering,
exercisable Warrants of 1,327,500 shares of Common Stock, and exercisable
options to purchase a total of 1,960,922 shares of Common Stock.
(5) Represents (i) 5,918,326 shares of Common Stock owned by Fred Gratzon and
Shelley Levin-Gratzon as joint tenants, (ii) 2,239,580 shares of Common
Stock held by the Fred Gratzon Revocable Trust, (iii) 2,239,580 shares of
Common Stock held by the Shelley L. Levin-Gratzon Revocable Trust, (iv)
1,265,201 shares of Common Stock owned by the Gratzon Family Partnership
II, L.P., a Georgia limited partnership, and (v) 173,966 shares of Common
Stock owned by the Gratzon Family Partnership I, L.P., a Georgia limited
partnership. Fred Gratzon and Shelley Levin-Gratzon are husband and wife,
and together they (i) serve as trustees of the two trusts referenced in
the prior sentence and (ii) own and/or control the general partners of
the two partnerships referenced in the prior sentence. Fred Gratzon is
the sole beneficiary of the Fred Gratzon Revocable Trust and Shelley
Levin-Gratzon is the sole beneficiary of the Shelley L. Levin-Gratzon
Revocable Trust.
(6) Represents (i) 4,804,629 shares of Common Stock owned by Lakshmi
Partners, L.P., a Georgia limited partnership, of which a corporation
owned and/or controlled by Mr. Rees serves as the general partner, and
(ii) 6,878,586 shares of Common Stock are held by a revocable trust of
which Mr. Rees is the trustee and sole beneficiary.
(7) Represents (i) 663,406 shares of Common Stock owned by Ronald Stakland
and (ii) 109,598 shares of Common Stock held by the Stakland Family
Trust, Ernst & Young Trustees Limited.
(8) Includes 154,052 shares of Common Stock owned by Richard DeAngelis,
formerly Vice President--Sales and Marketing, who was employed by the
Company from 1993 until May 30, 1997.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

After completion of the Offering, the authorized capital stock of the
Company will consist of 150,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, no par value.

The statements under this caption are summaries of all material provisions
of the Company's Second Restated Articles of Incorporation (the "Second
Restated Articles of Incorporation") and Amended and Restated Bylaws (the
"Bylaws"), relating to the Company's capital stock which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. Such
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, such documents.

THE RECAPITALIZATION

Immediately prior to completion of the Offering, the Company will adopt the
Articles and the Bylaws. The Articles will provide for the reclassification of
the Company's Class A Common Stock, no par value, and its nonvoting Class B
Common Stock, no par value, into a single class of voting Common Stock, no par
value, (the "Reclassification"). The Articles will also provide for "blank
check" preferred stock. See "--Preferred Stock." In addition, immediately
prior to the completion of the Offering, the Company will effect an
approximately 5.48-for-one stock split of its then existing Common Stock (the
"Stock Split"). The Reclassification and the Stock Split are referred to
collectively herein as the "Recapitalization."

COMMON STOCK

Prior to the Offering, after giving effect to the Recapitalization, there
were 26,211,578 shares of Common Stock outstanding and held of record by
approximately 23 holders of record. Holders of shares of Common Stock are
entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote and do not have any cumulative voting rights. This
means that the holders of more than 50% of the shares voting for the election
of directors can elect all of the directors if they choose to do so; and, in
such event, the holders of the remaining shares of Common Stock will not be
able to elect any person to the Board of Directors. Subject to the rights of
the holders of shares of any series of Preferred Stock, holders of Common
Stock are entitled to receive such dividends as may from time to time be
declared by the Board of Directors of the Company out of funds legally
available therefor. See "Dividends." Holders of shares of Common Stock have no
preemptive, conversion, redemption, subscription or similar rights. In the
event of a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, holders of shares of Common Stock are entitled to
share ratably in the assets of the Company which are legally available for
distribution, if any, remaining after the payment or provision for the payment
of all debts and other liabilities of the Company and the payment and setting
aside for payment of any preferential amount due to the holders of shares of
any series of Preferred Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock offered hereby when issued will be, upon payment
therefor, validly issued, fully paid and nonassessable.

At present there is no established trading market for the Common Stock. The
Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "TGRP."

PREFERRED STOCK

The Company's Board of Directors is authorized to issue from time to time up
to 10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, designations, preferences, qualifications, limitations and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, the terms of
any sinking fund, liquidation preferences and the number of shares
constituting any series, without any further action by the shareholders of the
Company. The issuance of Preferred Stock with voting rights could have an
adverse effect on the voting power of holders of Common Stock by increasing
the number of outstanding shares. In addition, if the Board of Directors
authorizes Preferred Stock

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<PAGE>

with conversion rights, the number of shares of Common Stock outstanding could
potentially be increased up to the amount authorized under the Articles. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock. Any such issuance could
also have the effect of delaying, deterring or preventing a change in control
of the Company and may adversely affect the rights of holders of Common Stock.
The Board of Directors does not currently intend to issue any shares of
Preferred Stock.

WARRANTS

As of December 31, 1996, there were outstanding Warrants granting the
holders of the Warrants the right to acquire up to 1,160,107 shares of Common
Stock. Pursuant to their terms, the Warrants were adjusted on July 2, 1997 to
increase the number of shares issuable upon exercise of the Warrants to 4.5%
of the issued and outstanding shares of Common Stock as of such date, less
certain excluded shares. In the event that the Company does not complete the
Offering prior to January 2, 1998, the holders of the Warrants will have the
right to acquire up to an additional 0.5% of the issued and outstanding Shares
of Common Stock on a fully diluted basis on such date, less certain excluded
shares. The Warrants are exercisable at any time prior to November 28, 2003.
The Warrants are entitled to certain antidilution protection in the event of
additional issuances of Common Stock, stock splits, stock dividends,
reorganizations and other similar events. The shares of Common Stock issued
pursuant to the exercise of the Warrants are entitled to certain registration
rights described below. As a result of certain options which were granted
since March 31, 1997 and pursuant to the adjustments described above, the
holders of Warrants will have the right to acquire 1,327,500 shares of Common
Stock.

REGISTRATION RIGHTS

Holders of the Warrants. The holders of the Warrants were granted
registration rights pursuant to the Warrant Shares Registration Rights
Agreement with the Company. Under the Warrant Shares Registration Rights
Agreement, a majority of the holders of the Warrants will be entitled to
demand registration of their shares once in each of the two years following
the Offering, provided that any exercise must include at least twenty percent
(20%) of the shares into which the Warrants are exercisable (the "Warrant
Shares").

The holders of the Warrants have piggyback registration rights with respect
to all registrations by the Company (other than a registration statement filed
on Form S-4 or S-8), including the Offering, pursuant to the following
priority rules: (i) in the case of the Offering, the Company has first
priority, the holders of the Warrants have second priority (with respect to up
to fifty percent (50%) of the Warrant Shares then held by such holders of the
Warrants), other shareholders have third priority (up to 4.5% of the issued
and outstanding shares of Common Stock prior to the Offering), and thereafter
the holders of the Warrants and other shareholders share on a one-third to
two-thirds basis; (ii) in the case of all other underwritten offerings the
Company has first priority, and the holders of the Warrants and other
shareholders (with rights to participate in the offering) have second
priority, pro rata with their holdings; and (iii) in all other offerings, the
Company has first priority, other shareholders with demand registration rights
have second priority, and the holders of the Warrants and all holders of
piggyback registration rights have third priority, pro rata with their
holdings.

Pursuant to the terms of the Warrant Shares Registration Rights Agreement,
the Company agreed to (i) pay all fees and expenses incurred with any
registration, except for all underwriting discounts and commissions relating
to the Common Stock sold by such holders, which will be borne by the holders
thereof, and (ii) indemnify the holders in connection with any registration
effected pursuant to the Warrant Shares Registration Rights Agreement,
including liabilities under the Securities Act.

Principal Shareholders. Prior to completion of the Offering, the Principal
Shareholders will be granted registration rights pursuant to the Principal
Shareholders Registration Rights Agreement. Under the Principal Shareholders
Registration Rights Agreement, the Principal Shareholders are entitled to
demand registration of their shares once in each of the two years following
the date the Company is eligible to file a registration statement on Form S-3,
provided that any such demand must include at least twenty percent (20%) of
the shares beneficially owned by the Principal Shareholders on the date of
such demand.

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<PAGE>

The Principal Shareholders have piggyback registration rights with respect
to all other registrations by the Company (other than a registration statement
filed on Form S-4 or S-8), pursuant to the following priority rules: (i) in
the case of any underwritten registration on behalf of the Company, the
Company has first priority, and the Principal Shareholders and other
shareholders (with rights to participate in the offering) have second
priority, pro rata with their holdings; and (ii) in any underwritten secondary
registration on behalf of the Company's shareholders other than the Principal
Shareholders, the other shareholders with priority demand registration rights
have first priority, and the Principal Shareholders and all holders of
incidental registration rights have second priority, pro rata with their
holdings.

CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS

The Company's Second Restated Articles of Incorporation contain a provision
that eliminates the personal liability of the Company's directors to the
Company or its shareholders for monetary damages for breach of fiduciary duty
as a director, except (i) for liability for any breach of the director's duty
of loyalty to the Corporation or its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of the law, (iii) for any transactions from which the director derived an
improper personal benefit, or (iv) for unlawful distributions in violation of
Section 490.833 of the Iowa Business Corporation Act. Any repeal or amendment
of this provision by the shareholders of the Corporation will not adversely
affect any right or protection of a director existing at the time of such
repeal or amendment.

In addition, the Company's Bylaws provide that the Company will indemnify
directors and officers of the Company to the fullest extent permitted by the
Iowa Business Corporation Act.

The Second Restated Articles of Incorporation and Bylaws include certain
provisions which are intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and which may
have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company unless such takeover or change in control is
approved by the Company's Board of Directors. Such provisions may also render
the removal of the directors and management more difficult.

The Second Restated Articles of Incorporation provide that the Board of
Directors of the Company be divided into three classes serving staggered
three-year terms. The Company's Second Restated Articles of Incorporation or
Bylaws and/or the Iowa Business Corporation Act include restrictions on who
may call a special meeting of shareholders and/or that shareholders may only
act at an annual or special meeting or with the written consent of holders of
at least 90% of the outstanding shares of Common Stock. The Company's Bylaws
contain an advance notice procedure with regard to the nomination, other than
by or at the direction of the Board of Directors, of candidates for election
as directors and with regard to certain matters to be brought before an annual
meeting of shareholders of the Company. In general, notice must be received by
the Company not less than 90 days prior to the meeting and must contain
certain specified information concerning the person to be nominated or the
matter to be brought before the meeting and concerning the shareholder
submitting the proposal. The Second Restated Articles of Incorporation and
Bylaws provide that the affirmative vote of the holders of at least 65% of the
voting stock of the Company is required to amend the foregoing provisions.

The Second Restated Articles of Incorporation contain provisions restricting
certain "Business Combinations". The Second Restated Articles of Incorporation
require the affirmative vote of at least 65% of the outstanding shares of
voting stock of the Company for the approval of certain material transactions
between the Company and any individual, corporation, partnership or other
person or entity which, together with its affiliates and associates
beneficially owns in the aggregate 20% or more of the outstanding voting stock
of the Company ("Substantial Shareholder") unless one of the following is
true: (1) 2/3 of the "Continuing Directors" on the Board (a) have approved in
advance the acquisition that caused the Substantial Shareholder to become a
Substantial Shareholder or (b) have approved the Business Combination prior to
the Substantial Shareholder involved in the Business Combination having become
a Substantial Shareholder; (2) the Business Combination

90
<PAGE>

is solely between the Company and one of its wholly owned subsidiaries; or (3)
the Business Combination is a merger or consolidation and the consideration
per share by holders of Common Stock of the Company in the Business
Combination satisfies the "fair price" requirements in the Second Restated
Articles of Incorporation. In general, a "fair-price" is not less than the
greater of (a) the highest per share price paid by the Substantial Shareholder
in acquiring any of it shares of stock of the Company or (b) an amount which
bears the same or greater percentage relationship to the market price of the
Common Stock of the Company immediately prior to the announcement of the
Business Combination equal to the highest percentage relationship that any per
share price theretofore paid by the Substantial Shareholder for any of its
holdings of Common Stock of the Company bore to the market price of the Common
Stock of the Company immediately prior to commencement of the acquisition by
the Substantial Shareholder.

"Continuing Director" means, with respect to a particular Substantial
Shareholder, a member of the Company's Board of Directors who was (1) a member
prior to the date on which a Substantial Shareholder became a Substantial
Shareholder or (2) designated as a Continuing Director by a majority of the
whole board, but only if a majority of the whole board shall then consist of
Continuing Directors, or if a majority of the whole board does not then
consist of Continuing Directors, by a majority of the then Continuing
Directors.

"Business combinations" subject to this approval requirement include
mergers, share exchanges, material dispositions of corporate assets not in the
ordinary course of business, certain dispositions to a Substantial Shareholder
of voting stock of the Company, or any reclassification, including reverse
stock splits, recapitalization or merger of the Company with its subsidiaries,
which increases the percentage of voting stock owned beneficially by a
Substantial Shareholder.

The "Business Combination" provisions of the Second Restated Articles of
Incorporation may not be repealed or amended in any respect, unless such
action is approved by the affirmative vote of the holders of not less than 65%
of the outstanding shares of voting stock of the Company; provided, that if an
amendment is recommended to shareholders by 2/3 of the whole board of
directors when a majority of the members of the board of directors acting upon
such matters are Continuing Directors then the affirmative vote of the holders
of not less than 50% of the outstanding shares of voting stock of the Company
is required.

IOWA BUSINESS CORPORATION ACT; ANTITAKEOVER EFFECTS

Under Chapter 502 of the Iowa Code a person making a "takeover offer,"
defined as an offer to acquire any equity securities of a "target company"
(defined as a public company with substantial assets in Iowa that is at least
20% owned by Iowa residents) from an Iowa resident pursuant to a tender offer
is required to file a registration statement with the designated Iowa public
official if the bidder would then own 10% of any class of outstanding equity
securities. Chapter 502 contains antifraud provisions and prohibits the
acquisition of equity securities from an Iowa resident within two years
following a takeover offer unless the holders are afforded a reasonable
opportunity to sell to the offeror upon substantially equivalent terms as
those provided in the earlier takeover offer.

The Iowa Business Corporation Act provides that in considering acquisition
proposals, directors may consider the effects on the Company's employees,
suppliers, creditors, customers and the communities in which it operates, as
well as the long-term and short-term interests of the Company. Consideration
of any or all community interest factors is not a violation of the business
judgment rule, even if the directors reasonably determine that effects on a
community or other factors outweigh the financial or other benefits to the
Company or a shareholder or group of shareholders. The Act also includes
authorization of "poison pills" which include, without limitation, provisions
that preclude or limit the exercise, transfer or receipt of stock rights by
persons owning or offering to acquire a specified number or percentage of a
corporation's outstanding shares. Unlike most states, Iowa does not presently
have a "business combination" law prohibiting business combinations with a
stockholder who holds over a specified percentage of stock for less than a
specified period after crossing the threshold. See "--Certain Provisions of
the Company's Articles and Bylaws."

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The foregoing provisions of state law could have the effect of delaying,
deferring or preventing a change in control of the Company if the Board of
Directors determines that a change of control is not in the best interest of
the Company, its shareholders and other constituencies. In addition, the
regulatory restrictions on acquisition of securities of the Company may also
deter attempts to effect, or prevent the consummation of, a change in control
of the Company.

TRANSFER AGENT AND REGISTRAR

First Chicago Trust Company of New York will serve as transfer agent and
registrar for the Common Stock.

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<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 30,211,578
outstanding shares of Common Stock (30,811,578 outstanding shares if the over-
allotment option is exercised in full), and 1,960,922 shares of Common Stock
subject to outstanding options, of which options to purchase 1,104,250 shares
will then be exercisable. In addition, 2,039,078 shares of Common Stock are
issuable upon exercise of options available for grant under the Stock Option
Plan and 1,327,500 shares are issuable upon exercise of the Warrants.

Of the Common Stock outstanding upon completion of the Offering, the
4,000,000 shares of Common Stock sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act, except
for any shares held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act, and the regulations promulgated thereunder
(an "Affiliate"), or persons who have been Affiliates within the preceding
three months and approximately 25,949,462 outstanding shares of Common Stock
will be currently eligible for sale under Rule 144 subject to restrictions on
the timing, manner and volume of sales of such shares.

Pursuant to the Principal Shareholders Registration Rights Agreement, the
Principal Shareholders or their permitted transferees are entitled to certain
piggyback registration rights, and, in the event the Company becomes eligible
to use a Form S-3 registration statement, two demand registration rights.
These rights are generally subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration in certain circumstances. The Principal
Shareholders Registration Rights Agreement obligates the Company to pay all
expenses of any such registration, other than underwriting discounts and
commissions relating to the shares being sold on behalf of any Principal
Shareholders and to indemnify the Principal Shareholders against certain
liabilities, including liabilities under the Securities Act.

Sales of restricted securities in the public market or the perception that
such sales could occur could adversely affect the market price of the Common
Stock.

The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that, subject to certain exceptions, for a period
of 180 days from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., directly or indirectly, sell, offer to
sell, contract to sell, hypothecate, pledge or otherwise dispose of, any
shares of Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to purchase any
shares of Common Stock of the Company. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rule 144 or Rule 701 under the Securities Act, or otherwise,
shares subject to lock-up agreements will not be saleable until such
agreements expire.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be "affiliates" of
the Company, who has beneficially owned his or her shares for at least one
year since the later of the date of the acquisition of the securities from the
Company or from an affiliate is entitled to sell within any three-month period
that number of restricted securities that does not exceed the greater of (i)
1% of the then outstanding shares of securities of the same class or (ii) the
average weekly trading volume of such securities during the four calendar
weeks immediately preceding such sale, or the filing of notice of proposed
sale, if required, subject to the availability of adequate current public
information about the Company. After two years have elapsed since the later of
the date the securities were acquired from the Company or from an affiliate of
the Company, such shares may be sold without limitation by persons who are not
affiliates of the Company at the time and have not been affiliates of the
Company for at least three moths under Rule 144(k).

Rule 701 under the Securities Act provides that, beginning 90 days after the
date of this Prospectus, shares of Common Stock acquired on the exercise of
outstanding options prior to the date of this Prospectus may be resold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144, and by affiliates subject to all provisions of Rule 144 except its
one-year minimum holding period. The Company intends to file

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<PAGE>

one or more registration statements under the Securities Act to register the
shares of Common Stock issued and reserved for issuance in compensatory
arrangements and under the Stock Option Plan. Registration would permit the
resale of such shares by non-affiliates and affiliates, subject to the lock-up
described above, in the public market without restriction under the Securities
Act.

In addition, the Company intends to register on Form S-8 under the
Securities Act 4,000,000 shares of Common Stock issuable under options subject
to the Company's Stock Option Plan. Shares issued under the Stock Option Plan
pursuant to such registration statement on Form S-8 (other than shares issued
to affiliates) generally may be sold immediately in the public market, subject
to vesting requirements and the lock-up agreements described below under
"Underwriters."

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<PAGE>

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
OF COMMON STOCK

General. The following discussion concerns the material United States
federal income and estate tax consequences of the ownership and disposition of
shares of Common Stock applicable to holders of such shares of Common Stock
who are not U.S. persons. The discussion is based on current law, which is
subject to change retroactively or prospectively, and is for general
information only. The discussion does not address all aspects of United States
federal income and estate taxation and does not address any aspects of state,
local or foreign tax laws. The discussion does not consider any specific facts
or circumstances that may apply to a particular investor. Accordingly,
prospective investors are urged to consult their tax advisors regarding the
current and possible future United States federal, state, local and non-U.S.
income and other tax consequences of holding and disposing of shares of Common
Stock.

In general, a "Non-U.S. Holder" is any beneficial owner of Common Stock that
is not (i) a citizen or resident, as specifically defined for U.S. federal
income tax purposes, of the United States, (ii) a corporation, partnership or
any entity treated as a corporation or partnership for U.S. federal income tax
purposes created or organized in the United States or under the laws of the
United States or of any State thereof, (iii) any other entity, including an
estate, whose income is includible in gross income for United States federal
income tax purposes regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a U.S. court and which
has one or more U.S. fiduciaries who have the authority to control all
substantial decisions of the trust.

Dividends. In general, dividends paid to a Non-U.S. Holder will be subject
to United States withholding tax at a 30% rate (or a lower rate as may be
specified by an applicable tax treaty) unless the dividends are (i)
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States, and (ii) if a tax treaty applies,
attributable to a United States permanent establishment maintained by the Non-
U.S. Holder. Dividends effectively connected with such a trade or business or,
if a tax treaty applies, attributable to such permanent establishment will
generally not be subject to withholding (if the Non-U.S. Holder files certain
forms annually with the payor of the dividend) but will generally be subject
to United States federal income tax on a net income basis at regular graduated
individual or corporate rates. In the case of a Non-U.S. Holder that is a
corporation, such effectively connected income also may be subject to the
branch profits tax (which is generally imposed on a foreign corporation on the
deemed repatriation from the United States of effectively connected earnings
and profits) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. The branch profits tax may not apply if the
recipient is a qualified resident of certain countries with which the United
States has an income tax treaty.

To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country,
unless the payor has definite knowledge that such presumption is not warranted
or an applicable tax treaty (or United States Treasury Regulations thereunder)
requires some other method for determining a Non-U.S. Holder's residence.
However, under proposed regulations, in the case of dividends paid after
December 31, 1997 or December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to United States withholding tax at a 31-percent rate under
the backup withholding rules described below, rather than at a 30-percent rate
or at a reduced rate under an income tax treaty, 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
complied with, directly or through an intermediary. Under current regulations,
the Company must report annually to the United States Internal Revenue Service
(the "IRS") and to each Non-U.S. Holder the amount of dividends paid to, and
the tax withheld with respect to, each Non-U.S. Holder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of these information returns also may be
made available under the provisions of a specific treaty or agreement with the
tax authorities of the country in which the Non-U.S. Holder resides.

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<PAGE>

A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the IRS.

Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax, by withholding or otherwise, on any gain
realized upon the sale or other disposition of such holder's shares of Common
Stock unless (i) the gain is effectively connected with a trade or business
carried on by the Non-U.S. Holder within the United States and, if a tax
treaty applies, the gain is attributable to a permanent establishment
maintained by the Non-U.S. Holder in the United States; (ii) the Non-U.S.
Holder is an individual who holds the shares of Common Stock as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition, and either (a) such Non-U.S. Holder has a "tax home"
(as specifically defined for U.S. federal income tax purposes) in the United
States (unless the gain from disposition is attributable to an office or other
fixed place of business maintained by such non-U.S. Holder in a foreign
country and a foreign tax equal to at least 10% of such gain has been paid to
a foreign country), or (b) the gain from the disposition is attributable to an
office or other fixed place of business maintained by such Non-U.S. Holder in
the United States; (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of U.S. tax law applicable to certain United States expatriates, or
(iv) the Company is or has been during certain periods a "U.S. real property
holding corporation" for U.S. federal income tax purposes (which the Company
does not believe that it has been, currently is or is likely to become) and,
assuming that the Common Stock is deemed for tax purposes to be "regularly
traded on an established securities market," the Non-U.S. Holder held, at any
time during the five-year period ending on the date of disposition (or such
shorter period that such shares were held), directly or indirectly, more than
five percent of the Common Stock.

Estate Tax. Shares of Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
will be includible in the individual's gross estate for United States federal
estate tax purposes, unless an applicable tax treaty provides otherwise, and
may be subject to United States federal estate tax.

Backup Withholding and Information Reporting. As a general rule, under
current United States federal income tax law, backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish the information required under the U.S.
information reporting requirements) and information reporting requirements
apply to the actual and constructive payments of dividends. The United States
backup withholding tax and information reporting requirements generally, under
current regulations, will not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the United States that are either
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,
unless the payer has knowledge that the payee is a U.S. person. Backup
withholding and information reporting generally will apply to dividends paid
to addresses inside the United States on shares of Common Stock to beneficial
owners that are not recipients that are entitled to an exemption, as discussed
above and that fail to provide in the manner required certain identifying
information. However, under proposed regulations, in the case of dividends
paid after December 31, 1997, a Non-U.S. Holder generally would be subject to
backup withholding 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 complied with,
directly or through an intermediary.

The payment of the proceeds from the disposition of shares of Common Stock
to or through the United States office of a broker will be subject to
information reporting and backup withholding unless the holder, under
penalties of perjury, certifies, among other things, its status as a Non-U.S.
Holder, or otherwise establishes an exemption. Generally, the payment of the
proceeds from the disposition of shares of Common Stock to or through a non-
U.S. office of a non-U.S. broker will not be subject to backup withholding and
will not be subject to information reporting. In the case of the payment of
proceeds from the disposition of shares of Common Stock to or through a non-
U.S. office of a broker that is a U.S. person or a "U.S.-related person,"
existing regulations require (i) backup withholding if the broker has actual
knowledge that the owner is not a Non-U.S. Holder, and

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<PAGE>

(ii) information reporting on the payment unless the broker receives a
statement from the owner, signed under penalties of perjury, certifying, among
other things, its status as a Non-U.S. Holder, or the broker has documentary
evidence in its files that the owner is a Non-U.S. Holder and the broker has
no actual knowledge to the contrary. For this purpose, a "U.S.-related person"
is (i) a "controlled foreign corporation" for United States federal income tax
purposes or (ii) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with
the conduct of a United States trade or business. The IRS recently proposed
regulations addressing the withholding and information reporting rules which
could affect the treatment of the payment of proceeds discussed above.
Non-U.S. Holders should consult their tax advisors regarding the application
of these rules to their particular situations, the availability of an
exemption therefrom, the procedure for obtaining such an exemption, if
available, and the possible application of the proposed regulations addressing
the withholding and information reporting rules.

Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be
allowed as a credit against such holder's United States federal income tax
liability, if any, and provided that such holder furnishes the IRS with the
information entitling such holder to an exemption from or reduced rate of
withholding, such holder would be entitled to a refund.

97
<PAGE>

UNDERWRITING

Upon the terms and subject to the conditions stated in the U.S. Underwriting
Agreement dated the date of this Prospectus, each of the underwriters of the
United States and Canadian offering of Common Stock named below (the "U.S.
Underwriters"), for whom Smith Barney Inc., Alex. Brown & Sons Incorporated
and Cowen & Company are acting as Representatives (the "Representatives"), has
severally agreed to purchase, and the Company has agreed to sell to each U.S.
Underwriter, the number of shares of Common Stock set forth opposite the name
of such U.S. Underwriter below.

<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
- ---------------- ---------
<S> <C>
Smith Barney Inc.................... 714,000
Alex. Brown & Sons Incorporated..... 713,000
Cowen & Company..................... 713,000
Advest, Inc......................... 25,000
Arnhold and S. Bleichroeder, Inc.... 25,000
Bear, Stearns & Co. Inc............. 40,000
Credit Suisse First Boston Corpora-
tion............................... 40,000
Deutsche Morgan Grenfell Inc........ 40,000
Donaldson, Lufkin & Jenrette Secu-
rities Corporation................. 40,000
A.G. Edwards & Sons, Inc............ 40,000
EVEREN Securities, Inc.............. 40,000
Ferris, Baker Watts, Incorporated... 25,000
First Albany Corporation ........... 25,000
First of Michigan Corporation....... 25,000
Furman Selz LLC..................... 25,000
Gabelli & Company, Inc.............. 25,000
Gerard Klauer Mattison & Co., Inc... 25,000
Goldman, Sachs & Co................. 40,000
Edward D. Jones & Co................ 25,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
- ---------------- ---------
<S> <C>
Kirkpatrick, Pettis, Smith, Polian
Inc................................ 25,000
Lehman Brothers Inc................. 40,000
McDonald & Company Securities, Inc.. 25,000
Morgan Stanley & Co. Incorporated... 40,000
Needham & Company, Inc.............. 25,000
Oppenheimer & Co., Inc.............. 40,000
PaineWebber Incorporated............ 40,000
Prime Charter Ltd................... 25,000
Prudential Securities Incorporated.. 40,000
RBC Dominion Securities Corporation. 40,000
The Robinson-Humphrey Company, Inc.. 25,000
Salomon Brothers Inc................ 40,000
Scott & Stringfellow, Inc. ......... 25,000
SoundView Financial Group, Inc...... 25,000
Stephens Inc. ...................... 25,000
Tucker Anthony Incorporated......... 25,000
Unterberg Harris.................... 25,000
Wheat, First Securities, Inc........ 25,000
---------
Total............................... 3,200,000
=========
</TABLE>

Upon the terms and subject to the conditions stated in the International
Underwriting Agreement dated the date of this Prospectus, each of the managers
of the concurrent International Offering of Common Stock named below (the
"Managers" and, together with the U.S. Underwriters, the "Underwriters"), for
whom Smith Barney Inc., Alex. Brown & Sons Incorporated and Cowen & Company
are acting as lead managers (the "Lead Managers"), has severally agreed to
purchase, and the Company has agreed to sell to each Manager, the number of
shares of Common Stock set forth opposite the name of such Manager below:

<TABLE>
<CAPTION>
NUMBER
MANAGER OF SHARES
- ------- ---------
<S> <C>
Smith Barney Inc....................211,000
Alex. Brown & Sons Incorporated.....210,500
Cowen & Company.....................210,500
ABN AMRO Rothschild................. 24,000
Banque Nationale de Paris........... 24,000
Daiwa Europe Limited................ 24,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER
MANAGER OF SHARES
- ------- ---------
<S> <C>
Robert Fleming & Co Limited......... 24,000
Soditic Finance Company Limited..... 24,000
VEREINS-UND WESTBANK
Aktiengesellchaft.................. 24,000
Westdeutsche Landesbank
Girozentrale....................... 24,000
-------
Total...............................800,000
=======
</TABLE>

Each of the U.S. Underwriting Agreement and the International Underwriting
Agreement provides that the obligations of the several U.S. Underwriters and
the several Managers to pay for and accept delivery of the shares of Common
Stock are subject to approval of certain legal matters by counsel and to
certain other conditions. The U.S. Underwriters and the Managers are obligated
to take and pay for all of the shares of Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken.

The U.S. Underwriters and the Managers initially propose to offer part of
the shares of Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus and part to certain dealers at
a price that represents a concession not in excess of $0.42 per share below
the public offering price. The U.S. Underwriters and the Managers may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
the other U.S. Underwriters or Managers, respectively, or to certain other
dealers.

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<PAGE>

After the initial public offering, the public offering price and such
concessions may be changed by the U.S. Underwriters and the Managers. The
Representatives of the U.S. Underwriters have advised the Company that the
U.S. Underwriters do not intend to confirm a sale of any shares to any
accounts over which they exercise discretionary authority.

The Company has granted to the U.S. Underwriters and the Managers an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 600,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus less underwriting
discounts and commissions. The U.S. Underwriters and the Managers may exercise
such option solely for the purpose of covering over-allotments, if any, in
connection with the Offering. To the extent such option is exercised, each
U.S. Underwriter and Manager will be obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares as the
number of shares set forth opposite each U.S. Underwriter's or each Manager's
name in the preceding tables bears to the total number of shares listed in
such tables.

In connection with the Offering and in compliance with applicable law, the
U.S. Underwriters and the Managers may overallot (i.e., sell more of the
Common Stock than the total amount shown on the list of U.S. Underwriters and
Managers and participations which appears above) and may effect transactions
which stabilize, maintain or otherwise affect the market price of the Common
Stock at levels above those which might otherwise prevail in the open market.
Such transactions may include placing bids for the Common Stock or effecting
purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the option described above rather
than by open market purchases. In addition, the contractual arrangements among
the U.S. Underwriters and the Managers include a provision whereby, if, prior
to termination of price and trading restrictions, the Representatives or the
Lead Managers purchase Common Stock in the open market for the account of the
underwriting syndicate and the securities purchased can be traced to a
particular U.S. Underwriter, Manager or member of the selling group, the
underwriting syndicate may require the U.S. Underwriter, Manager or selling
group member in question to purchase the Common Stock in question at the cost
price to the syndicate or may recover from (or decline to pay to) the U.S.
Underwriter, Manager or selling group member in question the selling
concession applicable to the securities in question. The U.S. Underwriters and
the Managers are not required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time.

The U.S. Underwriters and the Managers have entered into an Agreement
Between the U.S. Underwriters and the Managers pursuant to which each U.S.
Underwriter has agreed that, as part of the distribution of the 3,200,000
shares offered in the U.S. Offering (plus the U.S. Underwriters' portion of
the over-allotment option): (i) it is not purchasing any such shares for the
account of anyone other than a U.S. or Canadian Person and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares outside the United States or Canada to anyone
other than a U.S. or Canadian Person. In addition, each Manager has agreed
that as part of the distribution of the 800,000 shares offered in the
International Offering (plus the Managers' portion of the over-allotment
option): (i) it is not purchasing any such shares for the account of any U.S.
or Canadian Person and (ii) it has not offered or sold, and will not offer,
sell, resell or deliver, directly or indirectly, any of such shares in the
United States or Canada or to any U.S. or Canadian Person. Each Manager has
also agreed that it will offer to sell shares only in compliance with all
relevant requirements of any applicable laws.

99
<PAGE>

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between the U.S.
Underwriters and the Managers, including: (i) certain purchases and sales
between the U.S. Underwriters and the Managers, (ii) certain offers, sales,
resales, deliveries or distributions to or through investment advisors or
other persons exercising investment discretion, (iii) purchases, offers or
sales by a U.S. Underwriter who is also acting as a Manager or by a Manager
who is also acting as a U.S. Underwriter and (iv) other transactions
specifically approved by the Representatives and the Lead Managers. As used
herein, "U.S. or Canadian Person" means any resident or national of the United
States or Canada, any corporation, partnership or other entity created or
organized in or under the laws of the United States or Canada, or any estate
or trust the income of which is subject to U.S. or Canadian income taxation
regardless of the source of its income (other than the foreign branch of any
U.S. or Canadian Person), and includes any United States or Canadian branch of
a person other than a U.S. or Canadian Person.

Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.

Each Manager has represented and agreed that (i) it will not offer or sell
any shares to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which will not involve an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995 ("the Regulations"); (ii) it will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares in, from, or otherwise
involving the United Kingdom; and (iii) it will only issue or pass on to any
person in the United Kingdom any document received by it in connection with
the offer of the shares if that person is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 or is a person to whom such document may otherwise lawfully be
issued or passed on.

No action has been or will be taken in any jurisdiction by the Company or
the Managers that would permit an offering to the general public of the shares
offered hereby in any jurisdiction other than the United States.

Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page of this Prospectus.

Pursuant to the Agreement between the U.S. Underwriters and the Managers,
sales may be made between the U.S. Underwriters and the Managers of such
number of shares as may be mutually agreed. The price of any shares so sold
shall be the public offering price as then in effect for shares being sold by
the U.S. Underwriters and the Managers, less all or any part of the selling
concessions, unless otherwise determined by mutual agreement. To the extent
that there are sales between the U.S. Underwriters and the Managers pursuant
to the Agreement Between the U.S. Underwriters and the Managers, the number of
shares initially available for sale by the U.S. Underwriters and by the
Managers may be more or less than the number of shares appearing on the front
cover of this Prospectus.

Prior to the Offering, there has not been any public market for the Common
Stock. Consequently, the initial public offering price for the shares of
Common Stock included in the Offering has been determined by negotiations
among the Company, the Selling Shareholders, the Representatives and the Lead
Managers. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which
it competes, an assessment of the Company's management and the present state
of the Company's development, the past and present revenues and earnings of
the Company, the prospects for growth of the Company's revenues and earnings,
the current state of the economy in the United States and abroad and the
current level of economic activity in the industry in which the Company
competes and in related or comparable industries, and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company. There can be no
assurance that

100
<PAGE>

an active trading market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offering at or above
the initial public offering price.

The Company, the U.S. Underwriters and the Managers have agreed to indemnify
each other against certain liabilities that may be incurred in connection with
the Offering, including liabilities under the Securities Act.

Certain affiliates of Smith Barney Inc., a Representative and Lead Manager
in connection with the Offering, hold the Company's outstanding Senior
Subordinated Notes and will receive collectively in excess of 10% of the net
proceeds of the Offering in connection with the repayment of the Senior
Subordinated Notes upon consummation of the Offering. See "Use of Proceeds."
Accordingly, the Offering will be conducted in accordance with Section
2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD"), which requires that when more than ten percent of the
net proceeds of a public offering are paid to a member of the NASD
participating in the offering or to an affiliate of that member, the price at
which an equity security is offered to the public may not be higher than the
price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed
its usual standard of due diligence with respect thereto. Alex. Brown & Sons
Incorporated has agreed to act as Qualified Independent Underwriter for the
Offering, and the public offering price of the Common Stock will not be higher
than that recommended by Alex. Brown & Sons Incorporated.

101
<PAGE>

LEGAL MATTERS

Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Swidler & Berlin, Chartered,
Washington, D.C. The validity of the issuance of the shares of Common Stock
offered hereby will be passed upon for the Company by Marcus & Thompson,
Fairfield, Iowa. Certain legal matters in connection with the Common Stock
offered hereby will be passed upon for the Underwriters by Chadbourne & Parke
LLP.

EXPERTS

The consolidated financial statements of Telegroup, Inc. and subsidiaries as
of December 31, 1995 and 1996, and for each of the years in the three-year
period ended December 31, 1996 have been included in this Prospectus and
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits thereto, referred to as
the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other document are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by reference to
such contract or document. The Registration Statement may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the Registration Statement may be obtained from the
Commission at prescribed rates from the Public Reference Section of the
Commission at such address, and at the Commission's regional offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048, and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.

The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports with the Commission. In addition, the Company will furnish its
shareholders with annual reports containing audited financial statements
certified by its independent public accounts and quarterly reports for he
first three quarters of each fiscal year containing unaudited summary
financial information.

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<PAGE>

GLOSSARY OF TERMS

accounting or settlement rate--The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.

call-reorigination

traditional call-reorigination (also known as "callback")--A form of dial
up access that allows a user to access a telecommunications company's
network by placing a telephone call, hanging up, and waiting for an
automated callback. The callback then provides the user with dial tone
which enables the user to initiate and complete a call.

transparent call-reorigination--Technical innovations have enabled
telecommunications carriers to offer a "transparent" form of call
reorigination without the usual "hang up" and "callback" whereby the call
is automatically and swiftly processed by a programmed switch.

call-through--The provision of international long distance service through
conventional long distance or "transparent" call-reorigination.

CLEC--Competitive Local Exchange Carrier.

core markets--The Company's "core markets" are the U.S., Germany, the U.K.,
France, Switzerland, Hong Kong, Japan, the Netherlands, Australia and Sweden.

Country Coordinators--Persons in the Company's markets responsible for
coordinating Telegroup's operations, including sales, marketing, customer
service and independent agent support. Telegroup currently has 31 Country
Coordinators responsible for providing such support in 48 countries.

CUG (Closed User Group)--A group of specified users, such as employees of a
company, permitted by applicable regulations to access a private voice or data
network, which access would otherwise be denied to them as individuals.

dedicated or direct access--A means of accessing a network through the use
of a permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantage of dedicated access is simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access and
transmission costs (provided there is sufficient traffic over the circuit to
generate economies of scale).

dial-up access--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a paid local access number.

distributed intelligence--The proprietary architecture supporting the TIGN
which allows customer information, such as credit limits, language selection,
waiting voice-mail and faxes, and speed dial numbers to be distributed to
customers cost-effectively over a parallel data network wherever.

European Union--Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the
United Kingdom.

facilities-based carrier--A carrier which transmits a significant portion of
its traffic over owned transmission facilities.

fiber-optic--A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.

IPLC (International Private Line Circuits)--Point-to-point permanent
connections which can carry voice and data. IPLCs are owned and maintained by
ITOs or third party resellers.

103
<PAGE>

IRU (Indefeasible Rights of Use)--The rights to use a telecommunications
system, usually an undersea cable, with most of the rights and duties of
ownership, but without the right to control or manage the facility and,
depending upon the particular agreement, without any right to salvage or duty
to dispose of the cable at the end of its useful life.

ISDN (Integrated Services Digital Network)--A hybrid digital network capable
of providing transmission speeds of up to 128 kilobits per second for both
voice and data.

ISR (International Simple Resale)--The use of international leased lines for
the resale of switched telephony services to the public, by-passing the
current system of accounting rates.

ITO (Incumbent Telecommunications Operator)--The dominant carrier or
carriers in each country, often, but not always, government-owned or protected
(alternatively referred to as the Postal, Telephone and Telegraph Company, or
PTT).

LEC (Local Exchange Carrier)--Companies from which the Company and other
long distance providers must purchase "access services" to originate and
terminate calls in the U.S.

local connectivity--Physical circuits connecting the switching facilities of
a telecommunications services provider to the interexchange and transmission
facilities of a facilities-based carrier.

local exchange--A geographic area determined by the appropriate regulatory
authority in which calls generally are transmitted without toll charges to the
calling or called party.

node--A specially configured multiplexer which provides the interface
between the local PSTN where the node is located and the TIGN switch. A node
collects and concentrates call traffic from its local area and transfers it to
TIGN switches via private line for call processing. Nodes permit Telegroup to
extend its network into a new geographic locations by accessing the local PSTN
without requiring the deployment of a switch.

operating agreement--An agreement that provides for the exchange of
international long distance traffic between correspondent international long
distance providers that own facilities in different countries. These
agreements provide for the termination of traffic in, and return traffic from,
the international long distance providers' respective countries at a
negotiated "accounting rate." Under a traditional operating agreement, the
international long distance provider that originates more traffic compensates
the corresponding long distance provider in the other country by paying an
amount determined by multiplying the net traffic imbalance by the latter's
share of the accounting rate.

PBX (Public Branch Exchange)--Switching equipment that allows connection of
a private extension telephone to the PSTN or to a private line.

PNETs (Public Non-Exclusive Telecommunications Services) License--A license
allowing the licensee to provide certain telecommunications services in Hong
Kong. A PNETs licensee may not provide services the provision of which are
reserved to Hong Kong Telecommunications International Limited.

PSTN (Public Switched Telephone Network)--A telephone network which is
accessible by the public through private lines, wireless systems and pay
phones.

private line--A dedicated telecommunications connection between end user
locations.

resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.

Switching facility--A device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.

104
<PAGE>

TIGN--The Telegroup Intelligent Global Network.

Transit/termination agreements--An agreement that provides for the exchange
of international long distance traffic between international long distance
providers, which agreement provides for the termination of traffic in one or
more countries at negotiated termination costs. Such an agreement usually does
not include an "accounting rate" and often is not limited to the termination
of traffic in the home territories of the parties in the agreement.

Value-Added Tax (VAT)--A consumption tax levied on end-consumers of goods
and services in applicable jurisdictions.

Voice Telephony--A term used by the EU, defined as the commercial provision
for the public of the direct transport, enabling any user to use equipment
connected to such a network termination point in order to communicate with
another termination points. The term "voice telephony" is also used in the
Prospectus generally to refer to the direct transport and switching of speech
in real-time between public switched network termination points.

105
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31,
1997 (unaudited).......................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and the three months ended March 31, 1996 and March
31, 1997 (unaudited)...................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 and the three months ended March
31, 1997 (unaudited)...................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and the three months ended March 31, 1996 and March
31, 1997 (unaudited)...................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Telegroup, Inc.:

We have audited the accompanying consolidated balance sheets of Telegroup,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telegroup,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Lincoln, Nebraska
March 28, 1997, except as to note 1 (m) and the last paragraph of note 7 which
are as of July 8, 1997

F-2
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 4,591,399 14,155,013 16,327,047
Accounts receivable and unbilled services,
less allowance for credit losses of
$2,100,000 in 1995, $3,321,119 in 1996,
and $3,542,547 at March 31, 1997......... 23,196,743 32,288,507 35,109,480
Income tax recoverable.................... -- 1,796,792 1,874,707
Deferred taxes (note 8)................... 1,134,730 1,392,058 1,622,574
Prepaid expenses.......................... 110,325 245,271 155,086
Receivables from shareholders............. 75,952 14,974 37,551
Receivables from employees................ 87,895 85,539 104,603
----------- ---------- ----------
Total current assets.................... 29,197,044 49,978,154 55,231,048
----------- ---------- ----------
Net property and equipment (note 5)......... 3,979,039 11,256,139 13,839,733
----------- ---------- ----------
Other assets:
Deposits and other assets................. 282,378 376,614 1,056,623
Goodwill, net of amortization of $22,768
in 1996 and $39,894 at March 31, 1997.... -- 1,001,841 984,765
Capitalized software, net of amortization
(note 1e)................................ 117,051 1,906,655 2,072,393
Debt issuance costs, net of amortization
(note 2)................................. -- 1,437,004 1,385,208
----------- ---------- ----------
399,429 4,722,114 5,498,989
----------- ---------- ----------
Total assets............................ $33,575,512 65,956,407 74,569,770
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $16,479,564 30,719,562 38,088,981
Accrued expenses.......................... 6,990,053 8,561,041 10,182,045
Unearned revenue.......................... -- 64,276 39,990
Income taxes payable...................... 3,526,900 -- --
Note payable.............................. 2,000,000 -- --
Customer deposits......................... 515,434 602,940 638,430
Current portion of long-term debt (note
2)....................................... -- 232,596 100,221
Current portion of capital lease
obligations (note 6)..................... 137,114 138,309 127,477
Due to shareholders....................... 25,881 -- --
----------- ---------- ----------
Total current liabilities............... 29,674,946 40,318,724 49,177,144
Deferred taxes (note 8)..................... 269,630 756,891 925,812
Capital lease obligations (note 6).......... 483,489 301,393 260,993
Long-term debt (note 2)..................... -- 11,216,896 11,097,885
Shareholders' equity (note 7):
Common stock, no par or stated value;
150,000,000 shares authorized, issued and
outstanding 24,651,989 in 1995,
26,211,578 in 1996 and 26,211,578 at
March 31, 1997........................... -- -- --
Additional paid-in capital................ 4,595 10,765,176 10,850,771
Retained earnings......................... 3,142,852 2,597,327 2,257,165
----------- ---------- ----------
Total shareholders' equity.............. 3,147,447 13,362,503 13,107,936
Commitments and contingencies (note 9)
----------- ---------- ----------
Total liabilities and shareholders'
equity................................. $33,575,512 65,956,407 74,569,770
=========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Retail................ $68,713,965 128,138,947 179,146,795 41,439,948 56,909,405
Wholesale............. -- 980,443 34,060,714 1,910,592 17,186,372
----------- ----------- ----------- ---------- ----------
Total revenues...... 68,713,965 129,119,390 213,207,509 43,350,540 74,095,777
Cost of revenues........ 49,512,724 83,100,708 150,536,859 27,741,329 53,282,940
----------- ----------- ----------- ---------- ----------
Gross profit........ 19,201,241 46,018,682 62,670,650 15,609,211 20,812,837
----------- ----------- ----------- ---------- ----------
Operating expenses:
Selling, general and
administrative ex-
penses............... 19,914,168 39,221,849 59,651,857 13,160,798 19,454,755
Depreciation and amor-
tization............. 300,784 654,966 1,881,619 261,031 806,539
Stock option based
compensation......... -- -- 1,032,646 -- 85,595
----------- ----------- ----------- ---------- ----------
Total operating ex-
penses............. 20,214,952 39,876,815 62,566,122 13,421,829 20,346,889
----------- ----------- ----------- ---------- ----------
Operating income
(loss)............. (1,013,711) 6,141,867 104,528 2,187,382 465,948
----------- ----------- ----------- ---------- ----------
Other income (expense):
Interest expense...... (112,152) (120,604) (578,500) (33,471) (729,450)
Interest income....... 102,836 193,061 377,450 65,875 184,359
Foreign currency
transaction gain
(loss)............... 31,024 (101,792) (147,752) (128,339) (367,564)
Other................. 105,303 298,627 118,504 51,717 31,048
----------- ----------- ----------- ---------- ----------
Earnings (loss) before
income taxes........... (886,700) 6,411,159 (125,770) 2,143,164 (415,659)
Income tax benefit (ex-
pense) (note 8)........ 348,300 (2,589,700) 7,448 (755,637) 138,647
----------- ----------- ----------- ---------- ----------
Net earnings
(loss)............. $ (538,400) 3,821,459 (118,322) 1,387,527 (277,012)
=========== =========== =========== ========== ==========
Per share amounts:
Earnings (loss) per
common equivalent
share................ $ (0.02) 0.13 0.00 0.05 (0.01)
=========== =========== =========== ========== ==========
Weighted-average common
and common equivalent
shares outstanding..... 28,794,825 28,794,825 28,794,825 28,794,825 28,794,825
=========== =========== =========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THREE-MONTH PERIOD ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
----------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
---------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1994................... 24,651,989 $ -- 4,595 384,793 389,388
Net loss................ -- -- -- (538,400) (538,400)
---------- ----- ---------- --------- ----------
Balances at December 31,
1994................... 24,651,989 -- 4,595 (153,607) (149,012)
Dividends............... -- -- -- (525,000) (525,000)
Net earnings............ -- -- -- 3,821,459 3,821,459
---------- ----- ---------- --------- ----------
Balances at December 31,
1995................... 24,651,989 -- 4,595 3,142,852 3,147,447
Dividends............... -- -- -- (425,000) (425,000)
Net loss................ -- -- -- (118,322) (118,322)
Issuance of common
stock.................. 1,297,473 -- 52,366 -- 52,366
Notes receivable from
shareholders for common
stock.................. -- -- (52,366) -- (52,366)
Shares issued in
connection with
business combinations
(note 3)............... 262,116 -- 573,984 -- 573,984
Compensation expense in
connection with stock
option plan (note 7)... -- -- 1,032,646 -- 1,032,646
Warrants issued in
connection with the
Private Offering
(note 7)............... -- -- 9,153,951 -- 9,153,951
Change in foreign cur-
rency translation...... -- -- -- (2,203) (2,203)
---------- ----- ---------- --------- ----------
Balances at December 31,
1996................... 26,211,578 $ -- 10,765,176 2,597,327 13,362,503
Net loss (unaudited).... -- -- -- (277,012) (277,012)
Compensation expense in
connection with stock
option plan (note 7)
(unaudited)............ -- -- 85,595 -- 85,595
Change in foreign
currency translation
(unaudited)............ -- -- -- (63,150) (63,150)
---------- ----- ---------- --------- ----------
Balances at March 31,
1997 (unaudited)....... 26,211,578 $ -- 10,850,771 2,257,165 13,107,936
========== ===== ========== ========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net earnings (loss).... $ (538,400) 3,821,459 (118,322) 1,387,527 (277,012)
Adjustments to recon-
cile net earnings
(loss) to net cash
provided by operating
activities:
Depreciation and amor-
tization.............. 300,784 654,966 1,881,619 261,031 806,539
Deferred income tax-
es.................... (198,200) (937,200) 229,933 377,353 (61,595)
Loss on sale of equip-
ment.................. 4,422 261,241 -- -- --
Provision for credit
losses on accounts
receivable............ 1,056,781 3,981,525 5,124,008 1,227,488 2,473,265
Accretion of debt dis-
count................. -- -- 48,077 -- 127,263
Stock option based
compensation ex-
pense................. -- -- 1,032,646 -- 85,595
Changes in operating
assets and liabili-
ties, excluding the
effects of business
combinations:
Accounts receivable.... (8,450,053) (14,571,500) (14,199,095) (2,828,666) (5,294,238)
Prepaid expenses....... 1,603 145,656 (134,946) -- 90,185
Deposits and other as-
sets.................. 28,669 157,762 (80,001) 151,092 (680,009)
Accounts payable and
accrued expenses...... 8,860,164 8,375,566 16,292,448 5,756,600 8,990,423
Income taxes........... -- 3,526,900 (5,323,692) (2,550,928) (77,915)
Unearned revenue....... -- -- 64,276 1,125 (24,286)
Customer deposits...... 298,418 144,961 87,506 42,458 35,490
----------- ----------- ----------- ---------- ----------
Net cash provided by
operating activi-
ties................ 1,364,188 5,561,336 4,904,457 3,825,080 6,193,705
----------- ----------- ----------- ---------- ----------
Cash flows from invest-
ing activities:
Purchases of equip-
ment.................. (1,056,430) (2,651,823) (9,067,923) (1,890,981) (3,285,409)
Proceeds from sale of
equipment............. 13,815 9,543 -- -- --
Capitalization of soft-
ware.................. -- (117,051) (1,789,604) (428,238) (201,590)
Cash paid in business
combinations, net of
cash acquired......... -- -- (468,187) -- --
Net change in receiv-
ables from sharehold-
ers and employees..... 342,416 (58,464) 63,334 (153,857) (41,641)
----------- ----------- ----------- ---------- ----------
Net cash used in in-
vesting activities.. (700,199) (2,817,795) (11,262,380) (2,473,076) (3,528,640)
----------- ----------- ----------- ---------- ----------
Cash flows from financ-
ing activities:
Net payments on notes
payable............... -- -- (2,000,000) (2,000,000) --
Proceeds from issuance
of Private Offering... -- -- 20,000,000 -- --
Debt issuance costs.... -- -- (1,450,281) -- --
Dividends paid......... -- -- (950,000) -- --
Net proceeds (payments)
from long-term
borrowings............ 1,000,000 -- 530,803 975,668 (378,649)
Payments on capital
lease obligations..... (42,926) (112,863) (180,901) (61,479) (51,232)
Net change in due to
shareholders.......... -- (2,119) (25,881) (25,881) --
----------- ----------- ----------- ---------- ----------
Net cash (used in)
provided by financ-
ing activities...... 957,074 (114,982) 15,923,740 (1,111,692) (429,881)
----------- ----------- ----------- ---------- ----------
Effect of exchange rate
changes on cash........ -- -- (2,203) -- (63,150)
----------- ----------- ----------- ---------- ----------
Net increase in cash and
cash equivalents....... 1,621,063 2,628,559 9,563,614 240,312 2,172,034
Cash and cash equiva-
lents at beginning of
year................... 341,777 1,962,840 4,591,399 4,591,399 14,155,013
----------- ----------- ----------- ---------- ----------
Cash and cash equiva-
lents at end of year... $ 1,962,840 4,591,399 14,155,013 4,831,711 16,327,047
=========== =========== =========== ========== ==========
Supplemental cash flow
disclosures:
Dividends declared..... $ -- 525,000 425,000 425,000 --
=========== =========== =========== ========== ==========
Common stock issued in
connection with busi-
ness combinations..... $ -- -- 573,984 -- --
=========== =========== =========== ========== ==========
Common stock issued in
consideration for
notes receivable...... $ -- -- 52,366 -- --
=========== =========== =========== ========== ==========
Equipment acquired un-
der capital lease..... $ 480,007 87,553 -- -- --
=========== =========== =========== ========== ==========
Interest paid.......... $ 112,152 120,604 356,270 33,471 4,417
=========== =========== =========== ========== ==========
Taxes paid............. $ -- -- 5,164,634 2,929,212 975
=========== =========== =========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994, 1995 AND 1996 AND MARCH 31, 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Business

Telegroup, Inc. and subsidiaries (the Company) is an alternative provider of
domestic and international telecommunications services. Telegroup's revenues
are derived from the sale of telecommunications to retail customers, typically
residential users and small- to medium-sized business and wholesale customers,
typically telecommunications carriers. The Company's customers are principally
located in the United States, Europe and the Pacific Rim which consists of
Asia, Australia and New Zealand. In both the retail and wholesale aspects of
its business, the Company extends credit to customers on an unsecured basis
with the risk of loss limited to outstanding amounts.

The Company markets its services through a worldwide network of independent
agents and supervisory "country coordinators". The Company extends credit to
its sales representatives and country coordinators on an unsecured basis with
the risk of loss limited to outstanding amounts, less commissions payable to
the representatives and coordinators.

A summary of the Company's significant accounting policies follows:

(b) Basis of Presentation

The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
and include the accounts of the Company and its wholly-owned subsidiaries.

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

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1996 and March
31, 1997 cash equivalents consisted of a certificate of deposit in the amount
of $60,000. There were no cash equivalents at December 31, 1995.

(d) Property and Equipment

Property and equipment are stated at cost. Equipment held under capital
leases is stated at the lower of the fair value of the asset or the net
present value of the minimum lease payments at the inception of the lease.
Depreciation is provided using the straight-line method over the useful lives
of the assets owned and the related lease term for equipment held under
capital leases.

(e) Capitalized Software Development Costs

The Company capitalizes software costs incurred in the development of its
telecommunications switching software, billing systems and other support
platforms. The Company capitalizes only direct labor costs incurred in the
development of internal use software. Capitalization begins at achievement of
technological feasibility and ends when the software is placed in service.
Amortization of capitalized software will be provided using the straight-line
method over the software's estimated useful life, which ranges from 3 to 5
years. There was no amortization during 1995 or 1996 as the software had not
yet been placed in service. For the three-month period ended March 31, 1997,
amortization of software development costs totalled $35,852.

F-7
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(f) Stock-Based Compensation

The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretation (APB No. 25). The Company has provided pro forma disclosures as
if the fair value based method of accounting for these plans, as prescribed by
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), had been applied.

(g) Impairment of Long-Lived Assets

Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS No. 121), which requires that the long-lived assets and certain
identifiable intangibles, held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to be
generated by the asset is less than its carrying value. Measurement of the
impairment loss is based on the fair value of the asset, which is generally
determined using valuation techniques such as the discounted present value of
expected future cash flows. The adoption of SFAS No. 121 had no effect on the
consolidated financial statements of the Company.

(h) Other Assets

Goodwill results from the application of the purchase method of accounting
for business combinations. Amortization is provided using the straight-line
method over a maximum of 15 years. Impairment is determined pursuant to the
methodology in SFAS No. 121.

(i) Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.

(j) Estimates

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

(k) Business and Credit Concentration

Financial instruments which potentially expose the Company to a
concentration of credit risk, as defined by SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, consist primarily of
accounts receivable. At December 31, 1996 and March 31, 1997, the Company's
accounts receivable balance from customers in countries outside of the United
States was approximately $18,100,000 and $15,300,000, respectively, with an
associated reserve for credit losses of $2,400,000 and $2,000,000,
respectively. At December 31, 1996 and March 31, 1997, approximately 3% and
4%, respectively, of the international accounts receivable balance is
collateralized by deposits paid by a portion or its international customers
upon the initiation of service.

F-8
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(l) Foreign Currency Contracts

During 1996, the Company began to use foreign currency contracts to hedge
foreign currency risk associated with its international accounts receivable
balances. Gains or losses pursuant to these foreign currency contracts are
reflected as an adjustment of the carrying value of the hedged accounts
receivable. At December 31, 1996 and March 31, 1997, the Company had no
material deferred hedging gains or losses.

(m) Common Stock and Earnings (Loss) Per Share

Earnings (loss) per common and common equivalent share have been computed
using the weighted-average number of shares of common stock outstanding during
each period as adjusted for the effects of the Securities and Exchange
Commission Staff Accounting Bulletin No. 83. Accordingly, options and warrants
to purchase common stock granted within one year of the Company's initial
public offering, which have exercise prices below the assumed initial public
offering price per share, have been included in the calculation of common
equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented. Additionally, common share amounts have
been adjusted to reflect the stock split of approximately 5.48-for-1 and
reclassification of the Company's Class A and Class B common stock into a
single class of common stock which will occur immediately prior to the
effectiveness of the Registration Statement.

(n) Revenues, Cost of Revenues and Commissions Expense

Revenues from retail telecommunications services are recognized when
customer calls are completed. Revenues from wholesale telecommunications
services are recognized when the wholesale carrier's customers' calls are
completed. Cost of retail and wholesale revenues is based primarily on the
direct costs associated with owned and leased transmission capacity and the
cost of transmitting and terminating traffic on other carriers' facilities.
The Company does not differentiate between the cost of providing transmission
services on a retail or wholesale basis. Commissions paid to acquire customer
call traffic are expensed in the period when associated call revenues are
recognized.

(o) Prepaid Phone Cards

Substantially all the prepaid phone cards sold by the Company have an
expiration date of 24 months after issuance or six months after last use. The
Company records the net sales price as deferred revenue when cards are sold
and recognizes revenue as the ultimate consumer utilizes calling time.
Deferred revenue relating to unused calling time remaining at each card's
expiration is recognized as revenue upon the expiration of such card.

(p) Foreign Currency Translation

The functional currency of the Company is the United States (U.S.) dollar.
The functional currency of the Company's foreign operations generally is the
applicable local currency for each wholly-owned foreign subsidiary. Assets and
liabilities of its foreign subsidiaries are translated at the spot rate in
effect at the applicable reporting date, and the combined statements of
operations and the Company's share of the results of operations of its foreign
subsidiaries are translated at the average exchange rates in effect during the
applicable period. The resulting unrealized cumulative translation adjustment
is recorded as a separate component of equity.

(q) Fair Value of Financial Instruments

The fair values of cash and cash equivalents, receivables, accounts payable
and lease obligations are estimated to approximate carrying value due to the
short-term maturities of these financial instruments. The

F-9
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

carrying value of the long-term debt approximates fair value as the debt was
secured primarily during November 1996 at rates consistent with those in
effect at December 31, 1996 and March 31, 1997.

(r) Reclassifications

Certain amounts have been reclassified for comparability with the 1996
presentation.

(2) DEBT

Long-term debt at December 31, 1996 and March 31, 1997 is shown below:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
12% senior subordinated notes, net of discount,
unsecured...................................... $10,894,126 $11,021,389
8.5% note payable, due monthly through fiscal
2000, secured by vehicle....................... 19,003 15,228
10.8% note payable, due monthly through fiscal
1998, secured by equipment financed............ 160,628 141,505
12.0% note payable, paid in 1997................ 74,319 --
12.0% note payable, paid in 1997................ 276,853 --
6.85% note payable, due monthly through fiscal
1999, unsecured................................ 14,138 12,322
8.00% note payable, due monthly through fiscal
1998, unsecured................................ 10,425 7,662
----------- -----------
11,449,492 11,198,106
Less current portion............................ (232,596) (100,221)
----------- -----------
$11,216,896 $11,097,885
=========== ===========
</TABLE>

There was no long-term debt at December 31, 1995.

On November 27, 1996, the Company completed a private placement (Private
Offering) of 12% Senior Subordinated Notes (Note) for gross proceeds of
$20,000,000 which is due and payable on November 27, 2003. Net proceeds from
the Private Offering, after issuance costs of $1,450,281, were $18,549,719. In
connection with the Private Offering, the Company issued 20,000 warrants to
purchase 1,160,107 of the Company's common stock (see note 7).

The Note was originally recorded at $10,846,049 (a yield of 26.8%), which
represents the $20,000,000 in proceeds less the $9,153,951 value assigned to
the detachable warrants, which is included in additional paid-in capital. The
value of the warrants was based on a valuation performed by the Company's
independent financial advisors. The value assigned to the warrants is being
accreted to the debt using the interest method over 7 years. The accretion of
the value assigned to the warrants is included in interest expense in the
accompanying consolidated financial statements.

The Company may redeem the Note in whole or in part, at the redemption
prices set forth in the agreement plus unpaid interest, if any, and a
prepayment fee of $1,400,000, if applicable, at the date of redemption. The
Note indenture contains certain covenants which provide for limitations on
indebtedness, dividend payments, changes in control, and certain other
business transactions.

The Company had a credit agreement with a bank which provided for up to
$5,000,000 in committed credit at December 31, 1996. The credit line was
amended to provide up to $7,500,000 effective March 28, 1997 and terminating
June 30, 1998. There were no borrowings under the line at December 31, 1996
and March 31, 1997. The credit line is unsecured.

F-10
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a schedule by years of future minimum debt service
requirements as of December 31, 1996 and March 31, 1997:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ----------
<S> <C> <C>
1997............................................... $ 232,596 100,221
1998............................................... 229,684 70,716
1999............................................... 91,271 5,780
2000............................................... 1,815 --
2001............................................... -- --
Later years........................................ 20,000,000 20,000,000
----------- ----------
20,555,366 20,176,717
Less unaccreted discount on the 12% note........... (9,105,874) (8,978,611)
----------- ----------
$11,449,492 11,198,106
=========== ==========
</TABLE>

(3) BUSINESS COMBINATIONS

On August 21, 1996, the Company purchased TeleContinent, S.A. for $200,000.
Also on August 21, 1996, the Company purchased Telegroup South Europe, Inc.
Consideration for the purchase was $1,031,547 and 262,116 shares of common
stock of the Company valued at $573,984, for total consideration of
$1,605,531. The value of the common stock was determined by management based
on information obtained from the Company's independent financial advisors.

The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations are
included in the consolidated financial statements from the date of
acquisition. The aggregate purchase price of the acquisitions was allocated
based on fair values as follows:

<TABLE>
<S> <C>
Current assets................................................ $ 794,452
Property and equipment........................................ 54,571
Goodwill...................................................... 1,024,609
Current liabilities........................................... (68,101)
----------
Total....................................................... $1,805,531
==========
</TABLE>

Pro forma operating results of the Company, assuming these acquisitions were
consummated on January 1, 1994, do not significantly differ from reported
amounts.

(4) RELATED PARTIES

During 1994, 1995, and a portion of 1996, the Company had a management
agreement with an affiliate owned by certain shareholders of the Company
whereby it paid a management fee, determined annually, plus an incentive fee
based upon performance. Amounts paid under this agreement totaled $1,155,000,
$1,334,000 and $415,000 during 1994, 1995 and 1996, respectively. The
management agreement was terminated on May 15, 1996.

F-11
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) PROPERTY AND EQUIPMENT

Property and equipment, including assets owned under capital leases of
$813,790 in 1995 and $612,278 as of December 31, 1996 and March 31, 1997, is
comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31
USEFUL --------------------- MARCH 31,
LIVES 1995 1996 1997
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Land................................ -- $ 34,290 88,857 88,857
Building and improvements........... 2-20 -- 298,483 391,546
Furniture, fixtures and office
equipment.......................... 5-7 172,016 327,368 458,958
Computer equipment.................. 5 2,363,954 5,021,884 5,734,195
Network equipment................... 5 2,409,848 8,344,824 10,605,320
Automobiles......................... 5 62,055 104,260 100,538
---------- ---------- ----------
5,042,163 14,185,676 17,379,414
Less accumulated depreciation,
including amounts applicable to
assets acquired under capital
leases of $338,665 in 1995,
$269,098 in 1996 and $299,712 as of
March 31, 1997..................... 1,063,124 2,929,537 3,539,681
---------- ---------- ----------
Net property and equipment........ $3,979,039 11,256,139 13,839,733
========== ========== ==========
</TABLE>

Property and equipment includes approximately $800,000 of equipment which
has not been placed in service at December 31, 1996 and, accordingly, is not
being depreciated. The majority of this amount is related to new network
construction.

(6) LEASES

The Company leases certain network equipment under capital leases and leases
office space under operating leases. Future minimum lease payments under these
lease agreements for each of the next five years are summarized as shown on
the following page.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
1997.................................................... $187,421 860,777
1998.................................................... 164,626 527,175
1999.................................................... 143,120 437,981
2000.................................................... 43,149 437,160
2001.................................................... -- 106,630
Thereafter.............................................. -- --
-------- ---------
Total minimum lease payments.......................... 538,316 2,369,723
=========
Less amount representing interest....................... (98,614)
--------
$439,702
========
</TABLE>

As operating leases expire, it is expected that they will be replaced with
similar leases. Rent expense under operating leases totaled $224,504, $306,933
and $682,630 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $106,407 and $271,945 for the three months ended March 31,
1996 and 1997, respectively.

F-12
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(7) SHAREHOLDERS' EQUITY

Stock Option Plan

The Company has a stock option plan (the Plan) pursuant to which the
Company's Board of Directors may grant unqualified and performance-based
options to employees. The Plan authorizes grants of option to purchase up to
4,000,000 shares of authorized but unissued common stock. All stock options
have a ten-year term and become fully exercisable on the date of grant or in
increments over a three-year vesting period. The following table summarizes
the stock option activity since the inception of the Plan. There was no
activity during the three months ended March 31, 1997.

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE REMAINING
SHARES PER SHARE TERM
--------- -------------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1996 -- --
Granted................................... 1,631,031 $1.31
Canceled.................................. (4,110) --
Exercised................................. -- --
--------- -----
Outstanding at December 31, 1996............ 1,626,921 $1.31 9.2 years
========= =====
Exercisable at December 31, 1996............ 537,039 $1.31
========= =====
</TABLE>

The Company applies the intrinsic value method prescribed by APB Opinion No.
25 in accounting for its Plan and, accordingly, compensation costs of
$1,032,646 and $85,595 have been recognized for its stock options for the year
ended December 31, 1996 and for the three month period ended March 31, 1997,
respectively. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss and loss per share would have been:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss............................................. $118,322 79,767
======== ======
Loss per common equivalent share..................... $ 0.00 0.00
======== ======
</TABLE>

Under SFAS No. 123, the per-share minimum value of stock options granted in
1996 was $0.61. The minimum value, estimated as of the grant date, does not
take into account the expected volatility of the underlying stock as is
prescribed by SFAS No. 123 for privately held companies. Input variables used
in the model included an interest free rate of 6.43%, no expected dividend
yields, and an estimated option life of 10 years. The pro forma impact on
income assumes no options will be forfeited.

Options granted during 1996 included performance based options. The
compensation expense recorded for these performance based options under APB
Opinion No. 25 was greater than the expense recorded if the Company had
determined compensation cost under SFAS No. 123.

Warrants

In connection with the Private Offering, the Company issued warrants to
purchase 1,160,107 shares of the Company's common stock which, at the time of
closing of the Private Offering, represented four percent of the Company's
fully diluted common stock. The warrants are currently exercisable, carry an
exercise price of $.002 per share, and expire November 27, 2003. As of
December 31, 1996, all of these warrants remain outstanding. If

F-13
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the Company has not consummated an initial public offering (IPO) prior to July
2, 1997, the holder of the warrants will receive additional shares equal to
one-half of one percent of the outstanding shares on a fully diluted basis. If
the Company has not consummated an IPO prior to January 2, 1998, the holder of
the warrants will receive an additional amount equal to one-half of one
percent of the outstanding shares on a fully diluted basis.

The Company will not consummate its initial public offering prior to July 2,
1997. Accordingly, the number of shares of common stock issuable upon exercise
of the warrants will be increased by 153,644 shares, which represents one-half
of one percent of the outstanding shares at July 2, 1997 on a fully diluted
basis.

(8) INCOME TAX MATTERS

Income tax expense (benefit) for the years ended December 31 is comprised of
the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ ----------------
1994 1995 1996 1996 1997
--------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Current....................... $(150,100) 3,526,900 (237,381) 378,284 (77,052)
Deferred...................... (198,200) (937,200) 229,933 377,353 (61,595)
--------- --------- -------- ------- --------
$(348,300) 2,589,700 (7,448) 755,637 (138,647)
========= ========= ======== ======= ========
</TABLE>

Income tax expense differs from the amount computed by applying the federal
income tax rate of 34% to earnings (loss) before taxes, as follows:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------- ----------------
1994 1995 1996 1996 1997
--------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Expected federal income tax
(benefit).................... $(301,500) 2,180,000 (42,762) 728,676 (141,324)
State income tax (benefit),
net of federal effect........ (53,200) 384,700 (1,344) 23,493 (4,556)
Environmental tax............. -- 10,200 -- -- --
Other nondeductible expenses,
net.......................... 6,400 14,800 36,658 3,468 7,233
--------- --------- ------- ------- --------
$(348,300) 2,589,700 (7,448) 755,637 (138,647)
========= ========= ======= ======= ========
</TABLE>

F-14
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

The tax effect of significant temporary differences giving rise to deferred
income tax assets and liabilities are shown below:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1994 1995 1996 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Deferred income tax liabilities:
Property and equipment, principally
depreciation adjustments............ $148,200 269,630 502,711 582,827
Capitalized software................. -- -- 669,160 739,913
Basis in subsidiaries................ -- -- 32,898 --
Unearned foreign exchange
difference.......................... -- -- -- 5,073
Cumulative adjustment, change in
accounting for income tax purposes.. 153,600 -- -- --
-------- --------- --------- ---------
Total gross deferred tax
liabilities....................... $301,800 269,630 1,204,769 1,327,813
-------- --------- --------- ---------
Deferred income tax assets:
Allowance for credit losses.......... 130,000 840,000 1,151,172 1,212,601
Accrued compensation................. 19,200 294,730 447,878 571,164
Net operating loss carryforward...... 44,900 -- -- --
Charitable contribution
carryforward........................ 35,600 -- 107,729 107,729
Unearned revenue..................... -- -- 22,558 14,035
Basis in subsidiaries................ -- -- -- 4,468
Unearned foreign exchange
difference.......................... -- -- 4,543 --
Other................................ -- -- 106,056 114,578
-------- --------- --------- ---------
Total gross deferred tax assets.... 229,700 1,134,730 1,839,936 2,024,575
-------- --------- --------- ---------
Net deferred tax asset
(liability)....................... $(72,100) 865,100 635,167 696,762
======== ========= ========= =========
</TABLE>

No valuation allowance for deferred taxes at December 31, 1994, 1995 and
1996 and March 31, 1997 was necessary.

(9) COMMITMENTS AND CONTINGENCIES

Commitment with Telecommunications Company

The Company has an agreement with Sprint Communications Company L.P.
(Sprint) with net monthly usage commitments of $1,500,000. In the event such
monthly commitments are not met, the Company is required to remit to Sprint
25% of the difference between the $1,500,000 monthly commitment and actual
usage. Such amount, if necessary, would be recorded as cost of revenue in the
period incurred. The Company has exceeded the monthly usage commitments since
the inception of this agreement. This agreement extends through December 1997.

Retirement Plan

Effective January 1, 1996, the Company adopted the Telegroup, Inc. 401(k)
Retirement Savings Plan (the Plan). The Plan is a defined contribution plan
covering all employees of the Company who have one year of service and have
attained the age of 21. Participants may contribute up to 15% of their base
pay in pretax dollars. The Company will match employee contributions on a
discretionary basis. Vesting in Company contributions is 100% after 5 years in
the Plan. The Company made no contributions to the Plan in 1996.

F-15
<PAGE>

TELEGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

Litigation

In June 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a former
Country Coordinator for South Africa, filed a complaint (the "Complaint")
against the Company in the United States District Court for the Southern
District of Iowa (the "Action") alleging, among other things, breach of
contract, wrongful termination and intentional interference with contractual
relations. The Complaint requests compensatory and exemplary damages. Although
the Company is vigorously defending the Action, mamagement believes that the
Company will ultimately prevail and does not believe the outcome of the
Action, if unfavorable, will have a material adverse effect on the Company's
business, financial condition or results of operations, although there can be
no assurance that this will be the case.

The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a significant effect on the
financial statements of the Company.

(10) BUSINESS SEGMENT AND SIGNIFICANT CUSTOMER

The Company operates in a single industry segment. For the years ended
December 31, 1994, 1995 and 1996, substantially all of the Company's revenues
were derived from traffic transmitted through switch facilities in New York
and the United Kingdom. The geographic origin of revenue is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
United States...... $29,490,585 35,154,246 60,360,882 11,448,685 23,353,992
Europe............. 12,306,408 41,173,425 81,137,404 18,025,650 25,566,459
Pacific Rim........ 8,485,055 22,613,550 42,185,403 6,326,101 17,225,801
Other.............. 18,431,917 30,178,169 29,523,820 7,550,104 7,949,525
----------- ----------- ----------- ----------- -----------
$68,713,965 129,119,390 213,207,509 43,350,540 74,095,777
=========== =========== =========== =========== ===========
</TABLE>

All revenue was derived from unaffiliated customers. For the period ended
March 31, 1997, approximately 12% of the Company's total revenues were derived
from a single customer.

F-16
<PAGE>

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, ANY SELLING SHAREHOLDERS, OR BY ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS DOES
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.

-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 30
Dividend Policy.......................................................... 30
Dilution................................................................. 31
Capitalization........................................................... 32
Selected Financial Data.................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
The International Telecommunications Industry............................ 45
Business................................................................. 52
Management............................................................... 77
Certain Transactions..................................................... 85
Principal Shareholders................................................... 87
Description of Capital Stock............................................. 88
Shares Eligible for Future Sale.......................................... 93
Certain United States Federal Income Tax Considerations for Non-U.S.
Holders of Common Stock................................................. 95
Underwriting............................................................. 98
Legal Matters............................................................ 102
Experts.................................................................. 102
Additional Information................................................... 102
Glossary of Terms........................................................ 103
Index to Consolidated Financial Statements............................... F-1
</TABLE>

Until August 3, 1997, all dealers effecting transactions in the Common Stock,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a Pro-
spectus when acting as Underwriters and with respect to unsold allotments or
subscriptions.

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

4,000,000 SHARES

[LOGO OF TELEGROUP(SM) APPEARS HERE]

COMMON STOCK

-------

PROSPECTUS

JULY 9, 1997

-------

SMITH BARNEY INC.

ALEX. BROWN & SONS
INCORPORATED

COWEN & COMPANY

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PROSPECTUS
4,000,000 SHARES

[LOGO OF TELEGROUP(SM) APPEARS HERE]

COMMON STOCK

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

Of the 4,000,000 shares of Common Stock, no par value (the "Common Stock"),
offered hereby, 3,200,000 shares are being offered in the United States and
Canada (the "U.S. Offering") by the U.S. Underwriters (as defined) and 800,000
shares are being offered in a concurrent international offering (the
"International Offering" and, together with the U.S. Offering, the "Offering")
outside the United States and Canada by the Managers (as defined). The initial
public offering price and the aggregate underwriting discount per share are
identical for both offerings. All of the shares offered hereby are being
issued and sold by Telegroup, Inc. (the "Company").

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

SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------
<S> <C> <C> <C>
Per Share $10.00 $0.70 $9.30
- --------------------------------------------------
Total(3) $40,000,000 $2,800,000 $37,200,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the U.S. Underwriters and the
Managers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,600,000, all of which will be
paid by the Company.
(3) The Company has granted the U.S. Underwriters and the Managers a 30-day
option to purchase up to an additional 600,000 shares of Common Stock on
the same terms as set forth above solely to cover over-allotments, if
any. See "Underwriting." If all such shares are purchased, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $46,000,000, $3,220,000 and $42,780,000, respectively.
See "Underwriting."

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

The shares of Common Stock are being offered by the several U.S.
Underwriters and the several Managers named herein, subject to prior sale,
when, as and if received and accepted by them and subject to certain
conditions. It is expected that certificates for shares of Common Stock will
be available for delivery on or about July 14, 1997 at the offices of Smith
Barney Inc., 333 W. 34th Street, New York, New York 10001.

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

SMITH BARNEY INC.
ALEX. BROWN & SONS
INTERNATIONAL
COWEN & COMPANY
July 9, 1997
<PAGE>

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

-----------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 30
Dividend Policy.......................................................... 30
Dilution................................................................. 31
Capitalization........................................................... 32
Selected Financial Data.................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
The International Telecommunications Industry............................ 45
Business................................................................. 52
Management............................................................... 77
Certain Transactions..................................................... 85
Principal Shareholders................................................... 87
Description of Capital Stock............................................. 88
Shares Eligible for Future Sale.......................................... 93
Certain United States Federal Income Tax Considerations for Non-U.S.
Holders of Common Stock................................................. 95
Underwriting............................................................. 98
Legal Matters............................................................ 102
Experts.................................................................. 102
Additional Information................................................... 102
Glossary of Terms........................................................ 103
Index to Consolidated Financial Statements............................... F-1
</TABLE>

- --------------------------------------------------------------------------------
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4,000,000 SHARES

[LOGO OF TELEGROUP(SM) APPEARS HERE]

COMMON STOCK

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PROSPECTUS

JULY 9, 1997

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SMITH BARNEY INC.

ALEX. BROWN & SONS
INTERNATIONAL

COWEN & COMPANY

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