TELEGROUP INC, DEF 14A, 1998-04-17

TELEGROUP INC
DEF 14A, 1998-04-17
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

================================================================================

SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

TELEGROUP, INC.
------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies: .......

(2) Aggregate number of securities to which transaction applies: ..........

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............

(4) Proposed maximum aggregate value of transaction: ......................

(5) Total fee paid: .......................................................

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: ...............................................

(2) Form, Schedule or Registration Statement No.: .........................

(3) Filing Party: .........................................................

(4) Date Filed: ...........................................................

================================================================================
<PAGE> 2
TELEGROUP, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD

MAY 19, 1998

AND

PROXY STATEMENT

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

IMPORTANT

PLEASE MARK, SIGN AND DATE YOUR PROXY
AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE

<PAGE> 3

TELEGROUP, INC.
2098 Nutmeg Avenue
Fairfield, Iowa 52556

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

April 17, 1998
To Our Stockholders:

The Annual Meeting of Stockholders of Telegroup, Inc. will be held at
The Plaza Hotel, 5th Avenue at Central Park, New York, New York, on Tuesday, May
19, 1998 at 10:00 a.m., local time, for the following purposes:

(1) To elect three Class I Directors of the Company each to serve for
a three-year term expiring at the 2001 Annual Meeting of
Stockholders.

(2) To consider and act upon a proposed amendment to the Company's
1996 Stock Option Plan to increase the number of shares of Common
Stock issuable upon exercise of stock options under the Company's
1996 Stock Option Plan from 4,000,000 shares to 4,750,000 shares.

(3) To transact any other business which may properly come before the
meeting or any adjournment thereof.

You will be most welcome at the meeting, and we hope you can attend.
Directors and officers of the Company and representatives of its independent
public accountants will be present to answer your questions and to discuss the
Company's business.

We urge you to execute and return the enclosed proxy as soon as
possible so that your shares may be voted in accordance with your wishes. If you
attend the meeting, you may vote in person and your proxy will not be used.

By Order of the Board of Directors,

Robert E. Steinberg
Secretary

____________________________________________________

PLEASE SIGN AND MAIL THE ENCLOSED PROXY
IN THE ACCOMPANYING ENVELOPE
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES

____________________________________________________

<PAGE> 4

TELEGROUP, INC.
2098 Nutmeg Avenue
Fairfield, Iowa 52556

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

PROXY STATEMENT

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

ANNUAL MEETING OF STOCKHOLDERS

MAY 19, 1998

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

This Proxy Statement is furnished to the stockholders of Telegroup,
Inc. (the "Company") in connection with the solicitation of proxies to be used
in voting at the Annual Meeting of Stockholders to be held on May 19, 1998, at
The Plaza Hotel, 5th Avenue at Central Park, New York, New York, and at any
adjournment thereof. The enclosed proxy is solicited by the Board of Directors
of the Company. This Proxy Statement and the enclosed proxy will be first sent
or given to the Company's stockholders on or about April 17, 1998.

The Company will bear the cost of the solicitation of proxies,
including the charges and expenses of brokerage firms and others for forwarding
solicitation material to beneficial owners of stock. Representatives of the
Company may solicit proxies by mail, telegram, telephone, or personal interview.

The shares represented by the accompanying proxy will be voted as
directed if the proxy is properly signed and received by the Company prior to
the Annual Meeting. If no directions are made to the contrary, the proxy will be
voted FOR the nominees for director named herein and FOR the amendment to the
1996 Stock Option Plan to increase the number of shares of Common Stock of the
Company issuable upon the exercise of stock options under the 1996 Stock Option
Plan from 4,000,000 shares to 4,750,000 shares. Any stockholder giving a proxy
has the power to revoke it at any time before it is exercised by filing a
written notice with the Secretary of the Company prior to the Annual Meeting.
Stockholders who attend the Annual Meeting may vote in person and their proxies
will not be used.

Holders of record of Common Stock of the Company at the close of
business on April 15, 1998, will be entitled to vote at the Annual Meeting. At
that time, the Company had 33,003,992 shares of Common Stock outstanding and
entitled to vote. Each share of Common Stock outstanding on the record date
entitles the holder to one vote on each matter submitted at the Annual Meeting.

The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock of the Company is necessary to constitute a quorum for
the transaction of business at the Annual Meeting. Abstentions and broker non-
votes are counted for purposes of determining the presence or absence of a
quorum. Broker non-votes occur when brokers, who hold their customers' shares in
street name, sign and submit proxies for such shares and vote such shares on
some matters, but not others. Typically, this would occur when brokers have not
received any instructions from their customers, in which case the brokers, as
the holders of record, are permitted to vote on "routine" matters, which
typically include the election of directors.

The election of the director nominees requires the favorable vote of a
plurality of all votes cast by the holders of Common Stock at a meeting at which
a quorum is present. Proxies that are marked "Withhold Authority" and broker
non-votes will not be counted toward such nominee's achievement of a plurality
and thus will have no effect. Each other matter to be submitted to the
stockholders for approval or ratification at the Annual Meeting requires the
affirmative vote of the holders of a majority of the Common Stock present and
entitled to vote on the matter. For purposes of determining the number of shares
of Common Stock voting on the matter, abstentions will be counted and will have
the effect of a negative vote; broker non-votes will not be counted and thus
will have no effect.

<PAGE> 5

ELECTION OF DIRECTORS

The Company's Second Amended and Restated Articles of Incorporation
provides for a classified board of directors with three classes. Each class of
directors consists, as nearly as practical, of one-third of the total number of
directors. Effective March 28, 1998, the total number of authorized directors
was fixed at nine by the Board of Directors. The Board of Directors proposes the
election of two incumbent Class I Directors and one present Class II Director at
the 1998 Annual Meeting of Stockholders to continue service as Class I
Directors. Eric E. Stakland was appointed as a Class I Director on April 1, 1998
to fill the vacancy created by the retirement of his brother Ronald B. Stakland
from the Company. Four incumbent Class II and Class III Directors will continue
in office. The nominees for Class I Directors, if elected, will serve for
three-year terms expiring at the 2001 Annual Meeting of Stockholders. The
Company will have two vacancies on its Board of Directors, one for a Class II
Director and one for a Class III Director.

Eric E. Stakland and Rashi Glazer are currently Class I Directors of
the Company and Steven J. Baumgartner is a Class II Director. Each is being
nominated by the Board of Directors for re-election as Class I Directors.

It is intended that, unless otherwise directed, the shares represented
by the enclosed proxy will be voted FOR the election of Messrs. Stakland,
Glazer, and Baumgartner as Class I Directors. In the event that any nominee for
director should become unavailable, the number of directors of the Company may
be decreased pursuant to the By-Laws, or the Board of Directors may designate a
substitute nominee, in which event the shares represented by the enclosed proxy
will be voted for such substitute nominee.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION OF THE NOMINEES FOR DIRECTOR.

The following table sets forth for each nominee and each continuing
director of the Company, such person's name, age, and his position with the
Company:

CLASS I DIRECTORS
(NOMINEES FOR TERMS EXPIRING IN 2001)

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ------------ ------------------------------------------
<S> <C> <C>
Eric E. Stakland 46 Vice President - International
Marketing and Operations and Director

Rashi Glazer 48 Director

Steven J. Baumgartner 46 President, Chief Operating Officer and
Director
</TABLE>

CLASS II DIRECTORS
(TERMS EXPIRE IN 1999)

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ------------ ------------------------------------------
<S> <C> <C>
Douglas A. Neish 42 Vice President - Finance, Chief
Financial Officer, Treasurer and Director

J. Sherman Henderson III 54 Director

</TABLE>

<PAGE> 6

CLASS III DIRECTORS
(TERMS EXPIRE IN 2000)

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ------------ -----------------------------------------
<S> <C> <C>
Clifford Rees 46 Chief Executive Officer and Director

Fred Gratzon 52 Chairman of the Board and Director

</TABLE>

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.

Clifford Rees, a co-founder of the Company, has served as Chief
Executive Officer and a Director of the Company since its formation in 1989, and
as President of the Company from 1989 to February 1998. 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.

Steven J. Baumgartner has served as President and Chief Operating
Officer of the Company since February 1998, and as a Director of the Company
since October 1997. Mr. Baumgartner served as Executive Vice President and
Sector President Global Commercial Print for R.R. Donnelley & Sons Company
("R.R. Donnelley") from 1995 to 1998. Prior to that time, Mr. Baumgartner served
as Executive Vice President of R.R. Donnelley responsible for strategy,
communication, technology and human resources from 1993 to 1995. Prior to
working at R.R. Donnelley, Mr. Baumgartner was co-founder and chief executive
officer of FRC Management, Inc., a retirement concepts corporation, from 1991 to
1993.

Eric E. Stakland has served as Vice President of International
Marketing and Operations since April 1998. From 1995 to 1998, he served as Vice
President of Global Carrier Services. 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.

Douglas A. Neish has served as Vice President of Finance of the Company
since November 1995 and Chief Financial Officer and a Director since April 1997.
From October 1996 to February 1998, Mr. Neish also served as Treasurer of the
Company. 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 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.

J. Sherman Henderson III has served as a Director of the Company since
October 1997 and has served as President and CEO of UniDial Communications from
1993 to the present. Prior to that, Mr. Henderson was employed by US Network
where he served as a regional telecommunications distributor for American
Centrex beginning in 1989. Mr. Henderson currently serves as Chairman of the
Telecommunications Resellers Association's Board of Directors. Mr. Henderson has
over 35 years of business experience in sales, marketing, management and company
ownership.

Rashi Glazer has served as a Director of the Company since October 1997
and has served on the faculty of the Walter A. Haas School of Business,
University of California, Berkeley and Co-Director of the Berkeley Center for
Marketing and Technology from 1992 to the present. Prior to that time, Mr.
Glazer served on the faculty of the Columbia University Graduate School of
Business.

<PAGE> 7

INFORMATION CONCERNING THE BOARD OF DIRECTORS, EXECUTIVE OFFICERS,
AND PRINCIPAL STOCKHOLDERS

MEETINGS, COMMITTEES, AND COMPENSATION OF THE BOARD OF DIRECTORS

The Board of Directors of the Company had a total of five meetings
during the fiscal year ended December 31, 1997 ("Fiscal 1997"). During Fiscal
1997, each of the directors attended 75% or more of the total number of (i)
meetings of the Board, and (ii) meetings of committees of the Board on which
such director served. During Fiscal 1997, directors who were not employees of
the Company received an annual fee in the form of options to purchase 10,000
shares of the Company's Common Stock, which vest after each year of service, and
did not receive a meeting fee for their participation at board meetings and
committee meetings. All directors were reimbursed for out-of-pocket expenses
incurred in connection with attendance at board and committee meetings. In
addition, 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
1996 Amended and Restated Stock Option Plan (the "Stock Option Plan").

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee. The Board of Directors has established an Audit
Committee. The Audit Committee currently consists of Messrs. Henderson and
Glazer, and is charged with 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. On January 26, 1998, Mr. Glazer replaced Mr. Baumgartner on the Audit
Committee after Mr. Baumgartner was elected as the President and Chief Operating
Officer of the Company.

Compensation Committee. The Board of Directors has established a
Compensation Committee. The Compensation Committee is comprised solely of
"disinterested persons" or "Non-Employee Directors" as such term is used in Rule
16b-3 promulgated under 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"). Messrs. Henderson and
Glazer currently serve on the Compensation Committee, which is 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. On
January 26, 1998, Mr. Glazer replaced Mr. Baumgartner on the Compensation
Committee after Mr. Baumgartner was elected as the President and Chief Operating
Officer of the Company.

EXECUTIVE OFFICERS

In addition to Messrs. Gratzon, Rees, Baumgartner, Stakland, and Neish,
the following persons are executive officers of the Company:

John P. Lass has served as Senior Vice President and Chief Operating
Officer of the Company from January 1997 until January 1998 and is currently
serving as Senior Vice President of Strategy and Business Development. 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.

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
Mail 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

<PAGE> 8

of Stanley Crowe & Associates (predecessor to Oakwood Corp.), a real estate
development and brokerage firm, from 1979 to 1986.

Ronald L. Jackenthal has served as Vice President of Global Carrier
Services since April 1998. Prior to that he was 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.

Robert E. Steinberg has served as Vice President and General Counsel of
the Company since June 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 Columbus,
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.

Ellen Akst Jones has served as the Company's Vice President of
Administration and Director of Human Resources since August 1997. Prior to
joining the Company, Ms. Jones ran a private law practice in Fairfield, Iowa
from 1992 to 1997. Prior to that time, Ms. Jones served as an Associate
Professor of Law and Government and Dean of Maharishi International University
College of Natural Law in Washington, D.C., an Associate Counsel to the United
States Senate for the Senate Committee on Human Resources and an Assistant
General Counsel for the United States Conference of Mayors and Assistant
Attorney General of Texas.

Andrew Munro has served as the Company's Vice President of Revenue
Systems since September 1997. Prior to joining the Company, Mr. Munro held
positions with MCI in its Engineering and Information Technologies divisions,
where he was responsible for architectural definitions, design, and
implementation of multiple custom billing applications.

Steven W. Hathaway has served as the Company's Vice President of
Enhanced Services since August 1997 and, previously, as the Company's Director
of Enhanced Services from September 1994 to July 1997. Prior to joining the
Company, Mr. Hathaway co-founded and served as Vice President of Marketing for
Keyboard Advancements. Prior to that time, Mr. Hathaway served as Vice President
of Sales and Marketing for Laser's Edge and as a Product and Marketing Manager
for Computer Associates.

Sudhir Chadalavada has served as the Company's Vice President of
Marketing since February 1998. He first joined the Company in October 1997 as
marketing consultant for international marketing and new business development.
From January 1995 to April 1996, he served as Senior Manager of the
micro-computer and logic division of Toshiba America, Inc. From April 1996 to
April 1997, Mr. Chadalavada co-founded and served as Chief Operating Officer of
Stellar Solutions, Inc., where he established and implemented marketing and
sales strategy in emerging multimedia and Internet markets.

Thomas Brand joined the Company as Vice President and Chief Technology
Officer in March 1998, after 27 years of diversified engineering and
telecommunications experience in managing the design, development, production
and implementation of telecommunications systems and networks. From 1986 to his
joining the Company, Mr. Brand was Executive Director of Strategic Accounts
Engineering at MCI Communications, Inc. From 1980 to 1986, he was a Director of
Service Engineering and Network Engineering for Satellite Business Systems. Mr.
Brand Retired from the United States Air Force in 1980 after holding positions
of Director of Joint Tactical Communications Programs and Director of AF
Satellite Communications Program.

Stan Bierbrier has served as Treasurer of the Company since February
1998, and previously was Director of Treasury for the Company from 1997 to 1998.
Prior to joining the Company, Mr. Bierbrier served from 1993 to 1996 as Senior
Business Analyst at Advance Information Technologies, a public Canadian firm,
where he was responsible for all financial aspects of a large-scale business
process re-engineering and systems automation project for a Canadian Government
agency. From 1987 to 1993, Mr. Bierbrier held various positions at Telesat
Canada, including Venture Development Manager and Director of MediaSat Services.

<PAGE> 9

Officers are elected annually by the Board of Directors and serve at
its discretion. There are no family relationships among any of the directors and
executive officers of the Company.

OWNERSHIP OF COMMON STOCK BY DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL
STOCKHOLDERS

The following table sets forth information regarding beneficial
ownership of the Company's Common Stock, as of April 10, 1998, 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, (iii) each of the
Company's executive officers named in the Summary Compensation Table, and (iv)
the directors and executive officers of the Company as a group:

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)(2)
------------------------------------------------------
STOCKHOLDER NUMBER PERCENT
- ------------------------------------------------------------ ---------------------------- -------------------------
<S> <C> <C>
Fred Gratzon and Shelley Levin-Gratzon (3) 11,836,653 35.9%

Clifford Rees (4) 11,683,215 35.4%

Steven J. Baumgartner 0 *

Douglas A. Neish 153,438 *

Eric E. Stakland 32,880 *

J. Sherman Henderson III 0 *

Rashi Glazer 0 *

Stanley Crowe 147,958 *

Ronald B. Stakland (5)(6) 673,004 2.0%

All directors and executive officers as a group 24,620,307 74.6%
(18 persons) (3)(4)

</TABLE>

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

* Represents beneficial ownership of less than 1% of the Company's
outstanding Common Stock.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those shares.

(2) Includes shares purchasable within 60 days after April 10, 1998 pursuant
to the exercise of options covering 153,438 shares for Mr. Neish,
147,958 shares for Mr. Crowe, 32,880 shares for Mr. Eric Stakland, and
427,435 shares for all directors and executive officers as a group.

(3) Represents (i) 5,918,326 shares of Common Stock owned by Fred Gratzon
and Shelley Levin-Gratzon as joint tenants, (ii) 2,249,460 shares of
Common Stock held by the Fred Gratzon Revocable Trust,
(iii) 2,247,892 shares of Common Stock held by the Shelley L.
Levin-Gratzon Revocable Trust, (iv) 1,247,009 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.

<PAGE> 10

(4) 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.

(5) Represents (i) 563,406 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. Mr. Stakland expressly disclaims
ownership of the shares held in the Stakland Family Trust in which he
has no pecuniary interest.

(6) Mr. Stakland retired from his positions as a director and executive
officer of the Company effective March 31, 1998.

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding
compensation paid during the fiscal year ended December 31, 1996 and December
31, 1997 to the Company's Chief Executive Officer and each of the Company's four
other highest compensated executive officers (collectively, the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- -----------------
AWARDS
-----------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) (#) ($)
- --------------------------------- ----------- ------------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
CLIFFORD REES 1997 $600,000 $ 0 0 $ 0
President and Chief Executive 1996 $690,000 $250,000 0 $ 0
Officer

FRED GRATZON 1997 $600,000 $ 0 0 $ 0
Chairman of the Board 1996 $600,000 $250,000 0 $ 0

RONALD B. STAKLAND 1997 $246,833 $ 0 0 $ 0
Senior Vice President - 1996 $250,000 $ 71,417 0 $ 0
International Services

STANLEY CROWE 1997 $ 0 $ 0 0 $302,848(1)
Vice President - North 1996 $ 0 $ 15,000 147,958 $182,142(1)
America

ERIC E. STAKLAND 1997 $ 59,825 $ 0 153,439 $168,905(1)
Vice President - Global Carrier 1996 $ 51,000 $ 24,500 16,440 $ 56,699(1)
Services

</TABLE>

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

(1) Represents payments by the Company for earned commissions.

<PAGE> 11

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information concerning the grant
of stock options to the Named Executive Officers under the Company's Stock
Option Plan.

<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL POTENTIAL REALIZED VALUE AT
UNDERLYING OPTIONS GRANTED ASSUMED ANNUAL RATES OF
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED (#) FISCAL YEAR (1) PRICE ($/SH) DATE OPTION TERMS (2)(3)
---- ----------- --------------- ------------ ---- -----------------------------
5%($) 10%($)
----- ------
<S> <C> <C> <C> <C> <C> <C>
Clifford Rees 0 -- -- -- -- --

Fred Gratzon 0 -- -- -- -- --

Ronald B. Stakland 0 -- -- -- -- --

Stanley Crowe 0 -- -- -- -- --

Eric E. Stakland 120,559 24.9% $10.00 1/1/07 $758,190 $1,921,400
16,440 3.4% $10.00 1/1/07 $103,391 $ 262,012

</TABLE>

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

(1) The Company granted options to purchase a total of 483,439 shares of Common
Stock in Fiscal 1997.

(2) The dollar amounts in these columns are the product of (a) the difference
between (1) the product of the per share market price at the date of grant
and the sum of 1 plus the assumed rate of appreciation (5% and 10%)
compounded over the term of the option (ten years) and (2) the per share
exercise price and (b) the number of shares underlying the grant.

(3) The appreciation rates stated are arbitrarily assumed, and may or may not
reflect actual appreciation in the stock price over the life of the option.
Regardless of any theoretical value which may be placed on a stock option,
no increase in its value will occur without an increase in the value of the
underlying shares. Whether such an increase will be realized will depend
not only on the efforts of the recipient of the option, but also upon
conditions in the Company's industry and market area, competition, and
economic conditions, over which the optionee may have little or no control.

<PAGE> 12

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

The following table provides certain information regarding the number
and value of stock options held by the Company's Named Executive Officers at
December 31, 1997. None of the Named Executive Officers exercised any stock
options or stock appreciation rights during Fiscal 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(2)
------------------------------ --------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ---------- ----------- ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Clifford Rees 0 -- 0 0 -- --

Fred Gratzon 0 -- 0 0 -- --

Ronald B. Stakland 0 -- 0 0 -- --

Stanley Crowe 0 -- 147,958 0 $1,647,145 $ 0

Eric E. Stakland 0 -- 32,880 120,559 $ 181,552 $355,869

</TABLE>

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

(1) Value realized represents the difference between the exercise price of the
option shares and the market price of the option shares on the date the
option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses which may have been
owed.

(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year
end ($12.625 on December 31, 1997). An option is in-the-money if the fair
market value of the underlying shares exceeds the exercise price of the
option.

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 compensation
to both Mr. Gratzon and Mr. Rees will be reduced by at least $100,000 to offset
excess payments of such amount in 1997. 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.

<PAGE> 13

INDEMNIFICATION AGREEMENTS

The Company has entered 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 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.

The following Compensation Committee Report and Performance Graph shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any of the Company's filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.

REPORT OF THE STOCK OPTION AND COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

The Compensation Committee has the authority and responsibility to
determine and administer the Company's officer compensation policies and to
establish the salaries of executive officers, the formula for bonus awards to
executive officers, and the grant of stock options to executive officers and
other key employees under the Company's Stock Option Plan. The Compensation
Committee consists solely of independent non-employee directors of the Company.
In general, the philosophy of the Compensation Committee is to attract and
retain qualified executives, reward current and past individual performance,
provide short-term and long-term incentives for superior future performance, and
relate total compensation to individual performance and performance of the
Company. The preferred compensation policy of the Compensation Committee is to
set base pay at the lower end of the comparable market ranges, establish
performance based annual cash bonus opportunities, and grant significant option
positions to key employees to provide greater long term incentives.

The determination of executive officer base salaries for Fiscal 1997
was based primarily on subjective factors, such as the Compensation Committee's
perception of individual performance and the executive officer's contribution to
the overall performance of the Company, and not on any specific criteria. No
specific weight was given to any of these factors because each of these factors
was considered significant and the relevance of each varies depending upon an
officer's responsibilities.

<PAGE> 14

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.

In order to motivate management to meet both short-term and long-term
Company objectives, the Compensation Committee approved bonuses in the form of
stock options of 2,000 shares or less for certain executive officers. The
bonuses for senior officers were based on the achievement of certain performance
criteria on an individual level.

The purposes of the Stock Option Plan are to provide long-term
incentives to key employees and motivate key employees to improve the
performance of the Company and thereby increase the Company's Common Stock
price. Stock option awards are considered at the time of the hiring of key
employees and annually for all key employees by the Compensation Committee. The
value of the stock options awarded is entirely dependent upon the Company's
stock performance over a period of time.

The number of shares of the Company's Common Stock subject to the
options granted during Fiscal 1997 was determined based on a subjective
evaluation of the past performance of the individual, the total compensation
being paid to the individual, the individual's scope of responsibility, and the
anticipated value of the individual's contribution to the Company's future
performance. No specific weight was given to any of these factors. Options
awarded to each executive officer during previous years were reviewed by the
Compensation Committee in determining the size of an option awarded for Fiscal
1997.

To comply with loan covenants, each stock option awarded during Fiscal
1997 had an exercise price equal to the fair market value of the underlying
Common Stock of the Company for the average closing price for the 10 days
preceding the date of the grant. With the expiration of those loan covenants,
the Compensation Committee has amended the Stock Option Plan to provide that the
exercise price shall be the closing price on the date of grant. Generally, stock
options granted to new employees of the Company vest and become exercisable at
the rate of 331/3% per year if the option holder remains employed at the time of
vesting and terminate ten years from the date of grant.

The Budget Reconciliation Act of 1993 amended the Internal Revenue Code
to add Section 162(m) ("Section 162(m)") which bars a deduction to any publicly
held corporation for compensation paid to a "covered employee" in excess of
$1,000,000 per year. Generally, the Company intends that compensation paid to
covered employees shall be deductible to the fullest extent permitted by law.
The Stock Option Plan, as defined and described in this Proxy Statement, is
intended to qualify under Section 162(m).

COMPENSATION COMMITTEE

J. Sherman Henderson III
Rashi Glazer

<PAGE> 15

PERFORMANCE GRAPH

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE NASDAQ STOCK MARKET - US INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX

The following Performance Graph compares the performance of the Company
with that of the Nasdaq Stock Market - US Index and the Nasdaq
Telecommunications Index, which is a published industry index. The comparison of
the cumulative total return to stockholders for each of the periods assumes that
$100 was invested on July 9, 1997 (the effective date the Company's Common Stock
was registered under the Securities Exchange Act of 1934, as amended), in the
Common Stock of the Company, and in the Nasdaq Stock Market - US Index and the
Nasdaq Telecommunications Index and that all dividends were reinvested.

<TABLE>
<CAPTION>
Cumulative Total Return
-------- -------- -------- -------- -------- --------
7/09/97 12/31/97

<S> <C> <C> <C>
TELEGROUP INC TGRP 100.00 126.25

NASDAQ STOCK MARKET (U.S.) INAS 100.00 109.65

NASDAQ TELECOMMUNICATIONS INAT 100.00 126.60

</TABLE>

<PAGE> 16

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is comprised of directors who are not
executive officers or employees of the Company.

Principal Stockholders Registration Rights Agreement

In connection with the Company's initial public offering, the Company
and each of Clifford Rees, Fred Gratzon, Shelley Levin-Gratzon and Ronald
Stakland (the "Principal Stockholders") entered into a registration rights
agreement (the "Principal Stockholders Registration Rights Agreement") granting
the Principal Stockholders and certain other stockholders demand and incidental
registration rights in connection with their ownership of shares of the
Company's Common Stock.

AMENDMENT TO THE COMPANY'S 1996 STOCK OPTION PLAN

The proposed amendment to the Company's Stock Option Plan would
increase the number of shares of Common Stock of the Company subject to the plan
from 4,000,000 shares to 4,750,000 shares. Approval of this amendment requires
the affirmative vote of the holders of a majority of the shares of Common Stock
represented at the Annual Meeting.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE AMENDMENT TO THE COMPANY'S STOCK OPTION PLAN.

AMENDED AND RESTATED STOCK OPTION PLAN

On April 9, 1997, the Board of Directors of the Company adopted and the
stockholders of the Company approved the Company's 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 amendment increasing the number of shares of Common
Stock issuable under the Stock Option Plan was adopted by the Board of Directors
on April 4, 1998. The description in this Proxy Statement of the Stock Option
Plan is included solely as a summary, does not purport to be complete and is
qualified in its entirety by the terms of the Second Amended and Restated 1996
Stock Option Plan. The Company's Board of Directors has approved an amendment to
the Stock Option Plan to increase the number of shares of Common Stock of the
Company reserved for issuance upon the exercise of options granted under the
Stock Option Plan from 4,000,000 shares to 4,750,000 shares.

The total number of shares for which options may be granted pursuant to
the Stock Option Plan is currently 4,000,000 shares and the maximum number of
shares for which options may be granted to any person is 666,667 shares, subject
to certain adjustments to reflect changes in the Company's capitalization. The
Stock Option Plan is 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 fair market value of the
Common Stock on the date of grant 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.

<PAGE> 17

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 stockholders 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 fair market value of the Common Stock on the date of grant. 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 the Company's 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 stockholders 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
stockholders 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 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.

As of December 31, 1997, options to purchase an aggregate of 2,084,945
shares of Common Stock were granted under the Stock Option Plan options to
purchase 188,367 shares had been exercised, options to purchase 1,896,578 shares
remained outstanding, and only 1,915,055 shares remained available for future
grant. The outstanding options were held by 348 individuals and were exercisable
at a weighted average exercise price of $3.31 per share. Shares subject to
options granted under the plan that have lapsed or terminated may again be
subject to options granted under the plan. As of December 31, 1997, the market
value of all shares of the Company's Common Stock subject to outstanding options
under the Stock Option Plan was approximately $23,944,927 (based upon the
closing sale price of the Common Stock as reported on the Nasdaq National Market
on December 31, 1997 of $12.625 per share). During the 1997 and 1996 fiscal
years, options covering 483,439 shares and 1,586,891 shares, respectively, of
Common Stock were granted to employees of the Company under the Stock Option
Plan. Shares underlying presently exercisable, but unexercised, options will
constitute outstanding shares of Common Stock for purposes of calculating the
Company's net income per share. The market value of the 4,750,000 shares of
Common Stock to be subject to the Stock Option Plan was approximately
$59,968,750 as of December 31, 1997.

As of December 31, 1997, the following current directors and named
executive officers had been granted options under the Stock Option Plan as
follows:

<TABLE>
<CAPTION>
NUMBER OF OPTIONS AVERAGE EXERCISE
NAME GRANTED PRICE PER SHARE
- ------------------------------------- --------------------------- --------------------------
<S> <C> <C>
Fred Gratzon 0 --

Clifford Rees 0 --

Steven J. Baumgartner 10,000 $10.22

Douglas A. Neish 153,438 $ 8.22

Eric E. Stakland 153,439 $ 7.64

</TABLE>

<PAGE> 18

<TABLE>
<S> <C> <C>
J. Sherman Henderson III 10,000 $10.22

Rashi Glazer 10,000 $10.22

Stanley Crowe 147,958 $ 1.31

Ronald B. Stakland 0 --

</TABLE>

Since adoption of the Stock Option Plan through December 31, 1997: (i) all
current executive officers, as a group, have been granted options under the
Stock Option Plan covering 859,391 shares of Common Stock which represents
approximately 41.2% of the total number of options granted pursuant to the Stock
Option Plan; (ii) all directors who are not executive officers, as a group, have
been granted options under the Stock Option Plan covering 20,000 shares of
Common Stock which represents approximately 0.8% of the total number of options
granted pursuant to the Stock Option Plan; and (iii) all current employees,
excluding executive officers, as a group, have been granted options under the
Stock Option Plan covering 1,209,770 shares of Common Stock which represents
approximately 58.0% of the total number of options granted pursuant to the Stock
Option 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 nonqualified 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 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.

<PAGE> 19

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 stockholders 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
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.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and greater than 10% stockholders, to file
reports of ownership and changes in ownership of the Company's securities with
the Securities and Exchange Commission ("SEC"). Copies of the reports are
required by SEC regulation to be furnished to the Company. Based on its review
of such reports and written representations from reporting persons, the Company
believes that all reporting persons complied with all filing requirements during
the year ended December 31, 1997.

INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors has appointed KPMG Peat Marwick LLP independent
public accountants, as auditors for the Company for fiscal 1998. The Board of
Directors believes that the reappointment of KPMG Peat Marwick LLP for fiscal
1998, is appropriate because of the firm's reputation, qualifications, and
experience. Representatives of KPMG Peat Marwick LLP will be present at the
meeting and will have an opportunity to make a statement if they desire to do
so. Such representatives will be available to respond to appropriate questions.

PROPOSALS BY STOCKHOLDERS FOR 1999 ANNUAL MEETING

If any stockholder of the Company wishes to submit a proposal to be
included in next year's Proxy Statement and acted upon at the annual meeting of
the Company to be held in 1999, the proposal must be received by the Secretary
of the Company at the principal executive offices of the Company, 2098 Nutmeg
Avenue, Fairfield, Iowa 52556 prior to the close of business on December 31,
1998. Any proposal submitted after that date may be omitted by the Company from
the Proxy Statement and form of proxy relating to that meeting.

OTHER MATTERS

As of the date of this Proxy Statement, management knows of no other
business that will come before the meeting. Should any other matter requiring a
vote of the stockholders arise, the proxy in the enclosed form confers upon the
persons designated to vote the shares discretionary authority to vote with
respect to such matter in accordance with their best judgment.

The Company's 1997 Annual Report to Stockholders, including financial
statements, was furnished to stockholders prior to or concurrently with the
mailing of this proxy material.

By Order of the Board of Directors,

Robert E. Steinberg
Secretary

16
<PAGE> 20
TELEGROUP, INC.
2098 NUTMEG AVENUE, FAIRFIELD, IOWA 52556

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

PROXY FOR ANNUAL MEETING OF STOCKHOLDERS -- MAY 19, 1998

The undersigned stockholder of Telegroup, Inc. (the "Company") hereby
appoints Robert E. Steinberg, Charles E. Johanson and Douglas A. Neish, or any
one of them, as attorneys and proxies with full power of substitution to each,
to vote all shares of Common Stock of the Company which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Company to be held
at the Plaza Hotel located at 5th Avenue at Central Park, New York, New York, on
Tuesday, May 19, 1998, at 10:00 a.m. local time, and at any adjournment or
adjournments thereof, with all of the powers such undersigned stockholder would
have if personally present, for the following purposes:

1. THE ELECTION OF ERIC E. STAKLAND, RASHI GLAZER, AND STEVEN J. BAUMGARTNER
AS CLASS I DIRECTORS.
|_| FOR all nominees (except as marked to the contrary)
|_| WITHHOLD AUTHORITY to vote for each nominee
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR A SPECIFIC NOMINEE,
WRITE THAT NOMINEE'S NAME HERE:
_____________________________________________________________.)

2. TO APPROVE THE AMENDMENT OF THE COMPANY'S 1996 STOCK OPTION PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
STOCK OPTIONS UNDER THE 1996 STOCK OPTION PLAN FROM 4,000,000 SHARES TO
4,750,000 SHARES. |_| FOR |_| AGAINST |_| ABSTAIN

3. IN THEIR DISCRETION TO VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING.

(Continued and to be signed on other side.)

(Continued from other side.)

THIS PROXY, WHEN EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, AND 3.

The undersigned hereby acknowledges receipt of the Notice of the Annual
Meeting of Stockholders, dated April 17, 1998, the Proxy Statement and the
Annual Report of the Company furnished therewith. Any proxy heretofore given to
vote said shares is hereby revoked.

PLEASE SIGN AND DATE THIS PROXY BELOW AND RETURN IN THE ENCLOSED ENVELOPE.

Dated: _____________________, 1998 ________________________________________
(Signature)

________________________________________
(Signature)

SIGNATURE(S) SHALL AGREE WITH THE
NAME(S) PRINTED ON THIS PROXY. IF SHARES
ARE REGISTERED IN TWO NAMES, BOTH
STOCKHOLDERS SHOULD SIGN THIS PROXY. IF
SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE GIVE YOUR FULL TITLE AS SUCH.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

<PAGE> 1

TELEGROUP, INC.
SECOND AMENDED AND RESTATED
1996 STOCK OPTION PLAN

1. PURPOSE

This Amended and Restated 1996 Stock Option Plan for Telegroup, Inc.
(the "COMPANY") is intended to provide incentive to directors, officers, key
employees, and agents of the Company and its Subsidiaries by providing those
persons with opportunities to purchase shares of the Company's Common Stock
under (a) Incentive Stock Options and (b) other stock options.

2. DEFINITION

Except as otherwise expressly provided herein or unless the context
otherwise requires, as used in this Plan, the following words and phrases shall
have the meanings set forth in this Section 2.

(a) "BOARD" shall mean the Board of Directors of the Company.

(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.

(d) "COMPANY" shall mean Telegroup, Inc., the employer which has
established this Plan.

(e) "DISINTERESTED" shall mean disinterested within the meaning of
any applicable regulatory requirements, including Rule 16b-3, as
amended from time to time, as promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934,
as amended from time to time.

(f) "FAIR MARKET VALUE" per share as of a particular date shall
mean (i) the closing sales price per share of Common Stock on the
principal national securities exchange, if any, on which the Common
Stock shall then be listed for the last preceding date on which there
was a sale of such Common Stock on such exchange, or (ii) if the
Common Stock is not then listed on a national securities exchange,
the last sales price per share of Common Stock entered on a national
inter-dealer quotation system for the last preceding date on which
there was a sale of such Common Stock on such national inter-dealer
quotation system, or (iii) if no closing or last sales price per share
of Common Stock is entered on a national inter-dealer quotation system,
the average of the closing bid and asked prices for the Common Stock in
the over-the-counter market for the, last preceding dam on which there
was a quotation for such Common Stock in such market or (iv) if no
price can be determined under the preceding alternatives, then the
price per share as determined by the Committee in good faith.

(g) "INCENTIVE STOCK OPTION" shall mean one or more options to
purchase Common Stock which, at the time such options are granted under
this Plan or any other such plan of the Company, qualify as incentive
stock options under Section 422 of the Code.

(h) "IPO" shall mean the initial public offering of the Company's
Common Stock.

(i) "NON-INCENTIVE STOCK OPTION" shall any option or options that
are not Incentive Stock Options.

(j) "OPTION" shall mean any option, including any Incentive Stock
Option or other option issued pursuant to this Plan.

(k) "OPTIONEE" shall mean any person to whom an Option is granted
under this Plan.

(l) "PARENT" shall mean any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at the
time of granting an Option, each of the corporations other than

<PAGE> 2

the Company owns stock possessing fifty-one percent (51%) or more of
the total combined voting power of all classes of stock in one of the
other corporations in such chain.

(m) "PLAN" shall mean this Second Amended and Restated 1996 Stock
Option Plan.

(n) "RELIANCE PERIOD TERMINATION DATE" shall mean the date that is
the earlier of:

(1) The date of expiration or termination of the Plan;

(2) The, date of any material modification of the Plan, within
the meaning of Treasury Regulation section 1.162-27(h)(I)(iii);

(3) The first date as of which all Options provided for under
the Plan have been issued; and

(4) The date of the first meeting of shareholders of the
Company at which Directors are to be elected that occurs after the
year 2000.

(o) "SUBSIDIARY" shall mean any corporation (other than the
Company) in an unbroken chain of corporations beginning with the
Company if, at the time of granting an Option, each of the corporations
other than the last corporation in the unbroken chain owns stock
possessing fifty-one percent (51%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.

(p) "TEN PERCENT SHAREHOLDER" shall mean an Optionee who, at the
time an Option is granted, owns directly or indirectly (within the
meaning of Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company, its Parent or a Subsidiary.

3. GENERAL ADMINISTRATION

(a) The Plan shall be administered by the Compensation Committee
(the "Committee"), consisting of not less than two members of the
Board. From and after the consummation of the IPO, no person may serve
as a member of the Committee unless such person is both a Disinterested
person as well as an "outside director" within the meaning of Treasury
Regulation section 1.162-27(e)(3)(i).

(b) The Committee shall have the authority in its discretion,
subject to the terms and conditions hereof, to administer this Plan and
to exercise all the powers and authorities either specifically granted
to it hereunder or that are necessary or that are advisable in the
administration of the Plan, including, without limitation, the
authority to grant Options; to determine the purchase price of shares
of Common Stock covered by each Option (the "OPTION PRICE"); to
determine the persons to whom, and the time or times at which, Options
shall be granted; to determine the number of shares of Common Stock to
be covered by each Option, to interpret the Plan; to prescribe, amend
and rescind rules and regulations relating to the Plan; and to
determine the terms and provisions of the Option agreements (which need
not be identical) entered into in connection with Options granted under
the Plan ("OPTION AGREEMENTS").

(c) The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members
to the Committee and may at any time, under the terms and conditions of
the Company's Bylaws, remove, one, or more Committee members and
substitute others.

(d) No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to this
Plan or any Option granted hereunder.

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<PAGE> 3

4. RESTRICTIONS AND GRANTS TO COMMITTEE MEMBERS

From and after the IPO, directors serving on the Committee are
not eligible to receive Options pursuant to the Plan.

5. GRANTING OF OPTIONS

Options may be granted under this Plan at any time prior to
April 1, 2007.

6. ELIGIBILITY

(a) Subject to Section 4, Options may be granted to any director,
officer, key employee or agent of the Company or any Subsidiary,
however, incentive stock options will be available only to employees of
the Company. In determining from time to time the directors, officers,
employees and agents to whom Options shall be granted and the number of
shares of Common Stock to be covered by each Option, the Committee
shall consider the duties of the respective directors, officers,
employees and agents, their present and potential contributions to the
success of the Company and its Subsidiaries and such other factors as
the Committee shall deem relevant in connection with accomplishing the
purposes of the Plan.

(b) At the time each Option is granted under the Plan the Committee
shall determine whether such Option is to be designated as an Incentive
Stock Option. Incentive Stock Options shall not be granted to a
director who is not an employee of the Company.

(c) An Option designated an Incentive Stock Option can, prior to
its exercise, be changed to a non-incentive Option if the Optionee,
consents to amend his Option Agreement to provide that the exercise
period of such Option will be governed by Section 8(e)(2) hereof.

7. STOCK

(a) The stock subject to the Options shall be shares of Common
Stock. Such shares may, in whole or in part, be authorized but unissued
shares contributed directly by the Company or shares which shall have
been or which may be acquired by the Company. The aggregate number of
shares of Common Stock for which Options may be granted from time to
time under this Plan shall be four million (4,750,000) shares
(determined after the Company's planned split in connection with the
IPO), subject to adjustment as provided in Section 8(g) hereof. The
maximum number of shares of Common Stock for which any one person may
be granted Options under the Plan is six hundred sixty-six thousand,
six hundred sixty-seven (666,667) shares (determined after the
Company's planned split in connection with the IPO), subject to
adjustment as provided in Section 8(g) hereof.

(b) If any outstanding Option under the Plan for any reason expires
or is terminated without having been exercised in full, the shares of
Common Stock allocable to the unexercised portion of such Option shall
(unless this Plan shall have been terminated) become available for
subsequent grants of Options hereunder.

8. TERMS AND CONDITIONS OF OPTIONS

Each Option granted pursuant to this Plan shall be evidenced by one or
more Option Agreements in such form as the Committee may from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:

(a) INCENTIVE STOCK OPTION PRICE. Each Incentive Stock Option shall
state, the Option Price, which, shall be not less than one hundred
percent (100%) of the Fair Market Value of the shares of Common Stock
on the date of grant of the Option; provided, however, in the case of
an Incentive Stock Option granted to a Ten Percent Shareholder, the
Option Price shall not be less than one hundred ten percent (110%) of
such Fair Market Value. The Option Price shall be subject to adjustment
as provided in Section 8(h) hereof. The date

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<PAGE> 4

on which the Committee adopts a resolution expressly granting an Option
shall be considered the day on which such Option is granted.

(b) NON-INCENTIVE STOCK OPTION PRICE. Each Option that is not an
Incentive Stock Option shall state the Option Price. In the case of
Non-Incentive Stock Options granted on or before the Reliance Period
Termination Date, the Option Price shall not be less than fifty percent
(50%) of the Fair Market Value of the shares of Common Stock on the
date of grant of the Option. In the case of Non-incentive Stock Options
granted after the Reliance Period Termination Date, the Option Price
shall not be less than one hundred percent (100%) of the, Fair Market
Value of the shares of Common Stock on the date of grant of the Option.
The Option Price shall be subject to adjustment as provided in Section
8(h) hereof. The date on which the Committee adopts a resolution
expressly granting an Option shall be considered the day on which such
Option is granted.

(c) RESTRICTIONS. Any Common Stock issued under this Plan may
contain restrictions and limitations including, but not limited to,
limitations an transferability that may constitute substantial risks of
forfeiture, as the Committee may determine.

(d) VALUE OF SHARES. Options may be granted to any eligible person
for shares of Common Stock of any value, provided that the aggregate
Fair Market Value (determined at the time the Option is granted) of the
Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year
(under all the plans of the Company, its Parent and its Subsidiaries)
shall not exceed $100,000.

(e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in
full, at the time of exercise, in cash or, with the approval of the
Committee, in shares of Common Stock having a Fair Market Value in the
aggregate equal to such Option Price or in a combination of cash and
such shares.

(f) TERM AND EXERCISE OF OPTIONS.

(1) INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be
exercisable over the exercise period specified by the Committee in
an Option Agreement, but in no event shall such period exceed ten
(10) years from the date of the grant of each such Incentive Stock
Option; provided, however, that in the case of an Incentive Stock
Option granted to a Ten Percent Shareholder, the exercise period
shall not exceed five (5) years from the date such Option is
granted. An Incentive Stock Option may be exercised, as to any or
all full shares of Common Stock as to which the Incentive Stock
Option has become exercisable, by giving written notice of such
exercise to the Committee; provided, that an Incentive Stock Option
may not be exercised at any one (1) time for less than one hundred
(100) shares of Common Stock (or such number of shares as to which
the Incentive Stock Option is then exercisable if such number of
shares is less than 100).

(2) NON-INCENTIVE STOCK OPTIONS. Options which have not been
designated by the Committee as Incentive Stock Options shall be
exercisable over a period of ten (10) years.

(g) NONTRANSFERABILITY OF OPTIONS. Options granted under this Plan
are not transferable other than by will or by the laws of descent and
distribution, and, during Optionee's lifetime, Options may be exercised
only by the Optionee.

(h) EFFECT OF CERTAIN CHANGES.

(1) if there is any change in the number of shares of Common
Stock through the declaration of stock dividends, recapitalization
resulting in stock splits, or combinations or exchanges of such
shares, then the number of shares of Common Stock available for
Options, the number of such shares covered by outstanding Options,
and the Option Price of such Options shall be proportionately
adjusted to reflect any increase or decrease in the number of
issued shares of Common Stock, provided, however, that any
fractional shaves resulting from such adjustment shall be
eliminated.

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<PAGE> 5

(2) in the event of a proposed dissolution or liquidation of
the Company, each Option granted under this Plan shall terminate as
of a date to be fixed by the Committee, provided, however, that
each Optionee shall have the right, immediately prior to such
termination, to exercise the Options as to all or any pan of the
shares of Common Stock covered thereby, including shares as to
which such Options would not otherwise be exercisable.

(3) In the event of any merger, consolidation or reorganization
of the Company, the Committee shall promptly make an appropriate
adjustment to the number and class of shaves of Common Stock
available for Options, and to the amount and kind of shares or
other securities or property receivable upon exercise of any
outstanding Options after the effective date of such transaction,
and the price thereof (subject to the limitations of Section 424 of
the Code), to preserve each Optionee's proportionate interest
therein and to preserve unchanged the aggregate Option Price.

(4) In the event of a change in the Common Stock as presently
constituted, which is limited to a change of all of its authorized
shares without par value into the same number of shares with a par
value or, if such shares have a par value, then with a different
par value, the shares resulting from any such change shall be
deemed to be Common Stock within the meaning of the Plan.

(5) To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made
by the Committee, whose determination in that respect shall be
final, binding and conclusive, provided that each Option granted
pursuant to this Plan and designated an Incentive Stock Option
shall not be adjusted in a manner that causes the Option to fail to
continue to qualify as an Incentive Stock Option within the meaning
of Section 422 of the Code.

(6) Except as expressly provided in this Section 8(h), the
Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of
shares of stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation, and any issue by the Company
of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to,
the number or Option Price of shares of Common Stock subject to an
Option. The grant of an Option pursuant to this Plan shall not
affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge, consolidate, or
dissolve, liquidate, sell or transfer all or any part of its
business or assets.

(i) RIGHTS AS A SHAREHOLDER. An Optionee or a transferee of an
Option shall have no rights as a shareholder with respect to any shares
covered by an Option until the date of the issuance of a stock
certificate to such Optionee for such shares. No adjustments shall be
made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for
which the record date is prior to the date such stock certificate is
issued, except as expressly provided in Section 8(h) hereof.

(j) OTHER PROVISIONS. The Option Agreements authorized under this
Plan shall contain such other provisions, including, without
limitation, (i) the imposition of restrictions upon the exercise of an
Option and (ii) the inclusion of any condition not inconsistent with
such Option qualifying as an Incentive Stock Option, as the Committee
shall deem advisable, including provisions with respect to compliance
with federal and applicable state securities laws.

9. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES

(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state
and/or local taxes of any kind required by law to be withheld upon the
exercise of such Option, and

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<PAGE> 6

(b) The Company shall, to the extent permitted or required by law,
have the right to deduct from any payment of any kind otherwise due to
the, Optionee any federal, state and/or local taxes of any kind
required by law to be withheld upon the exercise of such Option.

10. TERM OF PLAN

Options may be granted pursuant to this Plan from time to time within a
period of ten (10) years from the date on which this Plan is adopted by the
Board, provided that no Options granted under this Plan shall become exercisable
unless and until this Plan shall have been approved by the Company's
shareholders.

11. SAVINGS CLAUSE

Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
hold to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not effect the remaining parts of this Plan, but rather it shall be construed
and enforced as if the Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.

12. AMENDMENT AND TERMINATION OF THE PLAN

The Committee may at any time and from time to time suspend, terminate,
modify or amend this Plan, provided that any amendment that would increase the
aggregate number of shares of Common Stock as to which Options may be granted
under this Plan or the maximum number that may be granted to any individual
person shall be subject to the approval of the holders of a majority of the
Common Stock issued and outstanding, except that any such increase or
modification that may result from adjustments authorized by Section 9(h) hereof
shall not require, such approval. Except as provided in Section 8 hereof, no
suspension, termination, modification or amendment of this Plan may adversely
affect any Option previously granted unless the written consent of the Optionee
is obtained.

Adopted by the Board of Directors on April 4, 1998.

Attest:

/s/ Robert E. Steinberg
-----------------------
Secretary

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